Monday, April 27, 2009

Is Spain really facing deflation risk?

Sources: New York Times: Spain’s Falling Prices Fuel Deflation Fears in Europe; Diario El Mundo: After the drop of retail prices in Spain, Europe fears deflation risk; Diario El Economista: The Secretary-General of the OECD affirm that Spain will not face deflation, The Spanish Government discount deflation, Weber foresees little deflation risk in the EuroZone.

Since Nelson D. Schwartz from the New York Times reported on April 20 about the inevitable deflation risk that Spain will face in the next months, analysts, private entities and official sources have put forth different opinions about whether the drop of retail prices in Spain will spread the fear of a possible deflation risk (a sustained decrease in the general level of goods and services) to the rest of Europe.

Deflation occurs when the annual inflation rate (the percentage rate of change in price level over time) falls below 0%, which results in an increase in the real value of money. In March 2009, the inflation rate turned negative in Spain for the first time ever since the old Spanish currency (the peseta) was changed for the Euro. Since last month, retail prices have dropped markedly in restaurants, shops and supermarkets while the unemployment rate (15.5%) has continued to grow. The main problem here is that, as unemployment grows, consumers spend less money. In consequence, companies are compelled to reduce the price of the goods or services they offer. If sales do not recover, then the revenue would decrease, causing budget cuts and more unemployment.

Spain does not have much margin to fight the deflation risk, since the Spanish Central Bank cannot take any measures (like devaluating the currency or lowering the interest rates closer to zero) because the European Central Bank is responsible for establishing the monetary policy in the Eurozone.

However, the Secretary-General of the OECD assured the public in a press conference on April 20 that Spain is not really facing deflation risk, and that the country is only showing a normal price drop corresponding to the fall in demand similar to other countries like the U.K, France or Italy. The Spanish Government completely agrees with this perception and refuses to accept that deflation is even a possibility.

Moreover, although the New York Times warned that a possible deflation in Spain may spread to neighboring countries like Portugal, Ireland or Luxemburg, which have also experimented price drops, Axel Weber, adviser of the European Central Bank and president of the Bundesbank assures that there is little risk of deflation in the Eurozone.

1) Due to the little margin that European Union member states have to fight deflation individually; do you think that the European Central Bank should take any preventive measure to avoid a spread of deflation trough Europe?

U.S. Could Be Majority Stakeholder in Automaker Bailout

Sources: Wall Street Journal, U.S. Would Hold Majority Stake Under New GM Plan; Financial Times, US to take Majority GM Stake

A new plan to save major U.S. automaker General Motors (“GM”) involves plant closures, job losses, and an aggressive debt-for-equity swap making the U.S. government the majority stakeholder. GM is working to meet a June 1 deadline to produce a viable turnaround plan to get government assistance—or face bankruptcy.

So far, GM has received $15.4 billion in emergency assistance from the U.S. government, and it is seeking $11.6 billion more with the plan. The plan would require the government to hand over half of its debt for equity in GM—in effect, forgiving half of GM’s debt to the government in exchange for a large stake in the company. GM officials have left open the possibility for government representation on the Board of Directors—though the Treasury has not shown any interest in actually running the company, but is more concerned with getting the company to run smoothly for its shareholders and other constituencies. GM’s clear preference is to stay out of bankruptcy—but company officials said that if the debt-for-equity plan fails, it will be forced to seek protection under U.S. bankruptcy laws.

Current GM bondholders have until May 26 to vote on the plan—but some bondholders said there is little incentive to accept the plan because it strongly favors the government and unions, and suggested that it might be more favorable to seek a solution in bankruptcy proceedings. Sources close to a committee representing GM bondholders said that they are close to proposing a counter-offer in the next ten days. They said the payoff to bondholders that GM is offering is less than what GM offered other parties, including unions and taxpayers—and is less attractive than the last plan GM offered bondholders.

If the plan succeeds, GM will cut 13 of 47 plants and 7,000 more jobs by the end of 2010. GM will also close the 83-year-old Pontiac brand and cut its dealership network from 6,200 to 3,600 by the end of 2010.

Questions for Discussion:

What does this mean for other U.S. automakers (like Chrysler) and other major industries in the U.S.? What does this mean for taxpayers? Is the debt-for-equity swap the right approach?

Sunday, April 26, 2009

Fed to Remain Creative in Monetary Policy

Source: Financial Times, Fed Study Puts Ideal US Interest Rate at -5%

An internal policy analysis prepared for the Federal Reserve’s last policy meeting indicates that the ideal interest rate for the U.S. economy’s condition should be -5% (yes, that is a minus sign). The conclusion, while unrealistic in actual application, encourages the Fed to continue using unconventional policies to stimulate the economy.

The -5% projection is based on the Taylor Rule, which estimates an appropriate interest rate based on unemployment and inflation. Even though a central bank cannot cut rates below zero, the analysis indicates that the Fed should continue its unconventional policies that stimulate the economy that roughly equate to a -5% interest rate. Separate estimates indicate that the Fed would need to expand its asset purchased by more than the $1,150 billion increase that the Board of Governors approved at the Fed’s last meeting. The Fed is not expected to make any substantial monetary policy changes at its next meeting—especially in light of the fact that the economy is a bit stronger than it was during the last meeting—but is expected to brainstorm potential monetary policy changes at its next meeting. One option is the Canadian approach of setting an explicit timeframe for keeping interest rates at or around 0%, though that approach is subject to debate—some arguing that it is not credible and could be ineffective.

At its last meeting, the Fed purchased long-term treasuries for the first time in decades—and is keeping open the possibility of buying more if economic forecasts go down again. But policymakers will most likely watch how market interventions already underway affect the economy before implementing new policies.

Questions for Discussion:

In light of basic macroeconomic theory, is monetary policy creativity the right approach? Given the tools that the Fed has to control the money supply and the expansion or contraction of the economy, are the Fed’s hands tied if they don’t opt for creative solutions? Or should the Fed follow macroeconomic models and try to affect only one monetary factor at a time?

Friday, April 24, 2009

IMF Sees a Light at the End of this Long Crisis Tunnel

Sources: IMF Survey, Global Economy Contracts, With Slow Recovery Next Year

On April 22, the International Monetary Fund (IMF) released its April World Economic Outlook. The gist of the outlook? Conditions will worsen in the coming months, but they may improve slightly by the end of 2010. While the IMF does not foresee that the global economy will contract as drastically as it has been since 2008, it still expects some contraction during the remainder of 2009. IMF experts predict that the global economy will begin to bounce back in early 2010, but that it will do so at a relatively slow rate when compared to past periods of recovery.

The IMF's Chief Economist, Olivier Blanchard, says that the global economy is currently being pulled in two directions. On one hand, it is being pulled down by investor and consumer uncertainty. On the other, it is being pulled up by government stimulus plans. According to Blanchard, the emergence of stimulus plans and other such policies present a possible light at the end of the tunnel. If the development of these policies continues, says Blanchard, we may begin to see a decrease in unemployment rates and an increase in world economic growth.

Some have wondered if the most recent meeting of the Group of 20 (G-20) in London will positively affect economic growth. Blanchard's response? It may, but recovery from this crisis will still be slower than past recoveries. Advanced economies, after all, have taken a strong hit as a result of the financial crisis. Blanchard argues that, while it may be tempting to view the financial crisis as being restricted to the United States' banking system, it has reached truly global dimensions. Western Europe and advanced Asian economies have been hit by both the global financial crisis and by their own internal financial problems. Emerging economies have also been hit by the crisis. The crisis, in other words, has reached unprecedented heights. It should not be surprising, then, that recovery will be slower than it has been in the past.

How may we get closer to the light at the end of the financial crisis tunnel? Blanchard, speaking for the IMF, urges countries to move forth with their policy-making efforts. In his view, the priority at this point should be to re-structure the global economy. At least for now, policy reform seems to be the answer to our financial crisis woes.

Discussion Questions:

1- What do you think of the idea that policy reform will be the key to recovery? Who do you think is likely to lead efforts to reform economic policy?

2- Are there any countries or actors that are left out of the IMF's current recovery scheme?

Tuesday, April 21, 2009

Obama Backpedals on Reopening NAFTA Agreement

Ronald Kirk, the U.S. Trade Representative, stated that President Obama will not push to reopen the North American Free Trade Agreement (NAFTA) over environmental and social concerns. That news was met with approval by Canada's Stephen Harper and Mexico's Felipe Calderon, both strong proponents of the current NAFTA language.

During his presidential campaign, Obama had argued that NAFTA should be re-negotiated and that labor and environmental provisions should be incorporated into the main part of the agreement. Obama's primary challenger Hillary Clinton also indicated she would have supported renegotiating or even opting out of NAFTA. Such criticism of the free trade agreement appealed to Americans losing their jobs to outsourcing and facing cheaper imports from Mexico, as well as to environmental groups. Yet even during the campaign, it was rumored that Obama aides assured Canadian politicians that he was not serious about pulling out of NAFTA.

Dismissing the notion that now was the time to re-open NAFTA, Obama stated that although it would "make sense" to include greater environmental and labor protection in the main part of the NAFTA agreement, the current economic crisis made him hesitant to provoke any disruption in trade. 

The Obama administration also faces other pending decisions on trade matters, including bilateral free trade agreements with Panama and Colombia.  The Bush Administration pushed for approval of those trade agreements, but was thwarted by opposition to Colombia's labor violence and other inadequate protections.

1. How does the global financial crisis represent a grave threat to the free global trade regime?
2. Which countries are benefiting currently from freer trade? Which are not?

Monday, April 20, 2009

Summit of the Americas: Cuba-U.S. relations warm

Summit of the Americas homepage

"The ghost at the conference table" The Economist

"Obama offers Cuba a 'new beginning'" BBC

"At Summit of the Americas, the spotlight is on Cuba" Miami Herald

"U.S., Cuba trade warm words ahead of summit" MSNBC

The fifth Summit of the Americas was held April 17-19 in Port of Spain, Trinidad and Tobago. The stated purpose of the Summit, which the 34-member Organization of American States (OAS) holds every four years, is to "bring together the Heads of State and Government of the Western Hemisphere to discuss common concerns, seek solutions and develop a shared vision for their future development of the region, be it economic, social or political in nature." The theme for this year’s Summit was "Securing Our Citizens' Future by Promoting Human Prosperity, Energy Security and Environmental Sustainability." However, a key focus of this year’s Summit was U.S.-Cuba relations.

Relationships between the United States and Cuba have been thawing, especially after a change in both administrations: President Raul Castro, who took over for his brother Fidel in February, 2008, and President Obama have both expressed interest in negotiating toward lifting the United States’ long-standing economic embargo against Cuba. Recently, both countries have been willing to admit past mistakes. Leading up to the Summit, US Secretary of State Hillary Clinton admitted that the old U.S. policy toward Cuba had failed, and President Obama said the United States is seeking a "new beginning" with Cuba. Also, the Obama administration recently eased restrictions to allow Cuban-Americans to visit relatives in Cuba and send money home more easily. At the Summit, President Obama explained, "I have already changed a Cuba policy that has failed to advance liberty or opportunity for the Cuban people. . . Over the past two years, I have indicated, and I repeat today, that I am prepared to have my administration engage with the Cuban government on a wide range of issues, from human rights, free speech, and democratic reform to drugs, migration, and economic issues."

Before the Summit, President Castro said he was ready to talk about "everything" with the United States, including human rights, political prisoners and freedom of the press. Castro also admitted that "We could be wrong, we admit it. We're human beings. We're willing to sit down to talk as it should be done, whenever." Secretary Hillary Clinton called Castro’s comments a "very welcome gesture." The number of political prisoners in Cuba has already dropped by one-third since Raul Castro took power. President Castro has also offered to trade political prisoners jailed in Cuba for five convicted Cuban intelligence agents jailed in the United States. This offer could mean freedom for 200 prisoners who are jailed for offenses including independent journalism and planting bombs in attempts to destabilize Cuba. President Obama is moving cautiously given the historic mistrust between the two nations and failed promises on both sides. The offer is still being considered. Where do things stand now? Neither side has set conditions on talk, but Obama insists Cuba make another move before the United States takes more action. President Castro demands the U.S. trade embargo be abolished, but Obama has said that will not happen until Cuba moves toward democracy.

It is telling that Cuba was not allowed to attend the conference. Cuba has been suspended from the OAS since 1962 and from the summits since the first summit met in 1994. Part of Cuba’s historic exclusion might come from the fact that the United States funds 70% of the OAS. Most Latin American leaders have been calling for Cuba to be admitted.

In addition to Cuban relations, it was clear that Obama was trying to repair relations between the United States and Latin America as a whole. He stated, "I didn't come here to debate the past, I came here to deal with the future. As neighbors, we have a responsibility to each other and to our citizens. And by working together, we can take important steps forward to advance prosperity, security, and liberty." Despite general (and expected) criticism of the United States from Venezuelan president Hugo Chavez, it was clear that President Obama received a much warmer welcome from the Latin American leaders the did his predecessor, Bush.

1) Is this a new era for U.S.-Cuba relations or simply talk?
2) How should the United States react to President Castro’s offer to exchange prisoners?

Friday, April 17, 2009

Is the Cloud Over the Banking Industry Lifting—Or Is This Just the Eye of the Storm?

Sources; NYTimes, Banking Industry Showing Signs of a Recovery; Associated Press, Citi Results Top Street Forecasts, But Shares Fall

Four banks announced positive earnings news this week—Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo—signaling a glimmer of hope for the banking industry’s recovery from a serious financial crisis that left credit markets frozen and left investors holding a handful of near-worthless securities. JPMorgan Chase reported $2.1 billion profit in the first quarter, with revenues up 45% from last year—and Citigroup, while it still reported a loss, reported earnings higher than forecast.

Financial-sector officials say that there are still weaknesses in the system. Millions of homeowners are still defaulting on their mortgages, home-equity loans, and consumers continue to default on credit card payments. The commercial real-estate sector is just starting to feel the blow of the recession—General Growth Properties, one of the nation’s largest mall operators, filed for bankruptcy on Thursday, for one of the largest collapses in history.

Still, banking institutions seem poised to continue down the road to full recovery—and many are eager to get rid of their debt from federal bailouts. One JPMorgan official noted that if the bank wanted to pay back its loan from the federal government tomorrow, it could—“We have the money,” he said. Low interest rates are encouraging many new homeowners to take out mortgages, and commercial and investment banks are acting with cautiously optimism, storing away millions in reserves in order to be ready for the next wave of losses. The overall sense is that until prices stabilize and unemployment peaks, banks will be concerned about losses on their balance sheets.

The Treasury is expected to release “stress test” findings on May 4, detailing which banks will be likely to sustain their earnings and survive the ever-present volatility in the system. The findings are expected to reveal that some banks may need to raise fresh capital—from private investors, but also by converting the preferred shares of stock currently held by the government (exchanged in bailout transactions) to common shares to sell to the public and other investors.

Question for discussion:

Does the banking industry’s positive numbers signal a larger recovery for the rest of the economy? Or do the positive earnings reflect only the effects of the government’s bailout efforts?

Thursday, April 16, 2009

IMF Offers Poland $20 Billion in Flexible Credit Line Arrangement

Sources: BBC, Poland To Seek $20bn IMF Credit; Forbes, Poland to IMF: Spare Some Change; New York Times, Poland Gets $20 Billion Credit Line from I.M.F.

The IMF on Tuesday decided to make Poland the second country in the world to receive credit under its new Flexible Credit Line Arrangement, after Mexico. The new funding, unlike credit that the IMF has extended to smaller, more desperate countries in Eastern Europe, is only available for countries that already have a relatively sound economy. As long as a country meets certain pre-conditions to be eligible in the first place, there are no conditions that have to be met after receiving some of the money, unlike loans offered, for example, to the Ukraine.

Factors that make Poland a candidate for this type of loan include the lack of any real banking crisis in the country, the expectation of a higher GDP growth than other Eastern European countries in 2009, strong economic fundamentals and framework, and the government's trustworthiness. Poland does have its problems – bankruptcies, foreign investors pulling out, and a currency that has plummeted during the crisis – but its relative strength indicates that it is a good credit risk and may not even need to use the money. The expectation is that if it does draw on the arrangement, it will be for a short time, and not all of the $20 billion will be used. Poland's intention is to use this arrangement to strengthen its reserves and guard against speculative attacks.

1) Do you think the IMF's expectation that Poland will not use, or will not use all, of the money extended to it through the Flexible Credit Line Arrangement is correct? Do you think the existence of the credit line will encourage Poland to depend on it?
2) Do you think that extending such a facility to a stronger economy in Eastern Europe will help confidence spread in Eastern Europe so that countries such as Hungary and the Ukraine that needed emergency support will become less dependent on the IMF in the long run?

Chrysler's Survival Hinges on Unions, Fiat Partnership

The U.S. and Canadian governments have indicated to Chrysler that it needs to reach a partnership deal with Italian carmaker Fiat in order to receive government financing. Chrysler's ability to do that, however, depends on concessions it can obtain from auto workers' unions.

Canada's Industry Ministry Tony Clement urged the CAW union to agree to a $19 an hour reduction in labor costs, the amount Chrysler says is necessary to be competitive with Japanese and German car manufacturers. Fiat's executives have tied approval of any partnership with Chrysler to its labor competitiveness.

Chrysler and the CAW previously agreed on a $7 an hour cut in labor costs, but with the imminent threat of Chrysler going into bankruptcy or liquidation, the stakes and demands have been raised much higher. The proposed $19 an hour cut would make Chrysler competitive with foreign automakers and non-unionized plants in Canada.

Chrysler has until April 30 to complete a deal with Fiat in order to be eligible for government help. Chrysler has received $4 billion from the U.S. government so far and several hundred million from the Canadian government, and would be eligible for another $6 billion from the U.S. government if the Fiat deal materializes.

1. What is the primary obstacle to Chrysler's (and GM's) profitability? Labor costs, product line, management?

Wednesday, April 15, 2009

All About Trade

Voice of America
All Africa
AFdB Website

Analyst predict that global trade will shrink by 9% in 2009, and although many originally thought that Africa was safe from the global credit because their banking system invested little in the exotic credit instruments that wrecked havoc in the West, this drop in trade is surely hurting Africa. Global demand, particularly in Europe and the United States, for Africa’s export commodities has dropped dramatically and established lines of credit for many African exported have dried up. Africa is left faced with a situation where many of the benefits global trade has brought Africa, such as poverty reduction, are in risk of being erased.

The world’s economic leaders were aware of this problem when they met at in London for the G-20 meeting in early April. Among other agreements, the G-20 agreed to increase the IMF’s ability to invest in global trade by $250 billion. This money will go towards a lot of initiatives, but especially towards securing lines of credit for the world’s emerging and frontier markets. And although this will go a long ways towards addressing shirking global trade, many experts say that even after the financial crisis has run its course Western demand for African exports may not return to pre-crisis levels.

To address this, experts say that Africa must continue to develop its trade with the BRIC countries (Brazil, Russia, India and China). These countries currently account for about 30% of Africa’s exports, but many see these countries as key engines for growth in Africa’s export industries. For instance, with over a billion citizens and only 7% arable land China is a potential huge source for African agricultural exports.

In addition to expanding trade with the BRIC countries, experts feel that it is important to increase trade within Africa itself. By trading amongst themselves, African countries can help mitigate future global downturns. This, however, may not be as easy as it sounds given the poor quality of infrastructure within Africa. To address the infrastructure issue, African leaders, including the AFdB, met in Lusaka, Zambia on April 6 and 7. The meeting focused particularly on improving roads, rail lines, and energy productions along the North-South trade corridor, which runs from Tanzania to South Africa. The meeting secured over a billion dollars to help finance infrastructure projects along the corridor.

This blog mentions the huge demand for agricultural products in China. How realistic is it that Africa will be able to provide China with food given the current food shortage problems Africa faces? Also, does Africa need to be wary of deals such as the (recently aborted) agreement between Madagascar and South Korea that would have given South Korea huge swaths of land for free?

Tuesday, April 14, 2009

World Bank's Half-Yearly Update Discusses Financial Crisis' Effects on East Asia

Sources: World Bank, Faces of the Crisis; World Bank, EAP Half-Yearly Update

This month, the World Bank released its East Asia and Pacific Update. The Update was entitled "Battling the forces of global recession." Along with the EAP Update, the World Bank has compiled a collection of stories about specific individuals living in the region who have been affected by the financial crisis. The World Bank has released these items in an effort to "put a face to the numbers" in relation to the financial crisis.

The Update recognizes at the outset that the financial crisis is now truly a global crisis-- one that is significantly affecting East Asian economies. The Update's first chapter, which elaborates on how the crisis has affected East Asia, notes that the crisis has affected high-income, middle-income and low-income countries differently. It argues that middle-income countries have been able to respond fairly well to the crisis because their experience in the 1997-1998 Asian financial crisis forced them to develop stronger response mechanisms to turmoil in the markets. For example, these countries now have stronger foreign exchange reserves and lower government debt. They also supervise their banks more closely than before. These developments, says the Update, have helped those countries weather the current crisis. According to the Update, low-income countries have not been terribly affected by the crisis because they are not as integrated into the global financial system.

The Update argues that the region has been most affected by the crisis by the fact that all East Asian countries produce products that countries in other parts of the world frequently purchase when the economy is doing well. Before 2008, when the global economy was thriving, these countries had a large market for the goods they were producing. Since 2008, industrial production in the region has declined. Exports, it appears, are no longer the great source of prosperity for the region that they were before. The Update also points out that in countries like Thailand, which have historically relied on tourism and the sale of other services, have been suffering a "slump" since September 2008.

Discussion Questions:
1- Why is it useful to classify East Asian countries by income level when analyzing the degree of the impact that the crisis has had in the region? Does it make sense to do this?

2- What do you think organizations like the International Monetary Fund (IMF) and the World Bank can do to help East Asia respond to the crisis?

Latin American currencies claw their way back, partially due to IMF lending, "Mexico stocks rise on rate-cut bets, stronger peso; Homex gains"
El, "Precio del Nuevo sol y Bolsa de Valores de Lima suben en apertura", "Peru Stocks Go to First From Worst as Metals Rebound", "Mexico Peso, Stocks, Bonds Rally as Calderon Seeks IMF Line"
El, "México puede endeudarse ante caída de ingresos: OCDE", "Peru Bank reduced on slowdown in spending, loans"

The IMF has been lightening loan conditions for emerging nations that need short-term assistance, and Latin American countries have been taking advantage of the new, resulting opportunities. Mexico, Latin America’s second biggest economy, is a key example: Mexico announced that its government is seeking a USD47 billion credit line to shore up its foreign reserves. Expectations for the IMF-backed credit line gave the peso enough firepower to rise to its strongest level since December. A rally in commodities and stocks also buoyed demand for emerging-market assets. Thanks to these factors, Mexico is experiencing its best economic rebound since April 1995. Mexico’s currency had declined over 30% during the past six months but has recovered over 19% this month alone, which constitutes the largest gain of the world’s 16 major currencies.

Mexico hopes to re-attract investors by reducing the concerns about its foreign reserves. According to Mexico’s central bank the country spent $21.1 billion of its foreign reserves since October to shore up the peso. The global crisis, which eroded demand for Mexico’s exports and throttled remittances from Mexican workers in the United States, continued to pound the currency until late March. This week, as the Mexican economy shows signs of an eventual recovery, lending rates in the country are to be cut to further boost growth.

Like Mexico, other Latin American economies also rallied after they were closed for the Easter holiday weekend. Perú’s sol regained some muscle against the U.S. dollar last week, and Peru’s central bank accelerated interest rate cuts after data showed consumer spending and the bank lending had slowed more than policymakers expected. Peru has also benefited from a rebound in raw-material prices, which helped Peru’s economy grow faster than any other Latin American economy in recent weeks. Brazilian stocks also rose on speculation that thawing credit markets will bolster economic growth and demand for the country’s exports.

Is the partial recovery of major Latin American currencies a short break from the downturn or a sign of lasting stabilization and recovery?

Sunday, April 12, 2009

The IMF's New Budget and Its Implications

Sources:, Banking on the Fund; The London Summit, Explanatory Guide to the Communique

On April 2, 2009, the Group of 20 (G-20) leading advanced and emerging economies met in the United Kingdom for the London Summit. The objective of the summit was to bring together world leaders to discuss the global financial crisis and devise ways to get out of it. At the close of the summit, the G-20 issued a communique summarizing the decisions that the leaders had come to and noting the steps that the international community will be taking from this point on.

The most talked-about development arising out of the London Summit was the US$750 billion loan that the G-20 countries will be making to the International Monetary Fund (IMF). Of those US$750 billion, US$250 billion will go directly to the IMF's Special Drawing Rights (SDRs). SDRs are the IMF's version of currency; each country has a quota of SDRs that are available to it. Some critics have pointed out that, though the US$250 billion figure is impressive, it may not make a tremendous difference for those countries (namely emerging economies) that do not have access to a large amount of SDRs.

Some critics have also gone as far as suggesting that the IMF re-structure the way it distributes loans and votes on important issues so that it is better able to make use of the US$750 billion. Some proposed changes: voting procedures (to reduce the influence of "big" players such as the United States), re-structuring short-term loan facilities to look more like insurance plans (with high premiums and close monitoring of pay-outs), and giving more clout to emerging economies. Will the IMF implement these changes? Only time will tell.

Discussion Questions:

1- Do you think that the IMF should be focusing on undergoing a structural face-lift, or should it focus on other issues related to the financial crisis?

2- What do you think the IMF should do with the US$750 billion?

Dubai's Regulator Takes A Hard Line

Sources: Dubai Financial Services Authority; Dubai’s Regulator Sharpens its Teeth, Financial Times

Dubai’s financial regulator, the Dubai Financial Services Authority, is overhauling its approach and promising to enforce a stronger regulatory scheme.

The Dubai Financial Services Authority (DFSA) is the sole independent regulator of all financial and ancillary services conducted through the Dubai International Financial Centre—the emirate’s financial free zone. The DFSA’s regulatory mandate covers asset management, banking and credit services, securities, collective investment funds, custody and trust services, commodities futures trading, Islamic finance, insurance, and international equities exchange and an international commodities derivatives exchange.

In the midst of an international financial crisis, Paul Koster, chief executive of the DFSA warns that “the light touch approach is over”—he is raising the number of visits his compliance team makes to registered members by 20 percent. Although he is aware of the problems with overregulation, Koster claims that the DFSA must adapt to the problems faced by the current economy.

Generally, Koster says that the DFSA will take a thematic approach to the crisis, focusing on spot checking firms and then broadening out if they come across any warning signs. The DFSA has also changed rules to prevent Madoff-type scandals among the more than 300 entities it regulates.

However, many are unhappy with the DFSA’s new approach. Given the global environment, some claim that the DFSA shouldn’t increase the regulatory burden too much during the credit crunch, as businesses are under a lot of commercial pressure at the moment.

Discussion: Should regulators be sensitive to the commercial pressures currently faced by businesses? Or should regulators work as quickly as they can to address the lax regulations that contributed to the crisis in the first place?

Saturday, April 11, 2009

Global Trade Falling and Protectionism on the Rise

NY Times - Trade Is Falling Fast Across the Globe
Washington Times - Trade Barriers Up, Global Study Says

Global trade is declining at a rapid pace not seen for several decades. Data from 15 of the world's largest exporters indicates their total value of exports in February 2009 was about one-third lower than in Feburary 2008. China, a recent export titan, saw its exports drop by 41 percent during that period. The current fall in global trade volume is more severe than that during the Great Depression era of the 1920s and 1930s.

Not all of the news is bad, however. United States exports, although falling year-over-year by 22 percent, actually rose a small amount between January 2009 and February 2009. It was the first month-over-month increase for U.S. exports since they reached a high of $121 billion in July 2008. And China's large stimulus program appears to have encouraged imports, especially from Australia.

Along with the overall decrease in global trade volume, major economic players have been putting up trade barriers at an increased pace during the global financial crisis. Although the G20 summit participants recently agreed not to resort to protectionist measures during the time of financial crisis, countries such as the U.S., China, Brazil, India, South Korea, and the E.U. bloc have been most active in devising new trade barriers.

The trade barrier study, by Grail Research, noted that non-tariff and non-traditional barriers were the weapon of choice. These barriers are less directly confrontational but also more difficult to track and quantify.

1. What are the benefits of trade barriers to countries during a time of global recession?
2. Will increased global trade be the cause or effect of global economy recovery?

Friday, April 10, 2009

U.S. Farmers Hit by Global Downturn

After experiencing a boom year in 2008, United States farmers' earnings will likely be pared significantly in 2009. The U.S. Department of Agriculture has predicted that farm income will fall about 20 percent in 2009, down to $71.2 billion. Farm exports, which make up about 20 percent of total farm production, are forecasted to fall from $117 billion to $96 billion.

U.S. agriculture rode a wave of prosperity in 2008, when agricultural commodities prices peaked, exports increased due to increasing developing country demand, and global conditions such as a drought in Australia increased demand for U.S. products.

Since then, however, U.S. agricultural conditions have become significantly bleaker. The rising value of the dollar has made U.S. exports more expensive and less competitive. The dollar has appreciated against the Euro (from $1.60 to $1.32) and the Pound ($2 to $1.47). Commodities prices have also fallen across the board, most between 40 and 50 percent since their highs in mid-2008.

U.S. agricultural exports have also softened because of decreased global demand due to the global financial crisis. Exports volumes of corn have fallen by 40 percent in recent months, with wheat falling 30 percent.

Not all of the news for U.S. farmers is bad. Farmland and farm building property values are still expected to rise by a small amount in 2009, although by much less than their seven percent increase in value in 2008. And rising requirements for the use of ethanol will give corn growers a buffer against decreasing exports.

1. How do U.S. declining agricultural revenues compare with other industries, such as manufacturing and services? Although their conditions are deteriorating, are U.S. farmers actually in a better position relative to other U.S. economic sectors during the financial crisis?

Major Players Debate Adding Eastern European Countries to Eurozone

Sources: Wall Street Journal, ECB Spokeswoman: Implementation of Euro Treaty Vital; Financial Times, ECB Dismisses Euro Short Cuts in East Europe; AFP, IMF Backs Euro for Eastern Europe; Reuters, ECB's Nowotny Says Forcing Euro Adoption a Bad Idea

On Monday, the Financial Times leaked an IMF report proposing that central and eastern European countries be added as "quasi members" to the eurozone. The European Central Bank quickly affirmed its position on the issue, which is that the Nice treaty should be fully implemented but not expanded. The treaty calls for adoption of the euro for Member States with a budget deficit lower than 3% GDP, total public sector debt below 60% GDP, and inflation a maximum of 1.5 percentage points above the average of the three lowest inflation rates among the member states. The treaty does not contain any provisions on the proposed "quasi membership," and the ECB believes that allowing adoption outside of treaty rules would lead to falling confidence in the euro.

After the leak of the IMF report, however, eastern European currencies rallied, and officials disagreed on the best currency strategy for these nations. One proposition was that only small countries with fixed exchange rates, such as the Baltic states, should adopt the euro. Another concern was that the countries adopting the euro have sufficient currency reserves. Many officials are sceptical about the practical effect of allowing quick partial adoption of the euro regime, and doubt the political viability of such a move.

The idea of "quasi membership" is to allow countries to adopt the euro as their currency without also allowing them seats on the Governing Council of the European Central Bank. The benefits would be resolving foreign currency debt and restoring confidence in troubled eastern European countries. However, it would be difficult to choose an exchange rate at which to make the switch, and going to the euro at a low rate could significantly harm individuals and businesses. Furthermore, the countries that have the greatest need for a currency rescue, such as Hungary and Poland, would be least likely to benefit from the switch.

Another option might be for emerging economies to speed up the process by joining the European Exchange Rate Mechanism early, but this is still a risky path for eastern European countries to take. This option would mean that the countries' currencies traded against the euro within a fixed band, and there would be a risk of counterspeculation against the eastern European currencies. One member of the European Central Bank's Governing Council said that the Bank would not use market intervention to support these currencies, but might start accepting non-euro denominated bonds as collateral.

1) Do you think that the ECB should support quicker adoption of the euro for these countries, or is it smart to stick with the existing framework to avoid a loss of confidence in the euro?
2) Do you think that a partial adoption, perhaps for the Baltic states but not for countries with more dangerously volatile currencies like Hungary and Poland, would be possible?

Thursday, April 09, 2009

Brazil builds walls around slums: protecting the rainforest or protecting the rich?

"Brazil: Plan to build giant wall around ghetto to protect rainforest?" Forest Policy Research

"Rio to Build 10-Foot Walls Around City Slums" FoxNews

"Brazil builds walls around Rio de Janeiro slums" Reuters

"Rio to build walls around slums in attempt to halt deforestation in Brazil" Guardian

Brazil is planning to construct concrete walls around at least 11 of Rio de Janeiro's largest slums, called "favelas", by the end of this year. The walls will be 7 miles long and 10 feet tall. The Rio state government announced the plan as a way to cut back on deforestation of the areas surrounding the favelas by setting limits on how far the favelas can expand. The project is expected to cost around USD17 million.

Deforestation is a constant concern for Brazil. The Atlantic rainforest in the area around Rio de Janeiro, has been hard hit by deforestation in recent years. About 506 acres were destroyed in the last three years. That is double the rate of the three years before that. Officials largely blame deforestation on the expansion of slums as newcomers arrived from Brazil's interior. The government also explains that the walls will protect favela residents from floods and mudslides, which wash away many shacks built in ravines or on hillsides every year during the rainy season.

Critics of the wall fear the move could be seen as discriminatory and become a blemish symbolizing Brazil's deep divisions between rich and poor. There is some truth to this criticism: the Rio government has already come under fire from social activists and even environmentalists that argue the walls are actually meant to further segregate the poor from the richer, more tourist-friendly parts of the city. Many of the slums are built on mountainsides and look down on wealthy, beach-front areas. Some critics dub the project a form of "social apartheid", comparing it to ­Israel’s security barrier. One critic from a Rio human rights group explained, "This is something that is very similar to what Israel does to the Palestinians and to what happened in South Africa." The government heartily rejects these criticisms and assures people the walls are only built to protect the rainforest and the slum dwellers themselves.

Work on the walls has already begun in two favelas in the southern districts of Rio de Janeiro. The most famous is Morro Dona Marta, which police occupied in November to control violence caused mostly by rival drug gangs. The Dona Marta slum, home of about 7500 people, sits in the shadow of Rio's famous Christ statute. In Dona Marta, 62-year-old Maria da Graçca Martins da Silva, who has spent most of her life in the slum, said: "We don't feel imprisoned. But I wonder about one thing–is this wall going to curtail our freedom? I hope not."

600 houses will be destroyed to make room for the walls in the 11 favelas, but the Rio government has promised to build new homes inside the favelas for those displaced residents. On the whole, residents of homes to be destroyed are hopeful that their new promised home will be better than their old, but some have expressed skepticism that the government will follow through with promises to provide new homes.

1) What is your opinion of the "eco-wall" project?
2) Are there other ways that the Rio government could prevent deforestation through encroachment by slums?

Tuesday, April 07, 2009

Alberta Province Projects Deficits on Lower Oil Revenues

Globe and Mail (Toronto) - Alberta Tightens Pursestrings Despite Downturn
Bloomberg - Alberta Offers Incentives to Drillers as Revenues Decline
Vancouver Sun - Alta. to Post $4.7B Deficit

The Canadian province of Alberta will face its first deficit in 16 years due to declining oil and natural gas revenues. Alberta, which holds the second-largest reserves of oil in the world behind Saudi Arabia, had been growing rapidly and spending large amounts on infrastructure and resource development. The Alberta government projection puts the deficit at C$4.7 billion, which would be the largest in the province's history.

The red ink is being driven by struggles in the oil industry. Companies' spending on oil extraction--which involves extracting oil from bitumen found in vast deposits of sand--is expected to drop by half, to $10 billion. Overall resource revenues for the province, headlined by oil and natural gas, will fall by C$6.4 billion. Oil prices that are expected to hold at US$55 in the near future are contributing to lack of spending on oil development.

The Alberta government expects to run budget deficits for three years prior to a return to surplus. The government is also expected to offer incentives to encourage oil drilling, contributing as much as C$1.5 billion. Unlike other provinces, however, Alberta will not embark on a stimulus spending campaign to jolt its economy back to life. Instead, the province will impose measures of financial austerity such as a 9.6 percent cut in capital spending.

Although some construction industry and labor leaders warn that Alberta's inaction during the crisis could cost 100,000 jobs, the government predicts a more modest 15,000 loss in jobs. Overall, Alberta's economy will shrink by about two percent in 2009.

1. Given the better-off condition of Canada's economy compared to other large economies, which priority should Canadian leaders be more concerned about: immediate stimuli measures or preventing large deficit spending?

Spain relies in renewable energy to fight the economic crisis.

As the United States President Barack Obama pointed out in January, Spain is one of the world leaders, with Germany and Japan, in producing renewable energy. Indeed, Spain is already producing 30% of its electricity solely from renewable energy sources, a record when compared with other countries like the United States, which only produces 10% of renewable energy. For this reason, Spanish Industry Minister argues that Spain’s leading renewable energy companies are likely to benefit from the stimulus plan proposed by President Obama, which includes investment in this type of energy. Because Spanish renewable energy companies already have a presence in the United States (although they began to expand five years ago), and these companies stand to benefit from the American stimulus plan, they seen as a hopeful sign for Spanish’s economy recovery.

Motivated by this recognition of Spain’s economic potential, Spain’s Prime Minister Jose Luis Rodriguez Zapatero announced in an international press interview on March 26 that, if the Spanish economy does not show any sign of recovery in a few months, he will launch a round of government spending focused on the renewable energy and biotechnology fields to help Spain’s economy get out of recession. Prime Minister Zapatero assures that Spain has an ample margin to maneuver in the fiscal field because the Spanish debt (38% of the GDP) is already under the European Union average, even though the last economic previsions amount for a 7% of total public deficit. Mr. Zapatero argues that investment in clean energy will give rise to a great structural reform that would help to reduce the high unemployment rate in the country and diminish the country’s dependence to the crude coming from abroad.

Moreover, Mr. Zapatero plans to convince other members of the European Union that making a coordinated conversion to renewable energy could be a good measure to beat the current economic crisis. Since Spain will be the next country to assume the presidency of the European Union, Mr. Zapatero has announced that one of his priorities will be to promote the coordination of investments in new technologies, mainly in renewable energy and biotechnology, because of its potential impact in the economical system.

However, these measures have not been received well by all in the Spanish Government. The Spanish Finance Minister Pedro Solbes, has directly contradicted Mr. Zapatero’s stimulus plan, calling for fiscal prudence. Mr. Solbes argues that there is no room for new fiscal measures in the current economic situation and that other European countries may be reluctant about further deficit spending. In fact, the United Kingdom Prime Minister has already announced that his country will not announce such a big fiscal stimulus in the near future.

1) Do you think that it is the appropriate time for the Spanish government to engage in more public spending, despite the high level of public debt in Spain?

Monday, April 06, 2009

Japan getting aggressive in attempts to stimulate economy

Sources: Tokyo to launch record fiscal stimulus, Financial Times; Japan ready to take lead on aggressive stimulus plan, Financial Times

The Japanese Prime Minister Taro Aso ordered his government to prepare a record $99bn (Y10,000bn) fiscal stimulus package on Monday to help alleviate the global credit crisis. The Japanese government plans to release details of the package on Friday and submit actual legislation to the Diet by late April or early May.  Aso declared that the stimulus should include measures dealing with healthcare and medical services, subsidies to local governments, a new social safety net for non-regular workers, increased use of government financial institutions to ease the credit crunch, and solar energy.

Aso also offered the International Monetary Fund a $100bn line of credit at the G20 Summit, which was described by Dominique Strauss-Kahn, IMF Managing Director, as the “biggest loan in the history of mankind.”  Japan offered an additional $22bn in financial trade assistance for developing economies.

Japan’s economy has suffered along with the rest of the world during the financial crisis. The demand for Japanese exports has fallen in recent months—by almost half in February— and the country’s GDP fell by 3.3 percent quarter-on-quarter at the end of 2008. Additionally, Japan’s industrial output was down 9.4 percent month-on-month and job availability rates are at their lowest since 1974. Japan has been actively attempting to combat the crisis and, in addition to the newly proposed stimulus package, the Japanese government has passed stimulus measures costing a total of Y12,000bn, which amounts to 2 percent of Japan’s GDP.


(1) What are potential Japanese motivations for offering so much financial aid to the rest of the world?

(2) What impact will the Japanese stimulus measures have on the Japanese economy? On the world economy?

IMF wants euro for eastern EU

Sources: Financial Times-IMF urges eastern EU to adopt euro

AFP: IMF backs euro for eastern Europe: report

The Eastern EU member states that are not part of the “Eurozone,” that is, those that have not yet adopted the euro as their currency, should adopt the euro now--even without officially joining the Eurozone, according to a recently released report by the IMF.  These countries (Bulgaria, the Czech Republic, Estonia, Hungary, Romania, Poland, Latvia, and Lithuania) have been hard hit by the global financial crisis and many are facing a large debt load in foreign currencies, like the euro.  Additionally, many of the nations have experienced currency depreciation, which makes it harder to pay off their foreign currency debt.  Hungary, for example, has seen the Hungarian forint depreciate by 25 percent since October 2008.

The IMF sees this “euroisation” as the best way for these nations to service their respective national debts, restore confidence in their economies, and remove uncertainties.  Without the euro, the reductions in public spending that would be required to service the debt would be politically unpopular and difficult to achieve, according to the report.

The Eastern EU countries would be adopting the euro as their currency without having seats on the board of the European Central Bank, which controls monetary policy and regulates price stability for the Eurozone.  Nonetheless, eurozone members and the European Central Bank continue to oppose lowering the entry requirements.  And, the Eastern EU countries themselves may not wish to adopt the euro without full membership, which could be seen as a sort of “second-class” membership.  Analysts are skeptical about the chances for implementation, but the disclosure of the IMF recommendations is sure to rekindle old debates about the value of Eurozone membership in both the Eurozone and the new members states.

Discussion: Is adopting the euro a good idea for these nations?  What are some pros and cons?  Would bringing these nations into the Eurozone reduce the stability of the euro?  

Putin Defends Russian Economy Despite 4.5% Predicted Contraction and Falling Oil Prices

Sources: BBC, Russia's Poor 'Need Crisis Help'; Reuters, Oil Falls Toward $50; Bloomberg, Putin Says $90B Stimulus Plan to Ease Hard Year; Wall Street Journal, Putin Defends Economic Record; BBC, Putin Says Russia Can Beat Crisis

The World Bank last Monday predicted that the Russian economy will contract 4.5% in 2009, as opposed to the Russian government's expectation of 2.2%. The World Bank cautioned that the rapid and dramatic decline of the Russian economy will put significant stress on the country's poorest citizens, and recommended that the government shift its anti-crisis program to focus on social spending including pension and unemployment payments. One of the biggest downward pressures on the economy is the price of oil, which is approaching $50/barrel on average.

Today, Prime Minister Putin responded with optimism in an address to the Duma (lower house of parliament), making it clear that the road ahead will be difficult for Russia, but not insurmountable. He is planning a $90 billion stimulus package for Russia in 2009, after the government's abandonment of a three-year budget approved before the size of the crisis in Russia became apparent. Putin refuses to blame the government for the impact of the crisis on Russia, framing its effects as inevitable and instead focusing on a decisive response and the government's achievements in softening the impact.

Current concerns include high unemployment, an expected 8% budget deficit, the need to spend reserves in one of Russia's sovereign wealth funds, and low domestic demand. Budget revisions include a "safety cushion" that can be used if further economic downturns occur, and other responses are being planned in addition to the budget. For example, payroll taxes may increase in 2011, and Putin is encouraging banks to consolidate to address default risk on the horizon. Corporate debt is also an issue, and the government may take a stake in some corporations, but feels no obligation to do so. Another possibility is price controls on oil and gas, but Putin is hesitant to risk harm to companies' profitability and recognizes the impossibility of complete isolation from the crisis.


1) Do you think Putin's expectations are realistic, or do you suspect that it may be impossible for Russia to recover from this crisis as quickly as he might prefer?
2) Can you think of any ways the Russian government might achieve a balance between the interests of corporations and the interests of individuals in its budgeting process? Should one of these interests be prioritized over the other?

Geithner Open to Possible Ouster of Bank Chiefs

Treasury Chief Says He's Open to Ousting Heads of Frail Banks, New York Times

U.S. Prepared to Oust Bank Chiefs, Financial Times

In an interview Sunday, U.S. Treasury Sec. Timothy Geithner said that the government was open to the idea of removing the chiefs and/or senior management teams of certain U.S. banks. Specifically, Geithner suggested that the government may require the removal of high ranking bank executives and directors as a condition of those banks receiving high levels of government aid or bailout funds.

Geithner offered the possibility of ousting bank executives in response to a question challenging the Obama Administration's choice to fire General Motors CEO Rick Wagoner while leaving bank executives untouched. Sec. Geithner first highlighted the government's (under the previous administration) decisions to change the leadership at AIG, Fannie Mae, and Freddie Mac, long before any discussion of ousting auto executives. He then made clear his--and the Administration's--willingness to remove failing bank executives, suggesting that such removals could be required "not just to protect the taxpayer but to make sure this is the kind of restructuring necessary for [the banks] to emerge stronger."

In addition to opening the door to possible leadership changes at American banks, Sec. Geithner also used his Sunday interview to fervently dispel rumors and suggestions that the Treasury Department was structuring certain banks' bailout agreements in a way that would allow those banks to circumvent some compensation limitations and requirements placed by Congress in the bailout legislation. “Our obligation is to apply the laws that Congress just passed on executive comp[ensation], and we’re going to do that.”

Discussion Questions:
1) Should the government, as part of its bailout packages, have the power to compel the removal of executives in banking, automotive, or any industry?
2) Is the government employing a double standard to the auto and banking industries?

Sunday, April 05, 2009

Obama Urges Turkish Addition to EU

Financial Times; Financial Times; Wall Street Journal

Today President Obama, while attending the G20 summit, urged European leaders to grant Turkey full EU membership status to strengthen ties to the Muslim community. France and Germany quickly rejected his pleas. As the two largest economies in the EU, a country as physically vast and populated as Turkey (70 million) could threaten their dominance of the European community. But as a secular Muslim country, Turkey’s inception into the EU could be a crucial peace-offering towards other Muslim nations. In response to Obama’s comment, EU President Sarkozy released a statement that EU matters should be governed by EU member states. Angela Merkel, the German chancellor, remarked that she believed in strengthening ties with Turkey, but saw those ties as taking the form of a privileged partnership rather than affording Turkey full membership status.

Meanwhile, Turkey continues to move towards complying with EU membership conditions. It has renewed talks to open its border with Armenia, a move that will demonstrate stability and cooperation. Turkey closed its border with Armenia in 1993 to protest its occupation of Nagorno-Karabakh, an enclave in Azerbaijan, following a bloody ethnic war. Investigations into claims of genocide are still pending in the UN. Similarly, Turkey continues to build the Nabucco pipeline, a 3,500 km channel for gas that will be transported from the Caspian Sea and central Asia through Turkey to Europe. In January, Turkey threatened that it would withhold support for the project unless the EU relaxed their energy conditions on Turkey’s membership, but the rift has since dissipated.

Obama arrives in Ankara for a two-day stop tonight. It will be his first trip to a Muslim nation as President.

What benefits and downsides do you see to a Muslim country joining the EU? Besides inclusivity and peace, what other motives might the U.S. have in encouraging the EU to accept Turkey?

Thursday, April 02, 2009

House Passes Weaker Bill as Furor Tempers Over AIG Bonuses

Sources: WSJ, House Passes New, Weaker Bill Curbing Bonuses; NYTimes, Bonus Bill Passes House, to Republicans’ Chagrin

After the U.S. Senate effectively quashed the House of Representative’s severe reaction a few weeks ago to the announcement of AIG, which received over $180 billion of federal bailout funding, paying executives several million in bonuses, the House passed a second, less-severe bill on Wednesday. The new bill prohibits firms who received funds from the Troubled Asset Relief Program (“TARP”) from making payments to executives as part of new or existing compensation packages that are deemed “unreasonable or excessive.” The new bill also allows compensation packages approved before the enactment of TARP to be curtailed.

The bill requires that companies award bonuses and other supplemental payments according to performance-based standards set by federal regulators, including the Treasury Department, the Federal Financial Institutions Examination Council and the TARP Congressional Oversight Panel. The Treasury would have far more discretion in defining “excessive” bonuses than the previous bill allowed for.

Congressional Republicans decry the measure as unwarranted government intervention in the private sector. Some lawmakers expressed concern that the new policy would disrupt efforts to stabilize the financial sector because companies would be more inclined to pay back their bailouts more quickly in order to be able to give their executives competitive compensation packages to retain them. Senate enthusiasm for bonus curtailing has waned as reports indicate that many AIG executives have given back the controversial payments.

Questions for Discussion: Do you think the AIG bonuses are still an issue that policymakers should address? To what extent do politics (i.e., reelection and “political capital”) factor into their decisions to vote for or against this bill? Is it good policy to stand behind, even though most executives have returned their bonuses?

G-20 Expected to Give IMF $500 Billion

Sources: Reuters UK, G20 to up IMF resources by $500 bn; BBC News, G20 leaders close to global deal; Telegraph, Don't Mistake an IMF "breakthrough" for G20 success; Dow Jones Newswires, IMF Lipsky: "Agnostic" on Amount of IMF Resource Increase; IMF Factsheet, Special Drawing Rights

News broke out today that the Group of 20 (G-20), a group of the world's 19 largest economies and the European Union, is set to lend the International Monetary Fund (IMF) $500 billion to bolster the organization's ability to lend funds to countries that are trying to recover from the global financial crisis. The G-20 countries are meeting today in the United Kingdom for a "summit" on how to respond to the financial crisis. After today's summit, the G-20 countries are expected to release a "communique" through which they will share with the rest of the world how they expect to contribute to the international effort to recover from the crisis.

The "hottest" item in the press right now is the $500 billion loan that the G-20 countries are expected to give to the IMF. Over the course of the day, the European Union and Japan have each pledged $100 billion. The United States has stated that it is ready to give at least that amount. Norway has pledged $4.56 billion and Canada has pledged C$10 billion.

Some sources also say that the G-20 countries are also considering an additional $100-250 billion contribution to the IMF's Special Drawing Rights (SDR). The SDR is a reserve asset that the IMF uses to supplement the assets that the IMF's member countries already have with the IMF. If the G-20 countries decide to allocate $250 of their SDR assets to the IMF, the IMF's resources will increase to almost $1 trillion. That amount is three times the amount that the IMF currently has to draw from in helping countries respond to the crisis.

What has been the response to this potential G-20 loan to the IMF? The IMF's First Deputy Managing Director John Lipsky has said that he is "agnostic" about the exact amount that the IMF is going to receive. His main concern is that global investors and policymakers feel that the IMF has the support of the G-20 and will be able to continue to help countries respond to the crisis. Some observers, on the other hand, are not surprised that the G-20 is expected to boost the IMF's resources. In their view, the increase in funding was really an expected development, and the international community should not automatically assume that, by lending money to the IMF, the G-20 has successfully addressed all major issues related to the crisis. Without a doubt, it is important to keep these issues in mind as the world awaits the G-20's confirmation of the exact amount the IMF is set to receive.

Discussion Questions:

1- Many people have referred to the current financial crisis as a "crisis of confidence." What do you think about John Lipsky's view that he does not care as much about the exact amount of the G-20's loan, as long as investors feel confident in the IMF's ability to help countries bounce back from the crisis? Is the IMF's apparent stability crucial to resolving this crisis?

2- Do you think that there will be countries in the G-20 that will be opposed to lending the IMF this much money? Why do you think a country would not favor the proposed $500 billion figure?

Wednesday, April 01, 2009

Sweden’s ‘Saab’ Story

New York Times; Financial Times; Financial Times

The Swedish government recently announced its decision to refuse the nationalization of iconic automaker Saab after reports of impending bankruptcy surfaced last February. General Motors has decided to phase out the carmaker by 2010 as part of its pitch to win a loan from the U.S. Treasury and keep itself afloat. Yesterday marked the original deadline for GM to demonstrate its solvency as a condition of that government aid, but the deadline was extended by 60 days and the aid predicated upon an agreement with the United Auto Workers union.

Saab recorded $343 million in losses last year. The company has long been known for its innovative engineering, but with pressure from GM and consumers to focus on economy and volume, the brand has lost its edge over the competition. Unless Saab can quickly find a private buyer, an estimated 15,000 Saab workers will be laid off in the next year. According to Saab representatives, 6 investors, both Swedish and not, have expressed serious interest in buying the company but no names have been released.

Saab finds itself the first large-scale victim of Sweden’s policy shift away for the traditional Nordic socialism to free-market economics since the election of the new right-leaning government in 2006. The Swedish model of nationalizing and recapitalizing businesses, from banks to carmakers alike, had long been criticized as protectionism by the United States; curious considering that the latest congressional plans have outlined nationalizing both industries.

World governments have endorsed various loan, bailout, and takeover plans for the auto industry. Germany, France, and England are lending the most aid to failing carmakers, though in March, they clarified that the numbers would be much less than they originally pledged. Yesterday German chancellor Angela Merkel announced the establishment of a task force to negotiate the future of GM's European subsidiary, Opel.

Since the EU was formed as an economic union, should the bailout policies for automakers in Sweden and Germany be aligned? Should Sweden reconsider its denial of state aid to Saab? What will this news mean for other Swedish brands such as Volvo and Ikea?

World Bank Provides Pakistan With $500M Loan

Sources: Pakistan Gets $500 Million Loan From World Bank, The Wall Street Journal; World Bank Approves $500 Million Loan for Pakistan, The Times of India; Pakistan Welcomes $500M World Bank Loan, Financial Times; International Development Association,

On Friday, the Pakistani government welcomed a $500 million interest free loan from the World Bank’s International Development Association (IDA). Established in 1960, the IDA is the part of the World Bank that helps the world’s poorest countries. The loan to Pakistan is interest-free for 35 years.

Pakistan hopes that the loan will help stabilize the economy in the face of political and economic turmoil and investor uncertainty. Specifically, the loan will support the Poverty Reduction and Economic Support Operation designed to promote stability, promote competitiveness, and protect the poor through targeted social programs.

According to the World Bank, Pakistan has experienced severe economic turmoil in the past year and is currently confronting a very difficult macroeconomic situation. The rise in international food and oil prices inflated Pakistan’s import bill and the subsequent global financial crisis dampened demand for Pakistan’s exports. In addition, violence and political turmoil has eroded investor confidence which, together with macroeconomic troubles, led to capital outflows.

In addition to this recent World Bank loan, Pakistan has also received a much larger $7.6 billion loan from the International Monetary Fund.

1. Pakistan had to meet certain requirements in order to receive the money. Do you think that requirements should be attached to loan disbursements by the World Bank?

2. Should the World Bank and the IMF monitor the use of the loan money given to Pakistan? What if the money is not used in the way that the Bretton Woods institutions expected?

3. Should there be a cap on the amount of loans that states can receive from both the World Bank and the IMF? If so, should it depend on the size of the state, the size of its economy, etc.?