Wednesday, September 30, 2009

Germany's Election Brings Changing Political Tide

Sources:
New York Times: Merkel’s Party Claims Victory in Germany
BBC News: Merkel Pledges Speedy Transition
News Week: After German Elections, the End of an Era for the European Left

Chancellor Angela Merkel claimed her second victory in the German election Sunday after her Christian Democrat party won 33.8 percent of the vote. The former coalition party, the Social Democrats, earning only 23 percent of the votes, failed to maintain a majority partnership in the government and will fall out of the majority coalition. The defeat comes as a shock to the Social Democrats who, along with the Christian Democrats, have dominated German politics since 1945. With the Social Democrats out of the majority, the Christian Democrats will form a new coalition with the Free Democrats, a more liberal, business-friendly party that earned 14.6 percent of the vote.

This election marks major changes for Germany’s political environment. The two formerly-dominant parties, the Christian Democrats and Social Democrats, both lost significant votes with their constituents. Votes for the Social Democrats plunged 11.2 percentage points from last election, while the Christian Democrats lost 1.4 percentage points. The big winners of the election were the Free Democrats gaining 4.7 percent, the Left Party gaining 3.2 percent, and the Green Party gaining 2.6 percentage points. The rise of these non-dominant parties, together with the Left Party’s acquisition of some leftist Social Democrats who were disillusioned over their party’s recent centrist nature, help explain the shift of power.

Despite these changes, the Christian Democrats and Free Democrats are motivated to form a majority coalition and make rapid changes. Even though the coalition doesn’t make up a simple majority, it won enough votes for a majority in Parliament because 6 percent of the election votes went to parties finishing below the 5 percent benchmark needed to win parliamentary seats. Both parties of the majority coalition campaigned for tax cuts and business-friendly reforms that might be difficult to implement in the face of the country’s soaring public debt and struggling financial system. The coalition also wants to tackle the country’s presence in Afghanistan, the nation’s unemployment level, and nuclear policy (see Germany's Nuclear Debate). Some constituents, however, are now calling for slower, less radical changes until the country can move beyond the challenges it faces in the midst of the financial crisis.

Political change is not the only development from the recent election. The once-traditional, right-leaning Germany has reelected the country’s first female chancellor, who is expected to be joined by the country’s first openly gay vice chancellor and foreign minister, Guido Westerwelle. Mr. Westerwelle will serve a vital role in nuclear diplomacy discussions with Tehran and Germany’s involvement in Afghanistan.

Discussion Questions:
1. Should the new coalition refrain from making radical changes until the country is out of the recession, or will the proposed changes help it climb out of its financial crisis?

2. Germany, the United Kingdom, and many other countries (Argentina, Chile, Finland, India, Ireland, Liberia, Haiti, Iceland, Mozambique, The Netherlands Antilles, Ukraine, etc.) have vested the highest leadership power in female leaders. Why do you think some countries have never had a female leader? Do you think developing countries are better suited for female leadership than developed nations?

Monday, September 28, 2009

G-20 Leaders Agree to IMF Changes in Pittsburgh

Sources:
Leaders Statement: The Pittsburgh Summit
G-20 Backs Sustained Crisis Response, Shift in IMF Representation
G20 agrees to shift more IMF voting power to developing countries
IMF Standing Borrowing Arrangements

At the G-20 meeting in Pittsburgh, the International Monetary Fund (IMF) was asked to support G-20 efforts under their new “Framework for Strong, Sustainable, and Balanced Growth.” The new framework is designed to help global growth become sustainable and more balanced. To ensure that the framework is supported by even-handed analysis, the IMF has been asked to assist the Finance Ministers and Central Bank Governors by developing a forward-looking analysis to determine whether the policies pursued by individual G-20 countries are consistent with the collective goals. The IMF will report on global economic developments, patterns of growth, and suggested policy changes regularly to both the G-20 and the International Monetary and Financial Committee. Plans to develop this process will take place in November.

The G-20 leaders agreed that the IMF must play a role in promoting global financial stability and rebalancing growth. Both the G-20’s commitment to increase funds available to the IMF and the innovative steps taken by the IMF to create the facilities needed for its resources to be used have reduced global risks. The leaders said the collective response to the crisis has highlighted the benefits of international cooperation and the need for a more legitimate and effective IMF. The G-20 leaders welcomed the reform of IMF’s lending facilities, including the creation of the innovative Flexible Credit Line, and committing over $500 billion to a renewed New Arrangements to Borrow program that provides financing to the IMF.

The IMF’s quota and voice reforms received continued support from the G-20. The reforms are a step toward enhancing the voice and representation of the worlds’ emerging and developing countries. These countries will see a shift in quota share of at least five percent from over-represented to under-represented countries from what is currently a 60/40 percent split. In addition, the G-20 has committed to protect the voting share of the poorest in the IMF. IMF Managing Director, Dominique Strauss-Kahn, said that these efforts will lay a foundation for a deeper partnership in economic policy between emerging and developing countries and advanced economies.

Some analysts are concerned that the reform failed to fully redress IMF imbalances. The poorest countries do not have enough voices, while some of the main emerging countries are still underrepresented. Max Lawson, Oxfam senior policy advisor, said that updating the IMF quota share is not real reform and without changing the IMF voting rules to give poor countries a real say, the IMF will remain the “world’s richest country club.”

Discussion Questions:
1. Do you agree with the G-20’s assessment that the IMF is in the best position to be the policy watchdog?
2. Will the increase in IMF lending capabilities cause harm to the emerging and developing countries that are accessing these funds? What effect will it have on the advanced economies?
3. Will the IMF’s shift in quota share have a positive impact on the partnership between emerging and developing countries and the advanced economies?

Sunday, September 27, 2009

African Union officials decide on strategy for upcoming climate change talks

AllAfrica.com: Africa: Walk Out of Climate Talks Possible If Views Ignored

AllAfrica.com: Africa: Continent Puts Price On Climate Adaptation Aid

The Age: Stumbling to Copenhagen

Trinidad and Tobago Express: The Copenhagen Challenge

Economist.com: A Bad Climate for Development

African Union (AU) officials have recently concluded a meeting of the Conference of Africa Heads of States and Government on Climate Change in Addis Ababa. This meeting linked action on climate change to development investment in their continent. These ministers see the Copenhagen talks on climate change in December as a global platform to press their issues. Ethiopian Prime Minister Meles Zenawi, who is leading the African climate negotiators, has outlined a two-prong negotiating approach. They will first argue that climate change must be contained, and secondly that Africa needs considerable economic help to deal with the impacts of climate change. Reports have suggested a myriad of impacts for Africa; increased diseases such as malaria, desertification of farmland, and disruption to the tourism industry.

African nations feel they are among the most vulnerable to economic disruption from climate change, and the least culpable for the release of greenhouse gases that have caused it. Citing principles of equity, the AU position paper outlines an aggressive reduction of greenhouse gas emissions. It targets 40% below 1990 levels before 2020, and 80% below 1990 levels by 2050.

The ministers have also agreed on a financial sum to compensate Africa for the impacts of climate change. Their plan would allocate the money to individual African countries to complete their own national plans of action. The package would cost an estimated $67 billion, and be paid for by developed nations such as the United States and members of the EU. This is the equivalent of .5% of these nations’ GDP to be targeted for developing nations. They stress that this amount is not a cash payment, and is focused on technology transfers and capacity building projects. The AU's director of rural economy and agriculture, Abebe Haile Gabriel says, “The continent's position is not that of demanding cash tokens but massive investment in ways to help the countries use technologies.” These technologies include clean and renewable energy development, energy-efficiency, and low carbon programs.

The lack of money being offered by developed nations is disturbing to the African nations. The current plan offers $21 billion. This is far below the target that these African leaders have agreed on. Closer to their goal is a plan by British Prime Minster Gordon Brown for $100 billion. However, this program would not begin until 2020 and would take its money from a wide group of funds both private and publicly raised from the sale of emission permits. Finding a common ground on financial development will be key not just for the success of the climate talks in Copenhagen, but for battling global warming.

Discussion Questions:

1) What are other development implications of the success or failure of the Copenhagen climate talks?

2) How can climate-related development programs help both the developed and developing countries?

Argentina works toward resolution of 2001 sovereign debt default

Sources:
WSJ - Argentina Works to Resolve Paris Club Default
WSJ - Argentina, Investors Reach Deal on Debt
Financial Times - Argentina hopes to settle debts
Reuters - Venezuela, Argentina to issue bond in latest pact

Argentina continues to work towards resolving the default on its sovereign debt that dates back to 2001. Since the default, Argentina has had extremely limited access to the international capital markets. Argentina has laid out an aggressive spending program for 2010. If tax revenues do not increase, the country will face a deficit that it is not likely to be able to fund. In recent years, Argentina financed its funding gap through Venezuela’s purchase of Argentinean bonds; however, Venezuela is currently in a cash crunch and it is unclear whether that funding source will be available in 2010.

Argentina has attempted to settle with the bondholders several times since the default occurred. In 2005, it reached a deal with approximately 75% of the bondholders. Currently, Argentina is in negotiations with two different groups, the Paris Club and a group of private investors, who are working with them in an effort to settle debts relating to the 2001 default. The Paris Club, which holds $6.7 billion of debt, is a 19-member creditor group that includes France, Germany, Italy, Japan, and the United States. The group of private investors holds debt with a face value of around $20 billion. If Argentina can reach a settlement with the two groups, the country would likely re-gain access to intenational capital markets.

Argentina met with Paris Club member France during the G20 meetings this week and discussed preliminary steps towards resolving the default. Argentina has already stated that it cannot pay the members at the current time, so any settlement would likely involve cutting the value of the debt and extending payment into the future. The Paris Club members are in a delicate situation, as they are encouraging developing countries to increase their domestic demand. One obstacle to increasing domestic demand for Argentina is its ability to fund deficits through access to international capital markets. This provides Argentina, which has the second largest economy in Latin America, with more bargaining power than it has had in past negotiations. Argentina is hopeful that an agreement can be reached by the end of the year.

Argentina is also in the advanced stages of negotiations with the group of private investors that hold approximately $20 billion dollars in bonds. Argentina is proposing that the group of investors exchange the defaulted bonds for bonds at a 33.7% exchange ratio and GDP warrants. Argentina would not pay out any cash under the deal. The new bonds would come due in 2016 and have a coupon rate of 13.5%. The GDP warrants would have a notional face amount equal to the value of the debt tendered and pay out based on the performance of Argentina’s GDP. Investors that hold $8 billion of the remaining $20 billion of debt have agreed in principle to the exchange. Argentina anticipates that once the offer is finalized, the transaction size will increase to between $11 and $15 billion. Argentina continues to assert that it will distinguish between investors that rejected the 2005 offer in good faith and “vulture funds” that refused to accept the deal in hopes of winning a large court settlement.

Questions:
Should Argentina distinguish between investors who refused the 2005 offer in “good faith” and “vulture funds” that held out in hopes of winning a lucrative court settlement during future negotiations?

Should the Paris Club have been more willing to negotiate with Argentina and cut the amount of debt due sooner, given the relatively small amount of the debt compared to the combined wealth of the Paris Club?

G20 summit marked by high hopes for international cooperation

Sources
Financial Times: New body takes on economic leadership, Skepticism over G20 pledge of new era, Full G20 communique
New York Times: Leaders of G20 vow to reshape global economy

As the recent G20 summit came to a close in Pittsburgh, many leaders voiced their hopes for a new era of global economic cooperation. U.S. president Barack Obama praised G20 members for real, tangible cooperation, and said that the financial system of the future “will be far different and more secure than the one that failed so dramatically last year.” Members addressed a wide variety of issues at the Pittsburgh summit, including a timetable for regulatory reform, improved guidelines for bankers’ pay and a new global framework for balanced economic growth.

One of the most noteworthy aspects of the summit was a marked shift in many countries’ views toward international oversight. The concept of national sovereignty has often been a stumbling block for international organizations, in economics and in many other contexts. In Pittsburgh, the G20 made plans for a more balanced global economy and established multiple priorities: the United States will need to increase its savings rate and trim its trade deficit while countries like China, Japan and Germany will need to decrease their dependence on exports and promote higher rates of consumer spending and domestic investment. In a remarkable step toward true international cooperation, each country agreed to submit these balancing policies to a “peer review” process, as well as to monitoring by the International Monetary Fund. Many attribute this change of heart to the severity of the recent crisis. The rest of the world was so shocked by the financial crisis, emanating from the United States, that they may be reevaluating what is in their best interest. Allowing international oversight may mean giving up a degree of sovereignty in economic policymaking, but that concession may be well worth the price if it can prevent another severe financial crisis.

Another important shift occurred at the Pittsburgh summit— the leaders formally announced that global economic discussions would shift permanently from the Group of 7 (the United States, Britain, France, Canada, Italy, Germany and Japan) to the Group of 20 (which includes China, India, Brazil, South Korea and South Africa and others). This change, believed by some to be long overdue, reflects the shifting dynamic of the global economy and the increased importance of fast-growing developing nations. The G20 also reemphasized their commitment to give China and other emerging economies a larger share of voting power at the IMF and the World Bank. Some analysts have voiced criticism over the potentially “unwieldy” nature of a 20-member group, while United Nations secretary general Ban Ki-Moon visited Pittsburgh to remind leaders that 85 percent of the world’s countries are not represented by the G20. Although current member nations do account for 85 percent of global income, group membership will remain an important issue as the global economy continues to shift.

The summit’s formal communique articulates clear priorities and cooperative goals. However the agreements endorsed by G20 leaders on Friday were for the most part non-binding pledges. President Obama and other leaders have hailed a new era of cooperation. They must now meet the very real challenge of working together to build a better global financial system.

Discussion
1. The G20 member nations have agreed to require higher levels of capital reserves at banks and other financial institutions. However the communique includes no specific numbers on how high the capital reserves must be. Different countries have diverse approaches to this issue (Japan’s banking system, for example, is traditionally more conservative than those of most European countries). Should the G20 establish a single, one-size-fits-all requirement for capital reserves, or should there be room for variation in the standard?
2. In response to the critique that a 20-member group is too unwieldy to manage global economic discussions, some argue that the real work will be done in sub-committees. What are the potential benefits of allowing sub-committee work within the context of the G20? Are there disadvantages?

Saturday, September 26, 2009

Banks Under Pressure to Change Overdraft Policies, May See Oversight Regardless of Cooperation.

Sources: Reuters.com: U.S. Bank Overdraft Fee Cut May Spur More Costs; WSJ.com: As Banks Retreat, Lawmakers Press Attack; WSJ.com: Democrats Soften Financial Bill.

Major U.S. Banks are waiving white flags of surrender under pressure from lawmakers to scale down overdraft fees and lessen consumer penalties. Increased customer dissatisfaction and the threat of adverse legislation has persuaded Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. to make statements this week conceding to the imposition of voluntary limits on their own penalties and fees. The question is whether these changes will be enough to satisfy lawmakers or if these banks have even more regulation coming their way.

So far, financial institutions have committed to limiting the frequency of overdraft fees and the amounts to which overdraft fees apply. For example, Wells Fargo has stated that they will discontinue the practice of charging overdraft fees to customers who overdraw their account by $5 or less. The bank has also agreed not to charge customers more than four overdraft fees per day. J.P. Morgan has agreed to halt practices that maximize penalties, such as the practice of deducting larger transactions before smaller transactions that occur on the same day in order to penalize more transactions per day. Instead the bank will, for the most part, list charges chronologically as they come in.

During the most recent financial crisis, overdraft fees have become critically important revenue for banks. As U.S. banks experienced a dramatic decrease in their net worth, increasing the overdraft penalty and other service charges was a natural way to rebuild. Overdraft fees now account for six percent of U.S. banks’ operating revenue.

House Financial Services Committee Chairman Barney Frank has stated that although he is pleased with the compliance of America’s top banks, he still plans to pursue legislation to force overdraft policies on banks. The Federal Reserve is also considering required curbs to overdraft fees. Mr. Frank believes the fact that banks are willing to curb their fees voluntarily is confirmation that mandatory laws doing the same will not be too burdensome.

While oversight of U.S. financial institutions’ ability to charge overdraft fees is positive for customers in the sense that it will limit hidden costs, banks will likely find a way to recover some of the lost revenue through charging fees for services that had been previously free.

Discussion Questions:
1) Will congressional democrats have a hard time getting a bill through both houses that places harsh limits on the way financial institutions do business in light of the current financial climate?
2) Have overdraft fees gotten out of hand since their imposition? Is it fair for a person to have to pay $60 for overdrawing their account by $5?
3) As a consumer, are lower upfront costs preferable to higher upfront costs and the risk of hidden overdraft charges or is it the other way around?

Friday, September 25, 2009

Asia Is Leading Global Recovery, Says ADB

Sources:
The Financial Times: Asia to Lead Global Growth, Says ADB
The New York Times: Asia Rebounding Rapidly, Bank Reports
ADB: Asia Needs Broader Openness for Economic Resilience, Says ADB

Developing Asian economies are more resilient to the global crisis and will grow stronger than expected, according to the Asian Development Bank. The bank, in its recent report, the Asian Development Outlook 2009 Update, raised its 2009 growth forecast for developing Asia to 3.9 per cent in 2009, from 3.4 per cent predicted in March. The bank also upgraded its growth forecast for China to 8.2 per cent in 2009, 1.2 percentage points higher than its forecast in March and 8.9 per cent in 2010.

The report says that Asia has been rebounding quickly as the governments’ stimulus programs such as tax cuts and greater public spending boosted domestic consumption and investment. Also, the relatively healthy status of commercial banks in the region with strong balance sheets underpinned the improved growth prospects. However, the report warns that “hasty withdrawal” of fiscal and monetary stimulus and “any slippage” in the major global economies’ recovery would impede the regions’ rebound.

To further strengthen Asia’s economic resilience and reduce its vulnerability to external shocks in a globalizing world, the bank says Asia needs balanced openness to international trade. Although the region successfully recovered from the 1997-98 Asian Financial Crisis, the recovery came “at the expense of an over-reliance on external demand from outside the region,” said ADB Chief Economist Jong-Wha Lee. While reducing the risk of excessive capital inflows, the region has more heavily relied on extra-regional demand, and the current global crisis exposed Asia to the risk of unbalanced trade openness. The report points out that the current financial crisis spread to Asia mainly through the collapse of demand in major global markets. In order to have more geographically balanced openness, the bank calls for strengthening intra-regional trade by stimulating domestic economies, eliminating trade barriers, and enhancing regional cooperation.

Discussion Questions
1. What are other options to bring more balanced openness to trade in Asia in addition to facilitating intra-regional trade? Should Asian countries consider loosening their governmental intervention in currency markets?
2. Asia’s rapid rebound seems to revive the notion of “decoupling.” Given that Asian countries were also hit hard by the global financial crisis, how persuasive is the decoupling concept?

Thursday, September 24, 2009

IMF Says Wealthy Countries Need to Give Financial Support to Low-Income Countries

Sources:
Low-Income Countries Need Extra Support to Cope With Crisis
IMF Says Poorer Nations Need $55 Billion in Aid
Press Release No.09/305

During past financial crises, low-income countries may have had to cut government spending, limit imports, or simply not pay their bills. During the recent crisis, an increase in IMF financial support and policy advice aided their macroeconomic policies. This support has allowed three quarters of low-income countries to increase their budget deficits to combat the recent global financial crisis. However, these countries have still been hit hard by the crisis and may see their growth levels fall to half of pre-crisis levels this year. Because low-income countries remain vulnerable to the global financial crisis, wealthy countries need to support their poorer neighbors, said IMF Managing Director, Dominique Strauss-Kahn, in a press release issued on September 17, 2009.

The long-term needs for development financing go beyond the IMF’s current capacity to provide. The IMF has made $8 billion available for concessional lending over the next two years and has approved zero interest payments up to the end of 2011 for all concessional loans as well as lower interest rates on a permanent basis thereafter. Challenges such as East Africa’s drought will further increase the need for financial support from wealthier countries.

Strauss-Kahn said that as the world emerges from the financial crisis, wealthier countries may be tempted to reduce aid and respond primarily to their domestic needs; however, the needs of low-income countries cannot be ignored. He also stated the global economic crisis stemmed from the wealthy countries' mistakes and poor countries should not be left on their own. The World Bank President, Robert Zoellick, has called on all rich countries to resist complacency and follow through on their promises to fund their poor neighbors.

Strauss-Kahn says he expects the global economy to emerge from recession during the first half of 2010. He warned that relying on the increasing world demand to pull the low-income countries along is a bet we should not take. Low-Income countries remain highly vulnerable and financing needs remain substantial.

Discussion:
1. Should the IMF require more of its member countries to solidify the financial support to poor countries?
2. Is it fair to ask wealthier nations to provide more funding to poor nations while they are struggling to emerge from the financial crises themselves?

Wednesday, September 23, 2009

Ireland's Toxic Assets Find a Home

SOURCES
The Economist; Ireland’s Toxic Asset Plan Makes A Good Fist of a Bad Situation.
BBC News; NAMA Q&A
Ireland.com; Lenihan Strongly Defends NAMA

Ireland’s previous attempts to save its banking system were apparently not enough. In January of this year, the Irish Government injected €7 billion into the Bank of Ireland and nationalized Anglo Irish Bank, creating a recapitalization that was the equivalent of 4% of the country’s GDP. Despite these efforts, the IMF predicts that Ireland will suffer a 13.5% peak-to-trough loss in GDP and a €35 billion banking-system loss if Irish banks are unable to offload their toxic assets.

To avoid this catastrophe, the Irish Government has come up with a plan to create a new agency called the National Asset Management Agency (“NAMA”). NAMA plans to take €77 billion of land and development loans off banks’ balance sheets in exchange for €54 billion in government-backed bonds. This transaction will provide the banks with about €7billion more than their assets are actually worth. Despite the overpayment, banks will still require additional capital from other sources to cover the 30% decrease in value the assets have sustained as a result of the financial crisis. The plan’s pricing strategy is somewhat mitigated by its risk-sharing element—a subordination of 5% of the value of NAMA bonds that will erode if the agency loses money on the assets. This feature ensures that the banks will share some of the responsibility for the losses.

NAMA will transfer assets from the same six banks that the Irish Government guarantees—Allied Irish Bank, Bank of Ireland, Irish Life and Permanent, Irish Nationwide Building Society, EBS Building Society, and the nationalized Anglo Irish Bank. NAMA’s goals for this plan are three-fold: to restore trust in the nation’s banks so that the Government can lift its guarantees on the banks’ money, to avoid shareholder enrichment at the expense of the taxpayers, and to avoid further state ownership of the banking system. Implementation of these goals, however, is proving more difficult than expected due to the large losses the banks have already suffered.

One challenge of implementation was to determine the appropriate level of contribution from taxpayers and shareholders. The Irish Government has decided to inject more government funds into the system up front by overpaying for the assets (relative to distressed market value), rather than force failing banks to raise additional, hard-to-find capital in a struggling economy. Patrick Honohan, the incoming governor of Ireland’s Central Bank, argues against overpayment, stating that authorities should take a more rigid approach to controlling the fiscal cost of a banking crisis by requiring holders of subordinated bank debt to bear a higher burden than the taxpayers. The extent of NAMA’s success will help determine which approach is better for an economy’s recovery.

Discussion:
1. How is NAMA’s overpayment strategy consistent with its goal of “avoiding shareholder enrichment at the expense of taxpayers?”

2. Will taxpayers always bear the greater burden in a financial crisis, whether it’s sooner in the form of government cash injections, or later when the economy fails from lack of government assistance?

3. Is the 5% subordination element of NAMA’s plan just a fiction to promote the plan, considering that the government overpaid for the assets by about 15%?

Monday, September 21, 2009

Auto Industry Woes Run Deeper Under Venture Capitalist's Looking Glass

Sources: WSJ.com: Michigan is Singing the White-Collar Blues; Reuters.com: Silicon Valley Warning: Detroit Still Doesn’t Get It; WSJ.com: For One Former Chrysler Manager, Cleaning Toilets Will Have to Do.

The Big Three, North America’s three largest automakers, have seen better days. General Motors, Chrysler and Ford once held dominant positions in the auto industry’s marketplace and now are all relying on substantial government assistance to avoid total collapse. Both General Motors and Chrysler have been through bankruptcies and have received sixty billion dollars of federal money in that process. Ford, while not sinking to the level of bankruptcy, has reached out to the government as well, relying on future assistance of at least six billion. As these companies continue to squirm under the present economic strain, industry leaders from other business sectors are weighing in on the situation.

Silicon Valley venture investors, individuals or firms who channel money and expertise into small rising star companies, are speaking out against the auto industry’s dated business model, conveying their beliefs through capital investments in companies that are focusing the greatest amounts of effort in auto-innovation and reform. The belief is that to be competitive on the world stage, Detroit automakers need to start over and completely overhaul their business model, making continuous technological innovations the focus rather than a focus. Automotive companies that are finding support from these investors have made the focus of their business advances in technology such as electric car innovations and battery charging production stations, rather than innovations in car design and attractiveness.

Even if the Big Three heed the advice of these investors, it will be awhile before the smoke clears. The Big Three have eliminated almost 30,000 jobs since the end of 2006. Despite the three billion dollars in trade-in incentives that have come their way, sales remain down 28 percent. On a more fundamental level, Michigan’s unemployment rate has reached 15.2 percent, up from 9.6 percent in November of 2008. In Detroit, that rate has soared to 17.7 percent, which makes Detroit the metropolitan area with the highest jobless rate in the U.S. Because most of the job loss has been white-collar (jobs that require a minimum level of education and consist of mainly office work as opposed to blue-collar labor jobs), many people who formerly held management positions in Big Three companies now find themselves working at jobs that they are overqualified for, if they are working at all.

Discussion Questions:

1) At what point does innovation translate into something too risky to buy into in a conservative spending regime?
2) What is an example of a sector that has a proven business model that could serve as a guide for the Big Three?
3) Are consumers likely to respond to business innovations like electric cars versus an aesthetically pleasing design?

Balancing the Global Economy

Sources:
The Financial Times: China scorns focus on imbalances; A lopsided world tilts upward, slowly
Reuters: China, U.S. key to global imbalances: Meirelles

Resolving global economic imbalances is likely to be another important issue along with financial regulations at the upcoming G-20 summit in Pittsburgh. The U.S. and European leaders will try to reach an agreement on a policy framework for addressing global imbalances at the summit to ensure that imbalances do not re-emerge as the global economy recovers from the crisis. The leaders will also try to ensure that future global economic growth no longer depends on “bubble-fuelled spending” in the United States.

In response, Chinese officials say that the summit should focus on repairing financial regulations rather than global imbalances. They believe that the root cause of the financial crisis is “the lack of supervision and abuse of openness of the market, very risky levels of leverage and too much speculation,” and China is not to blame for the financial crisis. In addition, China may also argue that it has already launched an effort to rebalance its economy. Its fiscal stimulus program contributed to increasing demand for commodities and its current account surplus is expected to fall this year.

According to the Financial Times, both sides represent valid perspectives. The global savings glut contributed to overly expanding credit and bad regulations failed to recognize the true risk of higher returns. Rather than engaging in such an unproductive blaming game, global leaders should focus on fixing both problems. In balancing the global economy, however, China’s role is limited and other developed surplus countries must act as well. The size of the Chinese economy is not large enough to solve the huge deficits in the developed countries, but its economic growth could boost domestic consumption. In this regard, Europe and Japan must exert the same effort to enhance domestic consumption and avoid turning back to surplus as the economy recovers.

Discussion Questions:
1. What kinds of policy measures or framework could be effective in reducing global imbalances? Could G20 leaders reach a meaningful agreement on those measures at the Pittsburgh summit?
2. What kinds of actions could China take in order to balance its economy rather than boosting domestic consumption with a stimulus program?

Sunday, September 20, 2009

Libya: Quickly increasing profile on anniversary of Gadhafi’s power

BBC: Italy PM opens North African road National Public Radio: U.S. Visit Marks Gadhafi's Makeover
Financial Times: Oil Groups Face Libya Ultimatum
New York Times: BP Conducts Seismic Survey Off the Coast of Libya
Aljazeera.Net: Libyans Await Economic Recovery

Libya is aggressively remaking its image and capturing a larger slice of the global spotlight. It has been growing in economic power since 2004 when American sanctions were lifted. But recent events coinciding with the 40th anniversary of Colonel Moammar Gadhafi’s successful coup d’├ętat have refocused attention on this North African country.

An alignment of political victories and oil investment deals have fueled Libya’s assent. Col. Gadhafi is currently the chair of the African Union and Libya is poised to accept the leadership of the United Nations. This comes at the same time as major deals are being discussed for oil development between Libya, with its largely unexplored and untapped oil reserves, and Great Britain, Italy, and China.

The release of Lockerbie bomber Abdel Basset Ali al-Megrahi, the diplomatic flap surrounding Gadhafi’s visit to the United Nations in New York, and a collection of “eccentric” statements have become so divisive in the Western media that it is possible to overlook their connection to Libya’s economic and development projects. Regardless of whispers of backroom political dealings, BP is drilling its first well in Libya in 30 years as part of a US$900 million exploration program.

Other countries are also progressing in their development programs with Libya. Italy has provided generous help to its former North African colony to open the first section of a major road project. This project represents a major part of a US$5 billion settlement between Italy and Libya over their shared colonial past. This coastal road will stretch from Tunisia to Egypt, and replace a road originally constructed with help from Mussolini. Italy is financing the project with a tax on its national oil company ENI and it has led to very rewarding deals to extract Libyan oil reserves.

The ongoing strength of the oil market is likely to continue to provide a stream of dollars for Libyan development. Recent market liberalizations have increased hopes that some of the oil money will seep into the greater economy. However, many Libyan citizens are still skeptical. They feel that greater oversight and attention to corruption and governmental efficiency is required before everyone will benefit from these development programs.

Discussion:
1) Does allowing Libya to chair the United Nations help or hurt the credibility of this institution? Will the work of the United Nations in Africa be more effective?
2) Will more Western countries begin giving Libya diplomatic and economic concessions to increase their chances to invest in oil reserves?

Latin America Moves Toward Integrated Exchanges

Sources
"Brazil Bourse Aims to Open Region’s Door" The Wall Street Journal
"Andean exchanges move to integrate" The Financial Times
"Chile, Columbia, Peru Agree To integrate Stock Exchanges" Nasdaq.com

On September 10, 2009, representatives from the Chile, Columbia, and Peruvian stock exchanges announced that they would integrate their respective stock exchanges by late 2010. The group will determine whether to integrate the exchanges by creating a single index or through cross-listings by March 2010. On September 16, 2009 the Brazilian financial exchange BM&FBovespa SA announced that it was pursuing an agreement that would allow the cross listing of stocks with the Chilean, Columbian, and Peruvian exchanges.

The integration of the Chilean, Columbian, and Peruvian stock exchanges creates a market with a combined market capitalization of around $300 billion that will have an average trading volume of $225 million per day. Currently there is very little cross border investment by private pension investors between the countries. The integration should encourage cross border investment between the countries and will provide investors in each country with more investment diversification opportunities because of the different composition of each country’s exchanges. For example, the Chilean stock exchange is comprised of a mix of energy, trade, and service companies, and the Columbian stock exchange is composed primarily of banking and oil companies, whereas the Peruvian stock exchange is composed primarily of mining companies. The mix provided by the integrated exchange will allow individual investors to benefit from growth in the Latin American region and help diversify investors to reduce risk from the economic fluctuations of each country’s primary output. The integration will also provide a new source of capital for companies within the region that need to raise capital because the combined exchange will have increased liquidity and decreased volatility (the Peruvian stock exchange fell 60% in 2008 and gained 93% so far this year). The countries also expressed an interest in permitting other countries to join the combined exchange as the exchange develops.

One week after the announcement of the Chilean, Columbian, and Peruvian agreement, Brazil’s exchange, BM&FBovespa SA, announced that it was seeking an agreement with the three exchanges that would permit cross listing of derivatives and stocks on the exchanges. Bovespa also announced that it was seeking cross listing agreements with both the Mexican and Argentinean exchanges. Brazil’s exchange currently has a market capitalization of slightly over $2 trillion dollars and is currently the region’s largest exchange. The Chilean, Columbian, and Peruvian exchanges declined to comment on Bovespa’s announcement.

Questions:
Do you think that the combined Chilean, Columbian, and Peruvian integrated exchange will eventually grow, both organically and by adding other countries, to challenge BM&FBovespa SA as the premier exchange in Latin America?

What is the biggest regulatory hurdle facing the integration of Latin American exchanges?

IMF reform to be addressed at upcoming G20 summit

Sources
Financial Times: IMF reform hope
IMF: U.S. Congress vote marks big step for IMF reform, funding,
IMF Governance- Summary of issues and reform options

The upcoming G20 summit in Pittsburgh may be an ideal opportunity for economic leaders to pursue long-awaited IMF reforms. G20 member nations will be tested on their commitment to international issues during the aftermath of the crisis, at a time when domestic difficulties are still a high priority. On the reform agenda: revised governance and representation of member nations, SDR allocation and improving the Fund’s capacity to respond to international crisis.

International Monetary Fund (IMF) managing director Dominique Strauss-Kahn has high hopes for the reform plan. He expects progress in ongoing efforts to give developing countries greater representation within the IMF and urges the G20 to brainstorm new ways to include poorer countries in the fund’s decision-making process. Strauss-Kahn also estimates that the world’s poorest countries need almost $55 billion in additional external financing over the next two years. The IMF could provide about a third of that, but Strauss-Kahn hopes G20 members will consider stepping up their aid, even perhaps to meet commitments made in 2005 at the Gleneagles summit.

In June of this year, the United States Congress set the stage for IMF reform by passing supportive measures in the Supplemental Appropriations Act for fiscal year of 2009. U.S. endorsement of the reform agenda is crucial, as many of the reform measures will require an 85 percent majority of the Fund’s voting power; and the U.S. possess 16.77 percent of that voting power. In the legislation Congress provided the U.S. administration the authority to move ahead on a number of key measures, including reform of country representation, gold sales, and increased funding for the IMF. Strauss-Kahn welcomed the United States’ initial steps and now looks to the G20 to continue the progress in Pittsburgh.

Discussion
1. The current allocation of IMF voting power largely reflects the distribution of global economic power. Is there an argument to be made in favor of eliminating this linkage? How could a different distribution of power address both economic realities and fairness concerns?
2. Can G20 member nations be expected to meet their 2005 Gleneagles aid commitments after undergoing severe economic crisis? How much external financing should the IMF realistically expect the G20 to pledge at the Pittsburgh summit?

Friday, September 18, 2009

Germany's Nuclear Debate

The Economist; Nuclear Power? Yes Maybe
WSJ; German Challenger Gains an Edge
Energy Tribune; German Elections Reigniting Nuclear Debate
World-Nuclear.org; Emerging Nuclear Energy Countries

Germany, the world’s fourth largest economy and the European Union’s most populous nation, is set to hold its federal election on September 27, 2009. Some of the issues up for debate include how to handle the country's budget deficit and current economic situation, unemployment, executive-pay laws, Germany’s involvement in Afghanistan, and the future of the country’s energy sources, a particularly emotive topic. Currently approximately seventeen percent of Germany’s energy comes from renewable sources like solar and wind power, twenty-five percent comes from nuclear power, and about half comes from burning coal, a major producer of greenhouse gases.

In 2000 the Social Democrat Party voted with the Green Party to phase out the seventeen existing nuclear plants by 2020, halting construction of new plants and increasing investment in renewable energy sources like wind and solar power. Chancellor Angela Merkel, leading the Christian Democrat Union, along with the Free Democratic Party, has campaigned to revisit the 2020 phase-out law and extend the lives of some of the nuclear power plants until the country can make greater investments in renewable sources. This coalition argues that because all renewable energies within the country are subsidized, and investment in renewable energy storage and transmission is extremely expensive, cheap nuclear power is a necessary and vital bridge technology that will assist in the development of renewable resources.

The Social Democrats and Green parties, on the other hand, argue that nuclear power is an irresponsible energy source and the 2010 phase out deadline should prevail. This argument comes in the wake of two recent accidents in Germany that caused emergency plant shutdowns. This Social Democrat-Green coalition contends that if nuclear power investment were extended, investment in renewable sources would end. Supporting this party’s argument is the contention that renewable energy production might be the ticket to conquering the economic crisis. (See Spain Relies on Renewable Energy to Fight the Economic Crisis, a recent Center for International Finance and Development blog discussing the potential benefits President Obama’s stimulus package might bring to countries selling renewable energy).

Fifty-thousand people protested against Merkel’s nuclear power position earlier this month in Berlin, highlighting the intensity of the issue. Germany’s debate over nuclear power comes at a time when as many as 30 other countries are actively pursuing their own nuclear power programs. These countries, both emerging and developed nations, are likely to pay close attention to both sides of the debate.

Questions:
1) Considering the great concern for non-proliferation and insurance arrangements relating to nuclear energy and waste, do you think countries embarking on efficient power programs should move straight to renewable sources?

2) What kind of power does a country assert in the global setting by being “energy efficient?” In a world of rising energy costs, has energy independence become as coveted as having a strong financial system or a powerful national defense?

Monday, September 14, 2009

MUCH HINGES ON FHA’S ANNUAL REPORT

Sources: WSJ.com: Behind FHA Strains, a Push to Lift Housing: WSJ.com: Loan Losses Spark Concern over FHA; Rueters.com: FHA Says Won’t Need Congressional Support

On September 30, 2009, the Federal Housing Administration (FHA) is set to release information on the amount of money it holds in reserve. If that amount is lower than the congressionally mandated minimum and home prices decline further, the result could mean taxpayer assistance for the first time since the Agency’s inception.

The FHA is a government agency that provides guarantees on mortgages for homebuyers, inducing private lenders to loan money to those unable to pay large down payments or those with little equity. It is a part of the U.S. Department of Housing and Urban Development. The suspected low levels of reserve money come as the FHA has attempted to stabilize the housing market by increasing guarantees on loans.

Federal law dictates that the FHA must maintain reserves equal to at least 2 percent of the loans that it insures. In recent years, the Agency’s reserves have declined from 6.4 percent to roughly 3 percent in 2008. The decline is primarily due to the rising number of defaults. According to the Mortgage Bankers Association, an estimated 7.8 percent of FHA insured loans were 90 or more days late or in foreclosure. That number is up from 5.4 percent in 2007.

If the reserve is found to be below minimum standards and the agency requires a government bailout of some kind, it is likely that further limitations and restrictions would be put on who can receive FHA backing, making it even more difficult for borrowers to get financing.

Although the FHA’s position is that it will not need government assistance should its reserve fall below the minimum, the agency is expected to announce new ideas for improved oversight of its lenders this fall, as well as announcing who will fill the newly created position of Chief Risk Officer. Much depends on the information contained in the annual report of September 30.


Discussion Questions:

1) Which is worse, making it even more difficult for borrowers to get loans or seeing the FHA reserves fall below mandated minimums?
2) What can the FHA do to improve the oversight of its lenders?
3) Does the Obama Administration need to make FHA oversight a higher priority in his agenda?

Sunday, September 13, 2009

Economic embargo increasing prices in Gaza during Ramadan

Sources:
Reuters.com: Gaza at Ramadan: blockade, dress code fray tempers
Ynetnews.com: Gaza: Red meat prices too high for Ramadan
Xinhua: Israel rejects Ramadan commodities, stationery into Gaza
Ma’an News Agency: Gaza: Residents complain of high prices as gov't announces decline
IPS InterPress-Services: MIDEAST: Malnutrition Begins to Bite
The Jerusalem Post: UNRWA starts Gaza Ramadan campaign

The economic impacts of the Israeli embargo on Gaza are poignantly felt this Ramadan. The cost of fruits, vegetables, and meat have increased dramatically during the Israeli blockade over the last two years. Basic food aid is available, but many of the special foods used to celebrate this holiday are available only when smuggled in via flourishing underground tunnels. This black market price gouging, combined with unemployment near 50%, means that many are going without traditional holiday staples such as pickles, dates, and jam this season.

Ramadan is the Islamic holy month that centers on both prayer and community celebration. Fasting during the day is designed to help increase empathy for the poor. Breaking the fast each night is a joyous occasion for most, with food and candy playing a large role.

The Israeli blockade on Gaza has lasted for three years since the election of Hamas. The impact has been even more crippling since the “Operation Cast Lead” military campaign in December of 2008. Israeli control over the border crossings has been uneven—at times allowing in shipments of cattle to reduce the cost of beef, but at other times denying some shipments of Ramadan supplies. These policies led the World Bank to describe the economic situation in Gaza as “extreme closure”, and one merchant said that the Ramadan economy was “the worst in 50 years”.

This dire economic reality has led the UN agency for Palestinian Refugees (UNRWA) to launch a special appeal. Their fundraising goal is U.S. $181 million, but so far donations have not been prolific. However, it points out that as long as Israel maintains the blockade it will make serious efforts to rebuild Gaza very difficult.

Discussion:
1) Who should be the targets of economic blockades? How does this embargo differ from the one the United States has placed on Cuba?
2)What materials should be the target of economic sanctions? Do international development goals supersede those of national security?

Switzerland to Disclose Accounts

Financial Times; Remarks by Commissioner Doug Shulman on UBS
PR News Wire; U.S. Discloses Terms of Agreement With Swiss Government Regarding UBS
IRS; IRS to Receive Unprecedented Amount of Information in UBS Agreement

The United States successfully challenged Switzerland’s banking secrecy practices. Some say Switzerland was the first true tax haven, allowing its customers to deposit money in its banks at low tax rates and protecting those funds from bankruptcy creditors. The country also declined to assist others in uncovering tax fraud offenders by refusing to disclose the names of its banking customers.

The challenge began when the United States filed a lawsuit against the Swiss government earlier this year. In August the two countries reached a settlement under which the Swiss government agreed to cooperate with U.S. authorities in tax fraud prosecution. Under a new treaty, Switzerland will disclose details of approximately 4,500 American accounts in UBS Bank and other Swiss banks upon the United States' request.

The United States has offered amnesty to anyone voluntarily disclosing a hidden account by a September 23, 2009 disclosure deadline. The Swiss will disclose names on a rolling basis and anyone found to be in violation of U.S. tax laws without coming forward voluntarily will face criminal prosecution and full monetary penalties. Voluntary disclosure will result in reduced penalties and amnesty from criminal prosecution. Neither the United States nor Switzerland has released the exact terms of the agreement.

The United States is not the only country seeking to recoup unpaid taxes. France, Canada, and India have also successfully pressured Switzerland into providing information about citizens hiding taxable money in Swiss accounts. The agreements do not require Switzerland to release the names of all its foreign customers, however, as requesting nations will need to provide evidence to substantiate a claim of wrongdoing before Switzerland releases account identities.

What does this mean for Switzerland and UBS? It is difficult to determine just how much money is in question, but some believe that American depositors at one time held over $18 billion in Swiss accounts. UBS is a large part of the Swiss economy and faces additional financial challenges in the wake of this agreement and the global financial crisis.

Discussion Questions:
1. How will Switzerland reposition itself as a global financial leader without its favorable banking secrecy laws?
2. Switzerland has maintained banking secrecy for a long time. Why did the United States wait until 2009 to pursue this issue? Could it have something to do with its global standing? The financial crisis?
3. Will the cost of imprisonment of tax evaders justify the IRS income obtained and the potential damage to the U.S.–Switzerland economic relationship?