Tuesday, October 27, 2009
WSJ: CrackING Down on Europe’s Banks
Star News Online: ING to Split in Two Amid $11.3 Billion Rights Issue
WSJ: ING to Spin Off Units in Bid to Assuage EU Over State Aid
This week the European Union forced the Dutch banking and insurance giant ING into a restructuring plan to comply with the EU’s rules on state assistance. The plan includes selling U.S. online banking subsidiary ING Direct, divesting 6% of the Dutch retail banking market, paying the Dutch government €1.3 billion for access to its bad-asset protection program, and divesting its entire insurance business. ING also had to agree not to buy or be a price leader in certain financial products for at least three years.
In October of 2008 the Dutch Government provided ING with €10 billion in emergency funds to help cushion the company’s Tier One capital level—a measure of a company’s financial strength. The government also provided €28 billion of guarantees to the bank’s illiquid securities. All of the European banks that received government assistance of this kind last year had to agree to restructuring plans under the European Union’s oversight. ING is making good on its word to restructure, and it is also raising €7.5 billion in equity through a stock issue to repay half of the aid the Dutch government provided during the crisis. The other half of the repayment will come from the divestment of bank assets and retained earnings.
The result of the bank restructuring will be a company with roughly half the balance sheet, with a third less assets, and a new management board by 2013. The bank has already begun to implement its so-called “back-to-basics” plan by trimming its major divisions from six to two and agreeing to sell its Swiss private banking unit to wealth manager Julius Baer. Oversea-Chinese Banking Corp. of Singapore has agreed to buy ING’s private banking assets in Asia, and ING’s Reinsurance Group of America is also up for sale. ING Direct could be harder to dispose of because many of the financially capable banks in the United States are preoccupied with buying U.S. failed banks at a discount with the U.S. government’s help.
It is no surprise that the future of ING looks much different than it did two years ago. Post restructure, a smaller, insurance-free ING will have to forego its “double leverage” model that allowed it to operate at lower capital requirements as a result of its diversified risk platform. The bank will also have to deal with weak growth prospects and a new era of cost cutting. Others banks are expected to follow ING’s lead, as 30 more European banks are currently awaiting financial restructuring plan approval from the EU, most notably Lloyds Banking Group and Royal Bank of Scotland.
1. Do you think ING knew of the consequences of the restructure plan when it agreed to take bailout money from the Dutch in 2008? Do you think knowing the consequences of the plan would have deterred it from accepting monetary assistance?
2. Did ING’s diversified risk program and lower capital requirements help or hurt? Would ING have been better or worse off had it had more reserves but been less diversified?
After a surprise announcement, the Ibrahim Prize for Achievement in African Leadership will not be awarded this year. The award is presented to a former sub-Sahara African head of state based on their good governance in the areas of security, health, education and the economy. A democratic transition of power from the former head of state to their successor is also a prerequisite to winning. Winners receive $5 million paid out over 10 years followed by $200,000 a year for the rest of their life. It has been praised not only by eligible African leaders, but world luminaries such as former South African President Nelson Mandela, United States President Bill Clinton, and United Nations Secretary General Kofi Annan have supported this unique idea.
The award was founded by billionaire Mr. Mo Ibrahim, a Sudanese mobile phone entrepreneur. In 2005, Mr. Ibrahim sold his pan-African company Celtel to Kuwait-based MTC for $3.4 billion. He now wants to give back to his homeland, and has started a foundation to promote good governance in Africa. Mr. Ibrahim felt that many former African presidents have difficulty letting go of the fancy trappings of their offices. Many go from having expensive cars and mansions to experiencing difficulty renting a house in the capital city. Mr. Ibrahim says this causes them to engage in embezzlement, corruption, and to slow smooth transitions to newly democratically elected leaders. The Ibrahim prize is the world’s largest, far exceeding the $1.3 million given for the Nobel Peace prize. Mr. Ibrahim hopes that the generous gift will help honest people who may be having trouble making the right decisions to stay the course and promote good democratic leadership.
Past prize winners have included Joaquim Chissano of Mozambique in 2007 and Festus Mogae of Botswana in 2008. Additionally, former South African President Nelson Mandela is an honorary laureate. This year marks the first time that the award has not been given, a possibility that Mr. Ibrahim has said always existed. He points out that the decision by the prize committee is not meant as a slight to any potential candidates. Early speculation favored South Africa's Thabo Mbeki and Ghana's John Kufuor. However, in failing to find a worthy recipient, the awards committee has highlighted a troubling trend on the continent. Uganda, Chad and Cameroon have all recently amended their constitutions to allow their leaders more time in office. Guinea, Mauritania and Madagascar have all recently suffered from coups. Many observers have noted that even when there were democratic elections, they often fell short of international standards. It is hoped that next year will see a return of the Ibrahim award and an improvement of the ideals that it stands for.
1) Is the Ibrahim prize a reward for good leadership or is it a bribe that good leaders should not need?2) When any prize skips a year, does it hurt the respect given to the award and what it stands for?
Sunday, October 25, 2009
World Bank Report Highlights Progress in Addressing Corruption Risks
Integrity Vice Presidency Annual Report Fiscal Year 2009
The World Bank Group has taken steps during the past year to address corruption risks and ensure that anti-corruption is a critical element in its development mission according to the Integrity Vice Presidency (INT) Annual Report for Fiscal Year 2009. The World Bank Group established the INT to investigate allegations of fraud and corruption in the Bank Group-sponsored activities, as well as allegations of significant fraud or corruption involving staff.
The World Bank Group President, Robert Zoellick, said that the bank must assure its donors and client governments that they are responsible stewards of funds at a time when the Bank Group is ramping up to support countries affected by the global crises. During the past year, the Bank Group debarred 13 firms and individuals from participating in Bank-funded activities because they engaged in fraud and corruption. In addition, the INT and Bank Group have worked to develop a Company Risk Profile Database (CRPD) to help the Bank Group staff perform due diligence before awarding contracts to firms being watched by the INT. A settlement in the Siemens AG case, where the company acknowledged past misconduct in its global business, requires Siemens’ to pay US$100 million to support anticorruption work and refrain from bidding on Bank Group business for two years.
During the past 20 months, the INT has implemented 18 recommendations of an Independent Review Panel headed by former U.S. Federal Reserve Chairman Paul Volcker in 2007. These recommendations were intended to increase the INT’s effectiveness in supporting the Bank Group’s Governance and Anticorruption (GAC) program. The INT has streamlined preventive measures into projects and has pushed integrity to the forefront early in the project cycle.
During this fiscal year, the INT signed two cooperation agreements with the European Anti Fraud Office and the UK’s Serious Fraud Office which allow for joint investigations and information sharing. In addition, INT organized regional meetings to bring together the people entrenched in the day-to-day fight against corruption. These regional meetings will allow the INT and national anticorruption enforcement authorities to build relations, better understand each other’s needs, and formalize cooperation. Leonard McCarthy, World Bank Vice President for Integrity, said that they will further develop the tools and networks among teams and clients to enhance the impact of INT’s investigations and preventive services.
1. What other ways could the World Bank Group filter corruption out of sponsored activities?
2. How can the INT expand its mission to prevent corruption?
Reuters - IMF says Brazil capital tax not enough on its own
Reuters - Brazil open to extra measures after new inflows tax
Financial Times - Brazil imposes tax on foreign investments
Financial Times - Brazil sets 2% tax on capital inflows
Financial Times - Fatal Attraction
On Monday, October 19, Brazil announced a 2% tax on new foreign portfolio investment. Brazil’s move was a response to its currency, the real, appreciating 36% against the dollar this year. Although foreign direct investment is down 56%, foreign portfolio investment is up nearly 159%. Currently, Brazil has one of the strongest IPO markets in the world; however, foreign investors purchase 70% of the IPO shares. The 2% tax will not apply to Brazilian companies’ U.S. listed American Depository Receipts. The tax only applies to foreign portfolio investment and does not affect foreign direct investment.
As recently as Friday, October 16, Brazil denied that it would impose any capital controls on investment. Several market commentators stated that the move damages Brazil’s credibility. Brazil’s economy has benefited from its predictability and accountability in monetary policy. Although Brazil asserted on Friday that it would not impose the tax, it appears that Brazil spread rumors before deciding to impose the tax to gauge how the market would react. After the announcement of the tax, Brazil’s currency dropped from R$1.70 to R$1.74 on Tuesday and its stock market index fell by 4.1%.
Brazil’s tax represents both a political as well as a monetary move. Labor Unions and manufacturing companies have pressed Brazil’s political leadership to take measures to stop further appreciation of the real in order to keep Brazil’s manufacturing base competitive. This tax should temporarily slow down further appreciation of the real. Although commentators assert that the tax will not have a lasting affect on further currency appreciation, the tax might work because it signals Brazil’s willingness to take measures to prevent further appreciation of the real as well as asset bubbles. Brazil’s Finance Minister, Guido Mantega, asserted that this tax was the first step towards preventing further appreciation of the real and that Brazil would take additional measures if necessary.
Brazil’s economy and stock market have recovered faster than much of the developed world. The credit crisis has not hurt Brazil as bad as other countries because Brazil’s economy is fairly closed. Exports only comprise 15% of Brazil’s economy and it has not relied on foreign credit. Brazil’s action signals that it is worried about a potential bubble in its currency hurting its economy in the future. Brazil is taking an active approach in attempting to prevent an asset bubble because asset bubbles and volatile capital inflows traditionally impede economic development in developing countries.
This is not the first time that a developing country has imposed a tax on investment flows. Malaysia imposed capital controls on its currency during the 1998 Asian financial crisis in order to try to prevent a run on its currency. Brazil’s tax is a preemptive move to try to prevent a financial crisis from ever developing, whereas Malaysia imposed capital controls in order to try to prevent further damages to its economy during a financial crisis. Brazil hopes that this move will help prevent a speculative bubble that could eventually lead to a run on the country’s currency, similar to what happened in Malaysia.
Should Brazil impose capital controls on its economy or should it take a more laissez-faire policy?
Will other developing countries follow suit and impose capital controls?
Does this move cast doubt on the notion that developing countries desire to end the Dollar as the World's reserve currency, as the dollar would likely further depreciate if was replaced as the reserve currency?
On Thursday, October 21, Washington set its sights on banks and Wall Street firms responsible for the financial crisis. With dual announcements from the Federal Reserve (Fed) and the Treasury Department, the U.S. government revealed plans for aggressive intervention in future salary decisions within various financial institutions.
Kenneth Feinberg, the special master at the Treasury Department sometimes referred to as Obama’s “pay czar,” announced salary restrictions at seven firms that received special bailouts after the financial crisis. Feinberg warned top executives at the seven firms: Bank of America, AIG, General Motors, GMAC, Citigroup, Chrysler and Chrysler Financial, to expect a 90 percent pay decrease in the cash portion of their 2009 salaries as compared with last year. Salaries will be capped at $500,000 for highest-paid executives. Total compensation for top executives will only decrease by 50 percent, however, because much of what is lost in cash will be given back to employees in stock that will vest over a lengthier period of time. Officials have said that the cap goes into effect for November and December, but employees will not have to pay back funds already received on the year. The salary restrictions will, however, inform next year’s pay and continue until the companies pay back their bailout debt plus interest.
Among new restrictions is the demand that these companies seek government approval before they spend over $25,000 in “luxury” items (country club memberships, company cars and private jet travel). AIG, the company which received $180 billion of the $700 billion bailout, has been singled out for special regulation. At AIG, no executive will receive more than $200,000 in total compensation. The government also charged AIG with finding a way to reduce the $198 million that has already been promised to employees in the financial services division, as that division was responsible for participating in risky trading practices that caused the company’s financial demise.
The Fed plan, unlike the Treasury proposal, includes a vast variety of financial institutions, many that never received bailout assistance. The Fed proposal would allow the government to review payroll policies of these institutions and would allow the government to veto those that encourage risk taking. Under the proposal, the 28 largest banks in the industry would create plans to combat undesirable risk taking and after government approval, the banks would implement the policies on their own. The Fed plan also requires 6,000 other banks to be subject to review by Fed supervisors.
The new regulation on compensation will likely affect how financial institutions all over the country pay those responsible for financial well-being. Criticisms of the new regulation center on the fact that targeted companies are, more than ever, in need of talented executives. If the companies are unable to pay competitive salaries, they will not be able to keep the employees they have or attract rising stars in the field. If companies were to lose their top executives, financial performance would continue to decline, crucially impacting ability to repay their portions of the bailout debt.
1) Do the Fed and Treasury plans sound like concrete ways to change the culture at these financial institutions? Does a severe pay decrease at the top change business or just punish those who have engaged in risky business transactions?
2)As unemployment continues to rise, will good workers quit as a result of the pay cuts? If so, should this be seen as a cleansing of the greed on Wall Street or as a major setback on the road to recovery?
3) A report from the New York Attorney General’s Office found that salaries for top-level bank employees have become disconnected from reliance on their bank’s performance. Should compensation be intrinsically linked to how well the employer performs?
Economist: Call of the market
FT: Telecoms IPO raises $71m in Bangladesh
TeleGeography.com: GrameenPhone IPO more than three-times oversubscribed
bdnews24.com: GP's record IPO closes with over 1m applications
Grameen Bank, founded by Muhammad Yunus, a pioneer of microfinance, has been providing the poor an opportunity to borrow money since 1974. GrameenPhone now gives them an opportunity to invest. GrameenPhone, the largest mobile-phone carrier in Bangladesh, is set to raise 4.86 billion takas (US $71 million) this month in the country’s biggest initial public offering (IPO) in history. This amount is ten times the size of the next-biggest IPO. The IPO opened on October 4th and closed on October 18th for non-resident Bangladeshi investors with total subscription over three times the issue target. The IPO for resident Bangladeshis ended on October 8th. According to the Chittagong Stock Exchange, local investors submitted 1.08 million applications (16.57 billion takas) and non-resident investors submitted 671 million takas worth of subscriptions.
In Bangladesh, most homes and almost all rural villages do not have telephone connectivity. In an effort to provide affordable telephone services, Muhammad Yunus established two entities in the 1990s: Grameen Telecom and GrameenPhone. Grameen Telecom is a not-for-profit organization which provides telephone services in rural areas as an “income-generating” activity for Grameen Bank members. Through its Village Phone program, rural entrepreneurs buy mobile phones with the money borrowed from Grameen Bank and sell phone services to people in the village by the call for higher rates (usually twice the wholesale rate). GrameenPhone is a for-profit company and now has about 50% of the nation’s mobile-phone market. Grameen Telecom owns 38% of the shares of GrameenPhone, and the other 62% is held by Telenor, a Norwegian telephone company.
GrameenPhone’s IPO is also expected to bring a positive effect on the financial market in Bangladesh. Since the stock market crash in 1996, the Dhaka Stock Exchange (DSE) has been struggling to rebuild its credibility and investor confidence. Although the market has been recovering for the past four years, the market capitalization of the DSE is only 16% of Bangladesh’s GDP. However, analysts hope that GrameenPhone’s successful IPO would encourage other big firms to list on the exchange. On the day GrameenPhone opened the IPO, Bangladeshis opened 28,000 new broking accounts, and the stock market hit a 13-year-high on October 8th.
GrameenPhone is owned by a for-profit company (Telenor) and a non-profit organization (Grameen Telecom). Given that Muhammad Yunus established GrameenPhone in order to benefit the poor, what could be the advantages and disadvantages of this type of ownership structure? Would there be any possible conflicts between Telenor and Grameen Telecom? If so, how could those problems be solved?
Saturday, October 24, 2009
AllAfrica: Botswana: SADC election observers applaud elections
Financial Times: Botswana set to vote for stability
New York Times: Botswana poll marked by discontent over economy
Last week, Botswana re-elected its ruling Botswana Democratic Party (BDP) to another five year term. The party, led by President Seretse Khama Ian Khama won a total of 45 out of 57 parliamentary seats and 53.26 percent of the popular vote, according to an independent election commission. The BDP has not lost an election since Botswana gained its independence in 1966. The African Union sent a 25-member observation mission to monitor the election, and concluded that Batswana voted in a peaceful and orderly manner. Despite some police presence, there were no firearms present at the polling stations to intimidate voters.
The peaceful elections took place against a gloomy economic backdrop. Botswana, long viewed as one of Southern Africa’s best-run economies, has been hit hard by the recession. The worldwide slowdown has reduced the demand for diamonds, which account for nearly 40 percent of Botswana’s economy. Demand for rough high-value diamonds has fallen by 90 percent, forcing De Beers and Botswana’s government to cut costs dramatically. All four of the country’s diamond mines were closed during the initial months of this year. Gross domestic product is expected to shrink by ten percent this year, and the country borrowed $1.5 billion from the African Development Bank in June to sidestep a massive budget shortfall.
Despite these economic woes, many voters continue in their support of the BDP. Most analysts predicted a comfortable BDP win, largely because of the party’s official efforts to limit the social impact of the recession. Although opposition parties offered criticism, many voters were unwilling to blame the BDP for the economic downturn. The country’s sound fiscal position meant it had considerable reserves to draw on during the first months of the recession. Many voters also credit Mr. Khama’s firm leadership for Botswana’s stability over the years. One 35-year-old voter likened Khama to a “father” in charge of a difficult family, saying “he is fair and honest and he makes sure things get done in the way they are supposed to be done.” Although the diamond market remains depressed, signs of recovery are beginning to appear. De Beers and the government have already reopened three of the country’s diamond mines.
1. The effects of the economic downturn in Botswana were greatly exacerbated by the country’s extreme dependence on the diamond market. What can Botswana do to better weather future fluctuation in the diamond market?
2. The BDP has been in power since Botswana gained its independence in 1966. Botswana has also enjoyed more stability than most of its South African neighbors during those years. In the recent election, some voted to extend the long-standing BDP rule while others opposed President Khama’s re-election precisely because he had been in power so long. Which is the better perspective? Is it preferable to maintain the status quo, or to “switch horses in midstream” during an economic crisis?
Friday, October 23, 2009
Earth Times: Bosnian reform talks collapse despite EU, US pressure
Financial Times: Bosnia-Herzegovina reform package rejected
EU Business: EU urges Bosnian leaders to agree on key reforms
The resolution of the Bosnian War (1992-1995) resulted in the partition of the country on ethnic lines into two semi-independent political entities—the Serb Republic and the Federation Bosnia-Herzegovina, (which is a partnership of the majority Muslim Bosniaks and Croats). In Bosnia-Herzegovina this peace plan that divided government authority gave each group veto power and equal control over bills in the shared central government. This plan had the unanticipated drawback of creating a complex and obstructive government that has limited reforms and often results in crippling deadlocks.
The United States and European Union have recently provided an incentive to end the power struggle and persistent mistrust between the three political parties by dangling the carrot of swifter EU and NATO membership. The EU and U.S. challenged Bosnian leaders to come to a compromise on constitutional reforms by Oct. 20th which would pave the way for regional integration with Europe and greater interethnic business cooperation. Although Bosnian political parties have already agreed to some reforms—such as creating a single army, customs regulations, and economic resolutions—the prospect of constitutional reforms seems grim at this point because of the economic and political struggles that have overwhelmed any possibility of change.
The global economic crisis has also exacerbated tensions between the three power-seeking groups because of their distinct economic positions. The Serb Republic has enjoyed more robust economic growth than the Bosniaks or the Croats in recent years, and has weathered the first year of the financial crisis with funds saved from energy and telecom privatizations. The Bosniak-Croat Federation, on the other hand, already on the verge of bankruptcy before the economic downturn, has been under pressure from the IMF to increase their fiscal conservativism. The IMF recently provided financial assistance to the country to help fend off the economy’s expected 3 percent contraction this year.
Because of their economic and political successes, Bosnian Serbs have refused any political structural modifications which might unify the two autonomous states and reduce their power. The two main Bosnian Muslim leaders have rejected the Bosnian Serb’s political grip and have instead insisted on ending the legislative vetoes that create political deadlocks and prevent the development of a centralized government. The Croats, the weakest of the three political blocks, have also objected to the Serb Republic’s support of a dual-autonomy because it further weakens their position of power.
Needless to say, the October 20th deadline came and went without an agreement, as one thing the three groups can agree on is their rejection of the reform package brokered by the U.S. and EU. Political experts plan to return to Bosnia next week to continue negotiations seeking to help the three Bosnian entities settle their perpetual battles for power.
DISCUSSION:1. Why is the U.S. so concerned with Bosnia’s entrance into the union?
2. Does the three ethnic groups’ struggle for power provide a good check against any one group becoming dangerously powerful on its own?
Monday, October 19, 2009
NYT: Guinea Boasts of Deal With Chinese Company
Guinea is set to become another example of China’s growing economic clout in the developing world. While countries such as the United States and members of the European Union have tried to link trade and development assistance to human rights and democracy, China has forged ahead with an explicitly neutral worldview. China has announced a new trade deal with the country a week after shocking state- sponsored violence in the Guinean capitol.
On September 28th, 50,000 people assembled in the National Stadium in Conakry. As they protested for a greater voice in their government, soldiers opened fire. The government claims the death toll was 57, but human rights groups estimate it near 157 with more than 1,000 wounded. These numbers tell only half the story. Photos taken on mobile phones show that soldiers were targeting women for rape and sexual violence. The Economic Community of West African States (ECOWAS) called an extraordinary summit of the heads of state to investigate these recent human rights abuses and recommended an arms embargo, while the International Criminal Court has opened an investigation into the deaths. Meanwhile, the overall political climate and security situation in Guinea has been deteriorating, with the third minister resigning this week and the French foreign ministry describing a surge in armed bandits.
Against this backdrop, the Guinean Minister of Mines has recently announced that a Chinese company, China International Fund, would invest US$7 billion into infrastructure and would become a “strategic partner.” The deal would develop ports, railway lines, power plants, low-cost housing and a new administrative center. Speculators estimate that Guinea has one of the largest reserves of aluminum ore in the world and is rich in gold, diamonds, uranium and iron ore. In addition, China will have a stake in the search for oil.
Policy specialists fear that this influx of money will give a “lifeline” to the otherwise undemocratically elected leaders. So far they have failed to follow through on their promises of free and fair elections and trade deals like this help prop up their governmental façade. Experts point out that deals such as this make it much more difficult for the international community to work to change the military junta. It is still unclear if the promise that these deals will trickle down and benefit the average Guinean will materialize, or if the money will remain with the military elite. Many Guineans feel that economic security will only come about after a regime change, and that deals such as this reflect the military’s determination to maintain its grip on power.
1) Despite criticism for its viewpoint neutral investment strategy, China is praised by some for its direct technology investments in developing countries. How can the United States boost private direct investments in Africa?
2) Will the ECOWAS arms embargo be effective in reducing violence? What can Western countries and international organizations do to make it more efficient?
Sunday, October 18, 2009
World Bank Provides Support to Afghanistan’s Public Pension Program
What is IDA?
The World Bank approved a $7.5 million International Development Association (IDA) grant to support Afghanistan’s efforts to improve the Afghanistan Pension Administration and Safety Net Project (APASNP). Oleksiy Sluchynsky, World Bank Senior Economist and Project Team Leader, said that the Afghanistan government’s vision for social protection and safety net is clear in the Afghanistan National Development Strategy (ANDS).
The APASNP was designed to improve the administrative capacity of the public pension system to ensure the effectiveness of a reformed pension scheme for public sector employees, develop a policy framework for safety nets, and implement a pilot safety net program for needy households. The APASNP also aims to develop capacity in the Ministry of Labor, Social Affairs, Martyrs and Disabled (MoLSAMD) over the next 48 months in order to plan and administer programs in pensions and safety nets.
Afghanistan’s social protection programs include a pension scheme for public sector employees, military and police uniformed servicemen, and selected families affected by conflict. Other programs include humanitarian aid and various public and nongovernmental programs. Afghanistan currently spends less than a half percent of GDP on the public sector pension program that reaches 60,000 people. A program that provides benefits to 310,000 people affected by conflict and disabled receives approximately the same amount of support. Weaknesses of these current social protection programs include lack of well-designed targeting instruments, poor coordination across programs, poor budgeting, and weak institutional and administrative capacity.
The World Bank will join other donors to ensure sustainability and efficiency of the government programs. Other donors such as the European Commission, the U.S. Agency for International Development, and United Nations Development Programme have recognized the need for social protection benefits and are providing technical and financial resources towards building capacity in the public sector.
1. Should there be controls and audits on the funds granted to Afghanistan?
2. Are there other methods for Afghanistan to better fund the public sector pension plan?
Sources: Wall Street Journal - Honduras Negotiators Move Closer to a Deal Financial Times - Honduras crisis talks edge forward The Economist - Time on whose side? Yahoo (AP) - Honduras, already poor, sinks further after coup
Honduras inched closer to a resolution regarding its current political crisis over the past week. The crisis started on June 28 when the Honduras military, by order of the Supreme Court, removed President Manuel Zelaya from power. The Supreme Court ordered Mr. Zelaya’s exile based on allegations that he had attempted to change the constitution through a reform process that would allow him to run for reelection when his term was up at end of the year. Robert Micheletti took power following the dismissal of Mr. Zelaya. Most of the world saw Mr. Zelaya’s removal as a coup and did not accept the Supreme Court’s decision. Those who supported the removal of Mr. Zelaya do so on the insistence that the Supreme Court exercised its constitutional authority in replacing Mr. Zelaya. Opinion polls in the country suggest that 60-70% of the country does not oppose Mr. Zelaya’s removal.
Honduras is one of the region’s poorest countries, and the removal of Mr. Zelaya further eroded its economy. Before his removal, Honduras’s economy was already suffering from the financial crisis. Immediately after the removal of Mr. Zelaya, countries cut foreign aid to Honduras and Multi-lateral lending organizations cut off the country’s access to credit. The foreign aid that was cut equaled over 6% of the country’s GDP. Tourism has dropped significantly in the country, with one tourist center reporting a drop of nearly 85%. Retail sales in the country’s two largest cities have also dropped by nearly 30%. Although many countries in the region have begun recovering from the financial crisis, the economic situation in Honduras continues to worsen because of the political crisis.
Negotiations between former President Mr. Zelaya and current President Mr. Micheletti began in June and the negotiations over the past week have brought the two parties the closest they have been to resolving the crisis. Representatives of Mr. Zelaya asserted on October 15 that the parties reached an agreement on restoring “powers of the state to where they were before.” Mr. Micheletti’s group of negotiators, however, asserted that no deal was reached that would return Mr. Zelaya to power. The negotiations will likely lead to Mr. Micheletti stepping down. The remaining issue separating the parties is who will lead the country in the interim period until the election in January 2010. The conclusion of this crisis should result in the resumption of foreign aid and access to credit through Multi-lateral lending organizations. This should allow the country’s economy to stop contracting and resume expanding.
Should countries and Multi-Lateral lending agencies have cut aid and access to credit to Honduras during the middle of the financial crisis?
Should the world community have taken a different approach to Honduras given that many people within the country did not view the removal of Mr. Zelaya as a coup?
The numbers are in, and it’s a new record. Fiscal year 2009 came to an end September 30, and the Obama Administration announced Friday that the deficit has reached a staggering $1.42 trillion. Further, the Administration warns that the next decade could see deficits totaling $9.1 trillion if corrective action is not taken.
Economists suggest that the U.S. deficit should not exceed three percent of the nation’s gross domestic product (GDP). GDP is a basic measurement of economic performance that calculates the final market value of a country’s goods and services. The 2009 deficit exceeds 10 percent of the nations GDP, making this deficit the highest since 1945 at the end of World War II. The deficit has risen nearly 7 percent since 2008, when it was at 3.2 percent of GDP.
Reasons for Increase
In 2009, the government reportedly collected 16.6 percent less in revenue than it did in 2008. As the recession deepened, job loss increased, causing the government to lose relied upon income tax. Loss in revenue combined with government tax cuts aimed at stimulating spending resulted in a dramatic drop in revenue. At the same time, government spending rose substantially due to the economic and financial bailouts. The $700 billion Troubled Asset Relief Program (TARP) (the financial bailout package) and the $787 billion American Recovery and Reinvestment Act (the economic stimulus package) accounted for 24 percent of the total deficit. Joint statements made by Timothy Geithner, Treasury Secretary, and Peter Orszag, the director of the Office of Management and Budget (OMB), placed the blame on spending and tax decisions of the Bush Administration combined with the debilitating recession and the financial crisis.
Consequences of the Increase
Estimated future deficits in light of the Obama Administration’s future budget proposals are considered unsustainable to some experts, given that the expected inadequacies concerning Social Security and Medicare funding were already looming before the financial crisis took hold. Investors who finance the debt (such as China), have expressed concerns as to whether the country will recover its losses and regain fiscal control; however, as unemployment and foreclosure problems persist, the government is forced to keep the focus on stimulating the economy, which adds to the deficit rather than reducing it.
The Bright Side
The actual deficit calculation released by the Obama Administration was lower than the Treasury and the OMB had anticipated, due to estimates in early August put out by Congress of $1.6 million and by the White House budget office of a projected $1.8 million. It is possible the overages were due to several financial institutions repaying their bailout money with interest.
After the deficit figure was announced Friday, the Obama Administration released a statement standing by economic recovery measures taken and promising to enact a plan that will lessen the deficit when the economy recovers.
1) As is common when unfavorable economic news is published, both political parties are playing the “blame game.” The democrats claim the Bush Administration is the source of all current economic woes, while the GOP claims over-spending by the democratically-ruled congress and current White House are to blame. Does this problem have a primary cause, and if so, does that cause originate with one political party?
2) Current numbers show that the country is close to breaching the debt ceiling (the highest amount of debt the country allows itself to take on). What consequences could come from raising the amount we allow ourselves to borrow? Is raising the amount the only option?
The Banker: Shanghai steams in; Shift in the balance
China Daily: China boosts int'l use of renminbi with bond sale in HK
WSJ: China Expands Yuan Bonds
China aims to establish its own international financial center (“IFC”) in Shanghai by 2020. Will Shanghai fulfill that ambition? The leading IFCs in Western markets are taking China’s plan very seriously. Stuart Fraser of City of London Corporation says that the biggest threat comes from “the places whether the most money will be made and where the huge growth rates are.” Indeed, China’s financial markets have shown impressive growth. The Shanghai Stock Exchange is the world’s third largest stock exchange in terms of market capitalization. China’s capital raising capacity and debt markets are expanding at an exceptional rate.
Recent developments are also encouraging, indicating China’s willingness to open its financial markets. China has been trying to internationalize its currency, the renminbi, and make it convertible. Since December 2008, the State Council has established pilot schemes to enable five cities in China including Shanghai to settle trade payments in renminbi with Association of South-east Nations members. In September this year, China started to sell Rmb6bn (US$879 m) of government bonds to offshore investors for the first time. Also, in January 2009, China allowed foreign banks to trade and underwrite corporate bonds in the interbank market.
However, according to The Banker, there are significant barriers to overcome. First, China will not achieve its ambition unless it establishes “the rule of law, including an independent judiciary and government transparency,” says Andy Rothman, China’s strategist at CLSA-Asia-Pacific Markets. China’s legal and regulatory framework is “opaque and unpredictable” and company and securities law still lags behind the law in other IFCs. Also, laws tend to favor domestic firms over foreign firms and provide little protection to foreign investors (e.g., the 2007 insolvency law). Second, China needs to float the renminbi freely since an IFC would not be possible with a fixed exchange rate system. It is not clear whether China would be willing to take this step by 2020. As long as the government tries to support its export-oriented economic growth and facilitate domestic consumption, a rising renmimbi may not be a risk worth taking.
The Banker further points out that there would be more fundamental challenges to China’s goal as the communist government continues to adhere to its government-controlled capitalism. There is no market discipline and the government changes market norms as it deems fit. Also, the government is heavily involved in the allocation and pricing of financial resources. Accordingly, Shanghai lacks vibrant small and medium-sized enterprises and a competitive service sector, which are crucial for developing a successful financial market. Bad quality real estate, poorly planned infrastructure and overcapacity in industrial sectors are also the consequences of a misallocation of resources.
1. What are the things that make China (or Shanghai) more attractive or less attractive to investors than other IFCs?
2. According to Mr. Rothman of CLSA, China has been moving quickly toward a market economy over the past one or two decades, yet is trying not to make the transition too quickly. He further explains that the Chinese are “careful students”; China learned lessons from history and from other countries and is "determined not to make the same mistakes." Do you agree with his view?
3. How long do you think China’s government-controlled capitalism would work? Would it ultimately require changes in the Chinese political system?
Saturday, October 17, 2009
Reuters: Trustee: Lehman Barclays Probe Should Be Unsealed
Forbes: Barclays in New Lehman Scrap
WSJ: Lehman Blasts Barclays “Windfall”
The global transfers of corporate wealth continue in this most recent phase of the financial crisis. Early in the crisis on Sept. 15, 2008, Lehman Brothers filed the largest bankruptcy in U.S. history with assets of $639 billion. Soon thereafter, Barclays Bank (UK) purchased Lehman Brothers’ US assets out of the bankruptcy estate for approximately $1.7 billion, while Nomura bought its European and Asian assets. The trustee of Lehman’s bankruptcy estate, James Giddens, is now demanding that the British company return over $8 billion to the U.S. bankruptcy estate because it amounted to a “windfall” payment from the sale of Lehman’s brokerage business last year.
In June of 2009, U.S. Bankruptcy Judge James Peck gave the Lehman trustee approval to explore whether Barclays got "too good of a deal" from the purchase of Lehman’s broker-dealer business last year, as the British bank was able to immediately book a $4.2 billion gain on its $1.75 billion purchase.
What the trustee is referring to is a fraudulent conveyance. In a U.S. bankruptcy proceeding, the trustee of the bankrupt estate has the power to claw back or recover those transfers of assets from the debtor’s estate that unfairly put the assets beyond the creditors’ reach. Even if there was no intent to commit fraud, the trustee can recover the assets if the transfer was constructively fraudulent—if it involved an exchange for grossly inadequate compensation. Two conditions must be met for the trustee to prevail on a claim of constructive fraudulent conveyance: (1) the seller, in this case Lehman, must have received less than a reasonably equivalent value for the Lehman Brothers U.S. assets it sold to Barclays, and (2) Lehman must have been unable to pay its debts either at the time it sold to Barclays, or as a result of the sale itself.
It is not clear whether the $4.2 billion gain resulted solely from the broker dealer transaction, or whether it stemmed from Barclay’s acquisition of $45 billion in Lehman-held securities which Barclay’s subsequently marked up to $50 billion. Contributing to confusion over the numbers is extensive redacting of Lehman’s filing due to confidentiality agreements. Further, Lehman’s lawyers allege that Lehman executives actually assisted Barclays’ raid on Lehman assets and helped Barclays extract an additional $2.7 billion at the deal closing. According to Lehman’s lawyers, Lehman executives were offered attractive employment agreements conditioned on a successful closing.
Naturally Barclays spokesman Michael O’Looney does not believe that the purchase of Lehman assets was a fraudulent conveyance, and instead suggests that Lehman’s claim is opportunistic and that the Lehman trustee is attempting to retrade the deal only because the economy is showing signs of stabilization. Lehman, on the other hand, feels its argument has merit and is not only requesting that the bankruptcy judge require Barclays to return the assets to the Lehman estate, but it is also hoping that the court will allow it to pursue claims against Barclays for breach of contract, breach of fiduciary duty and unauthorized transfer of assets.
The bankruptcy court is scheduled to hear the argument this week. If it rejects Barclays’ argument, Barclays will have to send the $8 million back to the United States in yet another massive transfer of wealth resulting from the financial crisis.
1. If it is true that Barclays provided $45 million of liquidity to Lehman at a unique time when the market broadly lacked liquidity, then is Barclay’s reported gain reasonable and justified?
2. What is the value of liquidity in a liquidity/credit crunch?
Thursday, October 15, 2009
Center for Economic and Policy Research: IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries, CEPR press release
International Monetary Fund: Review of Recent Crisis Programs
Inter Press Service: G20: IMF Finds a New Level of Unpopularity
In a recent discussion paper for the Center for Economic and Policy Research (CEPR) economists argue that countries currently involved in loan agreements with the International Monetary Fund (IMF) are subject to “pro-cyclical” macroeconomic policies, which tend to exacerbate economic slowdowns. The CEPR economists argue that the IMF has failed to learn valuable lessons from previous economic crises, and that the Fund continues to rely on overly optimistic growth forecasts for borrowing countries. By mismanaging these policies, the authors argue, the IMF may have intensified, or prolonged the financial crises in many of its borrowing countries.
The CEPR and other analysts have also levied criticism at the IMF for failing to foresee the cause of the initial crisis in the United States. Because the IMF produces regular World Economic Outlooks every six months- purposely to evaluate current economic trends, some economists argue that the Fund should have recognized the growing bubble and anticipated its likely consequences. The critics urge the IMF to reassess the criteria, assumptions and economic analysis it uses to prescribe macroeconomic policy in the developing world.
In many Eastern European countries, both leaders and citizens view IMF lending conditions as elements that have further exacerbated the crises in their countries. In Romania (which negotiated a 20 billion euro loan with the IMF in May) the political opposition party demanded a vote of no-confidence in the elected government over controversial IMF-imposed wage reforms. In Hungary, average citizens are aware of IMF loans and their accompanying conditions, and “the IMF is not very well liked,” according to an analyst at a Budapest-based think tank.
The IMF has reacted negatively to the CEPR paper. The Fund responded with assertions that the CEPR has presented “seriously misleading” conclusions about the pro-cyclicality of IMF programs. According to the IMF, most of their programs allowed for shifting growth targets, and the targets were quickly and substantially relaxed once the extent of the crisis became apparent. The Fund has also deflected criticism of its failure to predict the crisis. Because the United States refuses to be subject to an IMF Financial Sector Assessment Program (FSAP), Managing Director Strauss-Kahn argues, the Fund cannot be responsible for a lack of supervision. The FSAP is one of the IMF’s main supervisory instruments, and it was not employed in the United States during the lead-up to the crisis.
1. Should the United States be allowed to refuse an IMF Financial Sector Assessment Program? Does such a refusal place the health of the international financial system in the hands of U.S. regulators?
2. The IMF’s lending conditions have long been a point of controversy among the world’s policymakers and economists. How will the debate change because of the recent financial crisis?
Sunday, October 11, 2009
In a part of the world where many Americans would not expect to find coverage, cellular phones are fueling a surge in development. Telephones are bringing new methods of communication and important market information to farmers who previously were isolated and disconnected. Other citizens are using phones to transfer money and sell goods. Africa is the fastest growing cell phone market and developers are scrambling to feed it with new services, products, and improved technology.
The attachment that people show to their cells phones is impressive by any standard. Some people charge phones with car batteries and walk miles to electricity for a charge. The reason is that for many farmers, the phone has become an indispensable tool. Farmers take photos and fill out detailed diagnostics on sick plants and receive advice from crop extension services run in major cities. In Uganda this has been used to stop the spread of banana disease and protect the livelihood of an estimated 30 million farmers. Farmers can also use their phones to track market prices and know when to harvest and bring their crops to market. Previously, the lack of market information had been a major problem for farmers. But by using their phones, farmers now can locate the best price with much lower transaction costs than before.
Development organizations have started using cell phones to expand their reach as well. They are being used to make health clinics run more effectively and save lives. Projects have digitized medical records that can now be sent via text message. Instead of awkwardly handling boxes of paperwork when traveling deep into rural villages, they now quickly access and retrieve them remotely. Throughout Africa, these organizations are using the phones like small portable computers.
Mobile phones are also being used in Africa to expand the banking sector. For many people, saving and transferring small amounts of money is not common practice. Formal brick and mortar banks may be inaccessible, but phones put basic banking tools literally in the palms of peoples’ hands. Additionally, they are catching on as a quick, easy, and cheap way to send remittances home.
These new technologies have brought the promise of the future to rural parts of Africa. The International Telecommunications Union, a UN agency, has described the continued growth of this field as “vital” to helping people participate in the knowledge economy. The ITU has also found a correlation between technology growth and the strength of health and education.
1) What can more developed countries learn from the innovative ways that Africa is using cell phones?
2) How can “first-world” cell phone manufacturers makers and development organizations work closer together to encourage even more innovation and wider-spread dispersal?
This week, the Economic Policy Institute (EPI) joined a growing number of organizations in support of a levy on Wall Street financial transactions as a way to fund economic recovery. EPI President, Lawrence Mishel, testified before the House Ways and Means subcommittee on October 8, 2009, pointing to the finance sector as the cause of the recession and calling the financial transaction tax “entirely sensible” as a result.
The EPI is not the first to propose such a tax. In fact, the idea of taxing stock market transactions has been floating on the global stage for some time. The proposal to tax financial transactions or “Tobin Tax” was first introduced in the 1970s to penalize short-term speculation, (buying something on the basis of its potential selling price rather than on the basis of its actual value) thereby reducing financial sector volatility (the amount of risk in the value of a security). The concept, while never implemented, has been revisited as of late by the likes of Professor Joseph Stiglitz, former chief economist of the World Bank and Dominique Strauss-Kahn, IMF managing director. Some countries have, in recent times, begun to take the idea to the next level. In the United Kingdom, there is a levy of .05 percent on all stock trades. At one point, Sweden also imposed taxes on stocks and bonds, but has since abandoned the policy.
Talks of actual implementation of the tax on Wall Street are preliminary at this point; however, the concept is backed by a provision included in last year’s financial bailout bill. The provision requires the president to make efforts to hold the financial-services industry responsible if the bailout investment produced large losses.
The EPI’s proposed tax would come at a rate in the range of .1 to .25 percent of the value of each trade and would be collectable on all financial transactions (like stock trades), but not on consumer transactions (such as credit card purchases). Critics of a financial transactions tax claim that such a tax would drive investors elsewhere with their money, contributing to the further devastation of Wall Street by funding the competitor markets. According to the chairman of the House Financial Services Committee, Rep. Barney Frank, a one-time fee could satisfy the provision of the bailout bill and might also be a way to bypass the evils of a continuous tax.
1) Critics suggest a tax would most certainly send frequent investors elsewhere and would have a devastating effect on Wall Street. Would traders sacrifice lucrative stock options to avoid a trivial .1 percent tax?
2) Do you think taxing financial transactions is a proper way to finance economic recovery? What if the funds were to instead go to an unrelated area of reform, like healthcare?
3) If it is true that in order for a tax on financial transactions to be sustainable, the tax would have to be implemented on a global level, is that a feasible option? What kind of collaboration would be required to implement such a policy?
Khaleej Times Online: "Olympics affirms Brazil's rise, Lula legacy"
The Australian: "Olympic boost to Brazilian economy"
Financial Times: "Moody's rates Brazil at investment grade"
Wall Street Journal: "Brazil: IMF Bond Purchase To Diversity Foreign Reserves"
Brazil’s move from regional to world power continued to gain momentum over the past few weeks. On October 2nd, the International Olympic Committee selected Rio de Janeiro to host the 2016 Olympic Games. Earlier this September, Brazil agreed to provide $10 billion to the International Monetary Fund, and Moody’s upgraded Brazil’s debt to investment grade. The combination of these events is further validation of Brazil’s economic rise over the past decade.
The International Olympic Committee’s selection of Rio de Janeiro to host the 2016 Olympic Games marks the first time that South America will host the Olympics games. Similar to the way that China holding the 2008 Olympic Games represented China’s entrance onto the world stage, this selection further signifies Brazils’ rise as an economic power. Brazil’s economy, already out of the recession, will benefit from the IOC’s selection of Rio for the 2016 Olympics. Brazil’s tourism industry can expect a significant boost in the coming years. Rio will also require significant investment in infrastructure in preparation for the games that will also result in an influx of construction jobs. The IOC’s selection indicates its confidence in Brazil’s stability, an endorsement which will further assure the world of Brazil’s political and economic stability and should, in turn, increase foreign investment in the country.
Moody’s upgrading of Brazil’s debt to investment grade signifies the bond rating organization’s confidence in Brazil’s economic stability. Brazil’s economic stability represents a significant shift from the 1980’s and 1990’s, when Brazil faced high inflation and frequent economic crises. Since 2002, however, Brazil’s economy experienced significant growth and began to stabilize. Moody’s upgrade serves as a lagging indicator of the Brazilian economy’s development over the past decade. Furthermore, the fact that the upgrade comes just as the world is exiting the latest financial crisis represents a significant accomplishment. Brazil escaped the financial crisis relatively unscathed in comparison to developed nations. The BIC of the BRIC countries weathered the financial crisis relatively well and are now emerging from the crisis while developed countries have lagged behind. This represents a unique shift from historical economic crises, where developing countries often suffered more than developed countries.
Last week Brazil announced the purchase of $10 billion in bonds from the International Monetary Fund. The bond purchase from the IMF also marks a significant step in Brazil’s economic progress, as in the past, Brazil was the recipient of IMF loans, now it is contributing to the funding of the IMF. The purchase signals that Brazil, Russia, India, and China will soon expect a larger role at the institution. Currently, the BRIC countries hold less than 10% of the voting power. Recent reforms have increased their voting power by approximately 5%. The $10 billion purchase of bonds from the organization will likely result in further increases in voting power.
Will the IMF ease restrictive covenants on its loans as BRIC countries gain more voting power?
Will the developing nations' rise to power in international organizations create more legitimacy and progress in these organizations?
The Economist: The aid workers who really help
UNDP: Human Development Report 2009
Migration can enhance human development, according to the 2009 Human Development Report. About 200 million migrants around the world help their home countries by not only sending cash remittances but also sending "social and political remittances." The impact they bring to their home countries is "huge and benign."
Migrants remit cash on a vast scale to poorer countries and this amount exceeds official aid. According to the World Bank, migrants sent $328 billion from developed to poorer countries in 2008, while official aid from OECD members to those countries was $120 billion. India received $52 billion from its diaspora, more than it took in foreign direct investment. This flow of cash increases demand in home countries and supplies hard currency. Cash remittances and material aid during natural disasters and emergencies are also helpful. The Economist noted that technological advances (mobile phones and online banking) and competition between remittance agencies provide easier, safer and cheaper ways of remitting cash.
Moreover, migrants contribute to the social and political development in their home countries by sending useful values and knowledge. So called "social remittances" include reductions in fertility, higher school enrollment rates and the empowerment of women in home countries. In India's case, the government responded to the requests of many Indian-origin people living abroad by creating more transparency and simplified regulations for foreign investors.
In order to realize these benefits, the report calls for policy reforms in six areas: 1) opening up existing entry channels to more workers; 2) ensuring basic human rights for migrants; 3) lowering the transaction costs of migration; 4) finding solutions that benefit both destination communities and the migrants; 5) making it easier for people to move within their own countries; and 6) mainstreaming migration into national development strategies.
1) The report argues that migrants also benefit the host countries (e.g., boosting economic output, contributing to social diversity and the capacity for innovation, etc.). However, during the time of recession, how likely is it that governments in developed countries would pursue policy reforms suggested by the report? Should they? If so, why?
2) Large inflows of cash remittances into small economies may lead to inflation or currency appreciation. What could be other negative effects of remittances? See UICIFD's E-Book Part Four II, "Remittances and Development"
Bloomberg: Sub-Saharan Africa’s Per Capita Income to Fall
IMF: IMF Survey: Prudent Policies Help Sub-Saharan Africa Ride Downturn, Regional Economic Outlook: Sub-Saharan Africa
The International Monetary Fund, in its Regional Economic Outlook, expressed expectations for meager growth in sub-Saharan Africa in 2009. The IMF predicts that sub-Saharan Africa’s economy will expand 1.3 percent this year, down from 5.5 percent in 2009. The estimate is down from the IMF’s July forecast of 1.5 percent. The fund does expect growth to bounce back as the global economy recovers however, rebounding to 4.1 percent in 2010.
Angola’s economy, once marked by explosive growth (20.3 percent in 2007, 13.2 percent in 2008), will be a significant drag on the region. The IMF predicts 0.2 percent expansion in the Angolan economy this year. Nigeria- the most populous nation in the region- will see a decline from 6 percent growth to 2.9 percent this year. The fund also emphasized that its predictions were subject to “significant uncertainty”; improved growth in sub-Saharan Africa will be closely tied to a strong global recovery. As donor countries attempt to set their own advanced economies right, many may scale back their commitments to developing economies. The IMF remains concerned that reduced aid and investment flows into sub-Saharan Africa could jeopardize recovery and exacerbate poverty in the region.
The IMF outlook isn’t wholly bleak however. The report notes that the region is faring better this time around than it has in crises past. Many sub-Saharan countries were better prepared when crisis struck. The region’s current account balance was fairly strong in 2008, and international reserves were relatively high. From this position, most countries were able to survive the sharp declines in foreign exchange inflows caused by the global crisis.
The IMF urges countries in the region to continue pursuing supportive fiscal policies. The report urged sub-Saharan policymakers not to withdraw fiscal stimulus measures too early, to focus on medium term considerations (like growth and debt sustainability), to contain macroeconomic imbalances and to continue monitoring financial sector developments closely. Shrewd policymaking, paired with a steady global recovery, could lead many sub-Saharan countries back to their impressive, pre-crisis growth rates.
1. The IMF warns of “significant uncertainty” in their growth forecasts for the sub-Saharan region, emphasizing the linkages between global and regional recovery. What, if anything, can African leaders do to protect their economic recoveries from potentially negative international effects?
2. The IMF and G20 have pledged increased funds to developing and emerging economies in the wake of the crisis. How can these countries best allocate the new funds to meet economic and humanitarian needs?
VOA News: World Bank, IMF Urge More Funding to Prop Up Economies of Developing Countries
allAfrica.com: Nigeria: Poorest Countries Will Be Poorer – World Bank
The World Bank has estimated that there will be approximately 90 million more people at risk of entering the realm of extreme poverty by the end of 2010. This estimation comes as a result of the impact of the financial crisis on developing countries. Countries such as Africa need access to money made available through the World Bank to pay for investments in education, health care, infrastructure, agriculture, and national resource management.
Having enough funding to help less developed countries during this crisis is a large concern for the World Bank and International Monetary Fund (IMF). World Bank chief, Robert Zoellick, made an appeal to the leaders of the developed countries during the annual World Bank and IMF meetings in Istanbul. The World Bank will need significantly more money to aid the poorer nations. He estimated that there will be a record level of lending, approximately $40 billion or more this year in addition to last year’s lending of $33 billion. Failure to raise more money would require the World Bank to put serious constraints on lending and require a focus on the lowest income countries.
The main donor countries, including the United States, Great Britain and France are demanding that the World Bank implement reforms in exchange for more funding. Transparency in the way the World Bank does business is one of the reforms these countries are requesting. While agreeing that the reforms are necessary, Zoellick explained that the reforms take time and that the poor nations cannot afford to wait.
The World Bank said the poor and most vulnerable are at the greatest risk from economic shocks as families are pushed into poverty, health conditions deteriorate, and progress in other critical areas are stalled. While the global economy is showing signs of recovery, 43 low-income developing countries are suffering in the midst of the recession. It is for this reason that the World Bank said it must continue to increase support to the poorest countries.
1. How should the World Bank raise funds to aid the impoverished countries?
2. Should the developed countries be required to put out more money when they too are trying to recuperate from the recession?
Friday, October 09, 2009
Huffington Post: EU’s Lucky Charm: Ireland Supports Lisbon Treaty—Now What?
Guardian.co.UK: Lisbon Treaty Hangs in the Balance as Ireland Votes
BBC Europe: Q&A: The Lisbon Treaty
Europa: Treaty of Lisbon: Questions and Answers
What is the Lisbon Treaty?
The Lisbon Treaty seeks to replace the European Constitution in an effort to modernize and reform the functionality of the European Union (the “EU”). The three basic tenets of the Treaty are to (1) increase efficiency in the EU’s decision-making process, (2) increase democracy by giving member state parliaments greater roles, and 3) strengthen the EU’s external coherence.
Why is Ireland’s Vote Important?
On October 3, Ireland voted for a second time on the Lisbon Treaty, a referendum that overturned Ireland’s June, 2008 “no” vote. Ireland agreed to vote again in exchange for guarantees that the EU will not force Ireland to adopt new EU laws on taxation, family, and Irish state neutrality, and that every EU member state will maintain its own commissioner indefinitely—a change from the original plan to reduce the number of commissioners as early as 2014.
Each of the 27 member states must ratify the Treaty before it is adopted and its provisions are implemented. After Ireland ratified the Treaty this week, the Czech Republic and Poland remain the only two nations left to ratify it. Ireland was the only country to hold a referendum because of an Irish Supreme Court decision ruling that any EU treaty amendment constitutes a de facto amendment to the Irish Constitution that requires a national vote.
How is the Treaty Different from the European Constitution?
The Treaty ends the six-month rotating presidency and instead establishes a two and one-half year EU presidential term. A more permanent president will help increase EU membership, address problematic hierarchical issues, and provide a more stable image for the Union. The Treaty will also establish an EU diplomatic corps that will create an EU Human Rights Department and increase coherence in Europe's foreign policy, defense, and trade policies.
The Treaty will provide for new legislative tools such as the EU Charter of Fundamental Rights that will determine the EU’s civil, political, and social rights. It will also provide a mechanism for interacting with the European Convention on Human Rights and the European Court of Human Rights.
Another legislative provision of the Treaty provides for a shift in EU voting rights to a “double majority” requiring 55% member-state approval, constituting 65% of the EU’s population. This new decision-making process will increase the acceptance and adherence to sensitive areas of the law like asylum and immigration.
Why Did Irish Voters Vote For or Against the Treaty?
Some Irish voted “yes” because they feel a stronger European Union will collectively help the Irish government and economy, especially during a recession in which Ireland was hit particularly hard. Others think Ireland’s increase in tourism is a result of a more popular, stronger Europe and hope to capitalize on Europe’s strengths. Big businesses’ pleas that Ireland stay connected to Europe also positively affected the vote.
Some naysayers rejected the Treaty because they think that the second vote improperly usurped the results of the 2008 referendum. Others rejected the Treaty for nationalistic reasons, such as fear of losing military independence or as a tribute to the leftwing Irish Citizens Army who fought for independence against the British.
1. Has the economic chaos of the past year been helpful to those who support a stronger European Union?
2. Are the countries with smaller populations that were hit hard by the crisis, and that were resistant to stronger EU economic ties because they thought their small size prohibited them from power, now looking for shelter in the EU?
Tuesday, October 06, 2009
Recent reports have shown that the trickle down effects of the global financial crisis will have serious impacts on developing economies in Africa. The contracting world economy is shrinking the domestic economies of many African nations, and will cause a corresponding reduction in domestic spending. In addition, the global crisis is also forcing “first-world” donor countries to re-evaluate their financial contributions. World Bank Group President Robert B. Zoellick says, "The poor and most vulnerable are at greatest risk from economic shocks—families are pushed into poverty, health conditions deteriorate, school attendance declines, and progress in other critical areas is stalled or reversed.”
A World Bank paper prepared for the recent G-20 summit in Pittsburgh, Pennsylvania shows that the poorest countries face a $11.6 billion shortfall in spending in crucial sectors such as education, health, infrastructure and social protection. The report also says that net private capital has dropped from $30 billion in 2007 to $21 billion in 2008 to a projected $13 billion in 2009. Their export markets will have dipped 5%-10% in 2009. While developed economies are seeing the first green shoots of recovery, the lag will continue to put pressure on these developing countries.
Along with shrinking domestic spending, there is the problem of foreign aid spending by more developed countries. As these nations find their coffers drying up, there is concern that they will either renege on previously promised donations, or cut back on future spending. Liberia’s president Ellen Johnson-Sirleaf described international aid as a foundation that spurs more private investment. She points out that Africa did nothing to cause this crisis, but that it comes at a time when real success is being seen in Africa. If the aid from developed nations does not continue, it threatens to derail progress that has been decades in the making. In her own country she cites doubling public school enrollment, hundreds of rebuilt health care facilities, and renovated infrastructure as achievements that could be threatened.
Understanding the risk of backsliding, the World Bank has plans to double its financing for small and medium sized businesses by 2013 to $15.5 billion. During the G-20 conference, advocates for Africa kept the pressure on the leaders of developed countries. Members of the G-20 reiterated their commitment to aid, but African representatives continue to focus on economics and put pressure on global financial leaders. Reports like this one by the World Bank legitimize these concerns and stress the importance of not overlooking the impact of the world economic crisis on all countries.
1)During times of global economic crisis, is it more important or less important for developed countries to maintain their donations to less developed countries?
2)How could developed nations use their donations to less developed nations to help stimulate their own economy?
Sunday, October 04, 2009
Since the financial crisis devastated the housing market, short sales have become important as a last resort for distressed homeowners in lieu of foreclosure. Now that banks are seeing profit increases, reliance on the possibility of a short sale can prove disastrous for all parties to a potential sale.
A short sale is the sale of a home for less than the amount owed on the mortgage. The lender accepts the proceeds from the sale as full repayment of the home loan. Short sales are fairly complicated transactions. In order to satisfy lenders’ requirements for short sales, both buyers and sellers must provide a detailed accounting of their financial situations. Additionally, the homeowners have to prove financial hardship to qualify for the process. Once the lender is satisfied with the proposed settlement, the mortgage investors (individuals or organizations who fund mortgage lenders) have a chance to review the sale. Often, this process is held up by second and third lien-holders (persons who have a legal interest in the assets of a property that is inferior to the interest of a first lien-holder), who demand a larger amount of the settlement. This year, 12% to 18% of national home sales were short sales. In areas of the nation where the housing market was hit hardest, cities like Phoenix and Miami, almost one-third of listings involve situations where the homeowner owes more on their mortgage than the property is worth (so-called “underwater mortgages”).
Short sales have been preferred by all parties to foreclosure. Homes in short sales will generally be more profitable for banks than those in foreclosure, short sales are less damaging to the seller’s credit, and are also much cheaper for lenders than paying legal and maintenance fees on distressed properties that sit vacant. The mutually beneficial nature of short selling would seemingly create a willing negotiation framework between homeowner and lender; however, now that banks are experiencing mild profit increases, they are increasingly less willing to negotiate. For instance, today, banks take an average of 9.5 weeks to respond to a request for short sale versus 4.5 weeks a year ago. With waiting periods this long, many sales opportunities are lost due to either the seller or buyer backing out and moving on.
The U.S. Treasury has announced that it is working on a plan to further incentivize mortgage companies to include the possibility of short sales in their management strategies. Fearful that short sale opportunities are being lost in the time it takes banks to respond to requests, the Treasury has proposed to pay lenders up to $1,500 in closing costs, plus $1,000 for allowing the homeowner to sell for less than the amount owed on the mortgage. The Treasury has also proposed to pay second lien holders up to $1,000 to relinquish their claims in these types of transactions. A finalized plan from the Treasury is expected soon.
1) Short sales may keep the housing market afloat by keeping the foreclosure rate down, but don’t they also allow homeowners to “cheat the system” in the sense that they can walk away and leave lenders to bear substantial losses? What about second and third lien holders who suffer even further losses and who might not see any of the profits from the sale? Is $1,000 from the Federal Government going to help those who have lost $10,000 on a sale?
2) Does short selling without penalty encourage low income buyers to continue to reach outside of their financial limitations or does it give them an incentive to be more practical in future home purchases?
3) Do banks have an obligation to reduce loan principal and interest during the crisis to support economic growth? Should hard times confer a duty onto those with more economic might to soften the blow?