Sunday, January 31, 2010
BBC News; Davos 2010: Bankers Hit Out at Regulation Plans
Financial Times; Diamond Lashes Out at Obama Bank Plans
This month a group of the world’s most powerful economic and political leaders will converge in Davos, a small Swiss town in the Alps. The event is the World Economic Forum, started in 1971 to promote education and collaborative discussion on a number of global issues, including corporate risk management, poverty, and climate change. Many distinguished guests are invited, like presidents, heads of state, and foreign ministers; however anyone can receive an invitation by paying for it, as do many corporate strategists, social and political activists, religious leaders, and journalists.
This year the event’s theme is “Rethink, Redesign, Rebuild,” focusing on recovery from the global financial crisis. Although not attending the event, U.S. President Obama is focused on financial reform of the U.S. banking system and has presented a plan to limit U.S. banks’ growth by taxing them based on size and limiting their banking activities. He is encouraging other countries to adopt similar measures in an effort to help improve the global financial system. Even though Mr. Obama did not travel to the event, his ideas are spurring discussion among the event’s attendees. European Central Bank President Jean-Claude Trichet says he supports Obama’s plan for the United States but would like to see it implemented on a global scale. The Bank of England Governor Mervyn King also encourages this approach and has outlined his own plan to reduce the size of England’s biggest banks by requiring permanent pay cuts.
Not every leader supports Mr. Obama’s proposal. German’s BdB Banking Association opposes greater financial regulation and is instead in favor of mandating increased capital adequacy. Barclays president Robert Diamond also disputes the need to reduce the size of banks, arguing that such a plan will have negative consequences on global trade and won’t reduce the risks that banks pose to the global financial system. While Diamond agrees that some level of global regulatory reform may be in order, he thinks that upcoming U.S. and UK elections present local political impediments to achieving that goal. He also believes that President Obama’s plan to charge U.S. banks extra fees will limit liquidity and reduce the number of financial services in the marketplace.
One clear opinion has emerged from both camps: both believe that something must be done to change the global financial system to prevent another crisis. However, most also agree that obtaining international agreement is going to be the most significant, if not complete, barrier to success.
1. Can a global financial reform work if not every country agrees to be bound by the same measures?
Asian central banks used to wait for the U.S. Federal Reserve to act before loosening or tightening their monetary policy (in an effort to limit the fluctuation of their currencies against the dollar). This time, however, is different. As the economic recovery gains momentum and inflationary pressures are getting stronger in the region, several central banks have begun to take steps to address inflation worries even when the Fed is not expected to tighten its monetary policy until later this year.
For example, India's central bank made its first significant move last Friday to exit the loose monetary policy taken as stimulus measures during the global financial crisis. The Reserve Bank of India increased the cash reserve ratio (the proportion of deposits that banks must keep with the central bank) by 75 basis points. The Philippine central bank also signaled a tightening trend by raising its rediscounting rate. In 2010, Asian central banks need to increase rates by 2.5 percentage points according to Frederic Neumann of HSBC in Hong Kong.
However, Asian central banks by acting alone may increase the risk of exacerbating the inflation as well. Since the Fed keeps interest rates close to zero, rising rates in Asia would induce more capital from investors who seek higher yields. As these inflows of capital make local currencies appreciate, exporters become less competitive. Also, currency appreciation may create asset bubbles.
China, however, is in a different situation. Since it pegged its currency to the U.S. dollar, it is less risky for China to tighten its monetary policy unlike other neighboring countries. While China has started to tighten credit, its neighbors hesitate because of the risk of currency appreciation that will make their goods more expensive compared with goods produced in China. However, if China allows its currency to appreciate, other Asian countries will feel more comfortable raising rates.
1. After the global financial crisis, emerging markets seem to gain greater influence. What kinds of challenges and chances do emerging markets face?
2. According to the Institute of International Finance, net private sector capital flows to emerging economies will increase to $722bn in 2010 from $435bn in 2009, and warned that "such a rapid move" may create another global financial bubble in emerging economies, especially Brazil, China and India. How should these emerging economies manage these inflows of capital without creating another global financial bubble?
Sources: Financial Times - Argentina debt battle intensifies / Financial Times – Argentina woes will prove costly for comeback / Business News Americas - Central Bank Chief Redrado fired, Blejer to take the helm - Argentina / Business Day - Argentina central bank row rattles markets / The Wall Street Journal - Argentina Bonds Drop as Central Bank Flap Rattles Nerves / Yahoo News (AP) - Argentina's Central Bank President Resigns
Argentina Central Bank President, Martin Redrado, ended the month long political crisis by resigning on Friday, January 29. The crisis started when Argentina President Christina Fernandez ordered Mr. Redrado to transfer $6.57 billion in central bank reserves to pay off sovereign debt dating back to Argentina’s 2001 default. Mr. Redrado refused to transfer the money, reasoning that the reserves would be subject to court judgments if the international community did not view the Central Bank as independent. Mr. Redrado also feared that transferring the money following the decree would open the funds to further government spending in the future. The Central Bank has approximately $48 billion in reserves.
Mr. Redrado stated that he brought monetary stability to Argentina for the first time in 30 years. Mr. Redrado submitted his resignation claiming that he could no longer perform his duties because “the government…disregarded the independence of the Central Bank.” He stated further, “We have arrived at this situation because of the national government’s permanent trampling of institutions.” Argentina’s economy minister, Amado Boudou rejected Mr. Redrado’s claim that his policies resulted in the accumulation of the reserves, asserting instead that Argentina accumulated the reserves through the success of President Fernandez’s policies.
President Fernandez fired Mr. Redrado on January 7 for failing to follow her orders. A judge blocked her order and reinstated Mr. Redrado. The Court held that the Central Bank Charter required a non-binding opinion of a special commission of legislatures for the President to fire the Central Bank President. Argentina subsequently convened a congressional panel to decide whether to approve or reject President Fernandez’s firing of Mr. Redrado. Mr. Redrado returned to work briefly, but the police locked him out of his office on Sunday, January 24. Analysts predicted the congressional panel would support President Fernandez’s decree ousting Mr. Redrado. The congressional panel will present its finding early this week, but Mr. Redrado’s resignation means that that the congressional panel’s findings will have no impact. The government installed Mr. Redrado’s deputy, Miguel Angel Pesce, as interim governor. Analysts assert that it appears that Mr. Pesce has aligned himself with the government because his first economic report showed lower than expected inflation.
President Fernandez hopes that Argentina can resolve its $20 billion in outstanding debt relating to its 2001 default this year so that it can return to the international capital markets. Argentina would like to tap the international capital markets to decrease the expense associated with financing its funding gap. The bond it sold to Venezuela to finance its funding gap in 2008 had an interest rate of approximately 15 percent. Argentina politicians hoped that Argentina could raise money in the international capital markets at interest rates in the high single digits.
President Fernandez’s inability to rein in public spending coupled with the country's unexpected policy moves make Argentina a risky investment. Argentina bonds fell by approximately 10% during the first week of the crisis. In 2008, President Fernandez nationalized Argentinean pension funds and economists around the world allege that the country has manipulated its economic data over the past few years concealing inflation. Argentina has a projected funding gap of $11.4 billion for this fiscal year. Argentina has relied on ally Venezuela to fund its funding gap in recent years; however, Venezuela may be unable to offer Argentina financial assistance this year as it continues to struggle with the recession. Analysts predict that this political crisis will increase the interest rate Argentina will have to pay once it finally gains access to the international capital markets.
Will Argentina be able to return to the international capital markets this year?
Will Argentina stop manipulating its economic numbers (inflation, GDP) in 2010?
Wednesday, January 27, 2010
Al-Jazeera: Egypt Opens Gaza Border Crossing
Al-Jazeera: Activists Reject Egypt’s Gaza Offer
In a move that has raised concerns by many human rights experts, Egypt has increased security along its border with Gaza. The Rafah crossing between Egypt and Gaza has long been a contentious area. It is a crucial location because it is the only Gaza border not controlled by Israel. Most tunnels used for the smuggling of goods run though this border with tacit acceptance by the Egyptian government. Above ground the crossing is often closed. In January two events refocused international attention on this border. First, two humanitarian aid convoys were launched on the anniversary of Israel’s Cast Lead offensive into the Gaza territory. Second, the existence of an underground wall being built by Egypt through the Rafah crossing was publically announced.
The Gaza Freedom March (GFM) is an international group whose mission is to bring attention to the plight of Palestinians living in the occupied territory. Over 1,300 people came together in Cairo for a series of protests. Despite initial concern that the Egyptian government would not allow demonstrations to happen, the GFM successfully held events outside the United Nations, Israeli, American, and French embassies. The group had initially planned to travel en masse to Gaza to deliver humanitarian supplies, but the Egyptian authorities cited the “security reasons and a ‘sensitive situation’” to prevent the entire group from completing the trip. Instead, they offered to allow 100 representatives to go though the crossing. The GFM initially rejected this agreement, but eventually went along with it. While the groups demands were not fully met, they still felt a sense of accomplishment. Even holding a single protest in police state like Egypt can be a major achievement. The group also signed and released the Cairo Declaration, which called for boycotts, divestment, and sanctions against Israel until it follows international law. These actions are similar to the ones the international community used against South Africa during the apartheid years.
At the same time as the GFM protests, another group of activists tried to reach Palestine by another route. The Viva Palestina group wanted to use the Jordanian port of Aqaba. However, officials persuaded the group to go though the Syrian port of Latakia to El Arish in Egypt then to Gaza via the Rafah crossing. This group had intended to bring 210 truckloads of humanitarian supplies to the people of Gaza. Although there was some conflict with Egyptian authorities during the trip, it was in the end successful.
The second major action was the discovery that Egypt is building a major wall along the Rafah crossing. This is not a wall in the typical meaning of the word, it is underground and meant to disrupt the tunnels that bring in supplies to Gaza. All types of items are brought into the territory from fresh produce, to automobiles, to people. According to the mayor of Rafah there are around 400 tunnels that employ about 15,000 people and bring in around 1 million dollars of goods per day. The wall will run a reported 10 or 11 kilometers long and extend up to 18 meters deep. It is made of thick steel and is reported to be impossible to burn though with conventional welding torches. While work on the wall is thought to have started in November, it was not until recently that the public was made aware of it.
In the short term, it seems unlikely that Egypt will open the Rafah crossing permanently, even in a limited fashion. At the same time, Israel has done nothing to suggest it will ease its restrictions on Gaza. For the people of Gaza, the international attention that these events bring is comforting, but does not bring them closer to a resolution for their problems.
1) How have international NGOs improved the plight of the people of Gaza? In what ways have they helped bring international attention to this situation?
2) In what ways is the wall Egypt is building like the one that Israel has constructed in the West Bank? How is it different?
Tuesday, January 26, 2010
President Obama is set to give his State of the Union address on Wednesday, January 27, 2010. As part of his speech, the President will be calling for a spending freeze on many domestic programs in an effort to regain some control over the country’s massive deficit. The freeze will be a part of the President’s budget that he will send to Congress, and will be incorporated into the fiscal year that begins in October. Programs affected by the freeze will be those to which Congress allocates a yearly budget, such as education and national parks. These initiatives will not receive an increase in funding over the three year period, barring the cost of inflation. Obama’s proposed freeze would exempt security-related government programs such as homeland security as well as programs like Medicaid, Medicare and Social Security.
The reception for this proposed spending freeze is sure to be mixed. Liberal democrats in Congress are likely to disapprove of a freeze that would limit domestic spending while leaving the budget for military spending wide open. Republican members of the House have already responded negatively to the President’s plan, scoffing at the idea that a democratic administration would be successful at controlling domestic spending. Despite this criticism, there are those in Congress who have come out in support of the freeze. Fiscally conservative democrats have been encouraging President Obama to reduce spending since the start of his presidency. Perceptions of Obama as a big spender have contributed to his loss of independent and conservative supporters as well as a mounting distrust from investing nations like China. A loss of confidence in the United States’ financial welfare could raise interest rates from foreign financiers.
The Administration highlights that the spending freeze will not affect all qualifying government programs. Some funding for programs on the chopping block will be reduced so severely that other programs will be saved from the freeze. Obama’s camp has also suggested that the budget will contain new proposals to help the middle class, dealing with issues like student loans and child care. There will also be an attempt to stimulate spending and job creation in the budget proposal. It is expected that the relative savings after the spending freeze will amount to $250 billion after ten years. The deficit is expected to be at $9 trillion over the same ten year period, meaning that the proposed savings would only total three percent of money owed.
1. Why would President Obama create what is essentially a bottomless fund for military spending? Would it be reasonable for the president to commit to a spending freeze on the nation’s security budget in wartime?
2. Last week Republican senate hopeful Scott Brown beat out Democrat Martha Coakley for the Senate seat in Massachusetts by a margin of almost 5%. What role do you think last week’s Senate race play in President Obama’s decision to stray from his campaign platforms of heightening social welfare programs?
Sunday, January 24, 2010
FT.com: Satyam episode highlights India corporate flaws; SanLuisObispo.com: Lax Indian rules still problem after Satyam fraud; ACGA-ASIA.org: ACGA White Paper on Corporate Governance in India
India will risk the integrity of its capital markets and foreign investor participation will decrease unless it improves corporate governance laws quickly, says the Asian Corporate Governance Association ("ACGA"), an advisory group in Hong Kong. Last year, the head of Satyam Computer Services confessed to the largest fraud ($2.5 billion) in Indian corporate history, and this well shows deficiencies in India's corporate governance regime. The "ACGA White Paper on Corporate Governance in India," released on January 19, 2010, aims to provide government officials, financial regulators, listed companies, and investors with recommendations for strengthening corporate governance in India. The recommendations are based on feedback from foreign institutional investors and local market participants including the California Public Employees' Retirement System, KPMG, Deloitte and White & Case.
According to the report, despite the reforms enacted in recent years, "critical areas" of corporate governance still remain unimproved and there needs to be long-term efforts to reform corporate governance. The report specifically makes recommendations in five areas: shareholder meetings and voting; related-party transactions; preferential warrants; corporate disclosure; and the auditing professions. One of the main recommendations is to empower institutional investors because controlling shareholders have too much power in India. In addition, investors need to be informed of shareholder meetings earlier and be able to instruct their proxies to have a voice at the meetings. In India, companies often hold annual meetings in out of the way places (ICICI Bank, the largest private sector bank in India, holds its meetings in Baroda, a small city in Gujarat). The report also calls for overhauling the weak regime governing related-party transactions (e.g., providing independent shareholders with the power to approve large transactions). Regarding corporate disclosure practices, the report criticizes that audit firms commonly use bank account information provided by clients rather than independently verify the information.
After the Satyam scandal, there have been some changes to improve corporate governance. For example, many companies have been focusing on corporate governance and taking investor feedback more seriously, according to Nilesh Shah of ICICI Prudential Asset Management Company Ltd. Regulators have implemented some reforms such as requiring greater disclosure of the holdings of controlling shareholders. However, there has been no extensive structural reform, and some worry that the Satyam scandal would make it more difficult to root out fraudsters as they will work harder to evade detection.
1. According to the SanLuisObiopo's article, many Indian businesses are rooted in "old family empires run by men who are happy to take money from public shareholders but loathe to cede control." A corporate lawyer in Mumbai, Nishith Desai, also said that "the founders of a company forever thought they are the proprietors," and don't want to be answerable to outsiders." What are your thoughts on these remarks?
2. How does corporate governance in India compare with corporate governance in China?
Sources: The Economist: Pinera flies the flag / FT: A Change for Chile / NY Times: Right-Wing Businessman Wins Chile’s Presidency / The Santiago Times: Pinera Defeats Frei in Chile Presidential Election / OECD: Chile signs up as first OECD member in South America
Sebastion Pinera won the Chilean presidential election on January 17, 2010. President elect Pinera’s election marked the first time that Chile elected a center-right politician since 1958. Mr. Pinera defeated the center left Concertacion party’s Eduardo Frei with approximately 52 percent of the vote. Mr. Pinera won the urban areas whereas Mr. Frei fared better in rural Chile. Mr. Pinera, a Harvard educated economist, is a billionaire and the third richest individual in Chile. Mr. Pinera owns a television station, part of Chile’s most successful football team, and several other businesses.
President elect Pinera won despite the fact that the current center left President Michelle Bachelet had an approval rating of 81 percent at the time of the election. The center left coalition has ruled Chile democratically since Dictator General Pinochet stepped down in 1990. In 1988, Chile’s stock market index was at 100, by 2010, Chile’s stock market index reached 2,300. Mr. Frei called the election results “just a bump in the road” for the center left coalition. Mr. Frei asserted that his party was handing over the country in much better shape than it received it 20 years ago.
Mr. Pinera vowed after the election to continue the successful policies of center left President Bachelet. Mr. Pinera ran on strengthening Chile’s commitment to private investment and on the goal of creating one million new jobs. Mr. Pinera also vowed to increase Chile’s resources towards fighting crime. Mr. Pinera described his election as a breath of fresh air from the 20-year rule of the center left Concertacion party. Chile benefited from its conservative fiscal policy before the economic crisis that afforded it the ability to implement an aggressive stimulus program. The stimulus program kept unemployment relatively low.
Mr. Pinera faces pressure to continue Chile’s economic progress. One of the reasons Chile elected Mr. Pinera was because of his success as a businessperson. The Chilean people will expect further economic liberalization and success from Mr. Pinera as well as a responsible draw down of the stimulus funds. Mr. Pinera also faces pressure from the right to scale down the prosecutions of members of Dictator General Augusto Pinochet's government. Approximately 1,300 people disappeared during Mr. Pinochet’s dictatorship while another 27,000 people claimed they were tortured. Over the past 19 years, the center left Chilean government held over 700 human rights trials.
The OECD granted Chile membership with the OECD earlier this month. Admittance into OECD further signals Chile’s economic rise and political stability over the past two decades. Since 2007, Chile has reformed legislation surrounding tax information, corporate governance, and legal responsibility in bribery cases to gain admittance into the OECD. Further reform is necessary as it takes 27 days to start a business and 4 years to close an existing one, this is twice as long compared to its OECD peers. The Chilean economy has grown by over 5 percent over the past two decades. Countries throughout the region have modeled economic reform based on Chile’s success.
Was this election a sign of a shift in Chilean politics to more center right policies?
How will the election of a center right coalition in Chile affect regional relations with center left regimes?
Guardian UK; Ukraine Voters Weigh In on Orange Revolution
WSJ; Viktor Yanukovich Wins First Round of Ukraine Election
This week’s Ukrainian election was marked by ironic results, as voters rejected their once-respected leader, Viktor Yushchenko, in favor of the very man who was found guilty of rigging an election against Yushchenko in 2004. In the 2004 election, the Ukrainian Supreme Court allowed a re-vote that removed the fraudulently elected Viktor Yanukovich, putting Yushchenko in power. During this volatile time, voters rose up in outrage through demonstrations and protests against governmental corruption, bullying, and abuse. This uprising was known as the “Orange Revolution,” and even though Yushchenko supported this movement, he ultimately failed to effect real change.
Ukraine has never been a completely sovereign state, as Russian leaders kept Ukrainian assets and asserted control over the country after they granted the country “independence” in 1991. During the early 1990s, Ukraine suffered severe economic stress, mostly because its new independent leaders didn’t have much experience running an economy. Half-hearted economic reforms in latter half of the decade came with a semi-authoritarian government that became the root of the evil and corruption that the Orange Revolution sought to purge.
Many international observers have praised the latest election as a huge step in the right direction because it was without disruptions and generally free of corruption, a sign that Ukraine has matured politically. Only about 5% of voters supported incumbent candidate Yushchenko, while 35% voted for former vote rigger Yanukovich. Yanukovich faces a Feb. 7th run-off election against the Prime Minister Yulia Tymoshenko who earned 25% of the recent vote (because neither candidate earned a majority of the votes). The country is divided between these two candidates: The industrialized, Russian-speaking east and south support Yanukovich despite his checkered political history. The center and east support Tymoshenko, who, despite running on a platform of corruption reform, has voters leery of her reputation as a “power seeker” with close ties to the gas industry. Both candidates say they are seeking a positive relationship with Russia and would like to strengthen presidential powers and end the historical bitter rivalry between the president and the prime minister.
A new leader will enter the political post as the country faces a possible national bankruptcy, an unclear legal environment, and a parliament run by big business. Despite these challenges, he or she should be aided by the country’s enthusiasm for much-needed change.
1. Has a country truly matured as a democracy if it elects leaders with histories of political deceit?
2. Have Ukrainians come to accept political corruption as an intrinsic part of government?
3. Given Ukraine’s past political challenges, it is reasonable for Russia to maintain some degree of control over the country?
Tuesday, January 19, 2010
BBC Online: First Gulf Metro System to Open
Asharq Alawsat: New Dubai Driverless Metro Makes Room for VIPs
NPR: Dubai's Debt Troubles Ripple Worldwide
Aljareera.net: Abu Dhabi gives $10bn to Dubai
NPR: World's Tallest Building Opens In Dubai
The Independent: Dubai Reaches for the Skies Despite Crisis
While financial markets are faltering, Dubai has completed two major new engineering projects. The ambitious emirate that previously attracted headlines with projects such as man-made palm shaped islands and the world’s second largest marina, expanded this reputation by opening the Middle East’s first Metro station and recently cutting the ribbon on the world’s tallest building, the Burj Khalifa. However, despite these new jewels, many have pointed out that they only serve to draw attention to the shaky financial ground that Dubai clings to.
Dubai was not been immune to the financial malaise that gripped the world in 2008. In December 2009, Dubai World, a massive government controlled holding company, reported that it was having difficulty paying off some $60 billion in debt. The company comprises 60 percent of the GDP of the country. Much like the financial sector in the United States, there is concern that if Dubai World defaults, the contagion will spread throughout the region. It may be so strong as to weaken the traditionally oil rich countries in the area. In response, Abu Dhabi has loaned the country $10 billion, but many investors continue to be concerned about the financial health of the country. They point to these massive construction projects as being both a cause and symptom of Dubai’s instability.
The weak economy in the world and at home has not completely stopped work on Dubai’s massive infrastructure projects. The 32 mile-long first segment of the Dubai Metro opened this autumn. It is estimated that the Metro will have a completed length of 43 miles. This will make it the longest driverless train in the world. In an effort to win riders, this Metro features many accommodations not found in many other cities. These include wireless internet, optional luxury leather seats for riders willing to pay a premium, and in a nod to the conservative mores in this majority Muslim country, women only carriages. Planners hope to have 200 million riders annually. It will be a great aid for many of the city's guest workers who currently face long commutes in dangerously unsafe vehicles. But planners are concerned that they will have difficulty getting the city’s wealthy to give up their luxury brand vehicles. Unfortunately, the financial crisis has reduced the number of cars on the road, and many guest workers have returned home.
The most recent addition to the already glittering Dubai skyline is the opening of the Burj Khalifa. Simultaneously drawing praise and scorn, this tower boasts an impressive 4 swimming pools, a private library, and a hotel designed by luxury fashion icon Giorgio Armani. In a gesture of gratitude towards its benefactor neighbor Abu Dhabi, the tower was named after its ruler Sheik Khalifa bin Zayed Al Nahyan. It rises to a reported height of 2,720 feet. This is 1,053 feet higher than its next highest competition, the Taipai 101 in Taiwan. It also holds the record for most stories and highest occupied floor of any building. However, much like the experience of the Metro, the financial crisis has sapped the Dubai real estate market, plunging prices down by half. Many buildings stand empty, and it is unclear if the Burj Khalifa will be able to attract all the tenants needed.
As Dubai, like the rest of the world, looks forward to coming though the global economic crisis, it seems to be continuing business as usual. Impressive new office space meant to lure financial companies to the region and state of the art Metro to whisk them around follow the same general principles that transformed the sheikdom from a small fishing village into a glitzy metropolis. But, it is unclear if this course will result in long-term growth or only short-term gains.
1) Are major infrastructure projects good for an economy that is in recession? How are the projects down in Dubai like the American Works Progress Administration (WPA) during the Great Depression? How are they like projects suggested by President Obama during the current recession?
2) What value is there for a country to claim records such as tallest building? Is national pride linked to economic strength or the perception of it?
Sunday, January 17, 2010
The inflation threat is growing in China and India, the Asian Development Bank ("ADB") warned at a regional forum, "Impact of Global Economic and Financial Crisis," held by ADB on January 14-15. According to the ADB, Asia excluding Japan will grow by 6.6 percent in 2010 and China is expected to grow by 8.9 percent. Reports prepared for the forum emphasize that China and India need to take actions to make sure that return to growth does not lead to inflation. As for south-east Asian economies, they are recovering faster than expected, but need to make financial, fiscal and structural adjustments in order to buffer themselves against future economic shocks, says the ADB.
According to a report on China, China is set to grow sharply this year as the global economy recovers, and policymakers need to introduce tightening measures to prevent overheating of the economy. China had come through the financial crisis due to past structural reforms and policy actions including its emergency stimulus package ($586 billion). However, China soon needs to consider measures such as reining in lending to head off the potential threat of an asset price bubble and inflation, says the report. Haruhiko Kuroda, the ADB's president, said that China's recent increase in bank reserve requirements was an "appropriate" action to prevent inflation.
A report on India says that India is set for a solid recovery this year, but needs to address problems of inflation and fiscal deficit. India's economy regained growth momentum relatively fast due to its stimulus actions, past reforms, banks' limited exposure to troubled parts of the global financial system, and its robust domestic consumption, says the report. In the latter part of 2009, however, there were signs of an increase in inflation and a worsening trade deficit. The report says that India has to improve its fiscal management (e.g., streamlining or replacing subsidies with more targeted measures and introducing a new fiscal management framework).
According to a report on southeast Asia, the countries recovered relatively quickly from the crisis and were much more resilient compared to the 1997-98 Asian financial crisis. However, the report warns that Indonesia still remains vulnerable to financial shocks. Indonesia needs to exit the accommodative monetary policy to avoid stoking inflation, but the exit strategy should be carefully timed so that it would not damage growth prospects, says the report.
Discussion: In the process of recovering from the global financial crisis, what kinds of policy coordination will be crucial among Asian countries?
President Obama announced a new tax initiative this week, the focus of which is on recovering total losses resulting from the Troubled Asset Relief Program (TARP) created in October of 2008. Projected losses are estimated at around $90 billion, and the proposed tax would ultimately raise that amount over a span of around ten years. The plan could raise up to $117 billion over twelve years if needed. Obama’s tax would apply only to banks and insurance companies with over $50 million in assets acquired in risk-taking ventures.
Democrats in the House and Senate welcomed President Obama’s announcement, but while the general public sentiment is anti-Wall Street some Democrats are pushing for even more punitive measures to be taken. Democratic Congressman Peter Welch introduced a bill this week that would impose a 50 percent tax rate on all company bonuses over $50,000 at institutions that received TARP funds. The bill has been received with support. This initial success might be due in part to JPMorgan Chase’s announcement of impressive fourth-quarter profits totaling $3.3 billion and in anticipation of Goldman Sachs’ announcement of executive compensation set for early this week.
President Obama’s tax proposal does not include a regulation on employee bonuses, but would create an incentive for banks to stay smaller and to be more responsible with their assets. Banks have by and large responded to the announcement with sharp criticism, making statements that suggested the cost of the tax would serve only to punish consumers, to whom the banks would pass along the cost. However, some suggest that instead of punishing the consumer, the tax will create an opportunity for smaller banks and credit unions to expand their business. The idea is that if TARP banks raise consumer fees, consumers will naturally have an incentive to give their business to banks that do not do so.
President Obama’s tax proposal will be included with his February budget and will require the approval of Congress.
1) Is it true that a small community bank would be able to compete with the largest banks in the industry? While fees might be lower at a credit union, for instance, do those institutions necessarily have the capital or lack the risk-aversion to offer the same loans to small businesses and people with less-than perfect credit ratings?
2) Why do you think banks offer such extravagant bonuses to their top executives? Is there a strategic reason to give bonuses rather than higher salaries? Would a law that taxed employee bonuses like the one introduced by Congressman Welch shield the customer from fee spikes?
3) How would the banking industry change if a company like Wal-Mart was allowed to enter into the banking sector, extending their “everyday low prices” scheme to savings and loan situations?
NY Times – Chavez Devalues Currency Amid Oil Fall / WSJ - Chavez Devalues Venezuela’s Currency / Reuters – Devaluation ups stakes in Venezuela election year / wtop.com (AP) - Venezuela shutters stores in price-hike crackdown
Venezuelan President, Hugo Chavez, ordered the devaluation of Venezuela’s currency by 50% on January 8th. President Chavez created a new dual system for the fixed rate bolivar. The dual system will devalue the currency to 4.3 from 2.15 against the dollar for most imports and transactions. For imports of food, medicine, and other essential items the change will be from 2.15 to a new rate of 2.6. President Chavez set the 2.15 rate for basic goods to limit the impact of the devaluation on consumer goods. The move is an abrupt turn from President Chavez’s declaration 3 years ago of a “strong bolivar.” President Chavez also declared that the government would take further measures to attempt to decrease the size of the black market.
The Venezuelan economy has failed to recover from the credit crisis and lower oil prices. Other economies in the region have already exited the recession and have growing economies. The Venezuelan economy contracted by 2.9 percent during 2009. Furthermore, President Chavez faces growing unrest from continued blackouts and water shortages. President Chavez’s current popularity rating is hovering at around 50 percent. President Chavez hopes that the move will boost his popularity for the upcoming legislative election at the end of 2010. President Chavez has said that the policy would increase the competitiveness of exports of coffee and cocoa while also increasing domestic production. Some economists have concurred, finding that the policy could provide some relief to local industry and help close the budget deficit. President Chavez hopes that the benefits of a weaker currency will offset the faster rate of inflation.
Venezuelan citizens flooded to the markets following President Chavez’s announcement to purchase items before the price rise. One sales associate stated, “It was Black Friday, tinted red.” Individuals shopped at retailers, such as electronic stores, out of fear that prices would rise significantly in the coming weeks. Chavez ordered stores not to raise prices and threatened to shut down stores that did so. On Saturday, government inspectors, accompanied by soldiers closed 70 stores for raising prices in violation of the order.
Venezuelan finance minister projected that the devaluation will increase inflation from 27 percent to between 30 and 32 percent. Venezuela’s 27 percent inflation rate already was the highest in the region. Venezuela’s citizens rely heavily on imports for everything from beef and milk to automobiles. Economist Pedro Palma predicts that the move will further erode Chavez’s popularity due to the inevitable rise in the prices of imported goods. Furthermore, Economist Pavel Gomez stated that the two tiered exchange scheme creates incentives for corruption. Other economists fear that the policy could push inflation to 50% this year. Over the weekend the cost of dollars on the black market increased by 18 percent.
President Chavez also announced on Friday that the Central Bank transferred $7 Billion of foreign reserves to a fund used to finance investment projects. Traditionally, President Chavez’s popularity has risen with increased public spending.
Is Venezuela capable of curbing the black market exchange rate?
Do the opposition parties have a realistic shot at gaining legislative control this fall?
Saturday, January 16, 2010
Financial Times, Europe Cannot Afford a Greek Default
Bloomberg, Moody’s Says Greece, Portugal May Face ‘Slow Death’
Market News, Update: ECB Trichet: Rumors of Greece Eurozone Exit "Absurd"
Greece faces intense scrutiny after falling into its first recession in 16 years and becoming the Eurozone’s most indebted member with a budget deficit 12.7% of GDP, more than 4 times the allowable 3% deficit in the European Union (“EU”). Greece’s economic woes came as a surprise to many when Eurozone finance ministers revealed that Greece had been misrepresenting its budget deficit statistics for years. Greece’s Prime Minister George Papandreou has publically committed to an economic recovery plan to reduce the deficit to less than 3% by raising taxes and cutting expenditures in national defense and healthcare.
Foreign investors have not found comfort in Greece’s promises of reform and have demanded higher yield premiums on Greek debt because the country’s risk of default. After the news of Greece’s financial troubles were released, the cost of insurance products to protect against a Greek default—credit default swaps—also rose almost 50 basis points, their largest one-day increase on record. Analysts are skeptical that Greece can achieve a quick financial recovery. In December, Moody’s cut Greece’s credit rating from A1 to A2, and half of the agency’s analysts predict another downgrade below an A rating by the end of 2010.
Another challenge to Greece’s economic recovery is the downward cycle that financial troubles create. The more financially unstable an entity becomes, the higher its cost of funds, and the more difficult it is to return to profitability. One solution, like Greece’s recovery plan, is to raise taxes and cut costs, but these actions might lead to deflation and emigration which could further threaten the country’s social and economic stability. Another solution is financial aid from the IMF or a financial bailout by other EU members or the European Central Bank.
Some analysts suggest that if Greece does not receive economic support and were allowed to default, other EU countries would face increased scrutiny and credit downgrades because of their EU association. For example, Spain and Portugal are struggling economically, and a default in Greece could impact their credit ratings, increase their cost of funds, and reduce their chances of an economic recovery. Greece could also withdraw from the EU after a default to recover outside EU scrutiny, but such a move would probably weaken the EU’s image and be disastrous for its remaining members. Greece’s Finance Minister George Papaconstantinou said last week that there was no chance that Greece would require a financial bailout or leave the EU.
Twenty percent of analysts questioned predicted that Greece would need financial assistance within the next five years, but European Central Bank President Jean-Claude Trichet refuses to consider granting the country any special concessions to help alleviate its economic troubles. Some think this decision is a way of making an example of Greece for its financial deceptions.
1. Why did it take years to discover Greece's budget problems?
2. Can Greece be held accoutable for its misgivings without harming innocent Greek citizens?