Sources:
Financial Times 1
Financial Times 2
Financial Times 3
According to a report entitled “Comprehensive Economic Recovery in Zimbabwe” published by the United Nations Development Programme (UNDP), Zimbabwe is in bad shape financially and could need billions of dollars in foreign aid. Five Zimbabwean economist were responsible for the 239 page report often calls for drastic and potentially painful policy measures to get Zimbabwe’s economy back on track.
The report says it could take at least 12 years for Zimbabwe to recover to peak levels of per capita income recorded in 1991. A 5% annual growth rate of the economy of 12 years would be necessary to return to 1991 levels of income. The authors warn that 4% annual growth is much more likely to occur. And while Zimbabwe has been experiencing devastating inflation and a shrinking economy, other countries in sub-Saharan Africa have seen large economic gains. Zimbabwe is losing millions of skilled workers to South Africa and the UK and wide-spread AIDS has dropped the average life expectancy by 20 years.
It seems that a minimum of $5 billion of foreign aid will be necessary over the next 5 years in order to get Zimbabwe back on its feet. Most of the money will go to plug up large budget deficits and to beat back the hyper-inflation that has crippled the economy. The report also suggests that action must be taken immediately in order to ensure swift change and that the initiatives do not get bogged down by internal conflict.
As a previous post discussed, the recent presidential election in Zimbabwe was marred with conflict. The leaders of the two rival parties are in the process of negotiating an agreement to share power in a way that reflects the will of the Zimbabwean people. These negotiations have been mediated by South Africa’s president, Thabo Mbeki, who has recently resigned amid his own political controversy. Many worry that the rival parties will use this to their advantage and slow real progress.
The UK, US, and the European Union are all worried that no real political stability will emerge, thus making it difficult to imagine that they will be giving large sums of aid-money in the near future. The US has recently given Zimbabwe an ultimatum that it must quickly settle its government problems and insure that aid money will be available to all citizens regardless of political affiliations otherwise the US will not give more aid money. Ultimately the economic situation in Zimbabwe will continue to be unclear until the government can provide much need stability.
Questions:
1) After a heated election this summer that resulted in many deaths, how likely is it that the rival parties will be able to settle its differences and focus on the severely damaged economy?
2) Will the strain that the credit crisis is causing in the US and the recent announcement of the $700 billion bailout funded by taxpayers affect the US’s ability to offer substantial aid to Zimbabwe?
Monday, September 22, 2008
Sunday, September 21, 2008
Credit Crisis Draws Attention to the Virtue of Islamic Finance
Sources: Credit Crisis Gives Islamic Finance a Chance to Shine, Reuters; Turmoil Demonstrates Link With the World, Financial Times; Institute of Islamic Banking & Insurance
Although the credit crisis has proven that the Middle East is not detached from the world economy, Middle Eastern banks adhering to principles of Islamic finance remain virtually unscathed. In fact, the credit crisis has provided Islamic banks with a chance to play up the contrast between them and conventional banks.
The basic principle of Islamic banking is the prohibition of riba, or interest. In addition to discouraging interest-based banking, Islam also prohibits investments in sectors like liquor, pork, gambling, pornography and anything else that Islamic law deems haram, or unlawful.
Investors traumatized by the credit crisis could seek comfort from the stricter rules imposed on lending by Islamic law, which effectually bans some of the financing methods that proved unworkable during the U.S. mortgage crisis. Specifically, Islamic law requires transactions to be linked to assets, thus deterring the kind of complexities prevalent in conventional financing operations.
However, while the virtues of Islamic financing have recently been increasingly noticed, analysts say market commentators and intermediaries may be too zealous in promoting the merits of Islamic finance as a safe product.
Thus, while there is some debate on whether Islamic finance really provides a safer bet, most agree that the industry should make the most of the attention it is now receiving. The virtue of Islamic finance is currently drawing the interest of companies outside the Middle East. Accordingly, David Testa, chief executive of Gatehouse Bank (an Islamic bank in Britain) claims that “the current market condition has given Islamic finance a great opportunity to show what it can do—help to fill the liquidity gap. If Islamic banks step up to the mark, then they will gain attraction.”
Discussion: Do you think that companies affected by the credit crisis will consider pursuing principles of Islamic finance? Do you believe that Islamic banking is really less risky than conventional banking? Would the credit crisis have happened if Islamic finance principles were used in the United States? Even if it is less risky, does Islamic banking inhibit growth?
Although the credit crisis has proven that the Middle East is not detached from the world economy, Middle Eastern banks adhering to principles of Islamic finance remain virtually unscathed. In fact, the credit crisis has provided Islamic banks with a chance to play up the contrast between them and conventional banks.
The basic principle of Islamic banking is the prohibition of riba, or interest. In addition to discouraging interest-based banking, Islam also prohibits investments in sectors like liquor, pork, gambling, pornography and anything else that Islamic law deems haram, or unlawful.
Investors traumatized by the credit crisis could seek comfort from the stricter rules imposed on lending by Islamic law, which effectually bans some of the financing methods that proved unworkable during the U.S. mortgage crisis. Specifically, Islamic law requires transactions to be linked to assets, thus deterring the kind of complexities prevalent in conventional financing operations.
However, while the virtues of Islamic financing have recently been increasingly noticed, analysts say market commentators and intermediaries may be too zealous in promoting the merits of Islamic finance as a safe product.
Thus, while there is some debate on whether Islamic finance really provides a safer bet, most agree that the industry should make the most of the attention it is now receiving. The virtue of Islamic finance is currently drawing the interest of companies outside the Middle East. Accordingly, David Testa, chief executive of Gatehouse Bank (an Islamic bank in Britain) claims that “the current market condition has given Islamic finance a great opportunity to show what it can do—help to fill the liquidity gap. If Islamic banks step up to the mark, then they will gain attraction.”
Discussion: Do you think that companies affected by the credit crisis will consider pursuing principles of Islamic finance? Do you believe that Islamic banking is really less risky than conventional banking? Would the credit crisis have happened if Islamic finance principles were used in the United States? Even if it is less risky, does Islamic banking inhibit growth?
Despite recent turmoil, IMF “cautiously optimistic” about global economy’s resilience
Sources: IMF: The Global Economy and Financial Turmoil: Finding our Footing
In advance of the forthcoming publication of its highly anticipated yearly economic analyses-the World Economic Outlook and the Global Financial Stability Report-IMF First Deputy Managing Director John Lipsky gave a first look at the Fund’s impressions of the current global economy this week. He expressed “cautious optimism” about the prospects for avoiding a global recession, but emphasized the need for “clear and coherent” policy responses from governments around the world.
Citing three shocks to the global economy: high energy and commodity prices, the housing market crisis in the US and other advanced economies, and the recent, and ongoing, financial turmoil, he laid out their potential effects and his reasons for optimism that a “gradual recovery” will continue.
First on the list of encouraging developments was the recent decrease in oil prices, which should lead to increased consumer consumption with a potentially greater effect in the US than the income tax rebates given earlier this year. Second was what he characterized as the “plausible” anticipation that the US housing market will bottom out in 2009, reducing that market’s current drag on GDP. He also highlighted relatively robust growth in emerging markets, resulting in increased exports to those countries, which has supported US growth as the relatively low value of the US dollar further encourages export growth. Last, and perhaps most importantly, he cited recent research by the IMF indicating that a credit crunch does not necessarily foreclose overall economic recovery, particularly given the strength of American corporate finances and productivity.
In the speech, which was delivered at the Center for Strategic and International Studies in Washington DC, Mr. Lipsky praised the American government’s decision to bail out mortgage giants Fannie Mae and Freddie Mac, but said that a “more systematic” approach might be warranted. This suggestion turned out to be quite prescient as it was given just one day before the American government announced its plan to systematically buy “toxic” assets from troubled institutions.
Despite the global challenges and the increased risks from this past week’s financial meltdown, the IMF projects that global growth will be around four percent for 2008 and just under four percent in 2009, a relatively small decrease from the 4 and three quarters increase seen in 2007.
Discussion:
Do you think the IMF is overly optimistic about the state of the global economy? What are some possible global implications of the current instability in the financial world?
Saturday, September 20, 2008
The Aquafund: IDB Takes Steps to Improve Sanitation in Latin America
Sources: Inter-American Development Bank, "IDB Offers Grants to Jump-Start Water and Sanitation Projects"; IRC International Water and Sanitation Center, "Caribbean: Addressing Sanitation Issues Critical"
On Friday, September 19th, the Inter-American Development Bank ("IDB") approved the creation of the Aquafund, a project that will disburse funds to Latin American governments that wish to improve their water and sanitation services. The Aquafund is designed in large part to help finance the early stages of water and sanitation projects. Once it starts to operate, the Aquafund will be able to quickly disburse funds to elligible governments. By 2011, IDB officials hope to reach out to 100 Latin American cities and 3000 Latin American rural communities.
The Aquafund will be a multi-faceted financing project. Starting now, the Aquafund will be able to disburse up to $15 million in grants drawn from the IDB's internal sources. In 2009, the IDB will also begin to match contributions that other countries make to water and sanitation projects. IDB officials predict that they will be able to provide up to $35 million in grants over the 2009 calendar year through the Aquafund. The project will also provide flexibility to governments who seek support from more than one lender, since it will allow governments who have secured Aquafund loans to seek additional loans from private parties.
Loans received through the Aquafund project will go to different components of water and sanitation projects. For example, governments will be able to use funds to finance preliminary studies to see whether certain projects will be feasible and to provide tecnical training to the individuals participating in the projects. Governments will also be able to use funds to strengthen or change the laws and regulations that deal with sanitation and water systems.
IDB officials hope that the creation of Aquafund will help Latin American governments develop innovative approaches to water and sanitation. Officials also plan to use the Aquafund as an educational tool. Starting in 2009, the Aquafund will finance pilot projects that Latin American governments will be able to use as models. One of the pilot projects that is in the works will focus on improving Latin American households' connection to local sanitation networks. Overall, the goal of the Aquafund will be to turn what have thus far been "proposals" for improved water and sanitation systems into sustainable projects that will improve Latin Americans' quality of life.
Discussion questions:
1- Many areas of Latin America, particularly rural and urban areas of the Caribbean, do not have access to proper sanitation and water systems. Why has it been so difficult for this region to establish sustainable sanitation systems? Will the new Aquafund project address the obstacles that these governments have had, or should the IDB consider other ways of addressing the water and sanitation issue?
2- Some would argue that improving the health of the Latin American population is a necessary first step to addressing the multiple issues that the region faces. Will developing the water and sanitation systems in Latin America help spur progress in the region's political, economic, and social systems?
On Friday, September 19th, the Inter-American Development Bank ("IDB") approved the creation of the Aquafund, a project that will disburse funds to Latin American governments that wish to improve their water and sanitation services. The Aquafund is designed in large part to help finance the early stages of water and sanitation projects. Once it starts to operate, the Aquafund will be able to quickly disburse funds to elligible governments. By 2011, IDB officials hope to reach out to 100 Latin American cities and 3000 Latin American rural communities.
The Aquafund will be a multi-faceted financing project. Starting now, the Aquafund will be able to disburse up to $15 million in grants drawn from the IDB's internal sources. In 2009, the IDB will also begin to match contributions that other countries make to water and sanitation projects. IDB officials predict that they will be able to provide up to $35 million in grants over the 2009 calendar year through the Aquafund. The project will also provide flexibility to governments who seek support from more than one lender, since it will allow governments who have secured Aquafund loans to seek additional loans from private parties.
Loans received through the Aquafund project will go to different components of water and sanitation projects. For example, governments will be able to use funds to finance preliminary studies to see whether certain projects will be feasible and to provide tecnical training to the individuals participating in the projects. Governments will also be able to use funds to strengthen or change the laws and regulations that deal with sanitation and water systems.
IDB officials hope that the creation of Aquafund will help Latin American governments develop innovative approaches to water and sanitation. Officials also plan to use the Aquafund as an educational tool. Starting in 2009, the Aquafund will finance pilot projects that Latin American governments will be able to use as models. One of the pilot projects that is in the works will focus on improving Latin American households' connection to local sanitation networks. Overall, the goal of the Aquafund will be to turn what have thus far been "proposals" for improved water and sanitation systems into sustainable projects that will improve Latin Americans' quality of life.
Discussion questions:
1- Many areas of Latin America, particularly rural and urban areas of the Caribbean, do not have access to proper sanitation and water systems. Why has it been so difficult for this region to establish sustainable sanitation systems? Will the new Aquafund project address the obstacles that these governments have had, or should the IDB consider other ways of addressing the water and sanitation issue?
2- Some would argue that improving the health of the Latin American population is a necessary first step to addressing the multiple issues that the region faces. Will developing the water and sanitation systems in Latin America help spur progress in the region's political, economic, and social systems?
Friday, September 19, 2008
Asia Feeling the Credit Crunch
Asia moves to shield markets, boost confidence amid Wall Street crisis, insurancenewsnet.com
Asia battles to shield markets from Wall Street crisis, INQUIRER.net
ADB urges coordination among Asia’s regulators amid financial turmoil, China View
China steps in to prop up stocks, Financial Times
Asia is feeling the crunch as the effects of the U.S. credit crisis spread across the globe. Asian bank stocks tumbled after Lehman Brothers filed for bankruptcy protection on Monday and central banks have had to inject billions of dollars to support weakened money markets. The Asian Development Bank (ADB) has warned that the market is vulnerable in several areas, including asset markets—such as real estate—and is struggling to contain inflation to prevent slowed economic activity. Additionally, analysts have warned that financial integration across Asia is underdeveloped, in spite of growth in regional trade integration, and Asia is too dependent on European and North American markets for handling large-scale savings.
The ADB proposed establishment of an “Asian Financial Stability Dialogue” to coordinate regulatory development and keep a lookout for potential vulnerabilities in the Asian markets. The ADB is looking to develop new and deeper financial markets, promote consistent market standards, and set-up better standards for government transparency to increase domestic and international investment. The ADB hopes that by stepping up regulation and working to improve these different aspects of the Asian markets, policy makers and regulators can shield banks from the financial crises caused by U.S. mortgage defaults--which has caused more than $400 billion in losses and write-downs to Western lenders.
Although Asian stocks surged Friday after announcement of the U.S. bailout plan, analysts say that there hasn’t been enough change in companies and the world markets and warn that Asian financial markets and economies remain at risk.
Questions
(1) How will the U.S. bailout plan affect Asian markets and economies?
(2) How can Asia reduce dependency on U.S. and European markets?
(3) What impact might the proposed "Asian Financial Stability Dialogue" have on Asian markets? What is the likelihood Asian markets will cooperate to develop such a dialogue?
Asia battles to shield markets from Wall Street crisis, INQUIRER.net
ADB urges coordination among Asia’s regulators amid financial turmoil, China View
China steps in to prop up stocks, Financial Times
Asia is feeling the crunch as the effects of the U.S. credit crisis spread across the globe. Asian bank stocks tumbled after Lehman Brothers filed for bankruptcy protection on Monday and central banks have had to inject billions of dollars to support weakened money markets. The Asian Development Bank (ADB) has warned that the market is vulnerable in several areas, including asset markets—such as real estate—and is struggling to contain inflation to prevent slowed economic activity. Additionally, analysts have warned that financial integration across Asia is underdeveloped, in spite of growth in regional trade integration, and Asia is too dependent on European and North American markets for handling large-scale savings.
The ADB proposed establishment of an “Asian Financial Stability Dialogue” to coordinate regulatory development and keep a lookout for potential vulnerabilities in the Asian markets. The ADB is looking to develop new and deeper financial markets, promote consistent market standards, and set-up better standards for government transparency to increase domestic and international investment. The ADB hopes that by stepping up regulation and working to improve these different aspects of the Asian markets, policy makers and regulators can shield banks from the financial crises caused by U.S. mortgage defaults--which has caused more than $400 billion in losses and write-downs to Western lenders.
Although Asian stocks surged Friday after announcement of the U.S. bailout plan, analysts say that there hasn’t been enough change in companies and the world markets and warn that Asian financial markets and economies remain at risk.
Questions
(1) How will the U.S. bailout plan affect Asian markets and economies?
(2) How can Asia reduce dependency on U.S. and European markets?
(3) What impact might the proposed "Asian Financial Stability Dialogue" have on Asian markets? What is the likelihood Asian markets will cooperate to develop such a dialogue?
Latin America Heaves a Sigh of Relief and Investor Nerves Calm
Russia, Brazil Lead Record Emerging Market Gain; Bonds Rally Bloomberg.com, Sept. 19
Brazil's Real Climbs 5.5% Following US Bailout Plan News FX.com, Sept. 19
Latin America Bonds: Colombia Peso Debt Drops Most in Two Years Bloomberg.com, Sept. 18
Peso colombiano cierra con caida de 2,95 pct Reuters/Yahoo Noticias, Sept. 17
America Latin, ante periodo de vacas flacas tras crisis financiers en EE.UU. Noticias RCN, Sept. 18
News of the U.S. bank bailout, which was announced by U.S. Treasury Secretary Henry Paulson on Friday, came just in time for Latin America. Before the announcement, growing concerns about a domino effect from struggling U.S. markets had lead many foreign investors to leave these emerging markets. Latin American currencies were tumbling. By Thursday, the Mexican peso had slid 9.9 percent against the dollar from its August 4 high. The Colombian peso had fallen 6.3 percent since the Lehman Brothers bankruptcy, hitting its weakest since March, 2007. In Latin American, global market instability affects more than the financial markets. A weakening economy also threatens the demand for raw materials. Raw materials have been the principal driver of the recent economic growth throughout most of Latin America. They make up 65 percent of Brazilian exports, and as prices for commodities like oil and grain surged, so did the Brazilian economy. By Thursday, Latin American economists were recommending a period of "conservatism" and "belt tightening" as fears of a global recession increased.
On Friday, after the U.S. bailout plans were announced, emerging market currencies and bonds rebounded drastically. Bonds rallied the most since 2001. The Brazilian real, Latin America's reference point, led the currency rally. The Colombian peso also climbed an incredible 7.3 percent against the dollar on Friday. That is the biggest jump for the Colombian peso in 13 years. Investors who had recently left the Latin American markets for "safer bets" came running back. "The U.S. government needed to do something as the system was wobbling. The plan seems to have calmed nerves," said Jason Viera, an economist in Sao Paulo.
Questions:
1) The drastic fluctuations throughout Latin America this week demonstrate how closely the region is tied to the overall global economy. What does this mean for the average citizen of these countries?
2) Before Friday's bailout announcement, economists were recommending that Latin American countries enter a period of greater conservatism, especially when it comes to consumer credit. Many economists continue recommending that strategy. Is this a good recommendation for Latin America? Would it be good for some countries and not others?
3) Most countries are directly impacted by the financial decisions made in the U.S. Is there a way these countries can have a say in those financial decisions? Should they have a say?
Brazil's Real Climbs 5.5% Following US Bailout Plan News FX.com, Sept. 19
Latin America Bonds: Colombia Peso Debt Drops Most in Two Years Bloomberg.com, Sept. 18
Peso colombiano cierra con caida de 2,95 pct Reuters/Yahoo Noticias, Sept. 17
America Latin, ante periodo de vacas flacas tras crisis financiers en EE.UU. Noticias RCN, Sept. 18
News of the U.S. bank bailout, which was announced by U.S. Treasury Secretary Henry Paulson on Friday, came just in time for Latin America. Before the announcement, growing concerns about a domino effect from struggling U.S. markets had lead many foreign investors to leave these emerging markets. Latin American currencies were tumbling. By Thursday, the Mexican peso had slid 9.9 percent against the dollar from its August 4 high. The Colombian peso had fallen 6.3 percent since the Lehman Brothers bankruptcy, hitting its weakest since March, 2007. In Latin American, global market instability affects more than the financial markets. A weakening economy also threatens the demand for raw materials. Raw materials have been the principal driver of the recent economic growth throughout most of Latin America. They make up 65 percent of Brazilian exports, and as prices for commodities like oil and grain surged, so did the Brazilian economy. By Thursday, Latin American economists were recommending a period of "conservatism" and "belt tightening" as fears of a global recession increased.
On Friday, after the U.S. bailout plans were announced, emerging market currencies and bonds rebounded drastically. Bonds rallied the most since 2001. The Brazilian real, Latin America's reference point, led the currency rally. The Colombian peso also climbed an incredible 7.3 percent against the dollar on Friday. That is the biggest jump for the Colombian peso in 13 years. Investors who had recently left the Latin American markets for "safer bets" came running back. "The U.S. government needed to do something as the system was wobbling. The plan seems to have calmed nerves," said Jason Viera, an economist in Sao Paulo.
Questions:
1) The drastic fluctuations throughout Latin America this week demonstrate how closely the region is tied to the overall global economy. What does this mean for the average citizen of these countries?
2) Before Friday's bailout announcement, economists were recommending that Latin American countries enter a period of greater conservatism, especially when it comes to consumer credit. Many economists continue recommending that strategy. Is this a good recommendation for Latin America? Would it be good for some countries and not others?
3) Most countries are directly impacted by the financial decisions made in the U.S. Is there a way these countries can have a say in those financial decisions? Should they have a say?
Thursday, September 18, 2008
New Initiatives to Restore Calm
Financial Times, SEC Unveils Temporary Shorting Ban
Financial Times, FSA Bands Short-selling of Banks
New York Times, Treasury to Guarantee Money Market Funds
Reuters, SEC Issues Temporary Ban on Short Sales
News of the U.S. government’s rescue plan for troubled financial institutions buoyed markets early Friday, while financial regulators got to work issuing a gaggle of temporary orders to help restore calm amidst a storm of financial uncertainty.
The Securities and Exchange Commission (SEC) has temporarily banned the short-selling of 799 financial stocks, including AIG, Berkshire Hathaway, Loews and Blackstone Group. A short sale occurs when a seller borrows a stock, sells it, and then buys it back at a lower price. The goal of the short sale is to take advantage of price declines. The SEC has put some of the blame for the current financial crisis on short sellers, accusing them of driving down share prices of firms like Lehman Brothers and AIG. Financial regulators across the pond are following suit in banning short sales, including the U.K.’s Financial Services Authority, Ireland’s stock market regulator, and Australia (who banned “naked” short sales – short sales where sellers do not borrow the stock first and then fail to deliver to the buyer).
Hedge funds have warned that the ban on short sellers could make it very difficult for banks to raise new capital, and shares could become more expensive to trade because hedge funds will be unable to provide more liquidity to the market. But regulators maintain that the rules will provide much-needed stability in an otherwise volatile market.
The Treasury Department is [temporarily] guaranteeing monkey market funds, which have traditionally been safe and risk-free investments but have felt the stress of the current market turmoil, up to $50 billion to ensure their solvency. The Federal Reserve is also expanding its emergency lending program to support the $3 trillion in troubled funds. Money market funds are mutual funds, required by law, to invest in low-risk securities, and typically invest in government securities, certificates of deposits, commercial paper of companies, and other highly liquid and low-risk securities. The payments will be guaranteed by the Exchange Stabilization Fund which was set up in the 1930s to intervene in foreign exchange markets.
Questions for discussion:
1) Is market intervention absolutely necessary? Are the hedge funds right in claiming these rules will create artificial prices and hurt banks trying to raise capital?
2) Are these “temporary” rules really temporary, or do you think this is the beginning of an era of nationalization?
Financial Times, FSA Bands Short-selling of Banks
New York Times, Treasury to Guarantee Money Market Funds
Reuters, SEC Issues Temporary Ban on Short Sales
News of the U.S. government’s rescue plan for troubled financial institutions buoyed markets early Friday, while financial regulators got to work issuing a gaggle of temporary orders to help restore calm amidst a storm of financial uncertainty.
The Securities and Exchange Commission (SEC) has temporarily banned the short-selling of 799 financial stocks, including AIG, Berkshire Hathaway, Loews and Blackstone Group. A short sale occurs when a seller borrows a stock, sells it, and then buys it back at a lower price. The goal of the short sale is to take advantage of price declines. The SEC has put some of the blame for the current financial crisis on short sellers, accusing them of driving down share prices of firms like Lehman Brothers and AIG. Financial regulators across the pond are following suit in banning short sales, including the U.K.’s Financial Services Authority, Ireland’s stock market regulator, and Australia (who banned “naked” short sales – short sales where sellers do not borrow the stock first and then fail to deliver to the buyer).
Hedge funds have warned that the ban on short sellers could make it very difficult for banks to raise new capital, and shares could become more expensive to trade because hedge funds will be unable to provide more liquidity to the market. But regulators maintain that the rules will provide much-needed stability in an otherwise volatile market.
The Treasury Department is [temporarily] guaranteeing monkey market funds, which have traditionally been safe and risk-free investments but have felt the stress of the current market turmoil, up to $50 billion to ensure their solvency. The Federal Reserve is also expanding its emergency lending program to support the $3 trillion in troubled funds. Money market funds are mutual funds, required by law, to invest in low-risk securities, and typically invest in government securities, certificates of deposits, commercial paper of companies, and other highly liquid and low-risk securities. The payments will be guaranteed by the Exchange Stabilization Fund which was set up in the 1930s to intervene in foreign exchange markets.
Questions for discussion:
1) Is market intervention absolutely necessary? Are the hedge funds right in claiming these rules will create artificial prices and hurt banks trying to raise capital?
2) Are these “temporary” rules really temporary, or do you think this is the beginning of an era of nationalization?
U.S. Government Bailout Plan In The Works
Financial Times, U.S. Push for Crisis Breakthrough
New York Times, Fed and Treasury Offer to Work With Congress on Bailout Plan
As the stock market attempted to catch its breath from the roller coaster week after gaining 400 points at close of business on Thursday, U.S. policymakers met to create the structure for what could be the biggest financial bailout in history.
Details remain to be worked out, but the idea is that the U.S. government will have the power and capacity to buy distressed mortgages from banks and other institutions at deep discounts. The Thursday night meeting contemplated a “comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets.” The plan was the brainchild of Sen. Charles Schumer (D – NY) and Department of Treasury and Federal Reserve officials, who were concerned with keeping loan markets alive, even after the Federal Reserve committed almost $380 billion into the markets.
The plan will likely resemble the Resolution Trust Corporation that was set up during the Savings & Loan Crisis in the late 1980’s. U.S. officials had hoped for this plan over the past few days, but wanted to be sure it would pass Congress before they unveiled the plan to preserve what little remains of market confidence.
Several lawmakers have come out in support of the bailout plan, with everyone careful to note that the effort is bipartisan, though tense at times, and in the best interests of taxpayers. Lawmakers hope to have the plan hammered out by next week, when Congress adjourns and goes home to campaign in the homestretch before the November elections.
Questions for Discussion:
1) The Resolution Trust Corporation that helped to alleviate the S&L Crisis in the late 80's and 90's bought troubled assets, not entire institutions. Do you think the government bailout plan, the largest in history, will work in the same way? Will it solve the problem?
2) What do you think this means for taxpayers? What could this mean for the election?
New York Times, Fed and Treasury Offer to Work With Congress on Bailout Plan
As the stock market attempted to catch its breath from the roller coaster week after gaining 400 points at close of business on Thursday, U.S. policymakers met to create the structure for what could be the biggest financial bailout in history.
Details remain to be worked out, but the idea is that the U.S. government will have the power and capacity to buy distressed mortgages from banks and other institutions at deep discounts. The Thursday night meeting contemplated a “comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets.” The plan was the brainchild of Sen. Charles Schumer (D – NY) and Department of Treasury and Federal Reserve officials, who were concerned with keeping loan markets alive, even after the Federal Reserve committed almost $380 billion into the markets.
The plan will likely resemble the Resolution Trust Corporation that was set up during the Savings & Loan Crisis in the late 1980’s. U.S. officials had hoped for this plan over the past few days, but wanted to be sure it would pass Congress before they unveiled the plan to preserve what little remains of market confidence.
Several lawmakers have come out in support of the bailout plan, with everyone careful to note that the effort is bipartisan, though tense at times, and in the best interests of taxpayers. Lawmakers hope to have the plan hammered out by next week, when Congress adjourns and goes home to campaign in the homestretch before the November elections.
Questions for Discussion:
1) The Resolution Trust Corporation that helped to alleviate the S&L Crisis in the late 80's and 90's bought troubled assets, not entire institutions. Do you think the government bailout plan, the largest in history, will work in the same way? Will it solve the problem?
2) What do you think this means for taxpayers? What could this mean for the election?
Russian Situation Looks Grim After Stock Market Plunge
Sources: Financial Times, Medvedev pledges $20 bn liquidity boost; Russia halts trading after 17% share price fall; Moscow share trading remains suspended
Despite President Medvedev's assurances last weak that the blow to the Russian economy was only temporary and despite repeated liquidity injections, this week did not look good for Russian investors. The stock market showed catastrophic losses Tuesday when falling oil prices combined with poor money market conditions to prompt mass selling on the two major exchanges.
Both the Micex and RTS stock exchanges suspended trading at the urging of state regulators, but already the single-day drop in prices was the greatest for Micex since the August 1998 financial crisis. Traders forced to meet margin calls and brokers pulling their credit lines contributed to the plunge, but perhaps the worst aspect is loss of confidence in the system.
KIT Finance, a mid-sized Moscow brokerage firm, was unable to make payments on short-term loans, and there were rumours that other banks might fail as well. This made banks unwilling to lend to each other, and so a finance ministry injection of $5.8 billion into the banking system did not spread throughout it due to freezes on interbank lending. The interbank money market rates reached 11%, though by Thursday they were back down to 7-8% for the largest banks.
It remains to be seen whether the government will be able to save the situation with both lenders and borrowers afraid to participate in the economy. Alexei Kudrin, Russia's finance minister, insisted that the crisis is not systemic, but at the same time the central bank injected $14.16 billion into the money market in a single day, with its deputy reporting that the bank and the finance ministry could inject a total of $117.6 billion.
Large state-run banks were hardest hit, with stocks in Sberbank losing 21.76% of their value on Tuesday alone. The Micex exchange closed on Tuesday at 17.75% down, and the RTS at 11.47% down. In the past few months, the exchanges have lost nearly $800 billion in value.
With the exchanges planned to re-open on Friday, two more pledges came in – one from President Medvedev promising $20 billion and the other from the finance ministry, announcing a plan to put $59.1 billion in short-term deposits into three state-run banks. Other government measures include reducing oil export taxes to increase companies' cash balances, banning margin selling and short-selling on new accounts, and an order to state banks to open a sixty billion ruble credit line to the largest participants in the market.
Questions:
1) How does this crisis compare to the August 1998 ruble crisis?
2) Is the country's stronger financial structure enough to keep the crisis from becoming "systemic," as Kudrin suggested, or was this crash the inevitable result of an overheated emerging economy?
Despite President Medvedev's assurances last weak that the blow to the Russian economy was only temporary and despite repeated liquidity injections, this week did not look good for Russian investors. The stock market showed catastrophic losses Tuesday when falling oil prices combined with poor money market conditions to prompt mass selling on the two major exchanges.
Both the Micex and RTS stock exchanges suspended trading at the urging of state regulators, but already the single-day drop in prices was the greatest for Micex since the August 1998 financial crisis. Traders forced to meet margin calls and brokers pulling their credit lines contributed to the plunge, but perhaps the worst aspect is loss of confidence in the system.
KIT Finance, a mid-sized Moscow brokerage firm, was unable to make payments on short-term loans, and there were rumours that other banks might fail as well. This made banks unwilling to lend to each other, and so a finance ministry injection of $5.8 billion into the banking system did not spread throughout it due to freezes on interbank lending. The interbank money market rates reached 11%, though by Thursday they were back down to 7-8% for the largest banks.
It remains to be seen whether the government will be able to save the situation with both lenders and borrowers afraid to participate in the economy. Alexei Kudrin, Russia's finance minister, insisted that the crisis is not systemic, but at the same time the central bank injected $14.16 billion into the money market in a single day, with its deputy reporting that the bank and the finance ministry could inject a total of $117.6 billion.
Large state-run banks were hardest hit, with stocks in Sberbank losing 21.76% of their value on Tuesday alone. The Micex exchange closed on Tuesday at 17.75% down, and the RTS at 11.47% down. In the past few months, the exchanges have lost nearly $800 billion in value.
With the exchanges planned to re-open on Friday, two more pledges came in – one from President Medvedev promising $20 billion and the other from the finance ministry, announcing a plan to put $59.1 billion in short-term deposits into three state-run banks. Other government measures include reducing oil export taxes to increase companies' cash balances, banning margin selling and short-selling on new accounts, and an order to state banks to open a sixty billion ruble credit line to the largest participants in the market.
Questions:
1) How does this crisis compare to the August 1998 ruble crisis?
2) Is the country's stronger financial structure enough to keep the crisis from becoming "systemic," as Kudrin suggested, or was this crash the inevitable result of an overheated emerging economy?
21 Basques Behind Bars for Peaceful Lobbying
Sources: Financial Times- Spain Jails 21 ETA Prison Activists; Financial Times-Timeline: A History of ETA; New York Times- Basque Separatist, Free from Spanish Prison, Backs Talks
On Wednesday, the Spanish government engaged in yet another clash with the Basque community. It jailed 21 Basques for lobbying against the imprisonment of hundreds of fellow separatists deemed terrorist members of the guerilla group ETA. Sentences ranged from 8-10 years.
The Basque people occupy the north-central region of Spain and southwestern France and have long maintained a culture and language distinct from the rest of Spain. The organization ETA (Euskadi Ta Askatasuna or “Basque Homeland and Freedom") was founded in 1959 by a group of radical leftist students advocating independence from Spain and the creation of an autonomous state following brutal repression of the culture during the reign of Francisco Franco. In 1978, the Basque region was established as an “autonomous community” in the Spanish constitution, but was still restricted from the right to self-determination and independence. The past 50 years have been characterized by cycles of violence (the ETA has been responsible for the deaths of over 800 people since the 1960s) and peace talks between ETA and the Spanish government. The EU, including the governments of both Spain and France, and the United States classify the group as a terrorist organization.
However, more than forty years after the death of Franco, freedom of speech and political parties in Spain are still restricted. One can be charged, convicted, and jailed for the verbal offense of “defending terrorism”, as was Arnaldo Otegi, the former leader of the ETA who served a 15 month sentence in 2006 after a speech he gave at the 25th anniversary of a former Basque leader’s death. Other terrorism-related charges include participating in illegal political meetings and marches. The High Court of Spain has also banned the political participation of the Batasuna and ANV parties, believed to be political wings of the ETA.
Discussion
1. While terrorism and violence should never be tolerated, has the Spanish government gone too far in jailing ETA members for non-violent lobbying? If not, would your answer be different if the protestors were Basques not affiliated with the ETA?
2. Should political parties that are affiliated with terrorist organizations be allowed to function in a democratic state?
3. How does political repression affect the development of a country?
On Wednesday, the Spanish government engaged in yet another clash with the Basque community. It jailed 21 Basques for lobbying against the imprisonment of hundreds of fellow separatists deemed terrorist members of the guerilla group ETA. Sentences ranged from 8-10 years.
The Basque people occupy the north-central region of Spain and southwestern France and have long maintained a culture and language distinct from the rest of Spain. The organization ETA (Euskadi Ta Askatasuna or “Basque Homeland and Freedom") was founded in 1959 by a group of radical leftist students advocating independence from Spain and the creation of an autonomous state following brutal repression of the culture during the reign of Francisco Franco. In 1978, the Basque region was established as an “autonomous community” in the Spanish constitution, but was still restricted from the right to self-determination and independence. The past 50 years have been characterized by cycles of violence (the ETA has been responsible for the deaths of over 800 people since the 1960s) and peace talks between ETA and the Spanish government. The EU, including the governments of both Spain and France, and the United States classify the group as a terrorist organization.
However, more than forty years after the death of Franco, freedom of speech and political parties in Spain are still restricted. One can be charged, convicted, and jailed for the verbal offense of “defending terrorism”, as was Arnaldo Otegi, the former leader of the ETA who served a 15 month sentence in 2006 after a speech he gave at the 25th anniversary of a former Basque leader’s death. Other terrorism-related charges include participating in illegal political meetings and marches. The High Court of Spain has also banned the political participation of the Batasuna and ANV parties, believed to be political wings of the ETA.
Discussion
1. While terrorism and violence should never be tolerated, has the Spanish government gone too far in jailing ETA members for non-violent lobbying? If not, would your answer be different if the protestors were Basques not affiliated with the ETA?
2. Should political parties that are affiliated with terrorist organizations be allowed to function in a democratic state?
3. How does political repression affect the development of a country?
Wednesday, September 17, 2008
Sarkozy’s Alternative Economic Strategy Follows the U.S. Down the Rabbit Hole
Sources: Financial Times- Sarkozy’s Economic Reform Has Come Unstuck ; Financial Times- Sarkozy Has To Take a More Subtle Approach; The New York Times- Sarkozy, Ever Blunt, Confounds Both Friend and Foe
Contrary to traditional U.S. economic theory, France has been a huge proponent of prioritizing economic reform over fiscal prudence in recent years. French President Nicolas Sarkozy, especially, has developed the supply side of the economy rather than focusing on balancing the budget. While he planned with EU finance ministers to have a balanced budget by 2010, he recently pushed the date back to 2012. Experts say even this date is unrealistic and predict an actual date of 2014. At $59 billion, the French deficit is estimated to approach 3% of the GDP by the year’s end, making France the biggest spender in the European Union. Such a number is noncompliant with joint EU economic policy, and could lead to France’s dissipated political influence in the region.
Sarkozy’s adopted theory maintains that deficit reduction and budget- cutting inevitably create bitter public interest groups and private investors when funding or proceeds are diminished. Dissatisfied investors lead to less investment and market insecurity, which spirals into the general stifling of economic growth. By temporarily working on the supply-side of the economy, interest groups do not stand to lose, investor confidence and business are not diminished, and as the country’s economy rights itself and makes a surplus, the deficit lessens. Thus, the temporary increase in deficit is worth the public’s confidence and support leading into initial stages of economic reform. This strategy recently proved effective for Sarkozy in the labor market to convince co-opt trade unions and employers to work longer hours.
However, while such a policy has worked for France leading up to the economic crisis, it has been criticized as irrevocably flawed in light of the recent downturn of events. Without the capacity to maneuver the spending and debt of the country, financial crisis is less containable. Meanwhile, other European countries that have prioritized a balanced budget, such as Spain and Germany, have deficit “wiggle room” in times of financial crisis.
Sarkozy is now faced with the choice to amend his fiscal policy, or follow the U.S. economy further down the rabbit hole.
Discussion:
1. In times of financial crisis, do you believe it is ethically wrong for world leaders to purposefully and knowingly increase their countries’ deficits?
2. Are you more inclined to give a break to countries who have maintained fiscally responsible policies in recent years, and who may have planned more prudently for an economic downturn?
3. In the age of globalization, is economic policy a state issue or should other EU countries exert pressure on France to change its policy?
Contrary to traditional U.S. economic theory, France has been a huge proponent of prioritizing economic reform over fiscal prudence in recent years. French President Nicolas Sarkozy, especially, has developed the supply side of the economy rather than focusing on balancing the budget. While he planned with EU finance ministers to have a balanced budget by 2010, he recently pushed the date back to 2012. Experts say even this date is unrealistic and predict an actual date of 2014. At $59 billion, the French deficit is estimated to approach 3% of the GDP by the year’s end, making France the biggest spender in the European Union. Such a number is noncompliant with joint EU economic policy, and could lead to France’s dissipated political influence in the region.
Sarkozy’s adopted theory maintains that deficit reduction and budget- cutting inevitably create bitter public interest groups and private investors when funding or proceeds are diminished. Dissatisfied investors lead to less investment and market insecurity, which spirals into the general stifling of economic growth. By temporarily working on the supply-side of the economy, interest groups do not stand to lose, investor confidence and business are not diminished, and as the country’s economy rights itself and makes a surplus, the deficit lessens. Thus, the temporary increase in deficit is worth the public’s confidence and support leading into initial stages of economic reform. This strategy recently proved effective for Sarkozy in the labor market to convince co-opt trade unions and employers to work longer hours.
However, while such a policy has worked for France leading up to the economic crisis, it has been criticized as irrevocably flawed in light of the recent downturn of events. Without the capacity to maneuver the spending and debt of the country, financial crisis is less containable. Meanwhile, other European countries that have prioritized a balanced budget, such as Spain and Germany, have deficit “wiggle room” in times of financial crisis.
Sarkozy is now faced with the choice to amend his fiscal policy, or follow the U.S. economy further down the rabbit hole.
Discussion:
1. In times of financial crisis, do you believe it is ethically wrong for world leaders to purposefully and knowingly increase their countries’ deficits?
2. Are you more inclined to give a break to countries who have maintained fiscally responsible policies in recent years, and who may have planned more prudently for an economic downturn?
3. In the age of globalization, is economic policy a state issue or should other EU countries exert pressure on France to change its policy?
African Fund Set to Invest in the “Missing Middle”
Sources:
Financial Times
Free-Press-Release.com
A new African-based fund worth upwards of $150 million is set to launch by the end of the year. The fund is run by GroFin, an African investment group, and is aimed at small to mid-level entrepreneurs throughout the continent. The fund will offer loans between $50,000 and $1 million to African entrepreneurs who have had trouble obtaining loans from risk-averse local banks.
As previous posts have discussed, Africa has experienced record-level private capital investment in the past few years. There are many reasons for this; for instance, emerging markets in Africa have been largely insulated from the world’s credit shock, there has been consistent economic growth, and with the exception of a few countries (most notably Zimbabwe) increased political stability.
However, most of these gains in have gone unnoticed by the “missing middle” – businesses who lack the executive experience and size to attract large capital investors yet are still too big to obtain loans from microfinance investors. GroFin hopes to show that investing in the missing middle can be commercially successful. It plans to offer the loans at interest rates the entrepreneurs could obtain at local banks but are not requiring collateral. GroFin will also offer business advice and technical assistance.
Guido Boysen, the Regional General Manager of GroFin in East Africa, says GroFin helps insure success by “providing hands-on business development assistance” and that the key is that it “maintains a presence locally, on the ground.”
The fund will provide loans to many different sectors; such as, manufacturing, agri-business, tourism and transportation.
Questions:
1) If this investment strategy proves to be successful do you expect to see more funds trying similar strategies?
2) Many large pension funds invest in emerging markets in Africa because of their insulation from fluctuations in global markets. However, the sheer size and diversity of these funds seem to suggest a hands-off approach. Would large funds be successful investing in the missing middle or do you think that the hand-on approach and local presence of GroFin is what leads to successful investments?
Financial Times
Free-Press-Release.com
A new African-based fund worth upwards of $150 million is set to launch by the end of the year. The fund is run by GroFin, an African investment group, and is aimed at small to mid-level entrepreneurs throughout the continent. The fund will offer loans between $50,000 and $1 million to African entrepreneurs who have had trouble obtaining loans from risk-averse local banks.
As previous posts have discussed, Africa has experienced record-level private capital investment in the past few years. There are many reasons for this; for instance, emerging markets in Africa have been largely insulated from the world’s credit shock, there has been consistent economic growth, and with the exception of a few countries (most notably Zimbabwe) increased political stability.
However, most of these gains in have gone unnoticed by the “missing middle” – businesses who lack the executive experience and size to attract large capital investors yet are still too big to obtain loans from microfinance investors. GroFin hopes to show that investing in the missing middle can be commercially successful. It plans to offer the loans at interest rates the entrepreneurs could obtain at local banks but are not requiring collateral. GroFin will also offer business advice and technical assistance.
Guido Boysen, the Regional General Manager of GroFin in East Africa, says GroFin helps insure success by “providing hands-on business development assistance” and that the key is that it “maintains a presence locally, on the ground.”
The fund will provide loans to many different sectors; such as, manufacturing, agri-business, tourism and transportation.
Questions:
1) If this investment strategy proves to be successful do you expect to see more funds trying similar strategies?
2) Many large pension funds invest in emerging markets in Africa because of their insulation from fluctuations in global markets. However, the sheer size and diversity of these funds seem to suggest a hands-off approach. Would large funds be successful investing in the missing middle or do you think that the hand-on approach and local presence of GroFin is what leads to successful investments?
In Response To Worsening Credit Predicament, The Federal Reserve Stays One Course, Changes Another
Fed Holds Rates Amid Turmoil, Financial Times
Fed in $85 Billion Rescue of Insurer Near Failure, New York Times
Stocks Dive in Early Trading Despite Fed’s A.I.G. Bailout, New York Times
The Federal Reserve made two major announcements on Tuesday.
The first of these announcements was that the Federal Reserve would not lower the benchmark interest rate, which has held steady at 2% for some time as part of the Federal Reserve's efforts to battle inflation. While, early in the day on Tuesday, U.S. investors had seemed hopeful that the Federal Reserve would choose to lower interest rates, the decision to leave the rates as they were was seen by many as an indication that a Federal bailout of insurance giant AIG was forthcoming.
Indeed, later in the day Tuesday the Federal Reserve and the U.S. Treasury Department announced a massive, $85 billion bailout of AIG. This investment in the failing AIG by the federal government, aimed at preventing a worldwide financial panic, was not only an unprecedented move, it also directly contradicted the Federal Reserve's earlier "line in the sand" proclamation that that accompanied its refusal to bail out Lehman Brothers.
While the Federal Reserve, the Treasury Department, and much of the U.S. and worldwide financial community felt that the AIG bailout was necessary, it has not come without controversy. Many American politicians have called the bail out excessive and have heightened their calls for an aggressive investigation into the regulatory failures which may have contributed to the development of the worsening financial crisis, both in the United States and throughout the global marketplace.
Discussion:
1. Was the Federal Reserve correct in leaving the interest rates unchanged? Should the fight against inflation take priority over the need for greater liquidity in the marketplace?
2. Is the government bailout of AIG appropriate? What, if any, alternatives did the U.S. government have to a bailout of this scale? What would have been the consequences of the collapse of AIG?
Fed in $85 Billion Rescue of Insurer Near Failure, New York Times
Stocks Dive in Early Trading Despite Fed’s A.I.G. Bailout, New York Times
The Federal Reserve made two major announcements on Tuesday.
The first of these announcements was that the Federal Reserve would not lower the benchmark interest rate, which has held steady at 2% for some time as part of the Federal Reserve's efforts to battle inflation. While, early in the day on Tuesday, U.S. investors had seemed hopeful that the Federal Reserve would choose to lower interest rates, the decision to leave the rates as they were was seen by many as an indication that a Federal bailout of insurance giant AIG was forthcoming.
Indeed, later in the day Tuesday the Federal Reserve and the U.S. Treasury Department announced a massive, $85 billion bailout of AIG. This investment in the failing AIG by the federal government, aimed at preventing a worldwide financial panic, was not only an unprecedented move, it also directly contradicted the Federal Reserve's earlier "line in the sand" proclamation that that accompanied its refusal to bail out Lehman Brothers.
While the Federal Reserve, the Treasury Department, and much of the U.S. and worldwide financial community felt that the AIG bailout was necessary, it has not come without controversy. Many American politicians have called the bail out excessive and have heightened their calls for an aggressive investigation into the regulatory failures which may have contributed to the development of the worsening financial crisis, both in the United States and throughout the global marketplace.
Discussion:
1. Was the Federal Reserve correct in leaving the interest rates unchanged? Should the fight against inflation take priority over the need for greater liquidity in the marketplace?
2. Is the government bailout of AIG appropriate? What, if any, alternatives did the U.S. government have to a bailout of this scale? What would have been the consequences of the collapse of AIG?
Tuesday, September 16, 2008
As Crisis Worsens, Central Banks Attempt to Respond, and All Eyes Turn to the Fed
Central Banks Fail to Lift Markets, Financial Times
Wall Street Steady at Open; Fed to Meet, New York Times
As the number of U.S. institution falling prey to the worsening global financial predicament grew in the early week, the financial community’s eyes turned to the world’s central banks. On Monday and Tuesday, central banks in America, Europe, and Asia took aggressive steps (mostly in the form of infusions of cash) to attempt to mitigate the mounting panic and volatility in the marketplace.
In response to increased demand for liquidity by banks, the European Central Bank made available €70 billion in emergency funds. The Bank of England injected £25 billion of cash into the market over the course of the first two days of this week. In a similar move, the Federal Reserve Bank of New York pumped $50 billion into the U.S. market. The Bank of Japan has also let it be known that it stands ready to invest $24 billion to provide needed liquidity.
Unfortunately, these efforts by the central banks have not had a significant impact on the world’s markets. In Europe, London’s FTSE 100, Paris’ CAC 40, and Frankfurt’s DAX were all down sharply on Tuesday, as were Asian indexes including the Nikkei and the Hang Seng.
As central banks’ cash infusions prove, at least in the short term, to be unsuccessful in stopping the market’s decline, the eyes of the financial community have turned to the Federal Reserve. In light of the Federal Reserve’s recent commitment to battling inflation, a cut in the benchmark interest rate has been seen by most as unlikely. However, as circumstances in the marketplace worsen, liquidity becomes more imperative, and the effectiveness cash-infusion strategy employed by central banks early in the week comes into question, a change in the Federal Reserve’s position on interest rates may be forthcoming.
Discussion:
1. Were the Central Banks correct in their cash-infusion approach to the worsening global financial situation? Did they do enough? Do they react with sufficient speed?
2. Is a cut in the Federal Reserve's benchmark interest rate necessary? Is such a cut wise in the long-term?
Wall Street Steady at Open; Fed to Meet, New York Times
As the number of U.S. institution falling prey to the worsening global financial predicament grew in the early week, the financial community’s eyes turned to the world’s central banks. On Monday and Tuesday, central banks in America, Europe, and Asia took aggressive steps (mostly in the form of infusions of cash) to attempt to mitigate the mounting panic and volatility in the marketplace.
In response to increased demand for liquidity by banks, the European Central Bank made available €70 billion in emergency funds. The Bank of England injected £25 billion of cash into the market over the course of the first two days of this week. In a similar move, the Federal Reserve Bank of New York pumped $50 billion into the U.S. market. The Bank of Japan has also let it be known that it stands ready to invest $24 billion to provide needed liquidity.
Unfortunately, these efforts by the central banks have not had a significant impact on the world’s markets. In Europe, London’s FTSE 100, Paris’ CAC 40, and Frankfurt’s DAX were all down sharply on Tuesday, as were Asian indexes including the Nikkei and the Hang Seng.
As central banks’ cash infusions prove, at least in the short term, to be unsuccessful in stopping the market’s decline, the eyes of the financial community have turned to the Federal Reserve. In light of the Federal Reserve’s recent commitment to battling inflation, a cut in the benchmark interest rate has been seen by most as unlikely. However, as circumstances in the marketplace worsen, liquidity becomes more imperative, and the effectiveness cash-infusion strategy employed by central banks early in the week comes into question, a change in the Federal Reserve’s position on interest rates may be forthcoming.
Discussion:
1. Were the Central Banks correct in their cash-infusion approach to the worsening global financial situation? Did they do enough? Do they react with sufficient speed?
2. Is a cut in the Federal Reserve's benchmark interest rate necessary? Is such a cut wise in the long-term?
Monday, September 15, 2008
Lehman Brothers, Merrill Lynch . . . is AIG next?
Sources:
Los Angeles Times - Dow Jones Index Plummets 500 Points
Wall Street Journal - AIG, Lehman Shock Hits World Markets
Bloomberg - AIG Seeks Funds from JPMorgan, Goldman After Fed Balks at Loan
The Dow Jones Industrial Average fell by the most since 9/11 as fallout from the subprime mortgage crisis crippled some of the United States' most important investment banks. Lehman Brothers filed for bankruptcy protection after a buyout deal fell through with Barclays and Bank of America. Merrill Lynch, another investment firm that was vulnerable to failure, sold itself to Bank of America.
The Dow fell by 500 points, or 4.4 percent. Each of the composite's thirty indicators fell except for Coca-Cola. International stock markets also fell, with most of the European exchanges losing between three and four percent of their value and some Asian indexes losing greater amounts.
Analysts worried that another U.S. company, AIG, might be at a dangerous risk of failing. AIG, which is the U.S.'s largest insurance company, was negotiating for a cash infusion from private companies after the U.S. government showed an unwillingness to further extend taxpayer assistance to U.S. companies caught up in the mortgage crisis. However, the state of New York has taken the step of allowing AIG to transfer money from its subsidiary in an attempt to obtain more capital.
The scramble to sell Merill Lynch and obtain private help for AIG comes after U.S. Treasury Secretary Henry Paulson stated that he never considered giving federal money to help guarantee Lehman Brothers. It is estimated that AIG would need $70-75 billion in loans, possibly with assistance from JPMorgan Chase or Goldman Sachs.
Discussion
1. How did the U.S. Government-brokered assistance to Bear Stearns affect market expectations? Did it discourage changes for companies expecting a bailout?
2. How is AIG, an insurance company, affected by what began as a mortgage crisis?
Los Angeles Times - Dow Jones Index Plummets 500 Points
Wall Street Journal - AIG, Lehman Shock Hits World Markets
Bloomberg - AIG Seeks Funds from JPMorgan, Goldman After Fed Balks at Loan
The Dow Jones Industrial Average fell by the most since 9/11 as fallout from the subprime mortgage crisis crippled some of the United States' most important investment banks. Lehman Brothers filed for bankruptcy protection after a buyout deal fell through with Barclays and Bank of America. Merrill Lynch, another investment firm that was vulnerable to failure, sold itself to Bank of America.
The Dow fell by 500 points, or 4.4 percent. Each of the composite's thirty indicators fell except for Coca-Cola. International stock markets also fell, with most of the European exchanges losing between three and four percent of their value and some Asian indexes losing greater amounts.
Analysts worried that another U.S. company, AIG, might be at a dangerous risk of failing. AIG, which is the U.S.'s largest insurance company, was negotiating for a cash infusion from private companies after the U.S. government showed an unwillingness to further extend taxpayer assistance to U.S. companies caught up in the mortgage crisis. However, the state of New York has taken the step of allowing AIG to transfer money from its subsidiary in an attempt to obtain more capital.
The scramble to sell Merill Lynch and obtain private help for AIG comes after U.S. Treasury Secretary Henry Paulson stated that he never considered giving federal money to help guarantee Lehman Brothers. It is estimated that AIG would need $70-75 billion in loans, possibly with assistance from JPMorgan Chase or Goldman Sachs.
Discussion
1. How did the U.S. Government-brokered assistance to Bear Stearns affect market expectations? Did it discourage changes for companies expecting a bailout?
2. How is AIG, an insurance company, affected by what began as a mortgage crisis?
Sunday, September 14, 2008
Russian Stock Market Plunge Broadly Affects Economy
Sources: Financial Times, Medvedev and Putin at odds on market fall; Russia ready to tap wealth fund; Liquidity crunch hits Russian tycoons; Medvedev fails to halt Russia stock slide; Moscow facing lending crisis
A major drop in stock prices this week spells trouble for the Russian economy. The RTS stock market index fell 7.5% on Tuesday, the biggest one-day drop since June 2006, and fell again 4.4% on Wednesday and 2.7% on Thursday. This adds up to nearly a 50% drop in Russian stock prices since May, though there are differences of opinion on the reason for the decline. Russian Prime Minister Vladimir Putin denies that the conflict in Georgia is responsible, while President Medvedev claims that the conflict was a contributing factor, though a necessary move politically for Russia. He estimates that 75% of the decline is a result of international conditions, rather than the conflict.
The immediate cause of declining stock prices was a combination of political risk highlighted by the Georgia conflict and falling oil prices. Another factor is the liquidity crunch that has finally arrived in Russia, spurred by capital flight estimated by some to be as high as $20 billion. As investors pull their money out of the Russian economy, credit becomes short, exacerbating the stock market crash. Bankers and traders have focused on this element, noting that banks and funds have been forced to sell even attractive assets in order to come up with cash.
The liquidity crisis has also affected a handful of wealthy Russian individuals who used loans to buy shares in Gazprom and Sberbank, the state-owned investment bank. Others bought shares in metals using borrowed money before share and commodity prices fell. The individuals pledged some shares back as collateral in order to qualify for loans, and when the economy began to falter many faced margin calls or sold stock early to avoid greater losses.
Those looking to borrow money, especially in the real estate sector, have found it impossible to do so, and the Russian central bank’s attempt to build confidence in the economy by injecting over $10 billion into commercial banks in a single day does not appear to have had a significant effect. Proposals to use money from the national wealth fund and pension reserves to stabilize the economy have emerged, drawing criticism from those who believe the government should instead use oil revenues to stabilize the economy. Standard & Poor’s also warns that putting public funds at risk would lower Russia’s sovereign rating.
Medvedev continues to talk up the economy to try to draw investors back to Russia, and made a proposal Thursday for a comprehensive economic re-structuring plan. Its components would be considered in the Russian Duma in 2009.
Questions:
1) Will short-term cash injections have lasting impact on the Russian economy, or is it too late for the central bank to save the situation?
2) Will the Russian economy follow the trends of the rest of the world, or is there a better hope of rebound given unique political and market conditions?
A major drop in stock prices this week spells trouble for the Russian economy. The RTS stock market index fell 7.5% on Tuesday, the biggest one-day drop since June 2006, and fell again 4.4% on Wednesday and 2.7% on Thursday. This adds up to nearly a 50% drop in Russian stock prices since May, though there are differences of opinion on the reason for the decline. Russian Prime Minister Vladimir Putin denies that the conflict in Georgia is responsible, while President Medvedev claims that the conflict was a contributing factor, though a necessary move politically for Russia. He estimates that 75% of the decline is a result of international conditions, rather than the conflict.
The immediate cause of declining stock prices was a combination of political risk highlighted by the Georgia conflict and falling oil prices. Another factor is the liquidity crunch that has finally arrived in Russia, spurred by capital flight estimated by some to be as high as $20 billion. As investors pull their money out of the Russian economy, credit becomes short, exacerbating the stock market crash. Bankers and traders have focused on this element, noting that banks and funds have been forced to sell even attractive assets in order to come up with cash.
The liquidity crisis has also affected a handful of wealthy Russian individuals who used loans to buy shares in Gazprom and Sberbank, the state-owned investment bank. Others bought shares in metals using borrowed money before share and commodity prices fell. The individuals pledged some shares back as collateral in order to qualify for loans, and when the economy began to falter many faced margin calls or sold stock early to avoid greater losses.
Those looking to borrow money, especially in the real estate sector, have found it impossible to do so, and the Russian central bank’s attempt to build confidence in the economy by injecting over $10 billion into commercial banks in a single day does not appear to have had a significant effect. Proposals to use money from the national wealth fund and pension reserves to stabilize the economy have emerged, drawing criticism from those who believe the government should instead use oil revenues to stabilize the economy. Standard & Poor’s also warns that putting public funds at risk would lower Russia’s sovereign rating.
Medvedev continues to talk up the economy to try to draw investors back to Russia, and made a proposal Thursday for a comprehensive economic re-structuring plan. Its components would be considered in the Russian Duma in 2009.
Questions:
1) Will short-term cash injections have lasting impact on the Russian economy, or is it too late for the central bank to save the situation?
2) Will the Russian economy follow the trends of the rest of the world, or is there a better hope of rebound given unique political and market conditions?
A Korean Economic Disaster in the Making?
Sources:
Seoul fears burden of North’s implosion, Financial Times
Seoul Eases Conditions For Aid to North Korea, The New York Times Online
Recent reports of Kim Jong-il suffering from a serious illness have leaked out of North Korea and prompted speculation about what its fate will be when the dictator dies. Kim Jong-il has no known designated successor and it is feared that without a strong leader firmly in place, North Korea will politically and economically implode. If this were to happen, North Koreans would have nowhere to turn to for aid but to their South Korean neighbors.
South Koreans have long hoped for reunification with the North. They provide extensive aid to the resource-poor North and have recently relaxed conditions it has to meet to receive aid, requiring only that the country prove it is facing a crisis and guarantee that rice shipments won’t go to the military. However, the South’s economy has begun to experience trouble of its own. Its stock market has dropped by a fifth this year and inflation is rising. If the North were to collapse in the near future, the South would find it difficult—if not impossible—to provide enough aid to the struggling country to prevent a humanitarian crisis.
A North Korean economy expert claims it would be impossible for the South to absorb the North’s twenty-three million inhabitants, however much South Koreans might wish for reunification. The North’s economy is significantly less developed than the South’s and some economic analysts estimate that the gross domestic product may be as low as $500 per person. Additionally, the North’s infrastructure is dilapidated and in need of renovations, it is isolated from other types of international aid because of its nuclear programs, and there are few links between the two countries. Even their television systems are incompatible.
Questions:
(1) How is North Korea likely to fare economically upon Kim Jong-il’s death? Are there any possible better outcomes than the one forecasted here?
(2) How should South Korea deal with a North Korean economic collapse? Is absorption of the North Korean population the only option?
(3) What is the international community likely to do in response to a North Korean economic collapse?
Seoul fears burden of North’s implosion, Financial Times
Seoul Eases Conditions For Aid to North Korea, The New York Times Online
Recent reports of Kim Jong-il suffering from a serious illness have leaked out of North Korea and prompted speculation about what its fate will be when the dictator dies. Kim Jong-il has no known designated successor and it is feared that without a strong leader firmly in place, North Korea will politically and economically implode. If this were to happen, North Koreans would have nowhere to turn to for aid but to their South Korean neighbors.
South Koreans have long hoped for reunification with the North. They provide extensive aid to the resource-poor North and have recently relaxed conditions it has to meet to receive aid, requiring only that the country prove it is facing a crisis and guarantee that rice shipments won’t go to the military. However, the South’s economy has begun to experience trouble of its own. Its stock market has dropped by a fifth this year and inflation is rising. If the North were to collapse in the near future, the South would find it difficult—if not impossible—to provide enough aid to the struggling country to prevent a humanitarian crisis.
A North Korean economy expert claims it would be impossible for the South to absorb the North’s twenty-three million inhabitants, however much South Koreans might wish for reunification. The North’s economy is significantly less developed than the South’s and some economic analysts estimate that the gross domestic product may be as low as $500 per person. Additionally, the North’s infrastructure is dilapidated and in need of renovations, it is isolated from other types of international aid because of its nuclear programs, and there are few links between the two countries. Even their television systems are incompatible.
Questions:
(1) How is North Korea likely to fare economically upon Kim Jong-il’s death? Are there any possible better outcomes than the one forecasted here?
(2) How should South Korea deal with a North Korean economic collapse? Is absorption of the North Korean population the only option?
(3) What is the international community likely to do in response to a North Korean economic collapse?
World Bank revokes aid for Chad-Cameroon oil pipeline
Sources: BBC News: End to World Bank’s Chad oil deal
World Bank Statement on Chad-Cameroon Pipeline
Financial Times: World Bank quits Chad plan
The World Bank announced this week that it would no longer support the $4bn oil pipeline project between Chad and Cameroon. Originally signed in 2001, the loan agreement between Chad and the World Bank gave Chad a total of $140m for the pipeline project, while the Chadian government agreed to use a significant part of its oil revenues to reduce poverty in the central African country.
In a statement issued earlier this week, Michel Wormser, the World Bank’s director of African operations, said that Chad had repeatedly failed to abide by its part of the agreement over the years and that it had become “evident that the arrangements that had underpinned the Bank’s involvement...were not working.” Indeed, almost as soon as the oil started flowing in 2003, Chadian President Idriss Déby funneled large portions of Chad’s estimated $1.4bn yearly oil revenues into arming his security forces, instead of putting it towards infrastructure, health care, education, or agriculture, as the agreement required.
Many at the World Bank considered the agreement with Chad to be a test case for how poverty could be reduced through effective allocation of oil revenues in other oil-rich African countries. Not everyone was convinced, however. Anti-poverty campaigners, against the project from its conception, said that the collapse of the agreement vindicated their assertion that the Bretton Woods Institutions’ support for oil and other natural resource development projects has further cemented autocratic African governments hold on power instead of reducing poverty.
As of September 5, Chad had repaid its outstanding balance of $65.7m, officially ending the nation’s association with the World Bank on the pipeline project. The two former partners parted on good terms however, and both said that relations would continue in other, non-oil, sectors.
Discussion:
What are the pros and cons of World Bank and IMF involvement in natural resource development projects in less-than-democratic African nations? Do the risks of misuse or corruption outweigh the potential benefits to society?
What can be done to convince African governments to channel oil wealth into a development program to reduce poverty?
The “World’s Other Three Billion” People May Soon Have Broadband Internet
Sources:
Financial Times 1
Financial Times 2
New York Times
An ambitious project headed by Greg Wyler, a U.S.-based technology entrepreneur, seeks to offer high-speed internet access to the world’s poorest regions, the majority of which are in Africa. The project is called O3b, which is a reference to the three billion people who still have no internet access, and is backed by Google, Liberty Global cable group, and HSBC’s private equity group. The investors have thus far contributed $65 million of the estimated $750 million needed to complete the project.
The goal of O3b is to launch 16 low-earth orbit satellites that will bring high-speed internet access to places in Africa and other emerging markets. This will be a new type of telecommunication method. The United States and other developed nations use underground fiber-optic cables to provide high-speed internet access, but this method is not commercially viable in Africa. The cost of high-speed access in Africa is almost 20 times more expensive than in the U.S.
O3b’s satellite system will sharply reduce the cost of high speed internet access. Instead of having to lay hundreds of thousands of miles of underground fiber-optic cables in Africa, computer and mobile phone users will send their data to local cell phone towers which will in turn send the data to O3b’s satellites. The satellites will receive the data and then send it to other cell phone towers or to established fiber-optic networks in the developed world. Because it is much cheaper to build cellular towers than it is to lay underground cables, the cost of internet access will be much lower. Additionally, cell phone towers are already being constructed in large numbers in many remote places throughout the world and mobile phone use in Africa is growing at a rate of 60 percent annually.
The O3b satellite system will only serve as an intermediary, however, and will not be the company to actually provide the internet access. Companies in Africa will be the ones to develop the local cellular tower networks and provide the access to the people. This offers opportunities for entrepreneurs to get involved early in an industry that has vast potential. The O3b satellite system is set to be up and running by 2010.
Questions:
1) Will the advent of inexpensive internet access help provide political stability and increased government transparency to African countries?
2) In many emerging markets, consumers are skipping expensive personal computers and are instead purchasing mobile technology to access the internet. Will the O3b make this trend more likely in Africa? Is this a good trend?
3) Because O3b is not directly providing the high-speed access, the companies who invest in cellular towers will have a more direct impact on the price of the access. Should O3b be worried about the local providers charging high access fees or will competition between local providers help keep prices down?
Financial Times 1
Financial Times 2
New York Times
An ambitious project headed by Greg Wyler, a U.S.-based technology entrepreneur, seeks to offer high-speed internet access to the world’s poorest regions, the majority of which are in Africa. The project is called O3b, which is a reference to the three billion people who still have no internet access, and is backed by Google, Liberty Global cable group, and HSBC’s private equity group. The investors have thus far contributed $65 million of the estimated $750 million needed to complete the project.
The goal of O3b is to launch 16 low-earth orbit satellites that will bring high-speed internet access to places in Africa and other emerging markets. This will be a new type of telecommunication method. The United States and other developed nations use underground fiber-optic cables to provide high-speed internet access, but this method is not commercially viable in Africa. The cost of high-speed access in Africa is almost 20 times more expensive than in the U.S.
O3b’s satellite system will sharply reduce the cost of high speed internet access. Instead of having to lay hundreds of thousands of miles of underground fiber-optic cables in Africa, computer and mobile phone users will send their data to local cell phone towers which will in turn send the data to O3b’s satellites. The satellites will receive the data and then send it to other cell phone towers or to established fiber-optic networks in the developed world. Because it is much cheaper to build cellular towers than it is to lay underground cables, the cost of internet access will be much lower. Additionally, cell phone towers are already being constructed in large numbers in many remote places throughout the world and mobile phone use in Africa is growing at a rate of 60 percent annually.
The O3b satellite system will only serve as an intermediary, however, and will not be the company to actually provide the internet access. Companies in Africa will be the ones to develop the local cellular tower networks and provide the access to the people. This offers opportunities for entrepreneurs to get involved early in an industry that has vast potential. The O3b satellite system is set to be up and running by 2010.
Questions:
1) Will the advent of inexpensive internet access help provide political stability and increased government transparency to African countries?
2) In many emerging markets, consumers are skipping expensive personal computers and are instead purchasing mobile technology to access the internet. Will the O3b make this trend more likely in Africa? Is this a good trend?
3) Because O3b is not directly providing the high-speed access, the companies who invest in cellular towers will have a more direct impact on the price of the access. Should O3b be worried about the local providers charging high access fees or will competition between local providers help keep prices down?
Saturday, September 13, 2008
U.S. Sanctions Iran's Main Shipping Company
Sources: Financial Times, U.S. Imposes Fresh Sanctions on Iran; BBC News, U.S. Sanctions Target Iran Carrier; International Herald Tribune, Iran Calls U.S. Sanctions on Shipping Line Illegal
The United States announced new sanctions against Iran’s largest shipping company over its alleged support for Tehran’s nuclear program. The U.S. Treasury alleges that the Islamic Republic of Iran Shipping Lines (IRISL) facilitated shipments of military-related cargo to Iran’s Defense Ministry and Armed Forces Logistics, the organization in control of Iran’s ballistic missile research. Washington also alleges that the company falsifies documents and uses deceptive schemes to hide its involvement in illicit commerce.
Previous sanctions from the U.S. were enforced on entities that worked directly on Iran’s nuclear and missile program, but recently Washington and several European countries have taken steps against Iran’s financial sector, notably banning business with Bank Melli, Iran’s largest bank. Although the ban against Bank Melli has increased the cost of financing in Iran, it is unlikely that the sanctions against IRISL will have much practical effect because the company has no dealings with American companies and no bank accounts or assets in the U.S. However, Washington has indicated that it will discourage international companies from doing business with IRISL.
Iran responded to the new round of sanctions by condemning them as “illegal and unjustifiable,” insisting that IRISL had never engaged in any illicit activities and all consignments carried by its ships have been verified by authorities in departing and destination ports. Further, Iran’s Mission to the U.N. said in a statement that the Iranian government now reserves the right to “seek compensation for the damages that may be incurred to its citizens as a result of such unfounded accusations and unlawful unilateral measures.”
Discussion: Do you think that this new round of sanctions will increase the cost of imported refined oil, as Iran ships in to meet more than a third of domestic demand? If so, was this a “smart” sanction by the U.S. government? Do you think that pressure on Iran’s financial sector will serve its purpose of encouraging Tehran to terminate its nuclear program? If the U.S. can convince other nations and international companies to follow suit, how do think Tehran will react?
The United States announced new sanctions against Iran’s largest shipping company over its alleged support for Tehran’s nuclear program. The U.S. Treasury alleges that the Islamic Republic of Iran Shipping Lines (IRISL) facilitated shipments of military-related cargo to Iran’s Defense Ministry and Armed Forces Logistics, the organization in control of Iran’s ballistic missile research. Washington also alleges that the company falsifies documents and uses deceptive schemes to hide its involvement in illicit commerce.
Previous sanctions from the U.S. were enforced on entities that worked directly on Iran’s nuclear and missile program, but recently Washington and several European countries have taken steps against Iran’s financial sector, notably banning business with Bank Melli, Iran’s largest bank. Although the ban against Bank Melli has increased the cost of financing in Iran, it is unlikely that the sanctions against IRISL will have much practical effect because the company has no dealings with American companies and no bank accounts or assets in the U.S. However, Washington has indicated that it will discourage international companies from doing business with IRISL.
Iran responded to the new round of sanctions by condemning them as “illegal and unjustifiable,” insisting that IRISL had never engaged in any illicit activities and all consignments carried by its ships have been verified by authorities in departing and destination ports. Further, Iran’s Mission to the U.N. said in a statement that the Iranian government now reserves the right to “seek compensation for the damages that may be incurred to its citizens as a result of such unfounded accusations and unlawful unilateral measures.”
Discussion: Do you think that this new round of sanctions will increase the cost of imported refined oil, as Iran ships in to meet more than a third of domestic demand? If so, was this a “smart” sanction by the U.S. government? Do you think that pressure on Iran’s financial sector will serve its purpose of encouraging Tehran to terminate its nuclear program? If the U.S. can convince other nations and international companies to follow suit, how do think Tehran will react?
Friday, September 12, 2008
Brazil Shines in a Dark Global Economy
Sources:
"Brazil Raises Rate to 13.75%, Highest in Two Years (Update 1)" Bloomberg.com
"Brazil Stocks Rise on Commodities Rebound; Mexico's Bolsa Drops" Bloomberg.com
"Morgan, Goldman, Deutsche Say Brazil Stocks are Cheap (Update 2)" Bloomberg.com
"Lula Achieves Record Approval Rating of 64% in Datafolha Survey" Bloomberg.com
"Mexican Market Has Tried but Still Lags" Wall Street Journal
BM&F Bolvespa Official Site
Brazil's $1.3 trillion dollar economy is one of the few bright spots in the global financial world today. Brazil has been enjoying strong economic growth, despite the current global economic downturn. During the second quarter, Brazil exceeded general growth expectations when its gross domestic product increased 5.9 percent from the previous quarter. Brazil's Central Bank President Meirelles stated, "Brazil lives today a sustained growth cycle, supported by price stability." While other countries cut interest rates to spark growth and investment, Brazil's central bank has recently raised benchmark interest rates to the highest in almost two years, from 13 to 13.75 percent. The bank hopes that higher rates will cool accelerated growth and curb inflation.
Brazil's performance is certainly atypical. For example, six years ago, the Mexican and Brazilian stock markets were roughly the same size. Today, Brazil's market is more than triple the size of Mexico's based on the value of companies listed. Brazil's larges stock exchange, BM&F Bovespa, has become the largest stock exchange in Latin America. Much of the stock market growth is attributed to Brazil's Novo Mercado ("new market"). The Novo Mercado is a listing of shares issued by compaines that voluntarily abide by corporate governance practices and transparency requirements beyond those required under Brazilian law.
Perhaps it is no surprise that Brazilian President Lula currently enjoys record approval ratings, which rose to 64 percent in September from 55 percent in March, according to Datafolha, a Sao Paulo-based polling company. Datafohla explained that this is the first time Lula has won approval from the majority of the population, across all social, economic and geographical sectors.
Of course, the future is not all rosy for Brazil. BM&F Bovespa has dropped nearly 20 percent this year, declining commodity prices threaten Brazil's export revenue, and inflation is a continuing concern. Yet major investment banks, including Morgan Stanley, Deutsche Bank and Goldman Sachs, encourage investment in Brazilian stocks. These banks say Brazilian stock have become cheap after the 20 percent decline this year. Goldman Sachs added that Brazilian stocks are the cheapest in the Americas when comparing estimated earnings for the next twelve months.
Questions:
Is Brazil's growth sustainable in the face of falling commodity prices?
What lessons does Brazil offer to other Latin American countries?
What should be next in Brazil's economic development strategy?
"Brazil Raises Rate to 13.75%, Highest in Two Years (Update 1)" Bloomberg.com
"Brazil Stocks Rise on Commodities Rebound; Mexico's Bolsa Drops" Bloomberg.com
"Morgan, Goldman, Deutsche Say Brazil Stocks are Cheap (Update 2)" Bloomberg.com
"Lula Achieves Record Approval Rating of 64% in Datafolha Survey" Bloomberg.com
"Mexican Market Has Tried but Still Lags" Wall Street Journal
BM&F Bolvespa Official Site
Brazil's $1.3 trillion dollar economy is one of the few bright spots in the global financial world today. Brazil has been enjoying strong economic growth, despite the current global economic downturn. During the second quarter, Brazil exceeded general growth expectations when its gross domestic product increased 5.9 percent from the previous quarter. Brazil's Central Bank President Meirelles stated, "Brazil lives today a sustained growth cycle, supported by price stability." While other countries cut interest rates to spark growth and investment, Brazil's central bank has recently raised benchmark interest rates to the highest in almost two years, from 13 to 13.75 percent. The bank hopes that higher rates will cool accelerated growth and curb inflation.
Brazil's performance is certainly atypical. For example, six years ago, the Mexican and Brazilian stock markets were roughly the same size. Today, Brazil's market is more than triple the size of Mexico's based on the value of companies listed. Brazil's larges stock exchange, BM&F Bovespa, has become the largest stock exchange in Latin America. Much of the stock market growth is attributed to Brazil's Novo Mercado ("new market"). The Novo Mercado is a listing of shares issued by compaines that voluntarily abide by corporate governance practices and transparency requirements beyond those required under Brazilian law.
Perhaps it is no surprise that Brazilian President Lula currently enjoys record approval ratings, which rose to 64 percent in September from 55 percent in March, according to Datafolha, a Sao Paulo-based polling company. Datafohla explained that this is the first time Lula has won approval from the majority of the population, across all social, economic and geographical sectors.
Of course, the future is not all rosy for Brazil. BM&F Bovespa has dropped nearly 20 percent this year, declining commodity prices threaten Brazil's export revenue, and inflation is a continuing concern. Yet major investment banks, including Morgan Stanley, Deutsche Bank and Goldman Sachs, encourage investment in Brazilian stocks. These banks say Brazilian stock have become cheap after the 20 percent decline this year. Goldman Sachs added that Brazilian stocks are the cheapest in the Americas when comparing estimated earnings for the next twelve months.
Questions:
Is Brazil's growth sustainable in the face of falling commodity prices?
What lessons does Brazil offer to other Latin American countries?
What should be next in Brazil's economic development strategy?
"Kudos" to Nicaragua from IMF Officials Result in $10 Million Increase in Loan Package
Sources:
IMF Press Release, "IMF Executive Board Completes First Review Under Nicaragua's PRGF Arrangement and Approves Increase in Financial Support by US$10 million"
Bloomberg.com, "Nicaraguan Central Bank Warns of Spiraling Inflation"
El Nuevo Diario, "FMI Aprueba Primera Revisión de Programa"
On Thursday, September 11th, IMF Executive Board members conducted their first review of Nicaragua’s performance under the Poverty Reduction and Growth Facility (PRGF) arrangement it established with the IMF in October 2007. Board members expressed their satisfaction with how Nicaragua has performed in the months following the arrangement. They are particularly impressed with the fact that the country has been able to stay within the fiscal standards that the IMF established for it at the outset of the arrangement.
PRGF arrangements are special loan programs that the IMF designs for low-income countries. They typically focus on helping target countries better manage their public resources and establish more accountable governments. They carry annual interest rates of .5% and are repayable over 10 years with a 5 ½ year grace period on principal payments. Governments apply to participate in PRGF arrangements by outlining the economic targets and policy goals that they would like to meet in Poverty Reduction Strategy Papers. The IMF and the World Bank use these Strategy Papers as guides in setting standards for the arrangements, which are funded through trusts that the IMF administers.
Fortunately for Nicaraguan government officials, the IMF is not only providing positive feedback with its review. Executive Board members have also approved a $10 million increase in support provided to Nicaragua, increasing the total value of the arrangement to $120.4 million. Board members also waived two of the requirements that they had expected Nicaragua to meet by the first half of 2008; they have chosen to excuse delays in the approval of the 2008 budget and in the adoption of measures to discourage theft in electricity consumption.
IMF officials recognize that Nicaragua’s economy was particularly affected by Hurricane Felix last October, as the country was forced to import basic foods as a result of the hurricane’s effects on its vegetation. Officials also seem to be concerned with the upcoming national elections because it is likely that the government will spend significant amounts of money in the upcoming months in preparation for that process. Nevertheless, both IMF and Nicaraguan officials are optimistic that the continuing arrangement and the $10 million boost will help Nicaragua continue its progress and perhaps embark in new social and economic projects.
Discussion Questions:
1- One of the purported goals of PRGF programs is to help low-income countries establish more “transparent” governments. What is the relationship between increased external financial aid and accountability in governance? Does a country’s administration become “better” at governing when it receives more money from an organization like the IMF?
2- Given that the IMF is especially concerned with how the Nicaraguan government will respond to the upcoming elections, would IMF officials be wise to send advisors to Nicaragua to aid the government in running the elections? Should the IMF provide “educational” aid as well as financial aid?
IMF Press Release, "IMF Executive Board Completes First Review Under Nicaragua's PRGF Arrangement and Approves Increase in Financial Support by US$10 million"
Bloomberg.com, "Nicaraguan Central Bank Warns of Spiraling Inflation"
El Nuevo Diario, "FMI Aprueba Primera Revisión de Programa"
On Thursday, September 11th, IMF Executive Board members conducted their first review of Nicaragua’s performance under the Poverty Reduction and Growth Facility (PRGF) arrangement it established with the IMF in October 2007. Board members expressed their satisfaction with how Nicaragua has performed in the months following the arrangement. They are particularly impressed with the fact that the country has been able to stay within the fiscal standards that the IMF established for it at the outset of the arrangement.
PRGF arrangements are special loan programs that the IMF designs for low-income countries. They typically focus on helping target countries better manage their public resources and establish more accountable governments. They carry annual interest rates of .5% and are repayable over 10 years with a 5 ½ year grace period on principal payments. Governments apply to participate in PRGF arrangements by outlining the economic targets and policy goals that they would like to meet in Poverty Reduction Strategy Papers. The IMF and the World Bank use these Strategy Papers as guides in setting standards for the arrangements, which are funded through trusts that the IMF administers.
Fortunately for Nicaraguan government officials, the IMF is not only providing positive feedback with its review. Executive Board members have also approved a $10 million increase in support provided to Nicaragua, increasing the total value of the arrangement to $120.4 million. Board members also waived two of the requirements that they had expected Nicaragua to meet by the first half of 2008; they have chosen to excuse delays in the approval of the 2008 budget and in the adoption of measures to discourage theft in electricity consumption.
IMF officials recognize that Nicaragua’s economy was particularly affected by Hurricane Felix last October, as the country was forced to import basic foods as a result of the hurricane’s effects on its vegetation. Officials also seem to be concerned with the upcoming national elections because it is likely that the government will spend significant amounts of money in the upcoming months in preparation for that process. Nevertheless, both IMF and Nicaraguan officials are optimistic that the continuing arrangement and the $10 million boost will help Nicaragua continue its progress and perhaps embark in new social and economic projects.
Discussion Questions:
1- One of the purported goals of PRGF programs is to help low-income countries establish more “transparent” governments. What is the relationship between increased external financial aid and accountability in governance? Does a country’s administration become “better” at governing when it receives more money from an organization like the IMF?
2- Given that the IMF is especially concerned with how the Nicaraguan government will respond to the upcoming elections, would IMF officials be wise to send advisors to Nicaragua to aid the government in running the elections? Should the IMF provide “educational” aid as well as financial aid?
Thursday, September 11, 2008
Credit Crunch in No Rush
BBC News, “Credit Crunch to Last Into 2010"
Financial Times, “Recession to Hit Germany, UK, and Spain”
BBC News, “UK Recession This Year, OECD Says”
While the news of the nationalization of Fannie Mae and Freddie Mac, America’s giant mortgage underwriters, rippled throughout the world economy this week, other global players were taking stock of their economies’ health. The head of Halifax Bank of Scotland (HBOS), the largest mortgage provider in the United Kingdom, predicted that the fallout from the global credit crisis will most likely affect the UK economy until at least 2010 – until housing prices in the US start to rise again.
UK banks get about two-thirds of their wholesale funding from US banks, and US money-market investors will not have the credit to loan to UK mortgage-lending banks until US housing prices start to climb from their current trough. Hornby estimated that US housing prices will start to climb in about eighteen months, the time it will take for banks to regain the confidence to start lending again.
The effect of US housing prices on UK markets highlights the interdependence of major world markets, as US money market lenders’ drying funds is causing housing price deflation in the UK similar to that of the early 1990s. However, economists note that the unemployment rate now is nowhere near where it was during that time period, which means that people’s abilities to pay their mortgage bills will not be affected the way it was then.
Also this week, the Organization for Economic Cooperation and Development (OECD) forecasted that the UK economy is likely to shrink by 0.3%-0.4% this year, causing it to fall into a recession. Chancellor Alistair Darling said the UK is experiencing the worst economic conditions in 60 years. Though Chancellor Darling suggested that the right policies can pull the UK out of a recession, Hornby noted that there is little that the UK government can do to alleviate the pressure of the credit crunch because it was a reduction in the availability of credit that spurred the economic slowdown.
Economists blame the fact that UK mortgage lenders are too dependent on selling mortgage-backed securities to foreign (most notably American) investors. A lack of credit in the US means a lack of credit in US banks, and a lack of credit in US banks means a lack of credit to buy British mortgage-backed securities to fund the British housing market.
Questions for discussion:
1) Can the UK government do anything to alleviate the pressures of the credit crunch? What can it do? Will it be effective in the long term?
2) What does a recession in major European markets mean for developing countries?
Financial Times, “Recession to Hit Germany, UK, and Spain”
BBC News, “UK Recession This Year, OECD Says”
While the news of the nationalization of Fannie Mae and Freddie Mac, America’s giant mortgage underwriters, rippled throughout the world economy this week, other global players were taking stock of their economies’ health. The head of Halifax Bank of Scotland (HBOS), the largest mortgage provider in the United Kingdom, predicted that the fallout from the global credit crisis will most likely affect the UK economy until at least 2010 – until housing prices in the US start to rise again.
UK banks get about two-thirds of their wholesale funding from US banks, and US money-market investors will not have the credit to loan to UK mortgage-lending banks until US housing prices start to climb from their current trough. Hornby estimated that US housing prices will start to climb in about eighteen months, the time it will take for banks to regain the confidence to start lending again.
The effect of US housing prices on UK markets highlights the interdependence of major world markets, as US money market lenders’ drying funds is causing housing price deflation in the UK similar to that of the early 1990s. However, economists note that the unemployment rate now is nowhere near where it was during that time period, which means that people’s abilities to pay their mortgage bills will not be affected the way it was then.
Also this week, the Organization for Economic Cooperation and Development (OECD) forecasted that the UK economy is likely to shrink by 0.3%-0.4% this year, causing it to fall into a recession. Chancellor Alistair Darling said the UK is experiencing the worst economic conditions in 60 years. Though Chancellor Darling suggested that the right policies can pull the UK out of a recession, Hornby noted that there is little that the UK government can do to alleviate the pressure of the credit crunch because it was a reduction in the availability of credit that spurred the economic slowdown.
Economists blame the fact that UK mortgage lenders are too dependent on selling mortgage-backed securities to foreign (most notably American) investors. A lack of credit in the US means a lack of credit in US banks, and a lack of credit in US banks means a lack of credit to buy British mortgage-backed securities to fund the British housing market.
Questions for discussion:
1) Can the UK government do anything to alleviate the pressures of the credit crunch? What can it do? Will it be effective in the long term?
2) What does a recession in major European markets mean for developing countries?
Tuesday, September 09, 2008
Stocks Fall on Fears that U.S. Government May Not Continue Bailouts
New York Times - Wall Street's Fears on Lehman Bros. Batter Market
Telegraph (UK) - Lehman Brothers' Shares Plunge as Concern on Wall Street Grows
Bloomberg - U.S. Stocks Tumble as Lehman Brothers Rattles Banking Shares
The investment firm Lehman Brothers lost half its stock value in a day as investors' fears grew that the U.S. government would not bail out the company if it failed. The Dow Jones Industrial Average lost nearly 300 points because of the increased pessimism about Lehman Brothers. The downswing erased most of the gains from a day earlier, where news of the government bailout plan for Freddie Mac and Fannie Mae had caused stocks to gain the most in a month.
Lehman Brothers is one of the U.S.'s oldest and largest investment banks. The company has been losing value for over a year, and has lost 90 percent of its stock value since February 2007. Investors fear that after the U.S. government-initiated buyout of Bear Stearns earlier this summer and the recent government takeover of mortgage giants Fannie Mae and Freddie Mac, the government might decline to intervene in future corporate failings.
Lehman's price also dropped over fears of its inability to raise capital, with a Korean bank recently pulling out of negotiations with Lehman Brothers over a capital infusion. Standard & Poor's also downgraded Lehman Brothers to a negative rating.
The U.S. government has demonstrated its willingness to intervene in the U.S. markets in order to prevent corporate failure and further financial turmoil. However, because of the recent government action with Fannie and Freddie, investors are speculating that the government already has a high taxpayer burden and would not intervene to save more U.S. companies.
Discussion:
(1) How realistic is it for the U.S. government to continue to orchestrate bailouts and purchases of failing companies?
(2) How much would the failure of a single U.S. investment firm affect the entire financial system?
Telegraph (UK) - Lehman Brothers' Shares Plunge as Concern on Wall Street Grows
Bloomberg - U.S. Stocks Tumble as Lehman Brothers Rattles Banking Shares
The investment firm Lehman Brothers lost half its stock value in a day as investors' fears grew that the U.S. government would not bail out the company if it failed. The Dow Jones Industrial Average lost nearly 300 points because of the increased pessimism about Lehman Brothers. The downswing erased most of the gains from a day earlier, where news of the government bailout plan for Freddie Mac and Fannie Mae had caused stocks to gain the most in a month.
Lehman Brothers is one of the U.S.'s oldest and largest investment banks. The company has been losing value for over a year, and has lost 90 percent of its stock value since February 2007. Investors fear that after the U.S. government-initiated buyout of Bear Stearns earlier this summer and the recent government takeover of mortgage giants Fannie Mae and Freddie Mac, the government might decline to intervene in future corporate failings.
Lehman's price also dropped over fears of its inability to raise capital, with a Korean bank recently pulling out of negotiations with Lehman Brothers over a capital infusion. Standard & Poor's also downgraded Lehman Brothers to a negative rating.
The U.S. government has demonstrated its willingness to intervene in the U.S. markets in order to prevent corporate failure and further financial turmoil. However, because of the recent government action with Fannie and Freddie, investors are speculating that the government already has a high taxpayer burden and would not intervene to save more U.S. companies.
Discussion:
(1) How realistic is it for the U.S. government to continue to orchestrate bailouts and purchases of failing companies?
(2) How much would the failure of a single U.S. investment firm affect the entire financial system?
Monday, September 08, 2008
Chavez: "Fair" price for oil is just over $100/barrel
Sources:
"OPEC to Pump at Near Record as Prices Stunt Growth" Bloomberg.com
"Oil Production Move is a Tug of War" Wall Street Journal
"Russia, Venezuela May Hold Joint Military Maneuvers" CNN
"Venezuela's Oil-Based Economy" The Council on Foreign Relations
PDVSA Official Website
As consumers cheer in the face of declining oil prices, major oil-producing countries like Venezuela have been forced to make a tough decision. Should oil-production remain steady as prices fall, or should production be cut to ensure high prices even in the face of a floundering world economy? Meeting for the first time since March, OPEC's 13 ministers on Tuesday will determine the goal output of each country. Analysts expect production to remain at its present, albeit near all-time high level of production.
As the largest oil-producer in the Western Hemisphere, Venezuela is a major player in OPEC negotiations. Furthermore, Venezuela is highly dependent on its oil revenues, which make up over 75% of export revenues and over half of government revenues.
Venezuela has made no secret of its goal to keep oil prices high. At the time of this blog, crude oil is priced at about 106 USD per barrel. Venezuela's goal is to keep oil at just over 100 USD per barrel, a price which is states as "fair". Iran is the only country thus far to agree with Venezuela on that goal. Other OPEC countries, like Algeria and Kuwait, fear that high oil prices will jeopardize exports as the global economy slows. King Abdullah of Saudi Arabia has also argued that $100 per barrel is too high.
Oil production in Venezuela has been highly nationalized in recent years. Venezuela's state-owned oil company, Petróleos de Venezuela, or PDVSA, is the world's third-largest oil company. The newly instated company president of PDVSA stated that a key PDVSA goal is to further, below the "great leadership of President Chavez, the beautiful process of constructing Socialism." The company's mandate specifies that it must spend at least 10 percent of its proceeds on social programs.
Venezuela has been using its oil proceeds to finance social programs, agricultural development, military expenditures, and more generally to foster regional independence from the United States over the last few years. Many political analysts speculate that any significant decrease in oil prices will seriously damage Venezuela's new clout and jeopardize President Hugo Chavez's political future.
Of particular concern to the the "West" is Venezuela's use of well over $4 billion oil profits to purchase military equipment from Russia since 2004. Chavez, an ardent critic of the U.S., states that the military build-up is designed to counter any U.S. "imperialist" actions in Latin America or the Caribbean. Chavez also recently announced that Russian naval vessels are scheduled to arrive in Venezuelan ports in late November or December. The Russian Foreign Ministry spokesman said that any joint exercise between Russia and Venezuela would not be directed against any third country. Venezuela has also used its oil proceeds to strengthen economic and diplomatic ties with Iran, Cuba and China. The country has also extended oil at a preferential price to developing Caribbean countries.
Questions
1) If oil prices fall below $100 per barrel, what, if anything, can Venezuela do to maintain its current level of social spending?
2) How closely is President Chavez's political legitimacy linked to the success of PDVSA?
3) Does Venezuela have a moral duty to allow oil prices to fall, which in turn would likely soften the global economic decline? Or does Venezuela only owe a duty to its own citizens?
"OPEC to Pump at Near Record as Prices Stunt Growth" Bloomberg.com
"Oil Production Move is a Tug of War" Wall Street Journal
"Russia, Venezuela May Hold Joint Military Maneuvers" CNN
"Venezuela's Oil-Based Economy" The Council on Foreign Relations
PDVSA Official Website
As consumers cheer in the face of declining oil prices, major oil-producing countries like Venezuela have been forced to make a tough decision. Should oil-production remain steady as prices fall, or should production be cut to ensure high prices even in the face of a floundering world economy? Meeting for the first time since March, OPEC's 13 ministers on Tuesday will determine the goal output of each country. Analysts expect production to remain at its present, albeit near all-time high level of production.
As the largest oil-producer in the Western Hemisphere, Venezuela is a major player in OPEC negotiations. Furthermore, Venezuela is highly dependent on its oil revenues, which make up over 75% of export revenues and over half of government revenues.
Venezuela has made no secret of its goal to keep oil prices high. At the time of this blog, crude oil is priced at about 106 USD per barrel. Venezuela's goal is to keep oil at just over 100 USD per barrel, a price which is states as "fair". Iran is the only country thus far to agree with Venezuela on that goal. Other OPEC countries, like Algeria and Kuwait, fear that high oil prices will jeopardize exports as the global economy slows. King Abdullah of Saudi Arabia has also argued that $100 per barrel is too high.
Oil production in Venezuela has been highly nationalized in recent years. Venezuela's state-owned oil company, Petróleos de Venezuela, or PDVSA, is the world's third-largest oil company. The newly instated company president of PDVSA stated that a key PDVSA goal is to further, below the "great leadership of President Chavez, the beautiful process of constructing Socialism." The company's mandate specifies that it must spend at least 10 percent of its proceeds on social programs.
Venezuela has been using its oil proceeds to finance social programs, agricultural development, military expenditures, and more generally to foster regional independence from the United States over the last few years. Many political analysts speculate that any significant decrease in oil prices will seriously damage Venezuela's new clout and jeopardize President Hugo Chavez's political future.
Of particular concern to the the "West" is Venezuela's use of well over $4 billion oil profits to purchase military equipment from Russia since 2004. Chavez, an ardent critic of the U.S., states that the military build-up is designed to counter any U.S. "imperialist" actions in Latin America or the Caribbean. Chavez also recently announced that Russian naval vessels are scheduled to arrive in Venezuelan ports in late November or December. The Russian Foreign Ministry spokesman said that any joint exercise between Russia and Venezuela would not be directed against any third country. Venezuela has also used its oil proceeds to strengthen economic and diplomatic ties with Iran, Cuba and China. The country has also extended oil at a preferential price to developing Caribbean countries.
Questions
1) If oil prices fall below $100 per barrel, what, if anything, can Venezuela do to maintain its current level of social spending?
2) How closely is President Chavez's political legitimacy linked to the success of PDVSA?
3) Does Venezuela have a moral duty to allow oil prices to fall, which in turn would likely soften the global economic decline? Or does Venezuela only owe a duty to its own citizens?
Did Uncle Sam Trade In His Chevy for a BMW?: European Auto Manufacturing in the U.S.
Sources: Financial Times, Manufacturers Turn to US; New York Times, European Automakers Likely to Build Plants in the United States; NPR.org, ‘Marketplace’ Report: BMW Moving to U.S.; NPR.org, Weak Dollar Boosts Foreign Manufacturing in U.S.
The devaluation of the dollar against the euro has led to an emerging trend in manufacturing: European cars are increasingly being made in the U.S.A. Because the falling exchange rate has led to higher prices on European cars for American consumers, European automakers are faced with the decision to expand production to stateside factories or retreat from the U.S. market. For example, in Michigan, BMW can pay employees in devalued dollars, while lowering production and transportation costs on the cars it sells to Americans. In contrast, if it manufactures cars in Germany, it must pay employees in euros as well as take on import and increased transportation costs. U.S. manufacturing translates to reduced prices for American consumers and increased profits for the European automaker during a weak U.S. economy.
Other factors indirectly linked to currency fluctuations have contributed to the auto manufacturing shift. Relatively cheap American labor and relaxed factory regulations, alluring state tax breaks, and rising labor costs in East Asia, Eastern Europe, and Latin America have led many major European automakers to establish production in the United States. In addition to monetary incentives, manufacturers cite states’ willingness to fund the roads that lead to factories and train employees, and the productivity of U.S. workers, as enticing reasons to jump the pond.
While luxury German carmakers BMW and Mercedes have maintained plants in the American South since the 1990s, BMW aims to expand U.S. manufacturing in South Carolina by 50% during the next 5 years. Volvo of Sweden is in negotiations to build a plant in New Mexico. Analysts at Italian carmaker Fiat determined that it needs to build a North American factory to profit from the upcoming re-launch of its Alfa Romeo model. Tennessee recently closed a deal with Volkswagen to build a $1 billion factory by offering $577 million in incentives. Volkswagen previously operated its North American plant in Puebla, Mexico, but has not turned a profit since 2002. Last year its losses totaled $808 million.
As the exchange rate continues to fluctuate, manufacturing in the U.S. becomes a more attractive option for European automakers. Such foreign direct investment also provides employment opportunities and affordable European cars during a tough year for many Americans.
What will become of Sam’s Chevy?
-------------------------------------------------------------------------------------------------
Questions for the Reader:
1) How could American carmakers use currency fluctuations to revive the auto manufacturing industry at home?
2) In the present economy, would you prefer to buy a car from a European car company manufacturing in the United States, or an American car company manufacturing abroad?
What factors would influence your decision?
3) Do nationalism and brand loyalty still play a role in today’s car market?
The devaluation of the dollar against the euro has led to an emerging trend in manufacturing: European cars are increasingly being made in the U.S.A. Because the falling exchange rate has led to higher prices on European cars for American consumers, European automakers are faced with the decision to expand production to stateside factories or retreat from the U.S. market. For example, in Michigan, BMW can pay employees in devalued dollars, while lowering production and transportation costs on the cars it sells to Americans. In contrast, if it manufactures cars in Germany, it must pay employees in euros as well as take on import and increased transportation costs. U.S. manufacturing translates to reduced prices for American consumers and increased profits for the European automaker during a weak U.S. economy.
Other factors indirectly linked to currency fluctuations have contributed to the auto manufacturing shift. Relatively cheap American labor and relaxed factory regulations, alluring state tax breaks, and rising labor costs in East Asia, Eastern Europe, and Latin America have led many major European automakers to establish production in the United States. In addition to monetary incentives, manufacturers cite states’ willingness to fund the roads that lead to factories and train employees, and the productivity of U.S. workers, as enticing reasons to jump the pond.
While luxury German carmakers BMW and Mercedes have maintained plants in the American South since the 1990s, BMW aims to expand U.S. manufacturing in South Carolina by 50% during the next 5 years. Volvo of Sweden is in negotiations to build a plant in New Mexico. Analysts at Italian carmaker Fiat determined that it needs to build a North American factory to profit from the upcoming re-launch of its Alfa Romeo model. Tennessee recently closed a deal with Volkswagen to build a $1 billion factory by offering $577 million in incentives. Volkswagen previously operated its North American plant in Puebla, Mexico, but has not turned a profit since 2002. Last year its losses totaled $808 million.
As the exchange rate continues to fluctuate, manufacturing in the U.S. becomes a more attractive option for European automakers. Such foreign direct investment also provides employment opportunities and affordable European cars during a tough year for many Americans.
What will become of Sam’s Chevy?
-------------------------------------------------------------------------------------------------
Questions for the Reader:
1) How could American carmakers use currency fluctuations to revive the auto manufacturing industry at home?
2) In the present economy, would you prefer to buy a car from a European car company manufacturing in the United States, or an American car company manufacturing abroad?
What factors would influence your decision?
3) Do nationalism and brand loyalty still play a role in today’s car market?
Saturday, September 06, 2008
Cambodian Economy Growing Fast
Sources: Pol Pot Victims From Killing Fields Plan Resorts by Angkor Wat, Bloomberg
Cambodia, site of the “killing fields” and once under the brutal dictatorial reign of Pol Pot, is possibly the next hot destination in the foreign investment market. With a 9.7 percent growth rate each year between the years 2000 and 2007, it is the fastest growing country in Asia after China. Cambodia’s recent growth spurt is due in part to the influx of former refugees returning to their home country to rebuild. Because Pol Pot executed his highly educated and urban citizens in order to quickly convert Cambodia into an egalitarian and agrarian society, the returning refugees—many of whom have taken advantage of foreign educational systems—are the most likely to play a key role in jumpstarting Cambodia’s economy.
In addition to returning refugees, Cambodia’s growth appears to be driven in large part by its government, which has been increasingly friendly to foreign investors. For example, a 1994 law has allowed foreign investors to own 100 percent of a Cambodian company. These investors also face no restrictions on taking money in or out of the country, unlike other countries in Asia. This has led global companies, including Chevron, General Electric, and KFC, to open offices in Cambodia. The country is scheduled to open its first stock and bond markets in 2009.
Cambodia’s sunny future isn’t without its clouds, however. For all of its fast growth and economic accomplishments, it still faces some imposing hurdles. Cambodia is considered to be one of the most corrupt countries in the world and has been ranked near the bottom of the World Bank and International Finance Corporation’s list of Places to Do Business. The U.S. Agency for International Development estimates that $500 million of the country’s revenue “is diverted from government coffers” each year. Poverty is also a persistent problem in the country and most Cambodians live on less than 50 cents a day.
Questions:
(1) Will Cambodia’s growth continue at such a rapid rate or will the widespread corruption hamper its development efforts?
(2) How will the rapid economic development affect Cambodian society? Will the rich get richer and the poor remain poor or will the government institute effective welfare programs designed to improve the lives of all of its citizens?
(3) What problems is Cambodia likely to encounter as foreign investment increases?
Cambodia, site of the “killing fields” and once under the brutal dictatorial reign of Pol Pot, is possibly the next hot destination in the foreign investment market. With a 9.7 percent growth rate each year between the years 2000 and 2007, it is the fastest growing country in Asia after China. Cambodia’s recent growth spurt is due in part to the influx of former refugees returning to their home country to rebuild. Because Pol Pot executed his highly educated and urban citizens in order to quickly convert Cambodia into an egalitarian and agrarian society, the returning refugees—many of whom have taken advantage of foreign educational systems—are the most likely to play a key role in jumpstarting Cambodia’s economy.
In addition to returning refugees, Cambodia’s growth appears to be driven in large part by its government, which has been increasingly friendly to foreign investors. For example, a 1994 law has allowed foreign investors to own 100 percent of a Cambodian company. These investors also face no restrictions on taking money in or out of the country, unlike other countries in Asia. This has led global companies, including Chevron, General Electric, and KFC, to open offices in Cambodia. The country is scheduled to open its first stock and bond markets in 2009.
Cambodia’s sunny future isn’t without its clouds, however. For all of its fast growth and economic accomplishments, it still faces some imposing hurdles. Cambodia is considered to be one of the most corrupt countries in the world and has been ranked near the bottom of the World Bank and International Finance Corporation’s list of Places to Do Business. The U.S. Agency for International Development estimates that $500 million of the country’s revenue “is diverted from government coffers” each year. Poverty is also a persistent problem in the country and most Cambodians live on less than 50 cents a day.
Questions:
(1) Will Cambodia’s growth continue at such a rapid rate or will the widespread corruption hamper its development efforts?
(2) How will the rapid economic development affect Cambodian society? Will the rich get richer and the poor remain poor or will the government institute effective welfare programs designed to improve the lives of all of its citizens?
(3) What problems is Cambodia likely to encounter as foreign investment increases?
Friday, September 05, 2008
Dhabiwood?: Abu Dhabi Invests In Hollywood
Sources: New York Times, Abu Dhabi Puts More Cash on the Line in Hollywood; Los Angeles Times, Abu Dhabi Channels More Cash to Hollywood; Financial Times, Abu Dhabi Takes Fortunes to Hollywood
Just two days after purchasing the premier English football club Manchester City, Imagenation Abu Dhabi announced that it will invest more than one billion dollars over the next five years in productions to be made in Hollywood. Edward Borgerding, the chief executive of Imagenation Abu Dhabi, said Imagenation would make six to eight movies a year, with budgets of ten to fifty million dollars per film.
Imagenation Abu Dhabi is a newly formed subsidiary of the Abu Dhabi Media Co., which is controlled by the government of the United Arab Emirates. Imagenation is therefore controlled by the larger and more powerful Abu Dhabi Media Co., but it is technically a distinct legal entity. Imagenation was formed because media companies in the United States would have been unlikely to accept direct investment from the government-controlled Abu Dhabi Media Co. Foreign direct investment is capital invested by corporations into other countries, usually resulting in an ownership of at least ten percent of voting stock. Because the Hollywood production companies would not want another country, especially an Islamic country, to have any sort of direct control over them, it was necessary for Abu Dhabi Media Co. to form Imagenation Abu Dhabi.
However, there is still some question about how much influence Abu Dhabi will have on the movies that they finance. It is suspected that this new financing from the oil-rich Middle Eastern country will not come without restrictions. In its own state, the government only agreed to show edited versions of recent Hollywood film Syriana because it feared that it would show the Gulf in a negative light. Regardless of possible cultural clashes, Hollywood welcomes the new source of capital as hedge funds and private equity firms have slowed their investments due to disappointing returns and a deepening credit crunch.
Discussion: There is a question as to whether cultural conflicts will ensue between the Islamic state and Hollywood. Do you think that the UAE will attempt to play a direct role in the films that it finances? Do you think that we will begin to see a cultural bias develop in the movies that are funded by Imagenation? What are the pros and cons of foreign investment into a nation's entertainment industry?
Sources: New York Times, Abu Dhabi Puts More Cash on the Line in Hollywood; Los Angeles Times, Abu Dhabi Channels More Cash to Hollywood; Financial Times, Abu Dhabi Takes Fortunes to Hollywood
Just two days after purchasing the premier English football club Manchester City, Imagenation Abu Dhabi announced that it will invest more than one billion dollars over the next five years in productions to be made in Hollywood. Edward Borgerding, the chief executive of Imagenation Abu Dhabi, said Imagenation would make six to eight movies a year, with budgets of ten to fifty million dollars per film.
Imagenation Abu Dhabi is a newly formed subsidiary of the Abu Dhabi Media Co., which is controlled by the government of the United Arab Emirates. Imagenation is therefore controlled by the larger and more powerful Abu Dhabi Media Co., but it is technically a distinct legal entity. Imagenation was formed because media companies in the United States would have been unlikely to accept direct investment from the government-controlled Abu Dhabi Media Co. Foreign direct investment is capital invested by corporations into other countries, usually resulting in an ownership of at least ten percent of voting stock. Because the Hollywood production companies would not want another country, especially an Islamic country, to have any sort of direct control over them, it was necessary for Abu Dhabi Media Co. to form Imagenation Abu Dhabi.
However, there is still some question about how much influence Abu Dhabi will have on the movies that they finance. It is suspected that this new financing from the oil-rich Middle Eastern country will not come without restrictions. In its own state, the government only agreed to show edited versions of recent Hollywood film Syriana because it feared that it would show the Gulf in a negative light. Regardless of possible cultural clashes, Hollywood welcomes the new source of capital as hedge funds and private equity firms have slowed their investments due to disappointing returns and a deepening credit crunch.
Discussion: There is a question as to whether cultural conflicts will ensue between the Islamic state and Hollywood. Do you think that the UAE will attempt to play a direct role in the films that it finances? Do you think that we will begin to see a cultural bias develop in the movies that are funded by Imagenation? What are the pros and cons of foreign investment into a nation's entertainment industry?
IMF brokers “preliminary agreement” to ‘demystify’ investment choices of world’s largest foreign wealth funds
Sources: Wall Street Journal: Foreign Funds Agree to Set of Guiding Principles
BBC News: IMF Deal on Foreign Wealth Funds
The International Monetary Fund (IMF) has reached a “preliminary agreement” this week with the twenty-six member countries of the International Working Group of Sovereign Wealth Funds (IWG) on a set of “guiding principles” that will be used to govern the way these funds make investments.
Sovereign wealth funds (SWFs) are large sums of government money (often oil and trade profits) used by countries to invest in foreign markets, ostensibly for the sole purpose of making a profit. SWFs have recently been a hot button issue in many wealthy countries (particularly the US and Germany) in whose economies these funds have heavily invested because of the fear that some investments may be made for political, rather than commercial motives. A notable manifestation of this concern was the attempted buyout of UK port company P&O’s US port operations by a Dubai-owned investment fund, which was vigorously opposed by the Bush administration in 2006. The US operations were instead sold to American company AIG.
The IMF and the IWG hope that the new “Generally Accepted Principles and Practices” will help ease these fears by encouraging transparency in the funds’ management and investment practices, though the SWFs are not likely to be required to disclose specific investments. Finding the right balance of transparency is important because too much forced disclosure puts the funds at a disadvantage in the market, while too little fosters distrust amongst nations.
Use of the principles will remain voluntary and the IMF is not expected to create an independent monitoring agency to oversee the management of the funds. Instead, the member countries are largely expected to police themselves. David Murray, chairman of Australia’s SWF, believes that it will be relatively easy to spot the countries that are not following the rules simply by watching the way they operate. Whether this voluntary set of “guiding principles” will satisfy certain governments remains to be seen.
The IMF expects to finalize the agreement at its next meeting in October, at which point the set of principles will be released to the public.
Discussion:
Do you think this agreement will help dispel the fears some governments have about the motives behind certain funds’ investments? Should a more compulsory set of rules be developed for governing the management and investment policies of these funds? What are some of the potential benefits of allowing SWFs to operate relatively independently? Do they outweigh the risks?
Lehman Brothers: Glenda the Good Witch and the Wicked Witch of the West?
Source: Lehman Weights Split to Shed Troubling Loans, New York Times; Lehman Credit Spreads Widen Amid KDB Speculation, Reuters
Lehman Brothers, one of the U.S. banks hit hardest by the subprime mortgage crisis, is vetting a plan to split into two banks to separate its “good” from its “bad.” The strategy would put $30 billion of poorly performing commercial mortgages and commercial real estate – the “bad” part – into its own publicly traded company. The rest of Lehman’s operations – the “good” part – could continue with the help of one or more investors.
Setting off the financially troubled portion of the bank would encourage new investors in Lehman, who have been reticent to put any more money in mortgages or real estate. Splitting the bank into two would require Lehman to seek new capital investment, as one quarter of the equity would come directly from the firm, and the rest would come from debt financed by Lehman and other investors.
This is not the first time in the history of Wall Street that banks have turned to isolating poorly performing assets. In 1989, Mellon Bank created Grant Street National Bank to get rid of bad real estate loans. The spinoff bank was financed by direct equity and junk bonds. Six years later the entity was shut down when the notes were paid off before they matured. The spinoff worked for Mellon Bank; getting rid of the troubled assets improved the quality of the portfolio and of the “good” bank overall.
The plan came a few days after doubts about whether the Korean Development Bank and Japan’s UFJ Financial Group would invest in the troubled bank led to lower-than-expected projections for Lehman on Asian and European markets. These doubts fueled higher debt insurance prices for Lehman; the price to insure $10 million of debt rose from $325,000 to $345,000 per year for five years.
Questions for Discussion:
1) Will Lehman’s isolation of its “bad” from its “good” work? Will other banks follow suit? What effect will it have on the rest of the U.S. markets?
2) How will the U.S. government’s announcement that it is preparing to take over Fannie Mae and Freddie Mac impact Lehman’s plan?
Lehman Brothers, one of the U.S. banks hit hardest by the subprime mortgage crisis, is vetting a plan to split into two banks to separate its “good” from its “bad.” The strategy would put $30 billion of poorly performing commercial mortgages and commercial real estate – the “bad” part – into its own publicly traded company. The rest of Lehman’s operations – the “good” part – could continue with the help of one or more investors.
Setting off the financially troubled portion of the bank would encourage new investors in Lehman, who have been reticent to put any more money in mortgages or real estate. Splitting the bank into two would require Lehman to seek new capital investment, as one quarter of the equity would come directly from the firm, and the rest would come from debt financed by Lehman and other investors.
This is not the first time in the history of Wall Street that banks have turned to isolating poorly performing assets. In 1989, Mellon Bank created Grant Street National Bank to get rid of bad real estate loans. The spinoff bank was financed by direct equity and junk bonds. Six years later the entity was shut down when the notes were paid off before they matured. The spinoff worked for Mellon Bank; getting rid of the troubled assets improved the quality of the portfolio and of the “good” bank overall.
The plan came a few days after doubts about whether the Korean Development Bank and Japan’s UFJ Financial Group would invest in the troubled bank led to lower-than-expected projections for Lehman on Asian and European markets. These doubts fueled higher debt insurance prices for Lehman; the price to insure $10 million of debt rose from $325,000 to $345,000 per year for five years.
Questions for Discussion:
1) Will Lehman’s isolation of its “bad” from its “good” work? Will other banks follow suit? What effect will it have on the rest of the U.S. markets?
2) How will the U.S. government’s announcement that it is preparing to take over Fannie Mae and Freddie Mac impact Lehman’s plan?
Thursday, September 04, 2008
IMF Expected to Lend Georgia $750 Million to Aid Economic Recovery
Sources: "IMF Mission Reaches Agreement in Principle on a US$750 million Stand-By Arrangement with Georgia", The International Monetary Fund; "IMF approves $750 million loan to Georgia-minister", Reuters; "In Rebuff to Russia, IMF Is Set to Lend Georgia $750 Million", The Wall Street Journal
The International Monetary Fund (IMF) has provisionally agreed to lend Georgia $750 million to help revive the country's economy after its recent conflict with Russia. The agreement is currently an "agreement in principle," which means that it is a preliminary agreement that could result in a final, binding agreement. The IMF Executive Board will consider whether to officially approve the agreement in mid-September.
If approved, the loan will be issued in the form of an 18 month stand-by agreement. Stand-by agreements allow countries to use IMF financing (up to a specific monetary amount) to overcome short-term financial difficulties. As part of these agreements, the IMF sets "performance criteria" that a country must meet before it is able to collect funds. Performance criteria often come in the form of periodic monetary or budgetary targets that allow the IMF to determine whether the country receiving the loan is (or is not) making economic progress.
Though the IMF has not revealed what monetary targets it will set for Georgia's loan, IMF officials hope that the agreement will achieve several objectives. First, officials hope the loan will help counteract the notable blow that the Georgian economy has taken as a result of the war with Russia. Before the conflict, Georgia's economy was expected to grow considerably; as a result of the war, Georgia has now been forced to request $1-2 billion in international aid to repair and develop infrastructure affected by the war.
The loan is also intended to reinforce outside investors' confidence in the Georgian market and promote the recovery of general private sector investment in Georgia. Foreign investment has played, and continues to play, a crucial role in Georgia's economy, as it composed 1/5 of Georgia's gross domestic product in 2007. As such, reviving foreign investment in Georgia is a particularly important objective for the country's officials.
On a political note, IMF officials have openly stated that they hope the loan will support the economic policies of the current Georgian government and encourage political stability in the country. The current Georgian administration is headed by an American-educated president and supports market-friendly economic policies, so some commentators have suggested that the IMF's provisional loan package is symbolic of the West's desire to "strike back" at Russia after its invasion of Georgia. Such commentary undoubtedly will increase the public interest in this topic while the public awaits for the Executive Board to approve the financial package.
Questions:
1. Both IMF and Georgian officials have stated that one of the principal objectives for the loan package is to strengthen the confidence of outside investors in the Georgian market. To what degree, if at all, would a loan agreement with the IMF strengthen a foreign investor's confidence in an economy that is recuperating from war?
2. There has been talk of the United States and the United Kingdom preparing similar financial assistance packages for Georgia. To what extent do such developments reinforce the idea that the West is counteracting Russia's attack on Georgia using financial, rather than literal, weapons?
The International Monetary Fund (IMF) has provisionally agreed to lend Georgia $750 million to help revive the country's economy after its recent conflict with Russia. The agreement is currently an "agreement in principle," which means that it is a preliminary agreement that could result in a final, binding agreement. The IMF Executive Board will consider whether to officially approve the agreement in mid-September.
If approved, the loan will be issued in the form of an 18 month stand-by agreement. Stand-by agreements allow countries to use IMF financing (up to a specific monetary amount) to overcome short-term financial difficulties. As part of these agreements, the IMF sets "performance criteria" that a country must meet before it is able to collect funds. Performance criteria often come in the form of periodic monetary or budgetary targets that allow the IMF to determine whether the country receiving the loan is (or is not) making economic progress.
Though the IMF has not revealed what monetary targets it will set for Georgia's loan, IMF officials hope that the agreement will achieve several objectives. First, officials hope the loan will help counteract the notable blow that the Georgian economy has taken as a result of the war with Russia. Before the conflict, Georgia's economy was expected to grow considerably; as a result of the war, Georgia has now been forced to request $1-2 billion in international aid to repair and develop infrastructure affected by the war.
The loan is also intended to reinforce outside investors' confidence in the Georgian market and promote the recovery of general private sector investment in Georgia. Foreign investment has played, and continues to play, a crucial role in Georgia's economy, as it composed 1/5 of Georgia's gross domestic product in 2007. As such, reviving foreign investment in Georgia is a particularly important objective for the country's officials.
On a political note, IMF officials have openly stated that they hope the loan will support the economic policies of the current Georgian government and encourage political stability in the country. The current Georgian administration is headed by an American-educated president and supports market-friendly economic policies, so some commentators have suggested that the IMF's provisional loan package is symbolic of the West's desire to "strike back" at Russia after its invasion of Georgia. Such commentary undoubtedly will increase the public interest in this topic while the public awaits for the Executive Board to approve the financial package.
Questions:
1. Both IMF and Georgian officials have stated that one of the principal objectives for the loan package is to strengthen the confidence of outside investors in the Georgian market. To what degree, if at all, would a loan agreement with the IMF strengthen a foreign investor's confidence in an economy that is recuperating from war?
2. There has been talk of the United States and the United Kingdom preparing similar financial assistance packages for Georgia. To what extent do such developments reinforce the idea that the West is counteracting Russia's attack on Georgia using financial, rather than literal, weapons?
Dollar Rises, Hurts Some U.S. Companies
Source:
However, the rising value of the dollar has been a negative development for those U.S. companies with significant exports or operations overseas. A stronger dollar means that these companies' products will be more expensive and less competitive in foreign markets. In addition, a stronger dollar reduces profits when foreign earnings are changed into U.S. dollars.
The dollar's rise against international currencies affects those companies that did not hedge on the dollar's exchange rate. Hedging involves using the forwards market to lock in an exchange rate for a certain period of time in the future. Although companies that hedge their exchange rates remove the risk of unfavorable currency swings, they also lose the ability to take advantage of unexpected beneficial changes in the exchange rate.
Despite the dollar's recent gains, it still has only recovered 2.4 percent of the 8.4 percent in value it lost in 2007. The dollar's recent gains follow fears that other countries have lagged behind the U.S. and will now be increasingly affected by the global credit crisis, sparked by the U.S. sub-prime mortgage breakdown that began in 2007.
Discussion:
1. Which types of companies in the U.S. benefit from a stronger dollar, and which types of companies benefit from a weaker dollar?
2. What other type of futures or forwards markets exist for products or services?
The US and the IMF Agree to Grant Georgia Economic & Humanitarian Aid
Sources: Financial Times, US offers $1bn aid for Georgia; New York Times, U.S. to Unveil $1 Billion Aid Package to Repair Georgia; New York Times, White House Unveils $1 Billion Georgia Aid Plan; IMFSurvey Magazine, IMF and Georgia Discuss $750 Million Loan Package; Le Monde, Etats-Unis et FMI apportent une aide financière massive à la Géorgie
On September 3rd the U.S. announced plans to grant $1 billion in humanitarian aid to Georgia, and on the same day the IMF announced its plan to award Georgia a $750 million loan package. These forms of financial assistance would help Georgia rebuild after the conflict with Russia and give a boost to the Georgian economy, which had been experiencing strong growth prior to the conflict.
The IMF package was announced after meetings in Tbilisi that began August 23rd, and still requires IMF Executive Board approval. Consideration is expected in mid-September. The loan, which would be provided through a “Stand-By Arrangement” over a period of eighteen months, is designed to sustain investor confidence, continue macroeconomic stability, and give a boost to the private sector. Prior to the conflict, the IMF was pleased by the success of Georgia’s economic reforms and response to IMF programs, and is hoping to keep the Georgian economy on that same path.
President Bush announced the U.S. aid package to coincide with Vice President Cheney’s visit to Azerbaijan, sending a strong message to Russia. Though the U.S. short-term goals are, like the IMF’s, to rebuild and bolster the Georgian economy, long-term goals include reducing European energy dependence on Russia. The package requires Congressional approval and does not include U.S. military support. $570 million will be available by the end of the year, and will provide food and shelter to Georgians as well as economic assistance.
In addition, the European Union decided in an emergency meeting on Monday to organize an international conference of donors in the near future to solicit aid for reconstruction. Georgia is hoping for another €1 billion from the European Union, and Georgian President Saakachvili has stated that the conflict caused Georgia nearly €1.4 billion in damages.
Questions:
1) Will the proposed aid packages be successful in returning the Georgian economy to its upward swing?
2) To what extent is further aid dependent on U.S. policy and political goals in the region and ability to put pressure on the EU?
On September 3rd the U.S. announced plans to grant $1 billion in humanitarian aid to Georgia, and on the same day the IMF announced its plan to award Georgia a $750 million loan package. These forms of financial assistance would help Georgia rebuild after the conflict with Russia and give a boost to the Georgian economy, which had been experiencing strong growth prior to the conflict.
The IMF package was announced after meetings in Tbilisi that began August 23rd, and still requires IMF Executive Board approval. Consideration is expected in mid-September. The loan, which would be provided through a “Stand-By Arrangement” over a period of eighteen months, is designed to sustain investor confidence, continue macroeconomic stability, and give a boost to the private sector. Prior to the conflict, the IMF was pleased by the success of Georgia’s economic reforms and response to IMF programs, and is hoping to keep the Georgian economy on that same path.
President Bush announced the U.S. aid package to coincide with Vice President Cheney’s visit to Azerbaijan, sending a strong message to Russia. Though the U.S. short-term goals are, like the IMF’s, to rebuild and bolster the Georgian economy, long-term goals include reducing European energy dependence on Russia. The package requires Congressional approval and does not include U.S. military support. $570 million will be available by the end of the year, and will provide food and shelter to Georgians as well as economic assistance.
In addition, the European Union decided in an emergency meeting on Monday to organize an international conference of donors in the near future to solicit aid for reconstruction. Georgia is hoping for another €1 billion from the European Union, and Georgian President Saakachvili has stated that the conflict caused Georgia nearly €1.4 billion in damages.
Questions:
1) Will the proposed aid packages be successful in returning the Georgian economy to its upward swing?
2) To what extent is further aid dependent on U.S. policy and political goals in the region and ability to put pressure on the EU?
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