BBC reports that Ethiopian humanitarian aid diverted for arms

Sources

BBC News: Bob, Band Aid and how the rebels bought their arms

BBC News: Bob Geldof demands proof of BBC Ethiopia aid report

BBC News: On the trail of Ethiopia aid and guns

BBC News: Ethiopia famine aid 'spent on weapons'

Ethiopian Recycler: Live Aid money did pay for weapons

AOL News: Live Aid Famine Cash Bought Guns, Not Grain

A recent BBC World Service report alleged that rebel groups in Ethiopia diverted aid money intended for humanitarian famine relief and used it to purchase arms during the 1980s. The story has been met with strong criticism in Ethiopia and in Great Britain.

The Ethiopian famine in the 1980s gripped the world like few before or after have. Even today, the images of men who look like walking skeletons and sad faced children with bulging distended stomachs are etched in the minds of millions of Westerners. Those in the developed world felt with their heart, and acted with their checkbooks, donating large sums of money through many non-governmental organizations (NGOs) and events such as Live Aid. The cause of so much misery was the lack of food crops. But it was exacerbated by another horseman of the apocalypse—war. During this conflict, the Tigrinya People's Liberation Front (TPLF) was fighting the Ethiopian army, and had control over the Tigray region.

Aid planners found that the only way to provide needed supplies to people living in rebel-held areas like Tigray was to direct the money to the Relief Society of Tigray (Rest). Two key members of the TPLF have claimed they diverted the funds, with one claiming no more than 5 percent were used for humanitarian purposes. Robert Houdek, a former senior U.S. diplomat to Ethiopia in the 1980’s states that TPLF members at the time hinted at the diversions, while a CIA document collaborates the story. While the truth of these claims are disputed by some, such as former TPLF leader and current Ethiopian Prime Minister Mêlées Zenawi, the many signs found by the BBC point to at least some funds being diverted.

Despite strong evidence, this report has lead to a strong backlash from many aid organizations in England. The founder of the wildly successful Live Aid event, Sir Bob Geldof, has been a vocal critic. He has said there is "not a shred of evidence” that funds from those events were used to buy arms. He has said that if credible claims were brought forward, he would sue the Ethiopian government to reclaim the misspent funds. He has described some of the sources used by the BBC as “not credible,” and along with many other charities is writing a letter of complaint to the BBC Trust.

The veracity of these charges will do little to change the current reality in Ethiopia. No one has yet called for Prime Minister Meles Zenawi to step down. No one has also charged that any charity or NGO was complacent in these events, even the rebel leaders talk of using “tricks.” However, this will be of little comfort to Ethiopians who could have been saved by aid money, or Westerners whose donations unwittingly went to buy guns.

Discussion:

1) Does the risk that aid could be misused mean that it should not be given?

2) To what extend should governments and NGO’s try to take back their misappropriated funds?

Iceland Voters Reject National Repayment Referendum

NY Times: Iceland Voters Reject Repayment Plan
NY Times: Iceland Blocks Bank Compensation for Foreigners
BusinessWeek: Iceland Rejects Icesave Depositors Bill in Referendum

Ninety-three percent of Icelandic voters rejected Saturday’s national referendum that proposed to repay $5.3 billion to Dutch and British governments for bailing out nearly 300,000 citizens when an Icelandic bank failed in 2008. The referendum was called when the President failed to sign a bill that required Iceland to repay the debt over 15 years at 5.5% interest. The President claims that his refusal stemmed from a petition signed by one-fifth of his country’s citizens rejecting the plan because it unfairly saddled each Icelander with $16,400 of debt created by negligent regulators and irresponsible, greedy bankers who allowed the failed banks to take on debt 10 times the size of Iceland’s economy. Icelanders’ deposits were protected by a national deposit guarantee program, but the British and Dutch citizens only recovered the first $30,000 of their lost deposits from national bailout programs.

The failed internet bank IceSave, also known as Landsbanki, was one of three Icelandic banks that failed in 2008 as a result of Iceland’s stock market crash and currency collapse that completely shut down the nation’s banking system. The money that Britain and the Netherlands paid to their citizens to recover lost deposits in the bank were really considered loans to Iceland amounting to 40% of the country’s gross domestic product. Despite the “no” vote on the referendum to repay these loans, Iceland officials made clear that country would fulfill its loan obligations, just on different terms than the referendum’s proposal. Britain and the Netherlands are eager to come to agreement because of the pressure they feel from their increasingly finicky bond investors and the Central Bank’s increased scrutiny on all EU nations’ spending and deficits.

Besides pressure from Britain and the Netherlands, Iceland is pressured by other reasons to repay its loans. Since the beginning of the country’s financial crisis, Iceland has received $2.1 billion from the IMF, funding that was conditioned on coming to an agreement with British and Dutch governments on the repayment of their bailout loans. Iceland is also under pressure to repay because it was recently invited to begin discussions to join the European Union. Failing to repay its international debts would reflect poorly upon Iceland and might cause Moody’s and Standard & Poor’s to follow Fitch’s lead in downgrading the country’s sovereign debt to below investment grade, a move that would put Iceland on the same precarious level as debt-laden Greece.

The IMF and EU nations have been careful not to push Iceland too hard because they known that an alternative to repaying its debt is filing bankruptcy. Fear of insolvency prompted Britain and the Netherlands to propose a repayment plan at a more attractive interest rate of LIBOR plus 2.75 percent (now about 3%) after two-years of interest-free payments. EU Nations, candidate EU nations, and non-candidate EU nations will all watch with great interest to see how this international drama plays out.

1. Has the dialogue shifted from financial institution systemic risk to sovereign systemic risk, or are these terms fundamentally the same thing?

2. As the old saying goes, “as goes General Motors goes the nation.” So, might the new saying be “as goes a country’s largest financial institution, so goes the world financial system?”

China and U.S. Relations Remain Tense

Sources:
WSJ.com: China Signals Defiance on U.S. Relations;
Reuters.com: China Foreign Minister Says U.S. Ties “Disrupted;”
Newyorktimes.com: American Envoys in Beijing to Mend Relations;
Newyorktimes.com: Chinese Bank Chief Says Currency is Unlikely to Rise.

Tensions between the United States and China have been on the rise in recent months as the two nations clash on policies concerning internet censorship, Iran and U.S and Taiwanese arms deals. One issue in particular that has created friction between the two powerful nations is China’s fixed exchange rate policy. At a press conference Saturday, March 6, China’s Central Bank Governor, Zhou Xiaochuan, signaled that eventually China would abandon its exchange rate policy, but gave no indication of a date for that change.

China has since late 2008 kept its currency, the renminbi (also called the “yuan”) from appreciating against the U.S. dollar. This policy has kept the yuan artificially low as compared to other currencies and as a result, has kept the price advantage of Chinese exports. The Governor called China’s policy a response to the global financial crisis, indicating that sooner or later the policy would be abandoned but also acknowledging that the timing of that change would be critical. China has been heavily criticized for its currency policy, which some countries have called an unfair advantage. President Obama says the policy keeps the prices of Chinese exports low, but disadvantages other economies who cannot compete with those prices. Gov. Zhou indication that the Country’s policies will eventually change is not enough for some critics, who do not believe those changes will come soon enough.

While Gov. Zhou’s comments might have signaled optimism that China and U.S. relations were on the rise, the defiant tone of China Foreign Minister Yang Jiechi’s speech Sunday gave reporters a very different picture of Chinese attitudes towards the U.S. Mr. Yang expressed his displeasure with President Obama’s decision to meet with the Dali Llama in February of this year, saying, "The responsibility for the difficulties in China-U.S. relations does not lie with China." Mr. Yang also commented on its refusal to acquiesce to U.S. pressure that China sanction Iran for its nuclear weapons program. Mr. Yang expressed his belief that sanctions would not solve the issue and that further diplomacy was needed before a resort to sanctions was necessary. A week prior to Mr. Yang’s comments, the Obama Administration had sent two officials to Beijing to discuss Chinese policies in Iran.

President Obama has promised to get tougher with China on the currency issue, and in April the U.S. Department of the Treasury will decide whether to officially attach the label of “currency manipulator” to China as part of an annual process.

Discussion Questions:

1. Is China’s decision to freeze the Yuan’s value against the dollar detrimental to the growth of other emerging economies that compete with Chinese exports?
2. What result if the Department of the Treasury decides to label China a “currency manipulator?”
3. Does China’s refusal to participate in sanctions against Iran dilute the combined sanctions of other nations? How?

Argentina Central Bank Crisis Reemerges

Sources: Financial Times – Fernandez vows to ignore court over reserves / Financial Times – Opposition grows to Argentina bank governor / Wall Street Journal – Argentina Central Bank Pres: Reserves Move Absolutely Legal / Business Week – Argentine Senators Get ‘Rough’ in Central Bank Clash

A new chapter in the ongoing saga of the Argentinean Central Bank Crisis began this week. On Monday, March 4, President Christina Fernandez withdrew her decree from December that ordered the Central Bank to transfer $6.5 billion of Central Bank Reserves to the Treasury to pay sovereign debts. An Argentinean Judge had suspended the December decree pending Congressional action. Immediately following the withdrawal of the December decree, President Fernandez introduced two new decrees on Monday, one, an emergency decree, which authorized the transfer of $4.38 billion of Treasury reserves to private creditors, and the second, an ordinary decree, which authorized the transfer of an additional $2.18 billion of Treasury reserves to service debt payments from multilateral creditors. Central Bank Chief Mercedes Marco del Pont immediately transferred the Central Bank reserves to the Treasury. By Wednesday, however, Argentinean Federal Judge, Claudia Rodriguez Vidal, ordered the economy minister to suspend use of these funds subject to Congressional approval. Central Bank Chief Marco del Pont defended the decree, asserting that it was necessary to protect the country’s economy.

The source of this dispute can be traced back to the June 2009 elections in which President Christina Fernandez lost control of congress. Since Argentina seated the newly elected members of Congress in December, President Fernandez and Congress have disputed the authority of President Fernandez’s decree that transferred funds from the Central Bank Reserves to the Treasury. In addition to the dispute over the Central Bank Reserves, last week, an Argentinean Senate Committee also declined to recommend the ratification of President Fernandez’s selection for Central Bank Chief, Marco del Pont. Congress will debate President Fernandez’s decrees as well as the ratification of Marco del Pont next week. Should Congress decline to approve these decrees, an opposition deputy insists that the Central Bank must return the funds to the Treasury. The congressional party in control of congress, the Civic Coalition party, publicly stated that they would refuse to ratify the appointment of the Central Bank Chief. Faced with this opposition, President Fernandez will likely need to appoint a new Central Bank Chief for the second time this year.

Seemingly undaunted by this opposition, President Fernandez, in a nationally televised speech, claimed that, “no judge would stop the Central Bank from following her decree.” She also added that, “The person in charge of administering the finances of this country is not the judges but the president of the republic.” President Fernandez went on to deride Congress for refusing to ratify her appointment of Mercedes Marco del Pont as Central Bank Chief. Given this dynamic, experts fear that Congress will refuse to approve of any candidate that President Fernandez submits causing a major political crisis.

Discussion Questions:

How will the reemergence of the central bank crisis affect the Falklands dispute?

How does this dispute affect President Fernandez reelection campaign?

Niger coup might be opportunity for democracy and development

Sources
BBC News: Niger: A coup for democracy?
AllAfrica.Com: Niger: UN, African Officials Meet with Coup Leaders during Mission
New York Times: Opposition in Niger Urges Junta to Hold Vote
New York Times: Palace in Niger Is Attacked by Soldiers

In most of the world, a coup d'etat has negative implications. But, that feeling is not shared by people everywhere. The recent coup in Niger provides a perspective that is not often understood. In Niger, the coup provides a means to transition away from a leader who has lost the trust of his citizens. It can also serve as a way to restore the country’s standing in the international community and begin the process of restarting aid programs that were suspended because of past governments.

Former president Mamadou Tandja was democratically elected. However, he has been under increasing pressure because recent policies have rolled back democratic reforms. Last year he suspended the country’s highest court, and the National Assembly. Then he implemented a new constitution that removes term limits and gives him three more years in his current term. This led leaders of a military unit outside of the capital city, Niamey, to stage a coup on February 18th. There were few casualties, and those that died were limited to the armed forces and were not civilians. The attack came while the president was at his cabinet meeting and he was quickly taken to military barracks outside of town. It was then announced that Capt. Djibril Adamou Harouna would be Niger’s interim leader.

Niger is no stranger to coups, with one recently in 1999. After that coup, the transition to democracy was quick and successful elections were held. Niger’s mood about coups is summed up by Mohamed Bazoum, the deputy president of the opposition PNDS Taraya party, “We have had coups before, and usually not many people die, so for us the military coup is not so traumatic as it might be somewhere else”. Many in Niger think that they are not the fault of the military, but rather of the politicians who have failed the country. So strong is the belief in the military’s trustworthiness, that even some in the party ousted feel that the coup leaders will follow through on an election and that they might be allowed to participate. The United Nations, African Union, and Economic Community of West African States (ECOWAS) have all been in communication with the coup leaders and are committed to helping the country successfully navigate a road to democracy.

Democracy has more than just intrinsic value for the people of Niger. The country ranks very low in the United Nations Development Index, and recently the country warned that 2.7 million people were at risk of food shortages due to poor harvests. During the rule of President Tandja, international sanctions drastically cut back the amount of aid that was available. The country has been kept afloat from its sale of uranium, but has been vulnerable to changes in price for the ore. Many both inside and outside the country feel that the only way for Niger to sustain itself right now is from international aid. There are hopes that this aid will start flowing again when a new democratic government is elected.

The new leaders have not set out a timetable for new elections. However, many in the capital are not concerned, and feel that the coup is one step forward. For those going hungry and in need of international assistance, the coup might be a live saver.

Discussion Questions:
1) Are coup’s ever justified? Or should the rule of law always prevail?

2) How can the international community help countries make a smooth transition to democratic elections?

Another ETA Leader Nabbed

BBC NEWS: Who Are ETA?
CNN: Spain: Basque ETA Chief Arrested
Telegraph.UK: ETA Leader Arrested in France

French police arrested three high-level leaders of the Basque separatist group ETA on Sunday in a rural home in Normandy. The leader of the group, Ibon Gogeascoechea Arronategui had been running from authorities for 12 years after the murder of a police officer. The two other leaders arrested were Beinat Aguinagalde Ugartemendia and Gregorio Jimenez Morales, also fugitives wanted for deadly car bombings and missile attacks in furtherance of the ETA’s mission.

The Euskadi ta Askatasuna, better known as the ETA, was formed in 1959 to fight for Basque Country independence from Spain and France. The group, listed as a terrorist group by the United States, the European Union, and France, claim seven regions in northern Spain and southern France as “Basque” independent regions, and the group uses violence to campaign for secession. The group employs a small army of mostly youthful reengades willing to perform deadly missions to fight for separatism. Some suggest that the group could be as large as a few hundred; while other Spanish authorities say that the group might be less than half that. Despite the fact the the Basque region now has its own parliament, police force, education system, and taxes, it continues to fight for absolute indpendence from Spain and France using violence and threats.

The ETA has historically used France and Portugal as logistic bases for their terroist activities because of intense police pressure in Spain, although neither of these neighboring countries desire to harbor members of the radical, violent group and have recently improved police cooperation to deal with the problem.

Gogeascoechea’s arrest comes at the end of two busy months of ETA enforcement in the region. Security officials have arrested 32 known members of the group, confiscated over 4,000 pounds of explosives, thwarted ETA bomb factory planning in Portugal, and have prevented plans of ETA development across Spain. Since May 2008 the principal leadership of the ETA has changed hands five times as the leaders are detained by authorities. Gogeascoechea took control of the terrorist group in May 2008 after his predecessor was arrested in Bordeaux. Spanish authorities suggest that ETA support is diminishing because of the rise in popularity of the more moderate Basque nationalists and the sentiment that ETA’s mission to separate from France and Spain is dated and out of touch with public opinion. ETA officials claim otherwise, that they will simply continue to fight for complete independence and appoint new ETA leaders to further that goal.

Falklands Dispute Intensifies

Sources: BBC News – Oil drilling starts in Falklands / Mail Online – Falklands oil row: Argentina crisis deepens / Mail Online – The Falklands betrayal: U.S. fails to back British oil claims after row over American torture secrets / Financial Times – Argentina asks UN for help on Falklands row / Financial Times – Summit backs Argentina claim on Falklands / Financial Times – Moment for truth near in search for Falklands oil / Financial Times – UK company begins drilling for oil / Financial Times – Call to stiffen Falklands defense

The dispute between Argentina and Britain intensified over the past month as Britain moved forward with oil exploration. British based oil company, Desire Prospect, commenced exploratory oil drilling operations in the Falklands on February 22, 2010. Four British drilling companies are planning to drill around the islands. The companies are single asset companies, which investors set up specifically to drill for oil in the Falklands. The dispute centers on the archipelagic waters surrounding Argentina. Geologists predict that the seabed surrounding the Falklands could contain up to 60 billion barrels of oil.

The dispute began in 1833, when Britain reasserted control over the islands from Argentina. Britain and Argentina have disputed the sovereignty of the islands throughout the last 177 years. In 1982, Britain and Argentina fought a brief war over the islands in which Britain succeeded in claiming sovereignty over the Falklands. During that war, 255 British soldiers and 469 Argentina soldiers perished. Following that war, Britain and Argentina signed a joint oil exploration agreement. In the late 1990s, several oil companies obtained licenses under the joint agreement to drill in the Falklands, but abandoned the licenses because of low oil prices. The dispute began intensifying again in 2007, when Argentina abandoned the joint oil agreement and oil prices began reaching record levels. Argentina claimed that it abandoned the agreement because Britain kept changing the terms. During 2009, Argentina filed a claim with the United Nations asserting sovereignty over the islands.

The rhetoric between the two nations heated up over the past month as British oil company, Desire, commenced operations. Last week, a summit comprised of 32 Latin American and Caribbean countries declared that the disputed territory belongs to Argentina. Argentina has also petitioned the United Nations for resolution of the matter. Britain has resisted calls for negotiations. Argentina foreign minister called the drilling operation an invasion of Argentina’s sovereignty. The Tories have called for Britain to deploy more warships to the region to show Argentina its resolve to drill in the Falklands. UK Defense Minister Bill Rammell informed the House of Commons that Britain was prepared to take “whatever steps [were] necessary” to protect the islands and that it made Argentina “aware of that.” Argentina tightened the navigations rules surrounding its waters in response. A senior MP asserted that the U.S. has failed to support British claims in retaliation for a British court releasing details about the treatment of a Guantanamo Bay prisoner. The region hopes for a quick resolution to the matter, as the regional conflict threatens foreign trade and regional security in Latin America.

Discussion Questions:

What are the ramifications on world trade if this dispute intensifies further?

Will the dispute reside after Argentina holds elections?

Latest Toyota Inquiries May Reveal Foul Play

NYTimes: Toyota Accused of Withholding Records;
TheIrishTimes: Toyota’s Troubles;
Bloomberg.com: Toyota Deliberately Held Documents, Towns Says.

Representative Edolphus Towns of New York made a statement Friday, suggesting that Toyota was guilty of withholding records harmful to them in a past court proceedings. In his statement Rep. Towns did not release the documents that would reinforce his accusations. The Rep. informant, a former member of Toyota’s in-house counsel, is currently contending his employment discharge with Toyota in court. These facts together raise questions about the merit of the Rep.’s claims, and have already drawn skepticism from many.

This latest accusation is only one of the difficulties Toyota has faced this year. Toyota has recalled around six million vehicles for various engineering concerns. The recall was officially made to deal with “unintended acceleration” as well as braking problems linked to at least thirty deaths in the U.S. Toyota has suffered with wavering consumer confidence as a result of the recall. Man consumers are now suspicious of Toyota’s regard for consumer safety and as a result sales on particular models have been plummeting.

The current controversy involving Rep. Towns involves what Toyota has named its “Book of Knowledge.” Toyota claims that this electronic database is where Toyota engineers keep information relating to the design of the vehicles as well as the records of vehicle trials. Rep. Towns claims that the database contains support for his accusations that Toyota knew of the instability of its products and did nothing to remedy them. A request for discovery regarding the book was made in another legal matter, and that request was denied. Toyota’s argument was that the book is protected under trade secret laws because it contains confidential information relating to Toyota’s business and inventions.

Discussion Questions:
1. Should Toyota be protected by trade secret laws so that the Book of Knowledge cannot be released? What could happen to Toyota if the book was uncovered?

2. How much do you think the American media has targeted Toyota’s recall due? Do you think this has anything to do with the American auto-industry’s demise?

International Aid Organizations Target African Schoolgirl Absences with Sanitary Menstrual Pads

Sources
New York Times: Girls’ Health: Kits to Aid in Menstrual Health May Cut School Absenteeism in Kenya
WaterWired: Keeping Girls in School Through Better Sanitation
BBC: Sanitary pads help Ghana girls go to school
Voice Of America: On World Water Day, A Call for Improved Sanitation
Voice of America: Keeping Girls in School May be a Matter of Better Sanitary Protection

Small things matter. Using microfinance and paying close attention to root causes of what holds development back can sometimes yield greater results than a poorly implemented 100 million dollar loan from international donors. Recently concluded studies by Oxford University have found that contrary to common conception, by itself greater access to clean water and sanitation is not the greatest barrier to education. The results of the study conclude that greater access to sanitary products during their period can slash schoolgirl absenteeism.

To many in the West this may appear a simple problem. However, to those in Africa it is much more difficult. First, menstruation is a taboo subject. Many women and girls do not want to discuss it and they are not comfortable trying new alternatives to traditional ways of dealing with their monthly period. An example from Ghana demonstrates the difficulties that women currently face. Researches found that most schoolgirls have two small pieces of cloth and must wash and dry them each night. If they do not dry completely, the still damp or soiled cloth will be unhygienic and place the girls at a higher risk of infection.

In addition to physical health, the start of puberty brings extra pressure from men for sex. This unwanted pressure comes even from schoolteachers, providing an additional incentive to leave school. Recent reports in Kenya have begun exposing this frequent unwanted sexual harassment. Sadly, this all too often leads to schoolgirls becoming pregnant and dropping out of school permanently.

A simple solution to these problems would be greater access to sanitary products. Unlike most in the developed work, many poor families are unable to afford disposable pads. The cost in Kenya is as high as a sack of corn flour, and it is difficult to justify that expense for a family that can barely afford food. Kenyan women report that the lack of access to affordable menstrual pads is a major problem for their schooling and many families find that it is easier to keep girls at home during school days when they are menstruating.

In Kenya, Huru International has teamed up with several western donors to tackle the rarely talked about topic that has the potential keep women out of the classroom several days a month. It has developed washable and reusable menstrual cloth pads, and hopes that by distributing them more women will stay in school. These are sewn and distributed by a Nairobi community center, supported by an American charity. The pads also include information on safe sex and preventing the spread of AIDS. There is hope that other organizations throughout Africa will use microfinance loans to buy the machines needed to make these pads and set up their own distribution networks.

Big projects bring headlines, but small projects may have a more direct impact on people. Often microfinancing can solve problems that are not even a concern for many in the West. Reports have shown that a lack of sanitary menstrual pads is a major issue leading to missed school days by girls, is a clear health risk, and can lead to even more sexual abuse by male teachers. Where large projects might overlook an issue, smaller aid organizations can fill the niche. In Kenya, they are spurring the adoption of these processes across Africa and trying to build a cottage industry that both creates revenue and solves this important problem.

Discussion Questions

1) How can Western aid organizations better direct their aid to dealing with small projects that have bigger impacts?

2) What ways can international financing for development projects use microfinancing to leverage an expanded economic impact?

Is China Diversifying its Foreign Reserves?

Sources
FT.com: Beijing's rebalancing raises fears for Treasuries
USTreasury.gov: Treasury International Capital Data for December 2009

China's holdings of U.S. government bonds declined by a record amount ($34.2 billion) to $755.4 billion in December 2009 from the previous month, according to the Treasury International Capital (Tic) data, released on February 16th. Such data combined with the recent political frictions between the U.S. and China made investors wonder whether China began to diversify from Treasuries. According to Yasunari Ueno, a chief economist at Mizuho Securities in Tokyo, the conflicts between two countries over the issues such as President Obama's meeting with the Dalai Lama and weapons sales to Taiwan by U.S. need to be monitored because they "could cause China to become even less enthusiastic buyers of U.S. Treasuries."

However, most analysts including Mr. Ueno say that the December Tic Data is likely to indicate "a brief pause" before resuming the purchase of Treasuries. While China has reduced its holdings in Treasuries from May 2009, China may have purchased through Hong Kong last year. Hong Kong's holdings in Treasuries increased up to $152.9 billion in December 2009 from $77.2 billion in December 2008. Also, the fact that China increased its holdings of longer-dated coupon debt rather than short-dated bills shows that China is confident in the U.S. government's ability to pay its debt.

Even if China diversifies from Treasuries, the market will not be necessarily in trouble as long as there are other buyers such as U.S. banks or other foreign governments to fill the gap. In December 2009, Japan overtook the China's position as the largest foreign official holder of U.S. Treasuries, holding $768.8 billion. Furthermore, it would not be economically sound for China to reduce its holdings. If China sells U.S. government bonds, U.S. interest rates will rise, which would impede economic recovery in the U.S. This would have negative impacts on Chinese exports, and reduce the value of China's pre-existing holdings of the U.S. government bonds. In addition, as long as Yuan is pegged to the U.S. dollar, China will be limited in diversifying its foreign reserves because it needs to "recycle" its trade surplus dollars back into U.S. assets.

Discussion Questions:
Do you think a deteriorating political relationship between the U.S. and China could have an impact on China's decision to manage its foreign reserves?

Will New Bond Issue Solve Greek Debt Worries?

Financial Times: Greece Set for Critical Test with Bond Issue
Financial Times: Greece Ponders High-Risk Bond Move

Petros Christodoulou, treasurer at the National Bank of Greece, was just appointed as new senior debt commissioner Friday, replacing Spyros Papanicolaou as the head of Greece’s Public Debt Management Agency. Papanicolaou was let go amidst negative speculation regarding his issuance of the latest five-year Greek bond issue. Newly appointed Christodoulou has a challenge on his hands because the Greek government has little time to issue €53 billion in bonds to cover upcoming debt maturities at higher costs than the original debts.

This task will be a challenge because Greek debt yields have skyrocketed in the wake of Greece’s current financial troubles (see Greece's Financial Troubles). Higher yields means that Greece will have to pay higher premiums to its bondholders on any new debt it issues during its struggle to get its finances under control.

Usually a sovereign nation only has to pay a small premium (5-10 basis points) when it issues bonds similar to its existing bonds with commensurate maturity dates. But because of Greece’s financial woes, investors are speculating that the premium will be more like 20 basis points, or double the usual cost. The Prime Minister of Greece would like to avoid this premium, requesting that investors allow it to issue new debt on the same terms as other European countries.

This high bond pricing could cause a crowding out effect for corporate bonds because similarly rated corporate bonds are trading at rates lower than the same rated sovereign bonds. Ratings agencies could increase corporate debt spreads to match sovereign spreads, increasing the cost of borrowing for companies. It could also cause problems for other European countries whose sovereign debt premiums could rise as investors reconsider euro-zone pricing and the potential of an EU bailout.

Recent debt offerings in Spain, Portugal, and Ireland—other European countries struggling with weak finances—might offer some hope to Christodoulou. On Wednesday Spain raised €5 billion of debt at just over 1% of the pricing for German bunds, the industry benchmark. Cynical investors wonder if Greece’s high deficit and sovereign debt pricing problems are just the beginning of a much bigger problem.

Discussion Questions
1. Who would bail out the EU if the monetary block fell into a monetary crisis?
2. Might an all-European debt premium readjustment cause a contagion effect and trigger a true sovereign crisis?

While Somali warlords fight, people go hungry

Sources

AllAfrica.Com Somalia: Al-Shabaab Declares Jihad On Kenya

AllAfrica.Com Somalia: Humanitarian Crisis Persists with Malnutrition Rampant in Young, UN Warns

AllAfrica.Com Somalia: Al-Shabaab had Burnt Bakara Market, Minister Says

AllAfrica.Com Kenya: Neighbors' Polls Raise Fears of Influx of Refugees

Wikipedia Somalia

AFP Somali Pirates: the unlikely heroes of Kenya's Fishermen

The depressing reality of modern media is that bold statements and guns grab headlines and attention, while more human stories are cast aside. For at least the last fifteen years, Somalia has been a steady stream of violence-laden stories as one rival warlord takes on another, or as pseudo-commercial pirates take to the high seas. However, these stories mask a more important reality on the ground. The vast majorities of those who have ridden out the civil war and lawlessness have been subsisting on almost nothing and every day are closer to losing what little they have.

The story of Somalia is a sad one, and an account of each twist and turn in the last fifty years fills books. It is easy to forget that against the backdrop of startling poverty today, the country was once a center of commerce—the Dubai of the ancient world. During the 1960’s, former European colonies gained independence and joined together to form what is now known as Somalia. A series of military-led governments persisted until overthrown by armed revolutionaries in December of 1990. As a result of fighting, famine broke out and 300,000 died in 1992, leading to a United Nations intervention and a humanitarian operation led by the United States. While initially successful, the UN mission never secured a lasting peace and was ended in 1995. The next fifteen years have seen constant fighting between warlords, and a glimmer of hope has only recently been seen. The most recent fighting has been between the Islamic Court Union (ICU) and the Transitional Government. This has subsided somewhat, but each side blames the other for the fighting and conflict still exists. Most recently, the Islamic Al-Shabaab rebels that grew out of the ICU have declared a jihad on Kenya for reportedly training troops to prop up the Transitional Government.

The number of those suffering from this protracted conflict is shocking. The United Nations estimates that 3.2 million people need emergency support or livelihood assistance. This means that 42% of the population requires help. The UN also estimates that 1 in 6 children are suffering “acute malnourishment.” Of these 240,000 children, it estimates 63,000 are “severely malnourished .” Children who are severely malnourished are nine times more likely to die than a well-nourished child. The only encouraging news is that a bumper crop in the south has increased food availability and has already slightly reduced the amount needing aid.

A sign of the continuous poverty is the rise of piracy off the African coast. Foreign navies have been called in to patrol the waters near Somalia. One unnamed pirate says that he used to make less than 200$ per month, but that his life of crime has solved his poverty woes. But, not everyone in the international community is upset with this criminal activity. Kenyan fishermen claim the pirates have kept foreign fishing vessels away and increased their yields. Poverty never justifies even a petty crime, let alone one with international ramifications, but it must be seen as a root cause of traditional fishermen turning to a more lucrative trade.

Neighboring states have become unintentional havens for refugees fleeing the decades-long conflict in Somalia. It is estimated that currently 5,000 are entering into Kenya daily. The UN estimates that 400,000 people have taken shelter there. While this number might be absorbed quickly at first, the sustained strain has taken its toll. Kenya’s new concern is that growing instability in several of its neighboring countries could push its resources to the brink.

Day-to-day, headline grabbing events often overshadow the history of how Somalia became the almost lawless state that it is today. These events also mask the still tremendous amount of hunger and poverty within Somalia. This poverty is not only a problem for citizens in the country. Its ripple effect impacts have led to more piracy and increased refugees crossing the border. It is as clear now as it has been for decades that peace must come to Somalia before the humanitarian situation will improve.

Discussion:

1) How can the international community work with Somalia to bring stability, if not peace, to their country?

2) Does the wider international community have any responsibility to help countries that accept refugees?

2010 Winter Olympics Good for Vancouver’s Economy

Sources:
Vancouver Sun: 2010 Vancouver Olympic Games have injected $1 billion into economy: Report
Ctvolympics.com: Olympics will be good for Vancouver economy
Locate in Kent: Economic Impacts of Olympic Games
CNNMoney: Chicago Loses Olympic Bid to Rio.

The 2010 Winter Olympics in Vancouver began opening ceremonies on Friday, February 12, 2010. Since winning the official bid for the 2010 Olympics in 2003, the question has been how to make the Olympics profitable for Canada, not only right away but for the long term. The accounting firm Price Waterhouse Coopers conducted an independent investigation to determine the effect of the games on Canada and specifically British Columbia’s economies from the time of the bid through 2008. The firm’s report indicated that the Vancouver Olympics has already generated $1 billion for British Columbia. The firm calculated this number by measuring tourism, job creation and the development of businesses. The firm estimated that over six years there were approximately 21,000 new jobs created and Olympic preparation has generated between $684 and $884 million Gross Domestic Product (GDP) in British Columbia as well as an additional $170 in other Canadian provinces.

The numbers create the impression that Canada is much better off than if the Olympics had not come to Canada, but some analysts say that they can be deceiving. For instance, the report did not compare the amount gained by the amount that British Columbia and Canada in general have spent on the Games. The estimated cost of construction and other Game-related costs total around $1.6 billion. A partner from the Price Waterhouse Coopers firm stated that since their report was not intended to draw conclusions but rather to study the effects of the Games on British Columbia’s economy, he was not prepared to pass judgment on the positive or negative nature of the Olympic Games. Regardless of the hesitance of the firm to draw conclusions about the Games, another consulting firm had estimated on the outset that the Games would ultimately net between $2 and $4 million GDP, which puts Canada in the green.

Some say that the Games came at the perfect time for Canada, acting as a stimulus and injecting money into the economy after the global financial crisis. Others point to the fact that the actual tourism benefits have been extremely underwhelming thus far. Original estimates of tourism revenue was calculated at between $30 and $500 million, but actual tourism was reported at around $5 million according to Price Waterhouse Coopers. Many are confident that a final report of the Games will conclude that tourism was on point, the idea being that coverage of the Games will promote the Vancouver and larger British Columbian areas for years to come.

The games continue for two weeks, and final calculations of the Games’ economic impact will not be available for years to come.

Discussion Questions:

1) Do you think the poor attendance at the Vancouver Olympic Games can be attributed to the lack of disposable income due to the recent global financial crisis?

2) Do you think it is possible that Canada will eventually see acceptable profits from tourism because of Olympic coverage or are those profits lost on the financial crisis?

3) Recently, Chicago lost a bid on the 2016 Olympic Games. The bidding process alone cost Chicago and investors $100 million. If Chicago had won the bid, given the current state of the U.S. economy, do you think the resulting Games would have helped revive the city?

Sovereign Insolvency - Global Financial Crisis, Round II?

WSJ: The Greek Tragedy that Changed Europe
Financial Times: EU Stops Short of Immediate Aid for Greece
The Economist: The Spectre that Haunts Europe

The financial woes of Greece reported a few weeks ago in Greece’s Financial Troubles were only the beginning of a much bigger problem for the euro. Despite the vehement opposition to a Greece bailout a few weeks ago, European governments are now reconsidering as the European currency continues to fall. Finance ministers from EU nations met last week to discuss a possible Greece bailout that isn't exclusively altruistic. In addition to helping prevent Greece from defaulting on its debts, EU members are looking for a way to reassure the rest of the world that investment in other euro-zone countries remains sound. The meeting fell short of complete and immediate aid to Greece, with the 27 members of the EU pledging to take a coordinated and determined action “if needed to safeguard [monetary and economic] stability.”

While this economic crisis has caused some to call for coordinated EU action to prevent further currency deterioration and a possible European divide, German Chancellor Angela Merkel is insistent that if Germany or any other EU member is going to bail out Greece, Greece must make additional efforts to stabilize its monetary situation by cutting more spending and increasing its value-added tax, among other things. Others echo Merkel’s concerns, calling for Greece austerity before coming to the rescue.

Others are more leery of a European bailout, noting that this kind of a crisis should have been anticipated when EU members agreed to a common currency because of the complications in maintaining a separate governments while sharing a common currency. (Britain held on to its currency, the pound, for this very reason). Because of the interrelatedness of the euro-based economies, uncontrolled spending by one country in the currency union can greatly affect other union members. This was the case in 2003 when France increased spending to curtail an economic recession, an act that prompted outcries from other euro members like Portugal and Italy that had cut budgets to qualify for euro membership. Some members have even called for Greece’s ejection from euro membership for lying and tricking the EU through false financial reporting, but euro treaties do not provide for this kind of penalty.

The EU Stability and Growth Pact, a pact signed by all EU members that is notoriously inflexible yet sometimes unenforceable against larger EU members, explicitly prohibits any EU member bailout. Despite the fact that the IMF has experience in pulling troubled nations back from the brink of collapse, Greece and other EU members are resistant to an IMF bailout for political reasons, including the stigma that comes with it, the fact that many view the IMF as an “American-influenced institution,” and the international burden-shifting that would result.


Discussion Question:
1. Will stricter economic and monetary policies cause other European counties to adopt the euro (to become a “United States of Europe”), or will they prompt non-EU countries to continue to hold onto their monetary independence like Britain?

In Singapore, Being Poor Is Your Own Fault

Sources:
Economist.com: The Stingy Nanny
WSJ.com: Singapore's Expat Surge Fuels Economic Fears

In Singapore, citizens, not the government, are responsible for saving for the future. They rely on their families rather than the handouts from the government. The government provides some benefits, but does so rarely -- currently, only 3,000 qualify for public assistance. When people lose their jobs, they do not automatically receive benefits. Instead, applicants need to do community work and learn new skills in order to receive benefits. Being skeptical of the European-style welfare systems, the Singaporean government wants the benefit schemes to be a "springboard" to self-reliance. According to the government, getting people back to work is more important than providing temporary reliefs.

Such a thin safety net is based on the widely-held belief that public welfare would undermine work ethics, create disincentives to work, and burden taxpayers. A recent recession due to the global financial crisis has not changed such belief. Last September, the unemployment rate rose up to 4.1% (high level in Singapore). In response, the government assisted companies in retaining employees by providing grants rather than providing the dole for the unemployed. As for laid-off workers, they could participate in a government training program.

However, as the Singaporean society is rapidly aging and the number of migrant workers increases, Singapore may need to reconsider its policy and build a more robust safety net, according to the Economic Society of Singapore (ESS). The Ministry of Community Development, Youth and Sports estimates that 20% of Singaporeans will be over 65 by 2030. Currently, 35% of the workforce (3 million) is migrant workers, and native Singaporeans resentment is growing as they compete with foreigners for scarce jobs. In order to promote social stability and gain public support for its "open-door migration" policies, the government needs to introduce measures, starting with unemployment insurance, argued the ESS in a proposal to the government committee. The ESS also emphasized that "while self-reliance is a good principle in general, it may neither be efficient nor just if taken to extremes."

Discussion Questions:
1. Singapore is the third richest country in the world in terms of GDP per head at purchasing-power parity as of 2008, according to the World Bank. In Singapore, severe poverty is hard to spot and public housing is in good shape. The unemployment rate remains relatively low (3% as of December 2009). Do you agree that Singapore needs to reconsider its policy and build a robust safety net? If so, how can the government properly design the public welfare measures without undermining work ethics and creating disincentives to work?
2. How would you compare the Singaporean approach with the European-style welfare systems?
3. Lee Kuan Yew, Singapore's founding father, said in an interview with National Geographic in July 2009, that if native Singaporeans lag behind "hungry" foreigners because "the spurs are not stuck on their hinds," that is not state's problem to solve. Do you agree?

Costa Rica and China reach free trade agreement

Sources: Tico Times – C.R., Chinese Close to Cementing Accord / Bloomberg – Costa Rica, China Reach Preliminary Free-Trade Accord / Yahoo Finance – Costa Rica, China seal trade deal / Bloomberg – Costa Rica Exports to Drive Recovery, Gutierrez Says / Financial Times – Costa Rica elects first woman president

Costa Rica and China signed a free trade agreement on February 10, 2010 making it the first Central American country to reach a free trade agreement with China. The agreement will immediately open up trade by eliminating tariffs on 58% of products imported from China and 99.6% of products exported to China. Over the next ten years, the agreement will eliminate tariffs on approximately 90% of the goods imported from China. Costa Rican Foreign Trade Minister Marco Vinicio Ruiz stated that this agreement creates an “enormous opportunity” for the country to boost exports with its second largest trading partner. Mr. Ruiz added that the agreement would strengthen Costa Rica’s presence in Asia.

Negotiations for a free trade agreement with Costa Rica started in June 2007 when Costa Rica declared that it no longer recognized Taiwan and asserted its recognition of mainland China. Since 2007, China and Costa Rica strengthened their relationship through several rounds of negotiations and projects. China’s imprint in Costa Rica is already evident, as China is building an $80 million soccer stadium in Costa Rica as a gift. China gave Costa Rica $20 million of aid in 2007 and the China National Petroleum Corporation has agreed to assist Costa Rica in an expansion of Costa Rica’s National Oil Refinery that could potentially triple the refinery’s output by 2015. China also purchased $300 million in Costa Rican bonds during 2008. This year, the Costa Rican city, San Jose, will inaugurate an area of the city as “Chinatown.” In October 2009, the mayor of Beijing stood with the mayor of San Jose and laid the first brick in “Chinatown.” The area will have a Chinese architectural makeover and will include several symbols of the Chinese culture.

Costa Rican leaders hope that exports will drive economic growth in the coming years. Last year, Costa Rica’s economy contracted at a rate of 1.3%. This year, Costa Rican Central Bank President, Francisco de Paula Gutierrez, predicts that the Costa Rican economy will expand by 3.2%. Mr. Gutierrez stated that a decline in foreign trade drove most of the economic contraction last year. During 2009, exports to China rose 13% to $768 million whereas exports to the United States fell by 13% to $3.1 billion. Costa Rica has already experienced higher demand in dynamic exports in the past few months and Mr. Gutierrez expects this trend to continue to strengthen in 2010. The free-trade agreement with China should increase export demand for Costa Rican products. Experts predict that Costa Rican agricultural products will benefit the most from the free trade agreement in such products as fruit juice, decorative plants, leather, pork, beef, and coffee. Experts also expect that technology exports to China will surge.

Not everyone in Costa Rica supports the free trade agreement. Several Costa Rican leaders in the industrial and agricultural sectors openly oppose the agreement. Juan Maria Gonzales, President of the Chamber of Industries stated in a press release that the scope of agreement was too broad and that China has a reputation as an “untrustworthy” commercial society. Mr. Gonzales desired stronger protection for national industries and fears that the agreement will negatively affect investment in the industrial sector. Mario Montero, general manager of the Food Industry Chamber, expressed reservations about Chinese competition in the local market. Mr. Montero also thought that the agreement should have required China to increase its labor and sanitation standards to Costa Rican levels before opening up the markets. Foreign Trade Minister, Mr. Ruiz, acknowledged that free trade agreements do not please everyone; however, he insisted that in the end the free agreement with China “will provide extraordinary benefits to Costa Rica.”

Discussion Questions:

Will Costa Rica’s free trade agreement with China cause more Central American countries to liberalize trade relations with China?

What is the biggest risk that Costa Rica faces domestically in signing the free trade accord?

Nigeria on the precipice while President Yar’Adua in Saudi Arabia

Sources:

BBC: Ill Nigeria President Yar'Adua must quit - media chiefs

BBC: African Viewpoint: The Nation State

BBC: Sick Nigerian President Yar'Adua 'to hand over power'

New York Times: Goodluck Jonathan addresses Nigeria

AllAfrica.Com: Shell shuts flow stations after pipeline attack

AllAfrica.Com: Yar'Adua - Militants threaten to strick if...

AllAfrica.Com: Yar'Adua - We either resolve or dissolve, ministers threaten

Nigerian politics are at a breaking point that threatens to derail reforms, hamper development, and could lead to the breakup of the country. Since late November 2009, President Umaru Yar'Adua led the country from Saudi Arabia, but sufficient pressure has mounted to force him to transfer power to Vice President Goodluck Jonathan. On Tuesday, February 9^th, the National Assembly appointed him as acting president. However, until a permanent solution is agree to by all parties, Nigeria remains on hold until a smooth transition of power can be achieved.

The timeline of President Yar’Adua’s absence is well documented, unlike other political scandals. On November 23^rd he was transported to Saudi Arabia. Three days later he was diagnosed with an inflammation of the heart lining known as pericarditis. A month after leaving the country the first court case was filed that urged him to step down. On Januarys 12^th he gave his first interview from Saudi Arabia, with support coming from his cabinet on January 27^th and the court declaring that there was no need for a formal transfer of power. One reason given for the President’s lack of communication is that he is presently in the hospital suite reserved for the King of Saudi Arabia and the heightened security has made it difficult for information to flow to and from him freely.

Pressure to find an agreed on solution is pouring in from all sides. Leaders of the media elite have called on Yar’Adua to step down, as have numerous young professional ministers. They have said that the upcoming deadline will "resolve or dissolve” the country. Not all are willing to accept Vice-President Jonathan. Ministers from the north have rejected these calls and claim no power exchange should occur. At the root of the problem is the division of the country between the Muslim north and the Christian south. Peace is kept by alternating power between the regions during each election. President Yar’Adua will hold office until 2011, and those who benefit from him are reluctant to see power be given to Vice President Jonathan, a southerner.

Many experts have been predicting that the precarious balance of power in Nigeria would lead to the breakup of the country. Already, militants have used Presidents Yar’Adua’s absence to increase attacks, wreaking havoc with oil pipelines and leading to greater instability. They say that the political impasse must be resolved so that the agreed on peace process can move forward. The United States predicted the country might crumble 15 years ago, and has not improved its outlook much since that time. Some commentators have speculated that what holds the people of the country together is not national pride, but a sluggish apathy and a grudging acceptance of whatever the present circumstances are. This feeling is born out by the self-given moniker “the longest suffering people on earth.”

Discussion:

1) Should all countries constitutions contain provisions for a smooth transition of power when the leader is ill, similar to the 25^th Amendment in the United States?

2) What responsibilities should a country’s leader have when they leave the country, regardless of the reason?

Canada’s Rebound from Financial Crisis Too Good Too Soon?

Sources: Canada.com: Canada's housing bubble could soon burst: Merrill Lynch; WSJ.com: Housing Rebound in Canada Spurs Talk of a New Bubble.

Analysts have been watching Canada’s housing market closely for the last few months, alarmed by its similarities to the failed U.S. housing market of late 2008. February 4, 2010 a housing-price index that measured six of Canada’s biggest cities showed a gain for the seventh month in a row. Numbers have reportedly reached pre-recession highs.

Why is this dangerous?
Only two years ago, the housing market in the United States was booming at all time highs. This unusually lucrative time in the U.S. housing market is now referred to as the housing bubble. The housing bubble occurred when market prices for houses in various U.S. markets grew exponentially in a short amount of time. This dramatic value increase created a false sense of security and interest rates plummeted, allowing people from all income levels to believe they could finance any type of home. Like every bubble, however, this euphoria did not last. The housing bubble burst in September of 2008, igniting a global financial meltdown.

How has this happened?
Canada’s economy is based in substantial part on exports to the U.S. When the U.S. economy was devastated by the financial crisis, Canada’s economy was dramatically affected. As a stimulus, the government has focused on keeping interest rates extremely low. This decision has fostered low mortgage rates in addition to various financial and tax incentives. The product of the stimulus has been a 70 percent increase in home sales.

Lurking dangers for Canada in coming years
While home sales have risen, so has the unemployment rate. Worse, the average income for Canadian residents has fallen one percent over the same time period. The synchronicity of these statistics is problematic. When the market fails to mimic reality for a period of time, a false sense of security can set in. While Canadian banks, in general, engage in conservative lending practices, adjustable mortgage rates in the country are set to increase steadily. If Canadian residents are buying now with low teaser rates while their income is decreasing, a few years could be all it takes for a housing crash to mimic that of the U.S. in 2008.

While Canada’s housing boom has no immediate dangers, the danger has been identified. The benefit of hindsight is the ability to monitor like situations. Canada is surely taking steps to make sure history does not repeat itself.


Discussion Questions:
1) What can be done to prevent another housing bubble from bursting? Is it as simple as raising interest rates?

2) The winter Olympics are coming to Vancouver later this month. What effect, if any will the games have on Canada’s economy? If the effects are positive, do you think it would be wise for Canada to discontinue heavy regulation of the housing market?