Sources
Financial Times: IMF warns on ending fiscal stimulus
IMF: Sustaining a global recovery
New York Times: IMF revises up 2010 world GDP forecast
IMF economists are confident that a global recovery has begun. Sustaining that recovery however, will require careful monetary policy and spending choices in countries across the world. In a recent IMF report, chief economist Olivier Blanchard described the unique problems facing economic strategists in the aftermath of severe crisis.
Blanchard argues that just as the United States was the source of the crisis, a healed U.S. economy will be the key to global recovery. He fears that without an increase in external demand to the United States, stimulus measures could carry on for too long and increase the United States’ already significant debt burden. If fiscal deficits are maintained for too long, the stability of the dollar could be called into question, resulting in capital flows out of the U.S. and a potential depreciation of the dollar. Dollar depreciation may not be independently problematic, but if it occurs suddenly, or in a disorderly fashion, it could undermine the recovery by creating uncertainty and market instability. Alternately, Blanchard warns that negative consequences could result from cutting off stimulus funds too soon. The stimulus funds provide the liquidity that makes recovery possible. Allowing the funds to dry up too soon could compromise resurgent growth.
Emerging economies, after feeling the sting of reduced capital flows during the crisis, could be crucial to the U.S. recovery. If private U.S. domestic demand remains weak, the U.S. must hope for an boost in net exports, in order to keep pace with production. Emerging economies that still possess account surpluses, like China, could greatly improve the balance by boosting import demand. Sustained recovery in both developed and emerging economies will also require a rebalancing from public to private spending. Blanchard calls for international cooperation in efforts to sustain the current, “nascent” recovery.
Discussion
1. There are significant downsides to both prolonging stimulus measures too long and to cutting off stimulus funds too early. Is one alternative worse than the other? Should developed economies err on the side of providing too much stimulus funding or too little?
2. Which other emerging economies have weathered the crisis and surfaced with account surpluses? Are they, like China, in position to aid the U.S. recovery through increased import demand?
Sunday, September 13, 2009
Saturday, September 12, 2009
IMF Exceeds G-20 Expectations
Sources:
http://www.g20.org/Documents/FM__CBG_Comm_-_Final.pdf
http://www.imf.org/external/pubs/ft/survey/so/2009/POL082809A.htm
http://www.imf.org/external/pubs/ft/survey/so/2009/POL072909A.htm
The G-20 Finance Ministers and Central Bank Governors met this weekend in London prior to the Pittsburgh Summit. The purpose of the preliminary meeting was to assess their progress in recovery measures decided on at earlier summits and to establish further actions to sustain economic growth. How are they doing? Dominique Strauss-Kahn, head of the International Marketing Fund (IMF), said that that the IMF has not only progressed but also surpassed the expectations of the G-20 saying, “The IMF delivered everything, and even more.”
In April, the G-20 leaders agreed to triple of the IMF resources to $750 billion in an effort to prevent further fallout from the global crisis. The IMF has seen an additional $500 billion according to Strauss-Kahn. The G-20 also required $250 billion to be allocated to the Special Drawing Right (SDR), the IMF’s version of currency. That allocation was made on August 28 with an additional $33 billion expected to be allocated on September 9. The G-20 also asked for $6 billion for low-income countries over the next 2-3 years. Strauss-Kahn reports that the IMF will be able to lend $8 billion during that time frame and $17 billion through 2015 at zero interest at least until 2011. Further considerations of the G-20 concerned the governance of the IMF.
The G-20 recognizes that the IMF should remain a quota-based organization, meaning that a country’s representation should be based on that country’s weight in the global economy; however, as part of the reforms the voice of the emerging and developing economies, including the poorest, should be increased to reflect changes in the world economy. The G-20 is committed to increasing accountability, strengthening the involvement of Fund Governors in strategic oversight, and agreed to move to an open, transparent, and merit-based selection of IFI management.
Discussion Questions:
1. Should the poorest emerging and developing nations have a larger voice in the actions of the IMF?
2. If so, should these economies have other responsibilities to make their voices more viable in the governance of the IMF?
http://www.g20.org/Documents/FM__CBG_Comm_-_Final.pdf
http://www.imf.org/external/pubs/ft/survey/so/2009/POL082809A.htm
http://www.imf.org/external/pubs/ft/survey/so/2009/POL072909A.htm
The G-20 Finance Ministers and Central Bank Governors met this weekend in London prior to the Pittsburgh Summit. The purpose of the preliminary meeting was to assess their progress in recovery measures decided on at earlier summits and to establish further actions to sustain economic growth. How are they doing? Dominique Strauss-Kahn, head of the International Marketing Fund (IMF), said that that the IMF has not only progressed but also surpassed the expectations of the G-20 saying, “The IMF delivered everything, and even more.”
In April, the G-20 leaders agreed to triple of the IMF resources to $750 billion in an effort to prevent further fallout from the global crisis. The IMF has seen an additional $500 billion according to Strauss-Kahn. The G-20 also required $250 billion to be allocated to the Special Drawing Right (SDR), the IMF’s version of currency. That allocation was made on August 28 with an additional $33 billion expected to be allocated on September 9. The G-20 also asked for $6 billion for low-income countries over the next 2-3 years. Strauss-Kahn reports that the IMF will be able to lend $8 billion during that time frame and $17 billion through 2015 at zero interest at least until 2011. Further considerations of the G-20 concerned the governance of the IMF.
The G-20 recognizes that the IMF should remain a quota-based organization, meaning that a country’s representation should be based on that country’s weight in the global economy; however, as part of the reforms the voice of the emerging and developing economies, including the poorest, should be increased to reflect changes in the world economy. The G-20 is committed to increasing accountability, strengthening the involvement of Fund Governors in strategic oversight, and agreed to move to an open, transparent, and merit-based selection of IFI management.
Discussion Questions:
1. Should the poorest emerging and developing nations have a larger voice in the actions of the IMF?
2. If so, should these economies have other responsibilities to make their voices more viable in the governance of the IMF?
Columbia and Peru set to emerge from crisis, questions linger about Venezuela
Sources:
“On the brink” The Banker
“Fears over Chavez threaten oil auction” Financial Times
Columbia and Peru were not immune from the financial crisis over the past twelve months as Goldman Sachs is forecasting economic growth for Peru at 2 percent this year with Columbia contracting 0.1 percent. From 2003 until last year, Columbia and Peru experienced economic growth of 5.4 percent and 7 percent a year, respectively. Both countries are set to emerge from the crisis with favorable policies for economic growth intact relative to other Latin American countries.
The pre-crisis international commodities boom drove Columbia and Peru’s economic growth. Columbia’s main commodity exports include oil, coal, and gold, whereas Peru’s commodity exports consist mostly of copper, gold, and zinc. However, the commodities boom is only part of the economic growth story of each country. Both countries have pursued stable macroeconomic fiscal policies over the past five years. The president of Columbia’s independent Central Bank, Dario Uribe, stated that the Central Bank’s focus is on macroeconomic stability by “maintaining low and stable inflation and a sustainable exchange rate regime.” Both S&P and Fitch upgraded Peru’s debt to investment grade in 2008, evidencing Peru’s macroeconomic stability. Furthermore, the political environment welcomed foreign direct investment, free trade, and the orderly privatization of industries. The crisis did not disrupt either country’s commitment to stable macroeconomic conditions and both countries look poised to emerge post-crisis as economic leaders in Latin America.
When contrasted with Peruvian and Columbian policies, Venezuelan policies appear to be disrupting future potential economic growth. Like Columbia and Peru, Venezuela’s growth from 2003 to 2008 depended largely on the growing international demand for commodities. The political environment and uncertainty surrounding private investment in Venezuela also increased over the past five years. Venezuela is currently in the process of auctioning off productions rights for an oil field that the country expects to produce upwards of 1.2 million barrels a day. Ordinarily, one would expect the auction of production rights of an oil field this large to draw a large group of bidders. However, foreign investors fear the political environment as well as the unpredictability of the Venezuelan government. Over the past several years, the Venezuelan government, led by Chavez, has taken over numerous private companies including more than 70 oil service companies this year alone. The uncertainty in Venezuela has resulted in reduced interest in the project and has called into question whether the auction will attract enough bidders for Venezuela to move forward with the auction.
Discussion Questions:
1) Will Peru and Columbia’s emergence increase or decrease geopolitical tensions in the region?
2) If Peru and Columbia’s economies experience more robust economic growth than Venezuela, will Venezuela be pushed politically to adopt a less hostile attitude to foreign investment?
“On the brink” The Banker
“Fears over Chavez threaten oil auction” Financial Times
Columbia and Peru were not immune from the financial crisis over the past twelve months as Goldman Sachs is forecasting economic growth for Peru at 2 percent this year with Columbia contracting 0.1 percent. From 2003 until last year, Columbia and Peru experienced economic growth of 5.4 percent and 7 percent a year, respectively. Both countries are set to emerge from the crisis with favorable policies for economic growth intact relative to other Latin American countries.
The pre-crisis international commodities boom drove Columbia and Peru’s economic growth. Columbia’s main commodity exports include oil, coal, and gold, whereas Peru’s commodity exports consist mostly of copper, gold, and zinc. However, the commodities boom is only part of the economic growth story of each country. Both countries have pursued stable macroeconomic fiscal policies over the past five years. The president of Columbia’s independent Central Bank, Dario Uribe, stated that the Central Bank’s focus is on macroeconomic stability by “maintaining low and stable inflation and a sustainable exchange rate regime.” Both S&P and Fitch upgraded Peru’s debt to investment grade in 2008, evidencing Peru’s macroeconomic stability. Furthermore, the political environment welcomed foreign direct investment, free trade, and the orderly privatization of industries. The crisis did not disrupt either country’s commitment to stable macroeconomic conditions and both countries look poised to emerge post-crisis as economic leaders in Latin America.
When contrasted with Peruvian and Columbian policies, Venezuelan policies appear to be disrupting future potential economic growth. Like Columbia and Peru, Venezuela’s growth from 2003 to 2008 depended largely on the growing international demand for commodities. The political environment and uncertainty surrounding private investment in Venezuela also increased over the past five years. Venezuela is currently in the process of auctioning off productions rights for an oil field that the country expects to produce upwards of 1.2 million barrels a day. Ordinarily, one would expect the auction of production rights of an oil field this large to draw a large group of bidders. However, foreign investors fear the political environment as well as the unpredictability of the Venezuelan government. Over the past several years, the Venezuelan government, led by Chavez, has taken over numerous private companies including more than 70 oil service companies this year alone. The uncertainty in Venezuela has resulted in reduced interest in the project and has called into question whether the auction will attract enough bidders for Venezuela to move forward with the auction.
Discussion Questions:
1) Will Peru and Columbia’s emergence increase or decrease geopolitical tensions in the region?
2) If Peru and Columbia’s economies experience more robust economic growth than Venezuela, will Venezuela be pushed politically to adopt a less hostile attitude to foreign investment?
Thursday, September 10, 2009
Expanding Microfinance Market in India: Another Credit Bubble?
Sources
Economist: Froth at the bottom of the pyramid
Wall Street Journal: A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum
SKS: Letter to The Wall Street Journal
Microlenders started as non-profit, social agencies to aid the poor in financing their small businesses. As investors perceive microfinance as a profitable investment opportunity, however, microfinance has attracted billions of dollars worldwide over the past few years and now microlenders compete for profits. These for-profit microfinance institutions have been accused of charging the poor high interest rates (close to 100 % a year) and lending recklessly to those who are unable to repay loans.
A recent article in the Wall Street Journal on August 13th, warned of a credit bubble in the Indian microfinance market, the most dynamic microfinance market in the world. Reporting on a "repaying revolt" by over-indebted borrowers in a silk-making city in southern India, it pointed out that Indian microlending shared some similarities with U.S. subprime mortgage lending. For example, micro loans are made without any proof of income from borrowers and loan officers receive commissions for making larger loans. In addition, borrowers use loans for purposes other than expanding their small businesses or helping themselves out of poverty, i.e., using loans to "finance shopping sprees" or to pay off previous loans from other lenders.
Vikram Akula, founder of SKS, one of India's largest microfinance institutions, said in his response to the article that it was "unbalanced and misleading," and made a "sweeping generalization" based on anecdotal information from one neighborhood. According to Mr. Akula, microfinance institutions in India still have repayment rates of over 95%, and most microfinance institutions in India require borrowers to take "financial-literacy training," and to pass a test.
Jonathan Morduch, a co-author of "Portfolios of the Poor," agrees on the possibility of a bubble because lenders, with only limited information about borrowers, sometimes over-lend. He also emphasizes the urgent need for credit bureaus in the developing countries. However, these may be just localized bubbles, and there is currently no evidence of a global bubble. Moreover, given the fact that the microfinance industry has not yet served 90% of one billion poor people worldwide who want access to financial services, occasional local bubbles and competition would be good for the industry since they can bring more efficiencies, better pricing, and diverse products to customers, according to Alvaro Rodriguez Arregul, a former chairman of ACCION International.
Discussion Questions:
1. Do you agree with the WSJ's comparison between microlending and subprime mortgage lending and its warning of a credit bubble in the Indian microfinance market?
2. What kinds of regulatory reform would support microfinance institutions to minimize potential local credit problems and better serve the poor?
3. Microlenders first started as non-profit organizations. Do you think competition in the microfinance industry among for-profit microlenders would benefit the poor as Mr. Rodriguez said?
Economist: Froth at the bottom of the pyramid
Wall Street Journal: A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum
SKS: Letter to The Wall Street Journal
Microlenders started as non-profit, social agencies to aid the poor in financing their small businesses. As investors perceive microfinance as a profitable investment opportunity, however, microfinance has attracted billions of dollars worldwide over the past few years and now microlenders compete for profits. These for-profit microfinance institutions have been accused of charging the poor high interest rates (close to 100 % a year) and lending recklessly to those who are unable to repay loans.
A recent article in the Wall Street Journal on August 13th, warned of a credit bubble in the Indian microfinance market, the most dynamic microfinance market in the world. Reporting on a "repaying revolt" by over-indebted borrowers in a silk-making city in southern India, it pointed out that Indian microlending shared some similarities with U.S. subprime mortgage lending. For example, micro loans are made without any proof of income from borrowers and loan officers receive commissions for making larger loans. In addition, borrowers use loans for purposes other than expanding their small businesses or helping themselves out of poverty, i.e., using loans to "finance shopping sprees" or to pay off previous loans from other lenders.
Vikram Akula, founder of SKS, one of India's largest microfinance institutions, said in his response to the article that it was "unbalanced and misleading," and made a "sweeping generalization" based on anecdotal information from one neighborhood. According to Mr. Akula, microfinance institutions in India still have repayment rates of over 95%, and most microfinance institutions in India require borrowers to take "financial-literacy training," and to pass a test.
Jonathan Morduch, a co-author of "Portfolios of the Poor," agrees on the possibility of a bubble because lenders, with only limited information about borrowers, sometimes over-lend. He also emphasizes the urgent need for credit bureaus in the developing countries. However, these may be just localized bubbles, and there is currently no evidence of a global bubble. Moreover, given the fact that the microfinance industry has not yet served 90% of one billion poor people worldwide who want access to financial services, occasional local bubbles and competition would be good for the industry since they can bring more efficiencies, better pricing, and diverse products to customers, according to Alvaro Rodriguez Arregul, a former chairman of ACCION International.
Discussion Questions:
1. Do you agree with the WSJ's comparison between microlending and subprime mortgage lending and its warning of a credit bubble in the Indian microfinance market?
2. What kinds of regulatory reform would support microfinance institutions to minimize potential local credit problems and better serve the poor?
3. Microlenders first started as non-profit organizations. Do you think competition in the microfinance industry among for-profit microlenders would benefit the poor as Mr. Rodriguez said?
Thursday, August 06, 2009
U.S.-Centric Economic Strategy Presents Obstacles for Mexico amid Recession
Sources: reuters.com: Mexico recession shows downside of close U.S. links
As Mexico struggles to recover from one of the most severe recessions in its history, the drawbacks of the country’s dependence on U.S. consumers are laid bare. This year, the Mexican economy is expected to diminish at least 6.5 percent, its greatest reduction since the Great Depression and one of the most severe in Latin America as a whole.
Mexico’s single-market development strategy, as well as its failure to pursue broad-based economic progress through investments in education and infrastructure, produced the weakness in the economy. Large Asian economies such as China, India, and Korea—the growth rates of which have significantly exceeded those encountered in Latin America—have enjoyed the benefits of an emphasis on jobs and education.
The North American Free Trade Agreement, or NAFTA, which became effective in 1994, firmly established Mexico’s one-sided economic strategy. The commercial agreement did not give rise to the sort of explosive growth fitting an emerging economic steam engine, though it produced a quantity of factory jobs in the north. While Chile and Brazil, which are less reliant on the U.S. consumer, have experienced rapid growth, such development continues to evade Mexico’s grasp. Over the last ten years, the United States’ restrained 1.8 growth rate even exceeded Mexico’s percent rate.
Due to Mexico’s dependence on exports to the U.S., its growth rate falls on the shoulders of U.S. consumers. While data released on Friday about the U.S. gross domestic product revealed that the speed of contraction has slowed greatly, it also informed on a reduction in consumer spending. The Federal Reserve, the central bank of the U.S., has also indicated that the U.S. economy will not reach its former “potential” growth rate for five or six more years.
Discussion Questions:
1) What steps can Mexico take to improve its growth rate while consumer spending remains low in the United States?
2) How can Mexico guard against future international financial earthquakes?
As Mexico struggles to recover from one of the most severe recessions in its history, the drawbacks of the country’s dependence on U.S. consumers are laid bare. This year, the Mexican economy is expected to diminish at least 6.5 percent, its greatest reduction since the Great Depression and one of the most severe in Latin America as a whole.
Mexico’s single-market development strategy, as well as its failure to pursue broad-based economic progress through investments in education and infrastructure, produced the weakness in the economy. Large Asian economies such as China, India, and Korea—the growth rates of which have significantly exceeded those encountered in Latin America—have enjoyed the benefits of an emphasis on jobs and education.
The North American Free Trade Agreement, or NAFTA, which became effective in 1994, firmly established Mexico’s one-sided economic strategy. The commercial agreement did not give rise to the sort of explosive growth fitting an emerging economic steam engine, though it produced a quantity of factory jobs in the north. While Chile and Brazil, which are less reliant on the U.S. consumer, have experienced rapid growth, such development continues to evade Mexico’s grasp. Over the last ten years, the United States’ restrained 1.8 growth rate even exceeded Mexico’s percent rate.
Due to Mexico’s dependence on exports to the U.S., its growth rate falls on the shoulders of U.S. consumers. While data released on Friday about the U.S. gross domestic product revealed that the speed of contraction has slowed greatly, it also informed on a reduction in consumer spending. The Federal Reserve, the central bank of the U.S., has also indicated that the U.S. economy will not reach its former “potential” growth rate for five or six more years.
Discussion Questions:
1) What steps can Mexico take to improve its growth rate while consumer spending remains low in the United States?
2) How can Mexico guard against future international financial earthquakes?
Monday, August 03, 2009
Reformed IMF lending policies address the needs of low-income countries
Sources
Reuters Africa: IMF to boost funds, revamps lending to poor nations
IMF: The IMF Response to the Global Crisis: Meeting the Needs of Low-Income Countries
For the world’s industrialized economies, the worst of the global financial crisis seems to be over. G8 leaders are contemplating recovery strategies, trying to rein in inflation and hoping to reduce the overall severity of the recession. In low-income countries however, the global economic downturn, along with rising food and fuel prices, threatens to erase years of economic progress.
On July 29, the IMF announced a series of new lending policies to combat the effects of the recession in low-income countries. By adopting the new measures, the Fund has “transformed its relations with low-income countries,” and responded directly to an emerging international consensus on how best to respond to global crisis.
The IMF plans to increase concessional lending to low-income countries to $17 billion by 2014. The increased funding will be accompanied by more generous borrowing limits and by new, flexible concessional financing facilities. For example, the new Standby Credit Facility will address short term needs by allowing countries to tap the IMF specifically when they need funding, rather than in the course of an established IMF program. The Fund also plans to place a strong emphasis on poverty alleviation and growth, implementing programs to protect social and other priority spending. The Fund also plans to freeze interest rate payments on outstanding credit for 60 low-income countries over the next two and a half years, until 2011.
Already, in the first six months of 2009, the IMF has lent or committed about $3 billion, more than in the past three years combined. Their new commitment will increase overall lending to four times historical levels and represents an unprecedented transformation of the IMF’s lending policies.
Discussion
1. The IMF is overhauling its lending policies to meet an immense need. However some of those policies were established as safeguards against problematic lending to already debt-burdened countries. What are the potential costs of these new, flexible lending practices?
2. How can the Fund effectively monitor poverty-alleviation spending? Will other member countries be more willing to subsidize low-cost lending if the IMF is able to scrutinize loan spending?
Reuters Africa: IMF to boost funds, revamps lending to poor nations
IMF: The IMF Response to the Global Crisis: Meeting the Needs of Low-Income Countries
For the world’s industrialized economies, the worst of the global financial crisis seems to be over. G8 leaders are contemplating recovery strategies, trying to rein in inflation and hoping to reduce the overall severity of the recession. In low-income countries however, the global economic downturn, along with rising food and fuel prices, threatens to erase years of economic progress.
On July 29, the IMF announced a series of new lending policies to combat the effects of the recession in low-income countries. By adopting the new measures, the Fund has “transformed its relations with low-income countries,” and responded directly to an emerging international consensus on how best to respond to global crisis.
The IMF plans to increase concessional lending to low-income countries to $17 billion by 2014. The increased funding will be accompanied by more generous borrowing limits and by new, flexible concessional financing facilities. For example, the new Standby Credit Facility will address short term needs by allowing countries to tap the IMF specifically when they need funding, rather than in the course of an established IMF program. The Fund also plans to place a strong emphasis on poverty alleviation and growth, implementing programs to protect social and other priority spending. The Fund also plans to freeze interest rate payments on outstanding credit for 60 low-income countries over the next two and a half years, until 2011.
Already, in the first six months of 2009, the IMF has lent or committed about $3 billion, more than in the past three years combined. Their new commitment will increase overall lending to four times historical levels and represents an unprecedented transformation of the IMF’s lending policies.
Discussion
1. The IMF is overhauling its lending policies to meet an immense need. However some of those policies were established as safeguards against problematic lending to already debt-burdened countries. What are the potential costs of these new, flexible lending practices?
2. How can the Fund effectively monitor poverty-alleviation spending? Will other member countries be more willing to subsidize low-cost lending if the IMF is able to scrutinize loan spending?
Wednesday, July 22, 2009
IMF responds to global crisis with SDR allocation plan
Sources
International Monetary Fund: IMF Executive Board Backs US $250 Billion SDR Allocation to Boost Global Liquidity
Reuters: IMF backs $250 bln plan to bolster members’ reserves
Unlikely SDR allocation will affect inflation
Financial Times: How the Fund can help save the world economy
On August 7, the IMF will vote on a plan to allocate $250 billion worth of special drawing rights (SDR) to bolster reserves in member countries. The allocation would improve liquidity in the IMF’s 186 member countries, and provide $100 billion for emerging economies. In order to pass, the plan requires approval from 85 percent of member countries, which it is widely expected to receive.
World financial leaders have debated such an allocation since the Group of 20 summit in April of this year. A successful allocation of this size could increase confidence in cooperative, international solutions to global recession. IMF Managing Director Dominique Strauss-Kahn hopes the allocation will highlight an expanded role for the IMF as it provides “significant support to its members in these difficult times.”
If the allocation garners the required support on August 7, member countries could receive their allocations, disbursed in proportion to each member’s IMF quota, as early as August 28. Countries are free to lend or exchange their SDRs for hard currency. Many developed countries, which have the largest quotas, are expected to loan or donate their SDRs to their poorer, liquidity-strained neighbors.
Some financial analysts are wary of the proposed allocation, citing concerns about increased inflationary pressure. Isabelle Mateos y Lago, an advisor in the IMF Policy and Review Department believes inflationary problems are unlikely, given the small scale of the allocation relative to the global economy. The proposed $250 billion represents only one-third of a percentage point of global gross domestic product. The IMF has emphasized however, that the allocation should not weaken member countries’ pursuit of prudent macroeconomic policies or postpone necessary policy adjustments.
Discussion
1. The SDRs will provide funds to emerging and poor countries at current, low interest rates. If interest rates should later rise, the possible long-term cost to poor countries would be significant. How should this potential interest liability affect the way developing countries chose to use their SDRs? Should they hold them or spend them?
2. A substantial amount of the allocation will go to developed countries that may not need the additional funds. Are IMF officials right in assuming that countries will donate, trade or loan the SDRs? Should the IMF consider allocating SDRs out of proportion to the IMF quotas?
International Monetary Fund: IMF Executive Board Backs US $250 Billion SDR Allocation to Boost Global Liquidity
Reuters: IMF backs $250 bln plan to bolster members’ reserves
Unlikely SDR allocation will affect inflation
Financial Times: How the Fund can help save the world economy
On August 7, the IMF will vote on a plan to allocate $250 billion worth of special drawing rights (SDR) to bolster reserves in member countries. The allocation would improve liquidity in the IMF’s 186 member countries, and provide $100 billion for emerging economies. In order to pass, the plan requires approval from 85 percent of member countries, which it is widely expected to receive.
World financial leaders have debated such an allocation since the Group of 20 summit in April of this year. A successful allocation of this size could increase confidence in cooperative, international solutions to global recession. IMF Managing Director Dominique Strauss-Kahn hopes the allocation will highlight an expanded role for the IMF as it provides “significant support to its members in these difficult times.”
If the allocation garners the required support on August 7, member countries could receive their allocations, disbursed in proportion to each member’s IMF quota, as early as August 28. Countries are free to lend or exchange their SDRs for hard currency. Many developed countries, which have the largest quotas, are expected to loan or donate their SDRs to their poorer, liquidity-strained neighbors.
Some financial analysts are wary of the proposed allocation, citing concerns about increased inflationary pressure. Isabelle Mateos y Lago, an advisor in the IMF Policy and Review Department believes inflationary problems are unlikely, given the small scale of the allocation relative to the global economy. The proposed $250 billion represents only one-third of a percentage point of global gross domestic product. The IMF has emphasized however, that the allocation should not weaken member countries’ pursuit of prudent macroeconomic policies or postpone necessary policy adjustments.
Discussion
1. The SDRs will provide funds to emerging and poor countries at current, low interest rates. If interest rates should later rise, the possible long-term cost to poor countries would be significant. How should this potential interest liability affect the way developing countries chose to use their SDRs? Should they hold them or spend them?
2. A substantial amount of the allocation will go to developed countries that may not need the additional funds. Are IMF officials right in assuming that countries will donate, trade or loan the SDRs? Should the IMF consider allocating SDRs out of proportion to the IMF quotas?
Friday, July 17, 2009
Paulson Receives Bitter Reception from Lawmakers at Hearing
Sources: Washingtonpost.com: Lawmakers Blast Paulson for His Response to Crisis; Reuters.com: UPDATE 2-Lawmakers slam Paulson on BofA-Merrill deal
In a hearing before the House Committee on Oversight and Government Reform on Thursday, House Republicans and Democrats scolded Former Treasury secretary Henry M. Paulson Jr. for his response to the financial crisis. The hearing was convened as lawmakers investigate the government’s push for Bank of America’s acquisition of Merrill Lynch. Although the companies arranged in September to merge minus government aid, they did not settle the deal until January when the Treasury agreed to check Bank of America’s losses on a range of problem loans, and invest $20 billion.
Federal Reserve Chairman Ben S. Bernanke and Bank of America chief executive Kenneth D. Lewis had previously testified to the House Committee that the bank nearly backed out of the deal. Paulson’s version of events largely corroborated the accounts of Bernanke and Lewis. After conferring with Bernanke, Paulson had warned Lewis of the possible removal of senior management if the bank abandoned the deal. Paulson further assured Lewis that the bank would receive the aid needed to proceed with the acquisition.
Republicans on the committee have argued that the government compelled Bank of America to move ahead with the deal when the company decided to walk. Democrats, on the other hand, have suggested that Lewis worked one over on the government to obtain additional financial support in threatening to drop out of the deal.
Democrats and Republicans alike have questioned the lack of public disclosure by the bank and regulators of information pertaining to the negotiations. Internal Fed documents that seem to reveal that regulatory agencies were purposefully kept in the dark have captured the attention of the committee. These agencies include the Securities and Exchange Commission and the Financial Stability Oversight Board, an interagency team Congress created to manage the government’s handling of the financial crisis. The committee will next hear from these groups.
Discussion Questions:
1) Where should Congress draw the line of financial oversight by the government during times of crisis and times of economic strength?
2) What benefits does financial oversight during crises afford?
In a hearing before the House Committee on Oversight and Government Reform on Thursday, House Republicans and Democrats scolded Former Treasury secretary Henry M. Paulson Jr. for his response to the financial crisis. The hearing was convened as lawmakers investigate the government’s push for Bank of America’s acquisition of Merrill Lynch. Although the companies arranged in September to merge minus government aid, they did not settle the deal until January when the Treasury agreed to check Bank of America’s losses on a range of problem loans, and invest $20 billion.
Federal Reserve Chairman Ben S. Bernanke and Bank of America chief executive Kenneth D. Lewis had previously testified to the House Committee that the bank nearly backed out of the deal. Paulson’s version of events largely corroborated the accounts of Bernanke and Lewis. After conferring with Bernanke, Paulson had warned Lewis of the possible removal of senior management if the bank abandoned the deal. Paulson further assured Lewis that the bank would receive the aid needed to proceed with the acquisition.
Republicans on the committee have argued that the government compelled Bank of America to move ahead with the deal when the company decided to walk. Democrats, on the other hand, have suggested that Lewis worked one over on the government to obtain additional financial support in threatening to drop out of the deal.
Democrats and Republicans alike have questioned the lack of public disclosure by the bank and regulators of information pertaining to the negotiations. Internal Fed documents that seem to reveal that regulatory agencies were purposefully kept in the dark have captured the attention of the committee. These agencies include the Securities and Exchange Commission and the Financial Stability Oversight Board, an interagency team Congress created to manage the government’s handling of the financial crisis. The committee will next hear from these groups.
Discussion Questions:
1) Where should Congress draw the line of financial oversight by the government during times of crisis and times of economic strength?
2) What benefits does financial oversight during crises afford?
Sunday, July 12, 2009
G8 pledges $20 billion for agriculture in the developing world
Sources
Reuters: G8 pledges $20 billion in farm aid to poor nations, African leaders to ask G8 to honour pledges, G8 summit pledges $20 bln to boost food output
Financial Times: G8 to commit $20 billion for food security
According to United Nations reports, the number of malnourished people worldwide will exceed 1.02 billion this year. This represents a dramatic reversal, as the current global recession erodes decades of progress in reducing malnutrition. 103 million more are predicted to suffer before the end of the economic downturn. In response to these predictions, and near the end of a summit frustrated by discord, the G8 announced a pledge of $20 billion to fight hunger in the developing world.
On July 10th, the G8 promised to deliver $20 billion over the next three years, investing in agriculture to promote food security. The pledge is smaller than past aid commitments but has the potential to effect real change, according to development experts, because of its clear focus. Jacques Diouf, director general of the U.N. Food and Agriculture Organization, responded optimistically to the pledge, calling it “the biggest shift in strategy [he’s] seen over the past two decades.” The new strategy highlights the need to help hungry and poor people produce their own food. Emergency food aid, though necessary to help impoverished countries withstand food crises, is only part of the equation, according to Ajay Vashee, president of the International Federation of Agricultural Producers. The new G8 pledge aims to improve food security through investment in infrastructure- reaching small farmers with new seeds, irrigation technologies and farming methods to improve agricultural productivity within developing countries.
Leaders from Algeria, Angola, Egypt, Ethiopia, Libya, Nigeria, Senegal and South Africa joined G8 members later in the summit for a half-day meeting, discussing food security, past aid commitments and a proposal for climate change compensation. Led by Ethiopian Prime Minister Meles Zenawi, the African leaders were initially positive in their response to the $20 billion pledge but asked the G8 to live up to their commitments. Some remain wary, hesitant to rely on new promises from the G8 while member countries fail to follow through on 2005 aid commitments. Nigerian Agricultural Minister Abba Ruma called the pledge “very commendable,” especially in view of the current global recession, but called for the funds to be disbursed expeditiously.
NGOs have responded to the pledge with a mixture of hope and skepticism. Many view the pledge as a potentially significant policy shift, but are wary given the G8’s track record. According to ActionAid, a British aid organization, total food aid must reach $23 billion per year by 2020 to reach the millennium development goal for world hunger reduction. The G8 pledge does not reach that goal independently, but for many it is a welcome step in the right direction.
Discussion
1. U.S. president Barack Obama, discussing the G8 pledge, said "there is no reason Africa should not be self-sufficient when it comes to food.” What are the reasons that Africa has not been self-sufficient in food production in the past?
2. Can G8 leaders responsibly pledge additional aid when some are failing to meet existing aid commitments? Does the current recession affect the likelihood that G8 countries will follow through on the pledge?
Reuters: G8 pledges $20 billion in farm aid to poor nations, African leaders to ask G8 to honour pledges, G8 summit pledges $20 bln to boost food output
Financial Times: G8 to commit $20 billion for food security
According to United Nations reports, the number of malnourished people worldwide will exceed 1.02 billion this year. This represents a dramatic reversal, as the current global recession erodes decades of progress in reducing malnutrition. 103 million more are predicted to suffer before the end of the economic downturn. In response to these predictions, and near the end of a summit frustrated by discord, the G8 announced a pledge of $20 billion to fight hunger in the developing world.
On July 10th, the G8 promised to deliver $20 billion over the next three years, investing in agriculture to promote food security. The pledge is smaller than past aid commitments but has the potential to effect real change, according to development experts, because of its clear focus. Jacques Diouf, director general of the U.N. Food and Agriculture Organization, responded optimistically to the pledge, calling it “the biggest shift in strategy [he’s] seen over the past two decades.” The new strategy highlights the need to help hungry and poor people produce their own food. Emergency food aid, though necessary to help impoverished countries withstand food crises, is only part of the equation, according to Ajay Vashee, president of the International Federation of Agricultural Producers. The new G8 pledge aims to improve food security through investment in infrastructure- reaching small farmers with new seeds, irrigation technologies and farming methods to improve agricultural productivity within developing countries.
Leaders from Algeria, Angola, Egypt, Ethiopia, Libya, Nigeria, Senegal and South Africa joined G8 members later in the summit for a half-day meeting, discussing food security, past aid commitments and a proposal for climate change compensation. Led by Ethiopian Prime Minister Meles Zenawi, the African leaders were initially positive in their response to the $20 billion pledge but asked the G8 to live up to their commitments. Some remain wary, hesitant to rely on new promises from the G8 while member countries fail to follow through on 2005 aid commitments. Nigerian Agricultural Minister Abba Ruma called the pledge “very commendable,” especially in view of the current global recession, but called for the funds to be disbursed expeditiously.
NGOs have responded to the pledge with a mixture of hope and skepticism. Many view the pledge as a potentially significant policy shift, but are wary given the G8’s track record. According to ActionAid, a British aid organization, total food aid must reach $23 billion per year by 2020 to reach the millennium development goal for world hunger reduction. The G8 pledge does not reach that goal independently, but for many it is a welcome step in the right direction.
Discussion
1. U.S. president Barack Obama, discussing the G8 pledge, said "there is no reason Africa should not be self-sufficient when it comes to food.” What are the reasons that Africa has not been self-sufficient in food production in the past?
2. Can G8 leaders responsibly pledge additional aid when some are failing to meet existing aid commitments? Does the current recession affect the likelihood that G8 countries will follow through on the pledge?
Monday, July 06, 2009
China Advocates Fundamental Reform of the Global Monetary System, and Works to Ease Dependence on U.S. Dollar
Sources: Businessweek.com: China Ratchets Up Pressure on the Dollar; Reuters.com: China Officials Call for Displacing Dollar, In Time
As the G8 summit in Italy approaches—the summit begins on Wednesday—China has heightened its call for the fundamental reform of the international financial system. In its push for the replacement of the U.S. dollar as a reserve currency, China acknowledges that it will take time to overhaul to current system. Chinese officials maintain that the IMF unit of special drawing rights (SDRs) may provide a viable alternative to the dollar.
The dollar comprises an estimated 70 % of the $1.95 trillion China holds in official foreign exchange reserves. Accordingly, China remains cautious not to make statements which may hurt its investments.
To reduce its dependence on the dollar, China stated last week that it would permit its exporters and importers to settle international trade agreements with the renminbi. Prior to this action, companies have had to exchange renminbi for U.S. dollars or alternative currencies when settling cross-border transactions. Starting July 2, the People’s Bank of China (PBoC) would invite banks to offer settlement services tied to the renminbi.
The renminbi’s projected regular appreciation next to the dollar provides the incentive for Hong Kong companies to use it in settling trade agreements. Even though China has limited the renminbi’s appreciation since July 2008 to assist exports, the mainland currency has risen 21% since 2005 when a dollar peg was cast aside. Investors are betting it will strengthen less than 1% to 6.77 per dollar in the next year. Since July 1, 2008, the central bank has maintained a range of 0.08%.
Other initiatives also aim to promote the renminbi’s regional usage. For instance, China said in May that it would endorse the issuance of renminbi bonds by locally incorporated foreign lenders.
Still, in spite of the disfavor with the dollar-centric global financial system, the IMF announced on June 30 that the portion of dollars in international foreign exchange reserves reached 65% during the first three month of 2009, rising to its highest level since 2007.
Discussion Questions:
1) What short and/or long-term effects might China's promotion of the renmindi as a regional currency have on the dollar as well as other currencies?
2) How might China's efforts fuel discussion concerning the reserve currency at the G8 summit in Italy on Wednesday?
As the G8 summit in Italy approaches—the summit begins on Wednesday—China has heightened its call for the fundamental reform of the international financial system. In its push for the replacement of the U.S. dollar as a reserve currency, China acknowledges that it will take time to overhaul to current system. Chinese officials maintain that the IMF unit of special drawing rights (SDRs) may provide a viable alternative to the dollar.
The dollar comprises an estimated 70 % of the $1.95 trillion China holds in official foreign exchange reserves. Accordingly, China remains cautious not to make statements which may hurt its investments.
To reduce its dependence on the dollar, China stated last week that it would permit its exporters and importers to settle international trade agreements with the renminbi. Prior to this action, companies have had to exchange renminbi for U.S. dollars or alternative currencies when settling cross-border transactions. Starting July 2, the People’s Bank of China (PBoC) would invite banks to offer settlement services tied to the renminbi.
The renminbi’s projected regular appreciation next to the dollar provides the incentive for Hong Kong companies to use it in settling trade agreements. Even though China has limited the renminbi’s appreciation since July 2008 to assist exports, the mainland currency has risen 21% since 2005 when a dollar peg was cast aside. Investors are betting it will strengthen less than 1% to 6.77 per dollar in the next year. Since July 1, 2008, the central bank has maintained a range of 0.08%.
Other initiatives also aim to promote the renminbi’s regional usage. For instance, China said in May that it would endorse the issuance of renminbi bonds by locally incorporated foreign lenders.
Still, in spite of the disfavor with the dollar-centric global financial system, the IMF announced on June 30 that the portion of dollars in international foreign exchange reserves reached 65% during the first three month of 2009, rising to its highest level since 2007.
Discussion Questions:
1) What short and/or long-term effects might China's promotion of the renmindi as a regional currency have on the dollar as well as other currencies?
2) How might China's efforts fuel discussion concerning the reserve currency at the G8 summit in Italy on Wednesday?
Saturday, July 04, 2009
Unauthorized Trading Causes a Spike in Oil Price
Sources: BBC, Can Rogue Trading Move a Market?; Reuters, Oil Brokerage PVM Names Rogue Trader Behind Oil Spike; AFP, Oil Prices Drop Further as 'Rogue' Trader Probed; BBC, Rogue Trades Cost Oil Broke $10m
Early Tuesday morning, the price of Brent North Sea Crude spiked to $73.50 a barrel when a London trader purchased the equivalent of 9 million barrels of the oil. Steve Perkins, a crude futures trader at the PVM Oil Futures brokerage, conducted this unauthorized trade, which is now under investigation by PVM as well as the Financial Services Authority. When PVM discovered the unauthorized trading, which was unusual as it took place at a time when most London traders are asleep, it unwound the futures positions at a cost of nearly $10 million.
The trade caused a spike of nearly $2 in the oil price, but this quickly reversed, and contracts for 16 million barrels of oil changed hands in a very short period of time. The early hour and relatively low levels of trading meant that one large trade could greatly affect the price of oil, but that the price could also drop quickly. The drop in price was what accounted for PVM's loss in such a short time when it sold the contracts – by Friday morning, the price had fallen to a little over $66 a barrel, due largely to loss in confidence in a U.S. recovery after the release of poor employment numbers.
Brokers at PVM are authorized to link up large banks and hedge funds as trade counterparties, but they are not allowed to take positions in the crude markets directly. Perkins' motivations are unclear, but PVM—the world's largest independent broker—is conducting a full investigation. Though technology makes it more and more difficult for brokers to engage in this sort of unauthorized speculation, enough money changes hands regularly at a large firm like PVM that it may not be picked up on immediately. In this case, the lost was relatively small, unlike rogue trading at Societé Generale or Barings.
This incident may prompt renewed calls for regulation in the area of oil speculation, which has been a priority for many since last year. Regulation would focus on the OTC and futures markets. The US, for example, would like to reduce the amount with which a single broker can legally speculate, and the UK would be likely to follow any U.S. regulatory changes. There is some disagreement on just how much speculation can really affect markets over the long-term, but activity like this is undoubtably cause for some concern.
1) Do you think that an isolated incident like this should be enough to prompt regulatory changes over oil speculation as a whole, or do you think that the market is best left alone?
2) As technology advances, how do you think speculators who want to engage in rogue trading will react? Will technology ever make unauthorized trading impossible, or will more regulatory loopholes simply open up along with financial innovation?
Early Tuesday morning, the price of Brent North Sea Crude spiked to $73.50 a barrel when a London trader purchased the equivalent of 9 million barrels of the oil. Steve Perkins, a crude futures trader at the PVM Oil Futures brokerage, conducted this unauthorized trade, which is now under investigation by PVM as well as the Financial Services Authority. When PVM discovered the unauthorized trading, which was unusual as it took place at a time when most London traders are asleep, it unwound the futures positions at a cost of nearly $10 million.
The trade caused a spike of nearly $2 in the oil price, but this quickly reversed, and contracts for 16 million barrels of oil changed hands in a very short period of time. The early hour and relatively low levels of trading meant that one large trade could greatly affect the price of oil, but that the price could also drop quickly. The drop in price was what accounted for PVM's loss in such a short time when it sold the contracts – by Friday morning, the price had fallen to a little over $66 a barrel, due largely to loss in confidence in a U.S. recovery after the release of poor employment numbers.
Brokers at PVM are authorized to link up large banks and hedge funds as trade counterparties, but they are not allowed to take positions in the crude markets directly. Perkins' motivations are unclear, but PVM—the world's largest independent broker—is conducting a full investigation. Though technology makes it more and more difficult for brokers to engage in this sort of unauthorized speculation, enough money changes hands regularly at a large firm like PVM that it may not be picked up on immediately. In this case, the lost was relatively small, unlike rogue trading at Societé Generale or Barings.
This incident may prompt renewed calls for regulation in the area of oil speculation, which has been a priority for many since last year. Regulation would focus on the OTC and futures markets. The US, for example, would like to reduce the amount with which a single broker can legally speculate, and the UK would be likely to follow any U.S. regulatory changes. There is some disagreement on just how much speculation can really affect markets over the long-term, but activity like this is undoubtably cause for some concern.
1) Do you think that an isolated incident like this should be enough to prompt regulatory changes over oil speculation as a whole, or do you think that the market is best left alone?
2) As technology advances, how do you think speculators who want to engage in rogue trading will react? Will technology ever make unauthorized trading impossible, or will more regulatory loopholes simply open up along with financial innovation?
Wednesday, July 01, 2009
Rethinking Reserve Currency
The recent financial crisis highlights a need for effective management of international liquidity. The use of the dollar as an international reserve currency dates back to the 1944 Bretton Woods conference, when the U.S. was the largest international creditor and by far the largest economy in the world.
Recently, Chinese leaders and other international policymakers have become increasingly interested in transitioning to an alternative reserve currency. Critics of the dollar argue that the use of national currencies to manage a global economy is troublesome; the U.S. Federal Reserve inevitably places domestic policy goals above the needs of the international economy.
While there is no clear alternative to the dollar, Chinese officials propose the expansion of IMF Special Drawing Rights (SDRs). Today's SDRs are based on a basket of four currencies - the US dollar, yen, euro and sterling - and they are used as a unit of account by the IMF and other international organizations. The Chinese proposal would involve expanding the SDR basket to include all large economies and establishing a settlement system between SDRs and other currencies, so the SDRs could be used more easily in international finance and trade.
Some argue that the IMF SDRs will never function effectively as reserve currency because of institutional limitations on their use. Many other national currencies simply lack the economic longevity and credibility of the dollar.
Should SDRs replace the U.S. dollar as the international reserve currency?
Leave your comments below and cast your vote here, in the UICIFD poll.
Recently, Chinese leaders and other international policymakers have become increasingly interested in transitioning to an alternative reserve currency. Critics of the dollar argue that the use of national currencies to manage a global economy is troublesome; the U.S. Federal Reserve inevitably places domestic policy goals above the needs of the international economy.
While there is no clear alternative to the dollar, Chinese officials propose the expansion of IMF Special Drawing Rights (SDRs). Today's SDRs are based on a basket of four currencies - the US dollar, yen, euro and sterling - and they are used as a unit of account by the IMF and other international organizations. The Chinese proposal would involve expanding the SDR basket to include all large economies and establishing a settlement system between SDRs and other currencies, so the SDRs could be used more easily in international finance and trade.
Some argue that the IMF SDRs will never function effectively as reserve currency because of institutional limitations on their use. Many other national currencies simply lack the economic longevity and credibility of the dollar.
Should SDRs replace the U.S. dollar as the international reserve currency?
Leave your comments below and cast your vote here, in the UICIFD poll.
Nigeria allows foreign bank ownership, aims to acquire more than capital
Sources
Financial Times: Nigeria to lift ban on foreign bank takeovers,
Nigeria’s top banker to boost transparency
Reuters: Nigeria may lift ban on foreign bank ownership
Nigeria, a country of 140 million people, is Africa’s most populous nation and the continent’s second largest economy. There are 24 banks in Nigeria today, operating approximately 23 million accounts. The country’s large population and growing economy make it a massive potential market for retail banking. Large companies also view Nigeria as a desirable, strategically-located base for launching regional operations elsewhere on the continent.
For more than 30 years however, foreign acquisition of more than 5 percent of any Nigerian bank has been subject to approval by the governor of the country’s Central Bank. Foreign banks have also been prohibited from owning more than 10 percent of any Nigerian bank. These limitations date back to the 1970s, a period of strict nationalism under military rule, and have outlived their purpose, according to recently appointed Central Bank Governor Lamido Sanusi.
Recent financial turmoil has caused contraction in foreign credit lines, a stock market collapse and an overall tightening of liquidity in the Nigerian banking system. Sanusi sees increased international participation as an important step toward improving the health of the country’s banks, calling the old rules “unnecessarily restrictive.”
By opening doors to foreign banks, Governor Sanusi hopes to do more than simply shore up Nigeria’s capital base. He aims to improve the banking system’s disclosure requirements and tighten bank supervision, and he’s counting on foreign expertise to advance those goals. In the short to medium-term, Nigerian banks will undoubtedly benefit from capital influx, but exposure to the skills and management strategies of large foreign banks could reap even greater rewards in the future. During this period of recovery and potential growth, Sanusi brings an open perspective to his post as governor of Nigeria’s Central Bank. “What you want to do,” he says, “is open up all the possibilities.”
Discussion:
1. How will continued unrest in Nigeria’s oil delta impact the involvement of foreign banks in Nigeria?
2. Should the Central Bank maintain some lesser degree of control over the bank acquisitions as they occur? Are there risks that offset the sizeable benefits of foreign involvement?
Financial Times: Nigeria to lift ban on foreign bank takeovers,
Nigeria’s top banker to boost transparency
Reuters: Nigeria may lift ban on foreign bank ownership
Nigeria, a country of 140 million people, is Africa’s most populous nation and the continent’s second largest economy. There are 24 banks in Nigeria today, operating approximately 23 million accounts. The country’s large population and growing economy make it a massive potential market for retail banking. Large companies also view Nigeria as a desirable, strategically-located base for launching regional operations elsewhere on the continent.
For more than 30 years however, foreign acquisition of more than 5 percent of any Nigerian bank has been subject to approval by the governor of the country’s Central Bank. Foreign banks have also been prohibited from owning more than 10 percent of any Nigerian bank. These limitations date back to the 1970s, a period of strict nationalism under military rule, and have outlived their purpose, according to recently appointed Central Bank Governor Lamido Sanusi.
Recent financial turmoil has caused contraction in foreign credit lines, a stock market collapse and an overall tightening of liquidity in the Nigerian banking system. Sanusi sees increased international participation as an important step toward improving the health of the country’s banks, calling the old rules “unnecessarily restrictive.”
By opening doors to foreign banks, Governor Sanusi hopes to do more than simply shore up Nigeria’s capital base. He aims to improve the banking system’s disclosure requirements and tighten bank supervision, and he’s counting on foreign expertise to advance those goals. In the short to medium-term, Nigerian banks will undoubtedly benefit from capital influx, but exposure to the skills and management strategies of large foreign banks could reap even greater rewards in the future. During this period of recovery and potential growth, Sanusi brings an open perspective to his post as governor of Nigeria’s Central Bank. “What you want to do,” he says, “is open up all the possibilities.”
Discussion:
1. How will continued unrest in Nigeria’s oil delta impact the involvement of foreign banks in Nigeria?
2. Should the Central Bank maintain some lesser degree of control over the bank acquisitions as they occur? Are there risks that offset the sizeable benefits of foreign involvement?
Monday, June 29, 2009
International Finance Meeting Comes up Short for Proponents of a Greater U.N. Role in the Global Crisis
Sources: Guardian.co.uk: West Keeps U.N. At Bay on Financial Crisis; Reuters.com: NGOs Slam Results of U.N. Financial Crisis Meeting
Developing nations do not appear to have succeeded in increasing U.N. involvement in the world economy on Friday with the results a three-day international finance conference. The meeting was billed as a summit. However, no Western leaders showed up. Further, the majority of those presidents and prime ministers in attendance, amounting to less than a dozen, were from Latin America and the Caribbean. Other participants sent delegates of a lesser status. World Bank President Robert Zoellick and IMF Chief Dominique Stauss-Kahn did not attend the conference.
Miguel D’Escoto, president of the 192-nation U.N. General Assembly, called the “financial summit” to demand a reform of the global financial structure. He drafted a document that called for extensive changes to the existing system under the belief that the General Assembly should take the helm of the world economy from elite groups of rich countries. With the aim of “democratizing” global financial bodies, he demanded the abolishment of U.S. veto power at the IMF, where rich countries dominate the current voting system. Further, the conditions the IMF places on foreign-currency loans embitter some developing nations. The draft also demanded that the IMF unit of special drawing rights (SDRs), which is anchored in multiple currencies, replace the U.S. dollar as a reserve currency.
While the document received a positive response from many developing countries, its reception in Western capitals was less than warm, as officials feared that the non-legally binding document could send an unfavorable political message. The North-South negotiations, which delayed the meeting for three weeks, ultimately rendered the text a simple appeal for developing countries to have a greater voice in the IMF. This position has the support of the United States. The declaration also acknowledged the calls of many states for a more efficient system on the issue of currency reserves.
Even so, D’Escoto, declaring the meeting a success, stated that “the General Assembly…has now been established as the central forum for the discussion of the world financial and economic issues.” Other less optimistic advocates for the called-for changes considered the declaration deficient. Venezuela’s envoy, for instance, criticized the declaration’s failure to order a definite role for the United Nations to occupy in the world economy. Anti-poverty groups have also voiced disappointment in the declaration.
While the United States joined the consensus, it remains ambivalent about much of the document and is not prepared to give the U.N. a final voice in the global economy. The U.S. advanced its view on the floor that the U.N. lacked the authority to entangle itself in matters pertaining to the governance of the IMF and the World Bank. Further, even as the European Union held the meeting out as a break for developing nations, its delegates appeared more at home discussing development aid abroad than restructuring the IMF.
Discussion Questions:
1) Can the interests of rich and poor nations be reconciled? If the U.N. assumed a greater role in the global economy, what new problems might arise in relation to these competing interests?
2) How would the U.S. economy be affected if SDRs replaced the U.S. dollar as the currency reserve?
Developing nations do not appear to have succeeded in increasing U.N. involvement in the world economy on Friday with the results a three-day international finance conference. The meeting was billed as a summit. However, no Western leaders showed up. Further, the majority of those presidents and prime ministers in attendance, amounting to less than a dozen, were from Latin America and the Caribbean. Other participants sent delegates of a lesser status. World Bank President Robert Zoellick and IMF Chief Dominique Stauss-Kahn did not attend the conference.
Miguel D’Escoto, president of the 192-nation U.N. General Assembly, called the “financial summit” to demand a reform of the global financial structure. He drafted a document that called for extensive changes to the existing system under the belief that the General Assembly should take the helm of the world economy from elite groups of rich countries. With the aim of “democratizing” global financial bodies, he demanded the abolishment of U.S. veto power at the IMF, where rich countries dominate the current voting system. Further, the conditions the IMF places on foreign-currency loans embitter some developing nations. The draft also demanded that the IMF unit of special drawing rights (SDRs), which is anchored in multiple currencies, replace the U.S. dollar as a reserve currency.
While the document received a positive response from many developing countries, its reception in Western capitals was less than warm, as officials feared that the non-legally binding document could send an unfavorable political message. The North-South negotiations, which delayed the meeting for three weeks, ultimately rendered the text a simple appeal for developing countries to have a greater voice in the IMF. This position has the support of the United States. The declaration also acknowledged the calls of many states for a more efficient system on the issue of currency reserves.
Even so, D’Escoto, declaring the meeting a success, stated that “the General Assembly…has now been established as the central forum for the discussion of the world financial and economic issues.” Other less optimistic advocates for the called-for changes considered the declaration deficient. Venezuela’s envoy, for instance, criticized the declaration’s failure to order a definite role for the United Nations to occupy in the world economy. Anti-poverty groups have also voiced disappointment in the declaration.
While the United States joined the consensus, it remains ambivalent about much of the document and is not prepared to give the U.N. a final voice in the global economy. The U.S. advanced its view on the floor that the U.N. lacked the authority to entangle itself in matters pertaining to the governance of the IMF and the World Bank. Further, even as the European Union held the meeting out as a break for developing nations, its delegates appeared more at home discussing development aid abroad than restructuring the IMF.
Discussion Questions:
1) Can the interests of rich and poor nations be reconciled? If the U.N. assumed a greater role in the global economy, what new problems might arise in relation to these competing interests?
2) How would the U.S. economy be affected if SDRs replaced the U.S. dollar as the currency reserve?
Thursday, June 25, 2009
Russia Faces Mixed Economic Signals
Sources: Reuters, Russia Sees Some Economic Rebound, More Rate Cuts; AP, Russia's Fiscal Hawk Reins in Currency Ambitions; Reuters, Russian Officials Send Mixed Signals on Stress Test; New York Times, Oil's Price Rise Eases Push for Reform in Russia; The Economist, BRICs, Emerging Markets, and the World Economy: Not Just Straw Men; Bloomberg, Russian Stimulus 'Delay' Means GDP to Shrink 6.8%, OECD Says; Forbes, World Bank: Russian Economy to Shrink 7.9 pct
Growth forecasts for Russia started off positive early this month, but with each new figure released the outlook seems worse and worse. Numbers released by Russian officials early in the month predicted that the economy would contract slightly less than the 6.5% forecast by the IMF in 2009, albeit with performance varying greatly across sectors and among companies. The stock market also climbed 80% in the spring after devastating performance in late 2009, leading to hopes that Russia's fate might not be so dismal after all.
The expectation was that inflation would also fall this month and that the net outflow of capital could cease. Russia could then continue the strategy of cutting interest rates in order to encourage banks to loan and focus on economic recovery. Russia has also seen some relief due to recovering oil prices, though a New York Times article suggests that this may actually be a bad thing for Russia, since economic recovery tends to halt political reforms that might otherwise.
One part of Russia's recovery strategy involves close relationships with the other BRIC countries—Brazil, India, and China. At the first BRIC summit, held in Russia, all but India agreed to start switching currency reserves from dollars to IMF bonds, decreasing dependency on the dollar. Though Finance Minister Kudrin has stopped claiming that the ruble will be the new global reserve currency, Russia does continue to push for a move away from the dollar. Kudrin recently suggested that the yuan would be the quickest possible new reserve currency, though it would probably take about ten years for China to sufficiently liberalize and make the yuan convertible.
However, despite some positive signs and the possibility of productive cooperation with other emerging economies, there are also some signs of economic and financial weakness. For example, the state of Russian banks is uncertain, with government officials sending mixed messages on whether a general stress test of the banking system occurred, or whether only some banks have been tested. It is unlikely that capital injections will be used in the future, but as many as 20% of all loans may be non-performing by 2010 and bank lending is crucial to the recovery.
Growth forecasts released this week are also significantly less optimistic than the Russian numbers. The OECD predicts a 6.8% contraction for Russia in 2009, based on the Russian government's delay in enacting a stimulus package. It cautions that the government must quickly implement reforms and also inject capital into the banks to deal with delinquent corporate loans. The OECD does, however, recognize the importance of oil price recovery and a lessening of capital outflow pressures.
The World Bank's numbers are by far the worst, with a predicted 7.9% contraction for 2009 and unemployment rate of 13%. The World Bank expects that the downward pressure from the first half of the year will overpower any significant positive impact of oil price recovery, and that poverty will rise in Russia along with the need for social spending. The World Bank is cautious in terms of forecasting how long the recovery will take in Russia, and expects 2.5% growth in 2010 as opposed to the 3.7% predicted by the OECD.
Questions:
1) Do you think that the oil price recovery can save Russia, or at least minimize the impact of the crisis and make recovery happen sooner? Do you agree with the New York Times article that the political impact of oil price recovery is bad for the country, or do you think recovery is in Russia's interest?
2) Considering the possible motivations of the Russian government, the OECD, and the World Bank in developing predictions about the Russian economic outlook, do you trust a particular institution more than the others? Do you think that Western institutions may have a tendency to downplay Russian recovery for political reasons, or conversely do you think that the Russian government is trying to put a positive spin on what is essentially a sinking ship?
3) Do you think that the crisis will lead to more dependency on Russia's part on Europe or the United States, such as was the case in the 1990s, or do you expect that Russia will pull away from these countries due to the U.S. role in the crisis and rely more heavily on BRIC countries or others? What political consequences do you expect the economic relationship between Russia and China to bring about for Europe or the United States?
Growth forecasts for Russia started off positive early this month, but with each new figure released the outlook seems worse and worse. Numbers released by Russian officials early in the month predicted that the economy would contract slightly less than the 6.5% forecast by the IMF in 2009, albeit with performance varying greatly across sectors and among companies. The stock market also climbed 80% in the spring after devastating performance in late 2009, leading to hopes that Russia's fate might not be so dismal after all.
The expectation was that inflation would also fall this month and that the net outflow of capital could cease. Russia could then continue the strategy of cutting interest rates in order to encourage banks to loan and focus on economic recovery. Russia has also seen some relief due to recovering oil prices, though a New York Times article suggests that this may actually be a bad thing for Russia, since economic recovery tends to halt political reforms that might otherwise.
One part of Russia's recovery strategy involves close relationships with the other BRIC countries—Brazil, India, and China. At the first BRIC summit, held in Russia, all but India agreed to start switching currency reserves from dollars to IMF bonds, decreasing dependency on the dollar. Though Finance Minister Kudrin has stopped claiming that the ruble will be the new global reserve currency, Russia does continue to push for a move away from the dollar. Kudrin recently suggested that the yuan would be the quickest possible new reserve currency, though it would probably take about ten years for China to sufficiently liberalize and make the yuan convertible.
However, despite some positive signs and the possibility of productive cooperation with other emerging economies, there are also some signs of economic and financial weakness. For example, the state of Russian banks is uncertain, with government officials sending mixed messages on whether a general stress test of the banking system occurred, or whether only some banks have been tested. It is unlikely that capital injections will be used in the future, but as many as 20% of all loans may be non-performing by 2010 and bank lending is crucial to the recovery.
Growth forecasts released this week are also significantly less optimistic than the Russian numbers. The OECD predicts a 6.8% contraction for Russia in 2009, based on the Russian government's delay in enacting a stimulus package. It cautions that the government must quickly implement reforms and also inject capital into the banks to deal with delinquent corporate loans. The OECD does, however, recognize the importance of oil price recovery and a lessening of capital outflow pressures.
The World Bank's numbers are by far the worst, with a predicted 7.9% contraction for 2009 and unemployment rate of 13%. The World Bank expects that the downward pressure from the first half of the year will overpower any significant positive impact of oil price recovery, and that poverty will rise in Russia along with the need for social spending. The World Bank is cautious in terms of forecasting how long the recovery will take in Russia, and expects 2.5% growth in 2010 as opposed to the 3.7% predicted by the OECD.
Questions:
1) Do you think that the oil price recovery can save Russia, or at least minimize the impact of the crisis and make recovery happen sooner? Do you agree with the New York Times article that the political impact of oil price recovery is bad for the country, or do you think recovery is in Russia's interest?
2) Considering the possible motivations of the Russian government, the OECD, and the World Bank in developing predictions about the Russian economic outlook, do you trust a particular institution more than the others? Do you think that Western institutions may have a tendency to downplay Russian recovery for political reasons, or conversely do you think that the Russian government is trying to put a positive spin on what is essentially a sinking ship?
3) Do you think that the crisis will lead to more dependency on Russia's part on Europe or the United States, such as was the case in the 1990s, or do you expect that Russia will pull away from these countries due to the U.S. role in the crisis and rely more heavily on BRIC countries or others? What political consequences do you expect the economic relationship between Russia and China to bring about for Europe or the United States?
Wednesday, June 24, 2009
Brazil Implements Crisis-Management Strategies
Sources: The Wall Street Journal: Brazil Inflation Remains Tame, Opens Door for July Rate Cut; Chinaview.cn: Brazil Acts Swiftly Against Financial Crisis
Brazil now finds itself in a technical recession after experiencing two consecutive quarters of falling GDP. The country’s GDP contracted 0.8 percent in the first quarter from the fourth quarter, and 3.6 percent in the fourth quarter from the third quarter. In response to the global downturn, Latin America’s largest economy promptly adjusted its economic policies.
The basic annual interest rate (Selic) of Brazil’s Central Bank, which was 13.75 percent in January, stands at 9.25 percent—the lowest since its inception in 1999—after the bank recently slashed it by a full percentage point. Further, President Luiz Inacio Lula da Silva signed a law in January that established a 14.2 billion reais (6.4 billion dollars) sovereign wealth fund.
Banks, automakers, airlines, and construction firms have enjoyed tax breaks. A cut in the industrialized products tax triggered a recovery of production in Brazil’s auto industry during the first quarter of 2009. Thanks to the tax break, a record 271,494 new vehicles were sold in March, 17 percent higher than the same period last year. Car sales for the first quarter of 2009 also set record numbers at 668,314 registered sales.
Brazil has also encouraged banks to lend to the agricultural sector. Farmers and agricultural enterprises are projected to receive at least 15.8 billion reais (6.79 billion dollars) in loans this year.
When central bankers meet in July, the continued signs of quite growth in consumer prices thus far in June may usher in lesser reductions in interest rates. The country’s mid-month consumer price index, or ICPA-15, rose 0.38% through mid-June. Through mid-May, this figure climbed 0.59%. Moreover, through mid-June, the 12-month IPCA-15 figure fell to 4.89 percent, as compared to 5.44 percent through mid-May. The government’s target is 4.5 percent.
The meeting next month, on the other hand, may mark the floor of the low rates as central bankers look to the future, since the effects of these rates on domestics demand will not be fully realized until 2010.
Discussion Questions:
1) What measures might the Brazilian government enact to stimulate the economy as the central bank grows more conservative? How will inflation rates in 2010 affect the decision-making process?
2) How can Brazil work with other nations to pull from the global economic slump?
Monday, June 22, 2009
Ambitious plans and lapsed commitments: challenges for development funding in wake of financial crisis
Sources
Reuters: G8 should use any stimulus easing to help Africa
Financial Times: Kenya unveils record ‘stimulus’ budget
Italy and France draw fire over aid
African bank tries to triple capital base
This year marked the end of a five-year upward trend in Kenyan economic growth. A bitter combination of drought, inflation, post-election violence, and a deepening global financial crisis ground the nation’s once accelerating growth to a halt. In response, the government has unveiled an ambitious budget that includes more than $11 billion in fiscal stimulus spending. A sizeable portion of the budget is devoted to development spending (overall, an increase of 83 percent over last year’s development budget); aimed at road improvements, irrigation, water supply and energy programs. The plan will bring Kenya’s budget deficit up to 6.6 percent of gross domestic product in the fiscal year starting in July, with national debt rising to 44.5 percent of GDP. Government leaders plan to manage the budget without increasing taxes, hoping to meet targets by reducing wasteful, non-priority government spending.
While Kenya strives to fund its own development efforts in the face of global crisis, French and Italian leaders are receiving criticism for their failure to follow through on development aid commitments. By the end of 2009, the G7 countries as a whole will have delivered only half of their 2005-2010 promise, with Italy and France responsible for 80 percent of the shortfall. Reviews of Italy’s performance are especially critical, as it has delivered only an estimated 3 percent of the increase it promised in 2005. Italy acknowledged the figures but cited financial constraints as the cause of the failure, stating that it remained “fully committed to the objectives set at Gleneagles.” While other G7 countries are still fighting to keep pace with the 2010 goals, Italy is a striking example of the financial crisis’ harmful effects on development funding.
Donald Kaberuka, president of the African Development Bank (ADB), expects African economies to be affected more deeply and to recover more slowly than the rest of the world. In remarks timed to correspond with recent G8 meeting in Italy, he called for developed economies to devote “robust and greater attention” to the challenges facing low income countries as they plan their post-crisis exit strategies. In May of 2009, the ADB announced plans to triple its capital base in response to the financial crisis. An increase on that scale will require a large boost in funds from foreign donor shareholders. The foreign donors the ADB is counting on, like the French and Italian governments failing to meet their aid commitments, may struggle to prioritize development spending in today’s economic climate. Kenyan leaders hope they’re on the right track; welcoming aid and foreign investment, but working hard domestically to push their own economy back toward an upward trajectory.
Discussion
1. Is the Kenyan budget, with the significant increase in national debt that it entails, a prudent plan for the developing nation? How would a tax increase affect the feasibility and effectiveness of the budget?
2. Jamie Drummond, co-founder and executive director of One, an anti-poverty organization, says that Italian Prime Minister Silvio Berlusconi “needs to be censured by his peers” for his country’s failure to meet African aid commitments. As developed countries plan for economic recovery, to what extent should their leaders be bound by aid commitments?
Reuters: G8 should use any stimulus easing to help Africa
Financial Times: Kenya unveils record ‘stimulus’ budget
Italy and France draw fire over aid
African bank tries to triple capital base
This year marked the end of a five-year upward trend in Kenyan economic growth. A bitter combination of drought, inflation, post-election violence, and a deepening global financial crisis ground the nation’s once accelerating growth to a halt. In response, the government has unveiled an ambitious budget that includes more than $11 billion in fiscal stimulus spending. A sizeable portion of the budget is devoted to development spending (overall, an increase of 83 percent over last year’s development budget); aimed at road improvements, irrigation, water supply and energy programs. The plan will bring Kenya’s budget deficit up to 6.6 percent of gross domestic product in the fiscal year starting in July, with national debt rising to 44.5 percent of GDP. Government leaders plan to manage the budget without increasing taxes, hoping to meet targets by reducing wasteful, non-priority government spending.
While Kenya strives to fund its own development efforts in the face of global crisis, French and Italian leaders are receiving criticism for their failure to follow through on development aid commitments. By the end of 2009, the G7 countries as a whole will have delivered only half of their 2005-2010 promise, with Italy and France responsible for 80 percent of the shortfall. Reviews of Italy’s performance are especially critical, as it has delivered only an estimated 3 percent of the increase it promised in 2005. Italy acknowledged the figures but cited financial constraints as the cause of the failure, stating that it remained “fully committed to the objectives set at Gleneagles.” While other G7 countries are still fighting to keep pace with the 2010 goals, Italy is a striking example of the financial crisis’ harmful effects on development funding.
Donald Kaberuka, president of the African Development Bank (ADB), expects African economies to be affected more deeply and to recover more slowly than the rest of the world. In remarks timed to correspond with recent G8 meeting in Italy, he called for developed economies to devote “robust and greater attention” to the challenges facing low income countries as they plan their post-crisis exit strategies. In May of 2009, the ADB announced plans to triple its capital base in response to the financial crisis. An increase on that scale will require a large boost in funds from foreign donor shareholders. The foreign donors the ADB is counting on, like the French and Italian governments failing to meet their aid commitments, may struggle to prioritize development spending in today’s economic climate. Kenyan leaders hope they’re on the right track; welcoming aid and foreign investment, but working hard domestically to push their own economy back toward an upward trajectory.
Discussion
1. Is the Kenyan budget, with the significant increase in national debt that it entails, a prudent plan for the developing nation? How would a tax increase affect the feasibility and effectiveness of the budget?
2. Jamie Drummond, co-founder and executive director of One, an anti-poverty organization, says that Italian Prime Minister Silvio Berlusconi “needs to be censured by his peers” for his country’s failure to meet African aid commitments. As developed countries plan for economic recovery, to what extent should their leaders be bound by aid commitments?
Tuesday, June 16, 2009
The G8 is Unified on Fragile Recovery, Divided over Policy Details
Sources
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting
The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.
The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.
G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbrück, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.
IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.
Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?
Bloomberg: G8 plans to reverse stimulus as rebound signs grow
Reuters: G8 says economies stabilizing, recovery uncertain
Financial Times: Measures to tackle downturn cloud G8 meeting
The Group of Eight (G8), comprised of government leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, met in Lecce Italy last weekend to discuss the current economic outlook and monetary policy priorities. The G8 leaders took a united stance on the global economy’s tentative recovery, but remain divided on multiple important issues.
The leaders of G8 member countries disagreed on the timing of economic recovery strategies. U.S. and British leaders argued for a continued emphasis on combating the recession, saying that the recovery is still too fragile for the removal of strong federal support. Canada and Germany meanwhile, insisted that the time is right to begin scaling back mammoth government spending programs, in an effort to avoid inflationary problems. The French economic minister Christine Lagarde hesitated in the middle ground, saying that France should “anticipate” the planning of exit strategies, but that it was too soon to give up the stimulus measures.
G8 leaders also discussed the rift over European stress tests. U.S. and Canadian leaders pressed for increased transparency in European banks. They believe European countries should be doing more to test their banks, and that the results should be made public. European leaders like Germany’s Peer Steinbrück, resist disclosure, citing concern for investor confidence. The vulnerability of the Euro zone’s recovery was highlighted by the release of April’s industrial production numbers. Official figures confirm a staggering 21.6 percent drop from the previous year, the steepest year-on-year decline since Euro zone records began in 1991.
IMF managing director Dominique Strauss-Kahn didn’t sugarcoat his global recovery outlook, calling the current recovery “weak” and insisting that the social effects of the crisis aren’t going to diminish anytime soon. He predicted a recovery in average growth in the beginning of 2010 and estimated the peak in unemployment for more than one year from now, in early 2011. One thing is clear after the international debate of the Italy summit: there is not a lone, correct path out of the mire. Each country will emerge from the crisis in different shape, and at a different pace. The timing and content of recovery plans will vary as widely as the economic landscapes upon which they are based.
Discussion
1. Global financial markets are interconnected. As individual nations attempt to combat the effects of recession at home, does it make sense for leaders to strategize together? What are the benefits and the shortcomings of a global approach to recovery?
2. Who is right in the European stress test debate? Are the European leaders justified in resisting disclosure? What are the potential benefits of the increased transparency?
Monday, June 15, 2009
German Economy Still Contracting But With Some Signs of Recovery
Sources: BusinessWeek, German Economy to Shrink 6.2% in 2009; Bloomberg, German April Industrial Output Unexpectedly Declines
Following a poor showing for the first quarter of the 2009, the German economy continues to contract, though the contraction is expected to ease this year. Recovery in Germany is not expected to start until 2010, when the downward trend of growth should begin to reverse. The economy is expected to contract 6.2% in 2009, the most since World War II, which is a slightly higher rate than earlier expected. Though the trend should turn next year, there is still no positive growth in 2010, and it is not until 2013 that the 2008 growth level—a modest 1.3%—is expected to return.
The low point of growth for Germany should occur this summer, though unemployment should continue to rise, lagging behind other indicators. Unemployment is expected to peak in mid-2010 at 10.5%. Though one bank leader suggested that Germany is a better position to withstand the crisis and recover quickly than other countries due to its high savings rate and the lack of a real estate bubble, there are also some problems that will hamper recovery.
Exports, for example, may not be as great as they were before the crisis, which means that the German government will not be able to afford the kind of social security that its citizens are used to. Exports fell at a greater rate than expected in April, as did production, falling 1.9% in April contrary to the expectation of another 0.3% increase as occurred in March. Exports and investment drove the contraction in the first quarter, and the output in investment goods again declined the most in April. Production of consumer goods and energy, on the other hand, rose in April. In May, the contraction of manufacturing eased and business confidence increased in Germany, and there are indications that industrial output may soon bottom out.
Questions:
1) Do you expect that Germany's bad fortune will lead to the rise of another European economic power post-crisis, or do you think that the EU's economic power will fall as a result?
2) Do you think that some of the more positive indications mean that recovery may come quicker than expected, or do you expect that these are aberrations?
Following a poor showing for the first quarter of the 2009, the German economy continues to contract, though the contraction is expected to ease this year. Recovery in Germany is not expected to start until 2010, when the downward trend of growth should begin to reverse. The economy is expected to contract 6.2% in 2009, the most since World War II, which is a slightly higher rate than earlier expected. Though the trend should turn next year, there is still no positive growth in 2010, and it is not until 2013 that the 2008 growth level—a modest 1.3%—is expected to return.
The low point of growth for Germany should occur this summer, though unemployment should continue to rise, lagging behind other indicators. Unemployment is expected to peak in mid-2010 at 10.5%. Though one bank leader suggested that Germany is a better position to withstand the crisis and recover quickly than other countries due to its high savings rate and the lack of a real estate bubble, there are also some problems that will hamper recovery.
Exports, for example, may not be as great as they were before the crisis, which means that the German government will not be able to afford the kind of social security that its citizens are used to. Exports fell at a greater rate than expected in April, as did production, falling 1.9% in April contrary to the expectation of another 0.3% increase as occurred in March. Exports and investment drove the contraction in the first quarter, and the output in investment goods again declined the most in April. Production of consumer goods and energy, on the other hand, rose in April. In May, the contraction of manufacturing eased and business confidence increased in Germany, and there are indications that industrial output may soon bottom out.
Questions:
1) Do you expect that Germany's bad fortune will lead to the rise of another European economic power post-crisis, or do you think that the EU's economic power will fall as a result?
2) Do you think that some of the more positive indications mean that recovery may come quicker than expected, or do you expect that these are aberrations?
Sunday, June 14, 2009
Singapore Mitigating Effects of Global Crisis
Sources: Forbes.com: Singapore struggles, waiting for West to rebound; worldtrademag.com: Using the Financial Storm to Prosper
Singapore has fallen into the deepest recession it has seen since 1965 when it split from a brief federation with Malaysia. The island is home to 4.8 million people on 683 kilometers of land. The density of the population, as well as the lack of resources, has left it vulnerable to the changing tides of the global market.
With 185 percent of its gross domestic product in exports, the Southeast Asian city-state is more dependent on trade than any other Asian economy. Now that its leading customers—the U.S., Europe, and Japan—are bogged down in the global crisis, Singapore is feeling the effects of the financial shockwave. The IMF has forecasted that the GDP will contract more than any other Asian economy at 10 percent in 2009.
To weather the crisis, the government is working diligently to limit its impact. In an effort to retain container traffic in the port, Singapore is cutting port dues for smaller harbor vessels by 20 percent, and 10 percent for bigger, seafaring ships docking for less than 10 days in the port. These rate reductions will last for one year. To facilitate new business development in spite of the downturn, the government will also provide a 40 percent tax rebate in 2009 for industrial and commercial properties. Furthermore, Singapore has stricken goods and services taxes for certain shippers constructing new facilities for container cargo.
Boasting over $170 billion in foreign exchange reserves, the government is using the economic slump to make fresh investments. It also created the largest economic stimulus package of any Southeast Asian nation at $14 billion.
Despite the economic downturn, Singapore achieved record tonnage in 2008, having shipped some 1.6 billion gross tons. Moreover, 2008 saw a growth in retainer traffic in the port. Still, the large developed economies must pull from the current crisis for Singapore to realize a return of the booming growth it previously enjoyed. While 2009 will be difficult, the Southeast Asian city-state will most probably see traffic recover significantly in 2010.
Discussion Questions:
1) Does Singapore's heavy reliance on trade leave it entirely subject to the caprices of demand in global markets?
2) If the financial crisis is slow to pass, what additional measures might the Singapore government take to encourage investment and maintain traffic?
Singapore has fallen into the deepest recession it has seen since 1965 when it split from a brief federation with Malaysia. The island is home to 4.8 million people on 683 kilometers of land. The density of the population, as well as the lack of resources, has left it vulnerable to the changing tides of the global market.
With 185 percent of its gross domestic product in exports, the Southeast Asian city-state is more dependent on trade than any other Asian economy. Now that its leading customers—the U.S., Europe, and Japan—are bogged down in the global crisis, Singapore is feeling the effects of the financial shockwave. The IMF has forecasted that the GDP will contract more than any other Asian economy at 10 percent in 2009.
To weather the crisis, the government is working diligently to limit its impact. In an effort to retain container traffic in the port, Singapore is cutting port dues for smaller harbor vessels by 20 percent, and 10 percent for bigger, seafaring ships docking for less than 10 days in the port. These rate reductions will last for one year. To facilitate new business development in spite of the downturn, the government will also provide a 40 percent tax rebate in 2009 for industrial and commercial properties. Furthermore, Singapore has stricken goods and services taxes for certain shippers constructing new facilities for container cargo.
Boasting over $170 billion in foreign exchange reserves, the government is using the economic slump to make fresh investments. It also created the largest economic stimulus package of any Southeast Asian nation at $14 billion.
Despite the economic downturn, Singapore achieved record tonnage in 2008, having shipped some 1.6 billion gross tons. Moreover, 2008 saw a growth in retainer traffic in the port. Still, the large developed economies must pull from the current crisis for Singapore to realize a return of the booming growth it previously enjoyed. While 2009 will be difficult, the Southeast Asian city-state will most probably see traffic recover significantly in 2010.
Discussion Questions:
1) Does Singapore's heavy reliance on trade leave it entirely subject to the caprices of demand in global markets?
2) If the financial crisis is slow to pass, what additional measures might the Singapore government take to encourage investment and maintain traffic?
Subscribe to:
Comments (Atom)