Sunday, February 24, 2008

Pakistan: Will Musharraf Remain President?

Sources: Washington Post, Financial Times

Pakistani president Perfez Musharraf is facing calls to resign after last week’s election saw his party lose all but 40 of the 268 contested seats in the National Assembly. Musharraf’s party, the Pakistan Muslim League-Q, was soundly beaten by the two largest opposition parties: the Pakistan People’s Party (PPP) and the Pakistan Muslim League-N. The two parties 154 seats. The PPP was headed by recently assassinated Benazir Bhutto, and the Muslim League-N was headed by Nawaz Sharif.

The opposition parties have called for Musharraf’s resignation as president—but it seems unlikely that he will resign. He has made no showing that he wants to resign, and the Musharraf camp has refuted any rumors to the otherwise. Opposition forces do not have enough votes in the parliament to force an impeachment, but have cautioned that Musharraf may face civil disobedience by the population to force him to resign.

The two major opposition parties, faced with the prospect of working with Musharraf, have formed a coalition and nominated Amin Fahim to be prime minister. Fahim is a member of the PPP, and is believed to have been offered the post by Musharraf in 2002. This may likely result in additional stability when the opposition parties work with the ruling Musharraf.

Question: Will Musharraf bow to political pressure and resign? If not—how will Musharraf be able to work with opposition forces that he had previously tried to stamp out?

New Cuba Leader

Sources: CNN, AFP, Financial Times

Raul Castro, 76, has been approved by the Cuban National Assembly to become its next president. He succeeds his older brother Fidel Castro, who has ruled Cuba with an iron fist for nearly fifty years. During the elder Castro’s rule, Raul was the head of the army. He also assisted in planning the revolution that saw the overthrow of the government in the 1950s.

Raul Castro has served as acting president since Fidel Castro handed power to him in 2006. The Fidel Castro era officially ended on Tuesday, after he announced that he would resign as the Cuban leader. Fidel Castro called it “a betrayal to [his] conscience to accept a responsibility requiring more mobility and dedication than [he is] physically able to offer.”

Fidel Castro’s resignation was greeted with skepticism in the US. American leaders have pointed that this could be a catalyst for a change to democracy. Secretary of State Condoleeza Rice stated: “We urge the Cuban government to begin a process of peaceful, democratic change by releasing all political prisoners, respecting human rights, and creating a clear pathway towards free and fair elections.” Nevertheless, skeptics remain. Alina Fernandez, the elder Castro’s Florida-based daughter, says “I think that the government will remain mostly the same, but I think they are going to bring a different faces that they need.”

The new Castro regime has promised “a better form of socialism” and possibly a “more democratic society.” Fidel Castro, however, accused President George W. Bush stating that the American vision for Cuba amounts to an annexation of Cuba.

Question: Will Cuba, under Raul Castro, make some move towards democracy—and if so, how can this happen?

Wednesday, February 20, 2008

Central Banks show caution

Source: Central Banks take fewer risks

In light of the global credit squeeze, surveys indicate that managers of foreign exchange reserves within central banks are considerably more risk-averse, placing safe assets back in favor. Investment managers report that pressure is on them to search for greater yields, but that the risk required to achiever higher returns is not favored. Additionally, managers report feeling a much greater pressure to increase the transparency of their investment strategies.

In comparison to last year, more than 80% of reserve managers said that junk bonds, asset-backed securities and mortgage-backed securities are less attractive. In contrast, highly rated government securities are much more attractive. Reports one reserve manager from Asia, “Demand for mortgage-related and other structured products will slow down for some time until financial institutions hit by exposures from subprime investments have recapitalized their balance sheets, ensured their viability and restored confidence of investors in the financial markets.”

However, in spite of shying away from higher-risk assets, at least half of reserve managers report they think there will be a continued emphasis on increasing yields of funds under management. Additionally, euro-dominated assets continue to gain favor, with as many as two-thirds of responding reserve managers reporting that they had increased the proportion of their respective central bank’s euro-backed assets.

Monday, February 18, 2008

Kosovo gains supports of its independence

source: Kosovo is recognized by U.S., France and Britain

This Monday, following Kosovo’s declaration of independence on Sunday, the United States joined France and Britain in their support of the world’s youngest country. U.S. Secretary of State Condoleezza Rice said that the U.S. “has today formally recognized Kosovo as a sovereign and independent state. We congratulate the people of Kosovo on this historic occasion.” France’s foreign minister, Bernard Kouchner, said that a letter recognizing Kosovo’s independence would be sent from President Nicolas Sarkozy to Pristina on Monday, stating that the independence was “a victory for common sense.” Germany is reported to support Kosovo’s independence as well.

However, support for Kosovo’s independence is far from unanimous. The Associated Press reports that Serbia promptly removed its ambassador from the United States in protest of their support of Kosovo, despite reassurances from the U.S. government concerning the welfare of Kosovo’s Serbian minority. Miguel Angel Moratinos, foreign minister of Spain, informed reporters that Spain would not recognize Kosovo because the country’s declaration of independence did not respect international law. In a statement yesterday, he said that “the government of Spain will not recognize the unilateral act proclaimed yesterday by the assembly of Kosovo.” Cyprus, Romania, Bulgaria, Slovakia and Greece are also reluctant to recognize Kosovo. Additionally, Russia demanded an emergency meeting of the United Nations Security Council to proclaim the declaration “null and void,” but the meeting was without resolution. Russia has continuously opposed Kosovo’s independence. Vojislaw Kostunica, prime minister of Serbia, vowed that Serbia will never recognize the “false state.” Serbia has considered Kosovo its heartland since medieval times. Although the Serbian government ruled out the use of military force to respond to the declaration, it will downgrade diplomatic ties with any government that recognizes Kosovo. Demonstrations are planned for Monday in Serbian pockets of Kosovo.

Kosovo is an incredibly poor, predominantly Muslim country with an estimated population of two million. Its unemployment rate is a staggering 60% and the average monthly wage is a mere $250.

Questions for Discussion
1. France's foreign minister Bernard Kouchner stated that Kosovo and Serbia will one day be in the European Union together. Is this a likely outcome?

Sunday, February 17, 2008

Argentina takes proactive steps to protect against economic instability.

SOURCE:—“Argentina announces new measures to stabilize economy"

Concerned about the possibility of a financial crisis similar to that experienced in 2001-2002, Argentina announced protective measure to ensure a stable economy in January of the year.

Among the steps being taken are maintaining a stable exchange rate between the Argentine peso and the United States dollar, ensuring a trade surplus, engaging in necessary market interventions, and increasing its foreign exchange reserve to protect against the possibility of capital flight by investors.

Argentine President Christina Fernandez asserts that the nation is well-placed to weather the current global economic turbulence, despite reports that a recession in the United States could have an adverse affect on economies in South and Central America.


Do you think that the steps Argentina is taking will be enough to protect it from the global economic downturn?

South Africa faces power crisis, economic slowdown

SOURCE:—“South Africa: Country’s Economy Holds Up in Power Crisis—Analyst”

In his recent State of the Nation speech, South African President Mbeki recognized and responded to growing economic problems in the nation that have been further aggravated by the ongoing power crisis. Other factors that signal rough economic times ahead in South Africa are high inflation, the ever-increasing cost of food and fuel, the depreciating rand, and the threat of a recession in the United States.

To respond to the power crisis, which has hit the electricity-dependent mining sector particularly hard, the South African government plans to fund the building of generation facilities. While economic indicators are not promising, observers are not concerned that South Africa faces a recession. Rather they see economic slowdown falling short of recession as a more likely outcome for the continent’s largest economy.


Do you believe building additional generation facilities is the best use of government funds given high food and fuel prices?

US Recession?

Sources: Financial Times, Associated Press, CNN Money

Despite cheap credit and plentiful jobs in quarters past—the US economy may be heading towards a recession. Soaring gas prices, higher cost of consumer goods, and the ever deepening housing crunch has led to a rapid drop in consumer confidence in the US. Consumer import good prices rose 13.7%--the highest since 1982.

Former Federal Reserve Chairman Alan Greenspan predicts a 50% chance that the US economy will lead to recession in 2008. Mr. Greenspan also believes that economic difficulties will not lift until the housing crisis is resolved. He also believes that the US should already be in a recession, except for the fact that businesses are still well capitalized.

Many of the fears have been stoked by the drop in US consumer confidence. A Reuters index noted that confidence has slipped to the lowest levels since 1992. Other pundits believe that this year may be the “worst level in recessions” since the early 1990s. Nevertheless, most economists this downturn will be short-lived, and the current chair of the Federal Reserve is willing to “act as needed” to address the possible economic downtown.

QUESTION: In light of the no-end-in-sight housing crunch, what steps, if any, can the Federal Reserve take to forestall any recession? Furthermore, what effects may a US recession have on the world economy, and what steps can other world leaders take to forestall a global recession?

Hong Kong Cabinet Member Quits

Sources: Financial Times, Bloomberg

After paying an $8.1 million penalty to the US Securities and Exchange Commission (SEC), Hong Kong lawmaker and cabinet member David Li has quit the cabinet. Li was the chairman of the Bank of East Asia, Ltd., and represented the banking sector in the Hong Kong parliament. Li has finally bowed to the mounting pressure to resign that begun when investigation occurred. Li has represented the banking sector for over twenty years.

Li found himself in hot water when he allegedly provided insider tip information about the possible NewsCorp takeover of Dow Jones. At the time of the alleged tip, there was still as yet no announcement. Li was a former director of Dow Jones, and has since been investigated and charged by the SEC. Li settled the case for $8.1 million, neither admitting or denying fault.

Even though Li has resigned the cabinet, he may not have escaped all sanctions. As a bank director, he is regulated by the Hong Kong Monetary Authority, and may face sanctions from the HKMA. Hong Kong requires all bank directors to pass a test that measures “reputation and character, knowledge and experience, and past record, if any, of noncompliance or criminal activity. The HKMA is currently investigating Li.

Despite the pressure, Li is promising to run for another term in the HK parliament.

Discussion Question: How should the HKMA view the settlement between the SEC and Mr. Li in its evaluation of Mr. Li's character? Furthermore, while he claims to be running for another term in the legislature, how can he overcome this dark cloud?

Friday, February 15, 2008

WTO rules against Chinese trade practices

Source: WTO rules against China over trade

The World Trade Organization ruled against China on a complaint dealing with import duties on car parts from the U.S., the European Union, and Canada. This is the first WTO ruling against China since it joined the organization in 2001. Although China will have the right to appeal, effectively delaying a definite decision until late this year or early 2009, interim rulings are rarely changed.
This ruling comes after the creation of a panel in 2006 to examine a surcharge placed on imported car parts. China imposed the surcharge if the imported car parts made up more than a specified percentage of the finished vehicle. Beijing argued that the surcharge prevented circumvention of the car duty by importing large chunks of vehicles for local assembly, thus allowing importers to avoid the duty paid on a fully assembled imported vehicle. In response, the complaining countries argued that the surcharge was merely a device to discourage imports and foster growth in China’s domestic automobile manufacturing industry. Furthermore, the countries argued that the duties imposed on imported car parts was nearly equal the tariff on imported cars, and therefore exceeded the permitted tariff ceiling as well as violated international trade rules banning discrimination on imports. As a matter of comparison, the duty on completed cars is typically 25%, whereas the duty on imported parts is only 10%.

Questions for Discussion
1. If the ruling is not overturned, is the reduction in surcharges paid on imported car parts likely to have a significant impact on the Chinese domestic automobile manufacturing industry? As a matter of policy, given the international economic slump, and the slow in US automobile manufacturing, is this ruling overly strict?

An Independent Kosovo?

Source: Dissent clouds Kosovo’s birth

On Friday, the parliament of Kosovo laid the necessary groundwork for declaring independence, despite uncertainty that the United Nations mission, in place since 1999, will withdraw. The UN interim mission, which has ruled Kosovo since 1999, was scheduled to end in lieu of the western-backed status plan that calls for a 120- day UN handover and the opening of an international supervisory office led by the European Union. However, this transition is uncertain, with Russia continuing to uphold Serbia’s sovereignty over the primarily Albanian province.

As a result of the UN Security Council’s failure to agree on a new resolution, Resolution 1244 remains in place. Resolution 1244, adopted in 1999, provides a legal basis for an EU-led supervisory council even if the UN mission continues to exist. Russia, however, continues to insist that this is not the case. Vuk Jeremic, Serbia’s foreign minister, urged the UN secretary general Ban Ki-Moon to declare that Kosovo’s expected declaration of independence is worthless. Accoring to Vuk Jeremic “[Serbia] shall never recognize Kosovo’s independence. Now now. Not in a year. Not in a decade. Never. For Kosovo and Metohija shall remain a part of Serbia forever.”
At this point, it isn’t quite clear how any party will proceed. The EU distanced itself, while a spokeswoman for the UN secretary general said that “in terms of the UN’s operation in Kosovo, the secretary-general is monitoring the operation very, very closely.” Kosovo president, Fatmir Sejdiu echoed a similar state of limbo, stating that ‘we shall see what Ban Ki-moon will do.” The parliament of Kosovo adopted the Ahtisaari principles on Friday, which ensure that an independent Kosovo can protect human rights as mandated by the EU. However, Kosovo officials refused to confirm when the public declaration of independent might come forward, stating that a few “editorial issues” needed to be dealt with and that coordination with Kosovo’s prime minister, the US and “key EU countries” continues.

Questions for Discussion
1. Should the EU play a more aggressive role in Kosovo's quest for independence?

Monday, February 11, 2008

IMF managing director defends funds role in financial monitoring

Source: IMF Chief backs crises alert calls

The G7 finance ministers, meeting in Tokyo, called on the IMF to work more closely with the Financial Stability Forum, jointly reporting on “identifying potential vulnerabilities and enhancing early warning systems.” Officials at the meeting reasoned that the IMF is in a much better position to monitor, and in some cases prevent, global financial crises. However, Dominique Strauss-Kahn, the IMF’s managing director, insists that the fund can only play a small, primarily analytical role in such a monitoring system.

Although the G7 would like to see an increased involvement from the IMF, Strauss-Kahn stated that in his opinion “the specific work to be done by the IMF is mainly in the analysis of linkages between the financial sector and the real sector.” In defense of this position, he offered that the IMF identified US subprime lending as a potential flashpoint a year ago. However, by his own admission, the IMF could have been more vocal in persuading the US to reconsider its policy. Mr. Strauss-Kahn highlighted the reality that financial imbalances can spread through diverse channels, pointing to the worldwide fall in asset prices as an example. “Today the linkages are much more complicated. This has to be clearly identified and early warning is absolutely necessary.”

He also defended his call for a more coordinated action between countries on the issue of fiscal stimulus. While agreeing that countries are “masters of their own policy” he added that economies representing 20-25% of global GDP “had some room to do something.” “It will need some coordinated action. It will be a long way before we have this idea accepted by everybody: that what is good for one country can be good for the world economy.” But, it is opinion that the solution lies in a “correct policy mix” and a “targeted, timely and temporary fiscal response.”

Questions for Discussion
1. Is the IMF wise in focusing on maintaining a primarily analytical role, or are they better positioned to take a more active monitoring role in global finance?

Sunday, February 10, 2008

Myanmar/Burma To Hold Referendum and Elections

Sources: ABC News, Voice of America, Financial Times

Myanmar, which has been under military rule since 1962, will hold a constitutional referendum in May, with subsequent elections to be held in 2010. No elections have been held since 1990, when the military refused to hand over power to the winning parties. Furthermore, the state has been without a constitution since 1988, when the current military junta discarded it. Myanmar last held a constitutional referendum in 1973.

The election announcement has been met with skepticism and cynicism. While some citizens think this may be a small step forward, others believe the election will be rigged and military junta will retain its power. Debbie Stothardt, spokesperson for human-rights group "Alternative ASEAN Network on Burma," stated that this “is another delay tactic to get international pressure off Burma and also off China in the lead up to the Olympics,” and that "China has been supporting this regime and this has actually allowed this regime to be quite recalcitrant.”

Many of these observers argue that the election will be meaningless because the constitutional referendum process is flawed. There are charges that the current junta essentially wrote the current draft constitution, and thus cannot guarantee the essential rights necessary for democracy and human rights. Furthermore, because the actual draft of the constitution has not yet been publicly released, there are accusations that opponents do not have the time to build the case against the draft. More importantly, most of the anti-government activists are in jail after last year’s anti-government revolts. Finally, critics point out that this new constitution will merely give a civilian-twist to the same old military rule. This is because 25% of the parliamentary seats will be reserved for military appointees, and the military still reserves the right to declare martial law.

Question: If the pro-democracy activists successfully defeat the constitutional referendum, what will the next step be? Besides sanctions and “political pressures” what can the international community do to promote democracy in Myanmar?

Yahoo! Rejects Microsoft Bid

Sources: Financial Times, Bloomberg

Yahoo! is set to officially turn down Microsoft Corp.’s $31 billion bid. As noted in an earlier blog, Microsoft offered $31 for each share of Yahoo! stock. This was far greater than the approximately $19 per share Yahoo was trading for at the time of the Microsoft offer. Yahoo, a distant second in the web search industry, was faced with a $44.6 billion unsolicited takeover bid last week. The Yahoo! board, upon reviewing Microsoft’s offer, has apparently decided the $31 per share was too low, and has voted to reject it. It has been speculated that Yahoo! directors were seeking at least $40 per share. Nevertheless, many experts believe this deal is not dead, but rather the $31 per share offer would be simply an initial volley to begin a round of negotiations. A deal could be reached if the offer price increased to $34-$37 per share. Microsoft offered $43 per share a year ago, when Yahoo! was trading at a much higher level.

Despite Yahoo! apparent rejection of Microsoft’s offer, Microsoft may seek to engage in other means to succeed in the takeover. Microsoft’s CEO, in the offer presented to Yahoo!, noted that Microsoft “reserves the right to pursue all necessary steps.” It is believed that Microsoft could initiate a “proxy contest” and takeover the Yahoo! board. It has hired a series of experts at various proxy solicitations firms and financial advisors. Yahoo! is also preparing for a proxy fight. Yahoo has hired its own experts, and is rumored to be seeking assistance from other companies, such as News Corp. or even Google. The New York Times has reported that Google CEO has made initial forays into a discussion about a Yahoo-Google partnership. Rupert Murdoch, the owner of News Corp., has been stated as not being interested in such a partnership.

Question: If Yahoo! successfully staves off the Microsoft bid by entering a partnership with Google—how could such a deal survive regulatory scrutiny?

“Non-Dom” tax creates waves

Source: US unease at UK tax clampdown

The US and UK are at odds over a tax clampdown that will adversely affect many wealthy non-domiciled foreigners living in Britain. This tax threatens to hit Americans particularly hard, forcing them to pay up to £30,000 in taxes.

In its present form, the UK tax is not a valid write off under the US tax system. This means that Americans working in the UK will incur a double tax on their income. The fear if the UK refuses to compromise on the impending tax, the added financial burden will result in a dram of talent from the City to other jurisdictions, compromising London’s reputation as an international center of finance. Richard LeBaron, chargĂ© d’affaires for the US embassy in London stated that “The embassy has been consulting widely and hearing the concerns of American companies and taxpayers in the UK. We are communicating those concerns to HM Treasury and others in the UK government as part of our regular dialogue with them.

However, the Treasury continues to resist pressure to respond to the US concerns. It is the opinion of the Treasury that the implications of the UK tax changes on US taxpayers is a matter for the US authorities.

The exact details of the regime remain unsettled. The Treasury is still considering plans that would charge foreigners £30,000 a year who live in Britain for more than seven and wish to keep their foreign income out of the British tax system. The government also intends to close loopholes which allow wealthy individuals to escape capital tax on UK assets in offshore trusts. Decisions on these changes will not be settled until the Budget meeting on March 12. This leaves only 18 working days before the proposed changes will take effect. The uncertainty is creating chaos for tax advisiers. Mike Warburton, senior tax partner at Grant Thornton said that it was “quite extraordinary” that changes were not yet finalized, adding that “this is not the way to run a modern economy.”

Questions for Discussion
1. Are these proposed changes likely to dissuade foreign companies from establishing offices in London?

Sunday, February 03, 2008

Chad’s capital rocked by political violence

SOURCE: ASSOCIATED Press—“China pulls citizens out of Chad after violence in capital”

Chad’s government troops have struggled to beat back attacks on the presidential compound in the capital city of N’Djamena. Rebel forces seek to unseat the current president, Idriss Deby. Among the reasons for dissatisfaction with the leader noted in reports are what is seen as a lack of support for Sudanese rebels in Darfur, as well as the recent discovery of oil, which has contributed to power struggles in the nation.

The violence in Chad has escalated to such a point that the Chinese government has evacuated most of its citizens from that nation. China has steadily been increasing its presence in a number of African nations, including Chad, in efforts to access natural resources and energy, which are typically plentiful there, as well as obtain new markets for their consumer goods.

Political unrest is harmful to investor confidence and economic health in general. What are some solutions for countries suffering from political unrest—like Chad and Kenya—to avoid economic upheaval? Is it possible?

Taiwan and China At It Again

Sources: China Daily, Reuters

China is ratcheting up the verbal jousting over Taiwan’s proposed referendum regarding its UN status. Taiwanese voters will decide on March 22 whether the Taiwanese state should seek formal UN membership under the name “Taiwan.” The United States, adhering to its “One China” policy, opposes the measure. China released a strongly worded statement opposing the referendum calling this a vote on “de jure independence.” China has threatened that Taiwan President Chen Shui-Bian will “pay a heavy cost” if this vote occurs. China also reiterated the “One China” policy, stating that any issue involving China’s sovereignty “has to be decided by all the 1.3 billion people of the country, including Taiwan compatriots.” Nevertheless, Taiwan has decided to go through with the referendum in the face of world opposition. China views Taiwan as a “renegade” province awaiting reunification, and has promised to unify Taiwan and China—by force if necessary.

Some critics have found that this referendum is being held for political purposes to deflect attention from President Chen’s sagging presidency. President Chen has been accused of accomplishing very little during his terms, and this referendum would deflect such criticism. Furthermore, this referendum is being held after President Chen’s Democratic Progressive Party (DPP, a pro-independence party) suffered a massive defeat at the polls.

Question: How far will China dare to go if Taiwan decides to pursue UN membership under the name “Taiwan?” Will the United States intervene—and if so, how?

Microsoft-Yahoo! Merger?

Sources: Bloomberg, Silicon Valley Insider

Software giant Microsoft has placed a $44.6 billion hostile takeover bid for Yahoo! Inc. Yahoo! is one of the busiest web portals in the world, and would be a business boon for Microsoft who is keen to enter into the web market. A successful takeover of Yahoo! would quadruple the online advertising revenue for Microsoft. Microsoft’s MSN portal is far behind in terms of revenue and usage to the industry leaders Google and Yahoo. The market adjusted to the news of the takeover, as Yahoo gained nearly 48%, while Microsoft dropped 6%. Industry leader Google dropped 8.6% on the news.

While the most recent bid to purchase Yahoo! was unsolicited, Microsoft had privately made offers to purchase Yahoo! earlier. After being refused by Yahoo! CEO Jerry Yang, Microsoft went public. According to insiders, Microsoft “told Yahoo! execs that they had two days to respond [to the offer] or Microsoft would go public.” Yahoo refused the offer, and Microsoft made the hostile takeover bid. CEO Yang is now rumored to look sell Yahoo! to any bidder other than Microsoft.

Question: Can a Microsoft-Yahoo! merger unseat the industry leader Google?

Saturday, February 02, 2008

Opec to maintain current output

Source: Opec set to keep unchanged output

Opec will deny pressure from oil-consuming countries to increase production to offset inflationary pressures, attributing the recent record highs to price speculation rather than increased demand. Ministers of the oil producers’ cartel insist that there is no need to increase supplies, warning that the impending economic deterioration could force a cut later this year. Although prices soared to an unprecedented $100.69 per barrel earlier this year, Opec ministers insist that this peak is merely the result of Wall Street investors pouring money into the commodity market. Said one delegate, “Crude oil is the new gold. Investors are using crude oil as a perceived safe heaven and as a hedge against the weakening of the US dollar.” Opec president Chakib Khelil said “There is not demand for more oil and consequently I expect that production (levels) will be maintained. Additionally, Opec delegates offered that Saudi Arabia, the cartel’s de facto leader, shares the growing consensus that output levels should remain unchanged, although the kingdom is concerned about the impact of high oil prices on consuming countries. Saudi oil minister Ali Naimi insisted that “if there is a need to take an action we would take it. But the current situation shows that all market fundamentals are sound.” Additionally, “supply and demand are equal, and global reserves are fine.”

Not all consuming countries are content with maintaining current outputs. US President George Bush personally called on Riyadh to increase its oil supplies, arguing that record energy prices are only exacerbating the current economic crisis.
Opec delegates echoed the concerns that inventories are too low, but pointed out that gasoline stocks remain healthy. Additionally, the cartel’s own analyses insist that inventories will recover sharply in the second quarter due to lower season demand as the northern hemisphere’s winter comes to an end. Opec forecasts that it would need to supply approximately 31.99 barrels a day this quarter to balance the market but only 30.5 barrels per day in the second quarter. Current total output is 31.98 barrels per day. Opec plans to review its decision to maintain current output at its March 5th meeting. At this meeting, some countries, such as Venezuela, will propose the idea to cut production if the US economy falls into a recession.

Questions for Discussion
1. Is Opec making the right decision in maintaining current production rates?
2. Is the economic strain resulting from higher energy prices likely to considerably accelerate the economic decline?

Friday, February 01, 2008

Record Eurozone Inflation

Source: Eurozone inflation soars to 14-year high
The current Eurozone inflation rate of 3.2% represents a 14-year high, providing a strong case for the decision of the European Central Bank to not cut interest rates, despite the region’s slowing growth rate. Unlike the US Federal Reserve, who recently made sharp interest rate cuts in an attempt to bolster a slowed economy, the ECB is not expected to budge from its 4% interest rate.
The rise in inflation is attributed to a “hump” in inflation resulting from higher fuel and food prices, which are creating a longer lasting effect on the economy than anticipated. January’s rate is the highest since the ECB took control of the monetary policy in the eurozone in 1999. It is also significantly above the ‘target rate’ of 2%. This is further complicated by the fact that growth in the eurozone is typically less volatile than growth in the U.S. and recent trends suggest that the region has a significant chance of falling into a recession in the next two years.
Although the slowdown in growth is noticeable, both the housing and industrial markets seem to be faring better than most. The service sector and consumer markets are experiencing the sharpest falls in confidence, with German retail sales showing last Thursday that spending in Europe’s largest economy fell by 2.2% last year. However, Germany also reported a sharp drop in seasonally adjusted unemployment—the 89,000 drop represents the lowest unemployment figure in 15 years. However, Eurostat, the European Union’s statistical unit, warned that this ‘flash’ was “more uncertain than usual” because of statistical changes in Germany.

Questions for Discussion
Is the ECB’s consistent refusal to lower the interest rate good policy?
How ‘real’ is the threat of a recession and what effects is a recession in this region likely to affect the global economy?