Sunday, November 28, 2010

The Rise of the IMF

Irish Times: Efforts Intensify to Finalise Bailout Package by Tomorrow
New York Times: Debt Crisis Highlights I.M.F.’s Renewed Role
Bloomberg: Serbia Accepts IMF Terms, Paving Way for Loan Tranche

This year alone, the IMF has given loan packages and credit lines to Ireland, Colombia, El Salvador, Greece, Jamaica, Mexico, Poland, and Ukraine. Serbia is expected to join that list soon, and few would be surprised if Portugal and Spain accepted IMF aid in the near future. IMF’s active involvement throughout the world since 2007 has increased its legitimacy and made more countries inclined to accept IMF aid.

Two reasons for the IMF’s greater authority are its changes in policies and structure. The IMF gives out conditional loans. The conditions are various economic reforms recommended by the IMF. The IMF now gives central banks greater freedom to structure aid packages, retracting the old policy that central banks could only target a very low level of inflation. The old policy was an unpopular one because the central bank had to restrict the money supply to achieve low inflation, and restricting a country’s money supply slows its overall economic growth. The IMF also mandated severe budget austerity programs to decrease government borrowing and eliminate the prospect of future inflation. Decreasing borrowing alleviated long term concerns that the government would increase the money supply and then use the less valuable, and thus inflated, currency to repay its debts. Although unpopular, the old policies were effective at fighting inflation. The IMF also allows developing countries to exercise mildly protectionist measures in severe situations to help domestic industry where the IMF was previously against protectionism in any situation.

Structurally, the IMF has reorganized itself by giving more voting authority to Asia at Europe’s expense. The redistribution of power has given the IMF more legitimacy to many in the developing world as many feel the IMF now reflects their interests. Another sign that the IMF is incorporating more of the developing world is that the next Managing Director of the IMF is not expected to be from the developing world. Kenneth S. Rogoff, the former Chief Economist of the IMF, finds it “inconceivable that they’ll have a Western European or North American as the next Managing Director.”

The IMF has also taken on a new role as advisor. The G-20 economic powers gave the IMF the task of correcting the balance-of-payments distortion which is a source of political and economic danger between Asia and America. This is a massive task that lies at the heart of the global economy.

The IMF and EU bailout of Ireland shows the IMF’s traditional role as lender, and its new role as global economic advisor. The total loan of €85 billion comes from a variety of sources, only one of which is the IMF. However, the IMF is in charge of supervising the use of all the funds and advising Ireland’s economy policymakers. The IMF is seen as the best institution to monitor policy reforms and is highly valued in that capacity.

While the IMF has increased its power in recent years, it still issues the same type of conditional loans it always has. Serbia and IMF recently reached an agreement, subject to approval by the IMF Board of Directors, for anther loan tranche from the IMF in exchange for Serbian economic reform. Serbia will reduce its budget deficit from 4.8% to 4.1% of GDP this year, freeze subsidies at 2010 levels, and allow for only modest rises in public wages and pensions. The IMF will also oversee the reform of the pension system.

1. The IMF is the leader in the G-20’s effort to diminish the trade imbalance between Asia and America. Will the IMF be as successful advising China and the United States as it has previously been with smaller nations?
2. Does the fact that the IMF is now directing most of its energies towards European issues please or displease the developing world?
3. Given the increasing economic power of the developing world, how many more changes in the IMF’s structure can be expected in the next twenty years?

Portuguese Economy Struggling


With the slow growth that has plagued the Portuguese economy over the past decade, both Portuguese officials and EU Commission President Jose Manuel Barroso have had to fend off rumors that Portugal is next in line for a financial rescue package from the European Union. The Financial Times Deutschland recently reported that several Euro Zone countries and the European Central Bank were encouraging Portugal to seek financial aid from the EU and the IMF. However, Barroso claimed that that report is "absolutely false," and that a rescue package for Portugal has been neither requested nor suggested by the EU.

Nevertheless, economists still anticipate that Portugal will eventually receive EU bailout funds. One economist stated that the market is already assuming a bailout for both Portugal and Spain, even though officials from both countries have vehemently denied this possibility. Portuguese Prime Minister Jose Socrates emphasized the 2011 budget that the Portuguese parliament recently passed, which aims to cut the deficit from 7.3% of GDP to 4.6% in 2011 by imposing public spending cuts. The budget measure also includes a value-added tax (VAT) increase to a maximum rate of 23%.

Portugal's economic problems are primarily a result of the country's inability to adapt to globalization over the past decade. Portugal has struggled to compete with nations like China, who are able to produce the same goods as Portugal but at a much lower price. At one time, one of Portugal's largest exporters was its shoe-making industry. But since 2001, its shoe production has decreased by 40%.

Some of the stronger economic EU countries may be putting pressure on Portugal to accept aid to help stabilize its economy. The euro has sharply fallen due to fears of instability in several European nations, including Portugal. The euro fell to $1.32 this week, down 3% in this week alone.

Discussion Question: Are EU and Portuguese leaders just trying to instill confidence by denying that Portugal is set to receive EU bailout funds?

Saturday, November 27, 2010

Bemba Trial Marks Crucial Point in International Criminal Court’s History

The Economist: International Justice: In the Dock, but for What?
The Washington Post: Witness at War Crimes Trial Weeps Over Girl’s Rape
The Guardian: Bemba Trial: The International Criminal Court Takes on Gender Crimes

CNN: Militia Leader Accused of Crimes Against Humanity Goes on Trial
International Criminal Court: Situation in the Central African Republic
Wikipedia: International Criminal Court

Last Monday marked the start of the long awaited trial of Jean-Pierre Bemba Gombo in The Hague, Netherlands. Bemba was formerly the vice president of the Democratic Republican of Congo. He is on trial in the International Criminal Court (ICC) for both war crimes and crimes against humanity, including murder, pillaging, and rape. These alleged crimes did not take place in Congo, but in the bordering country of the Central African Republic from October of 2002 to March of 2003.

International human rights groups have accused Bemba, the leader of the political party and militia known as the Movement for the Liberation of Congo (MLC), of using the MLC to kill, rape, and pillage civilians in the Central African Republic in order to assist the Central African Republic’s then president in his fight against rebel forces. Bemba, as the MLC’s commander in chief, is accused of failing to prevent and punish the MLC’s war crimes and atrocities. This is the ICC’s first case trying the commander of a military force for failing to responsibly handle his troops.

Bemba’s trial marks a critical point in the ICC’s history. The Rome Statute of the International Criminal Court treaty established the ICC in July of 2002. There are currently 114 countries that have either signed or ratified the treaty, including the United States. The main purpose of the ICC is to provide an international tribunal that has jurisdiction over four different types of crimes: genocide, war crimes, crimes against humanity, and the crime of aggression. Since its creation in 2002, there have only been a handful of trials in the ICC. Critics of the tribunal condemn its slowness, the expensive natural of its operations, and even its credibility. The Bemba trial is a chance for the ICC to silence some critics by holding a fair and speedy trial in the midst of high publicity.

The Bemba trial also marks a significant point in history, because it is the first trial in which sex crimes are part of the main focus. Bemba’s trial is an opportunity for the ICC to prove it is serious about the prosecution of sex crimes. The tribunal needs to set a firm precedent that sex crimes will not be tolerated in order to discourage their occurrence in the future.

Sex crimes have been historically used to demoralize and terrorize civilians into submission. Sexual violence in conflicts usually results in increased numbers of AIDS, gang rapes, and unwanted pregnancies. Often victims of sex crimes are wrongfully blamed within their cultural groups. If successful, the International Criminal Court’s trial of Bemba should be a step in the right direction for the prosecution, punishment, and declination of sexual violence in times of conflict. Hopefully, it will also bring more peace to the Central African Republic and its survivors, many of whom have been waiting almost a decade for justice.

1. Do you think there should be an international tribunal, like the ICC, to try crimes against humanity, war crimes, genocide, and the crime of aggression? Why or why not?

Wednesday, November 24, 2010

Eastern European Stock Exchanges

The Economist: Bourse Battle
Bloomberg Businessweek: Shares in Warsaw Stock Exchange Rise After IPO

On November 9th, the Warsaw Stock Exchange (WSE) launched its initial public offering (IPO) of shares to great demand. The Polish government is looking to raise 25 billion zlotys ($8.6 billion) to pay for part of its budget deficit in the coming years. The IPO raised 1.2 billion zlotys, which was more than anticipated, and represented 63.5 percent of the exchange’s total stock. The targeted price per share was 36-43 zlotys, but the price for each share by the end of the day was 46 zlotys.

This is a massive privatization effort by the Polish government. Previously, stock in the WSE has been under the aegis of the Polish government. Although this gave the Polish Government great control over the economy, it was an outdates policy resulting from actions taken immediately after Soviet rule. There is evidence that Poland is succeeding in privatizing its stock market. There are now 700 businesses listed on the exchange, and daily trading surpasses $600 million. The November 9th IPO was the 25th IPO this year, which is a strong number of IPOs for the WSE compared to Poland’s neighboring countries.

Poland is not alone in Eastern Europe in trying to create a viable stock market. Vienna is striving to be the regional leader too. The Vienna stock exchange, the CEE Stock Exchange Group (CEESEG), brings together the exchanges from Vienna, Budapest, Prague, and Ljubljana. However, in the CEESEG, there has only been one IPO since 2007. In the Prague exchange alone, there are only 27 companies listed, which is down from over 150 a decade ago.

The development of multiple stock exchanges has led to competition for companies’ IPOs. Many companies in Eastern and Central Europe find that their own nation’s stock exchange is fragmented or unstable. For example, Romania has two competing stock exchanges. This is a problem as smaller stock exchanges have less liquidity than larger ones, decreasing investment. The WSE has been a popular destination, drawing companies from Ukraine, Romania and elsewhere. The CEESEG is targeting companies in the Balkans. Although both are looking for international clients, the two are still mostly composed of domestic companies.

The biggest threat to the WSE or the CEESEG is not from one another, but from the London Stock Exchange (LSE). The LSE has attracted many listings from Russia, Ukraine, and Kazakhstan. Even the chief executive of the WSE admits the WSE is modeled after the LSE. Another threat outside of Eastern Europe is the Istanbul Stock Exchange (ISE). The ISE is has double the market capitalization of the WSE and five times the turnover. The ISE may also act as a more accurate model for the WSE as the ISE is still state-owned, and like the WSE, it has not expanded its sphere of influence much beyond its own borders.

Eastern European companies are now looking for a place to hold an IPO, and investors are eager to invest. The stock exchanges are rising in Eastern Europe to serve that demand. While it would be beneficial to the region if the WSE and CEESEG were successful, as money would stay in the region, it will be a long time before either can rival the Dow Jones or the LSE.

1. Financial markets allow for businesses and governments to conduct commerce around the globe. If the world is so globalized, then why do companies care which stock exchange their stock is listed on?
2. Given that Greece was one of the nations worst hit by the financial crisis, how wise is it for the CEESEG to focus on gaining investment from Balkan nations?

Monday, November 22, 2010

Argentina Ready to Pay Paris Club Debt

Sources: Argentina's Paris Club Debt to be Resolved by Early 2011, Lorenzino Says El Club de París quiere que la Argentina pague en el corto plazo La Argentina y el Club de París El FMI ve como una "cosa buena" el inicio de negociaciones de la Argentina y el Club de París UPDATE: Argentina Rules Out Quick Paris Club Repayment –Minister

Argentine President Christina Fernández de Kirchner announced earlier this week that Argentina would begin negotiations to pay off its debts to the Paris Club, a group of international creditors that includes the U.S., Japan, and Germany. Argentina has been in default with the Paris Club since its economy collapsed in 2001.

The Paris Club debt totals about $7.7 billion. The Argentine Government originally announced plans to pay the debt with foreign currency reserves in late 2008, but when Lehman Brothers failed and the global financial crisis ensued, the Government changed course and decided to hold on to those reserves through the lean times. Now that the country is back on track economically (its economy is projected to grow by around 9% this year), the Government has decided that it is financially capable of making the debt payments.

Normally the Paris Club will only negotiate debt repayment plans with the participation of the International Monetary Fund and its team of auditors. However, most Argentine politicians say the 2001 collapse was a direct result of the changes the International Monetary Fund required Argentina to make to qualify for loans, which has resulted in poor relations between the two over the last decade. This inspired Argentina to successfully insist that any negotiations with the Paris Club not include the IMF. This is a huge political victory for Argentina, where politicians claim victory in this “David versus Goliath” clash. The IMF has even made public statements saying that its exclusion is a “good thing.”

Though the IMF will not participate in the negotiations, the meetings will surely still be contentious. The Paris Club creditors want Argentina to pay the debt off as fast as possible to avoid another change of course by the Argentine Government. This fear has escalated with the recent passing of former President Néstor Kirchner who was widely expected to run for (and easily win) the presidency in 2011; with his death the race is now wide open.

Argentina, on the other hand, disagrees with any proposed payment schedule that might interfere with its growth. The Argentine Government has already made it clear that it will not pay the debt in one lump sum or in less than one year, but it is also anxious to receive the benefits that come with removing the stigma that comes with defaulting on national debt. The Government hopes that paying the debt will increase the amount of foreign capital flowing into the country, which would help build needed infrastructure and fund further economic expansion.

1) Some government critics have suggested that Argentina wants to keep the IMF out of the negotiations process because the Government fears that the IMF auditors will find flaws in the Government’s accounting that will expose an economic situation less favorable than the picture the Government currently projects. This is surely a situation the Paris Club recognizes, and yet it has agreed to negotiations without the IMF. Why?

Thursday, November 18, 2010

India's Microfinance Sector Facing Collapse

WSJ: SKS Chairman Fights Backlash
NYT: India Microcredit Faces Collapse From Defaults
FT: Microfinance: India Considers Rate Cap on Loans to Poor

Microfinance is the practice of extending small loans to individual borrowers who have traditionally lacked access to credit. The goal of this practice is to help the poor start or expand businesses, and it has become a popular antipoverty strategy in the developing world. In India, commercial banks are required to direct a certain percentage of their net credit (40 percent for local banks, and 32 percent for foreign banks) to designated "priority sectors." The Reserve Bank of India designates these sectors, and includes areas such as agriculture, small business, housing, education, and lending to the poor and vulnerable.

In recent years, Indian commercial banks have met this requirement by making loans to microfinance institutions such as SKS Microfinance. Rather than making loans to hard-to-reach borrowers directly, commercial banks turned to these microfinance institutions because it was cheaper and easier for them. Today, Indian banks have $6 billion in outstanding loans to the 44 for-profit Indian microfinance companies. Initially, this relationship was mutually beneficial–– microfinance companies received the liquidity they needed to make the millions of tiny loans to provide poor borrowers with the capital necessary to lift themselves from poverty, and the banks were able to fulfill their required priority lending targets by simply making loans to a couple of large microfinance companies, "rather than trying to establish rural network lending themselves."

Now, it appears that this mutually beneficial relationship is breaking down. Microfinance companies have recently been under scrutiny for their lending tactics, which have been compared to the subprime mortgage crisis in the United States. For example, the microfinance companies borrow from commercial banks at a rate between 11 and 15 percent, and then turn around and lend at a rate of 30 percent. They also have been criticized for their "coercive" debt collection tactics. Further, these microfinance institutions are making huge profits. SKS, India's largest microlender, was valued at $1.5 billion last August. According to India's Minister for Rural Development, "[t]hese institutions are using quite coercive methods to collect . . . . They aren't looking at sustainability or ensuring the money is going to income-generating activities. They are just making money."

All of this came to a head in October, when India's Finance Minister asked India's state-owned banks to stipulate that interest rates be capped at 24 percent in their loan agreements with microfinance institutions, and legislators in Andhra Pradesh passed a strict new law restricting how microfinance companies can lend and collect money. But this new legislation may be too late, as the industry is now facing collapse because it has put the banks' portfolios in serious risk, and many borrowers have no idea how they are going to pay their debts back.

Microfinance systems similar to India's have sprung up in Africa, Latin America, and other parts of Asia. The World Bank has used India as a test for similar social enterprises that make profit will simultaneously filling a social need.

Discussion Question: How should law makers in India, and around the world respond to microfinance companies' tactics?

Wednesday, November 17, 2010

G-20 Summit Concludes without Much Resolution on Important Issues

BBC: G20 to Tackle US-China Currency Concerns

Wikipedia: G20 Major Economies
Republic of Korea G20 Website: What is the G20?
Christian Science Monitor: Curtain Closes on G20 Summit

The Financial Times: G20 Shuns US on Trade and Currencies

The G-20 Summit in Seoul, South Korea came to a close last week. The G-20 group consists of the European Union along with the 19 countries that comprise the world’s leading economies. The countries are usually represented by their finance ministers and governors of central banks, and in more recent times, by the heads of state. Since 2008, the G-20 group has replaced the G-8 as the main global economic forum, mainly in response to the global financial crisis, but also in recognition of the need to include emerging countries in discussions about the global economy. The G-20 group represents two-thirds of the global population, 80% of all global trade, and 85% of the global gross national product. The group’s purpose is to address issues involving global economic stability and growth, as well as global development.

Tensions were high coming into the Summit because of the impending currency war between the United States and China. (See Currency Wars). During the Summit, the G-20 failed to reach any agreement concerning the “currency imbalances.” The G-20 Summit declaration did state that the world should move towards “more market-determined exchange rate systems” in order to enhance “exchange rate flexibility to reflect underlying economic fundamentals” and avoid “competitive devaluation” of global currencies. The declaration, which relied on G-20 existing policies, was well short of what the United States wanted– China to revalue its currency that would limit the United States’ trade deficits.

Because of the vast impact currencies and trade have on the global economy and the tensions going into a summit, it was unlikely China and the United States could reach an agreement; the Summit seemed doomed to fail. Indeed, many critics have categorized the 2010 G-20 Summit in Seoul as a failure. However, despite the G-20 group’s failure to resolve any of the major issues concerning the currency wars and imbalances of global trade, the group made some important progress. G-20 leaders did agree on the procedures that will increase emerging countries’ influence on the International Monetary Fund. Additionally, the G-20 group approved the Basel III standards on bank capital and liquidity. However, this progress may not be enough; many experts fear that without any resolution on the issues of trade and currency imbalances, the conflict between the United States and China will only escalate further and hinder global growth.

1. Was the G-20 Summit doomed to fail?
2. Why would the G-20 Summit rely on previous language and existing policies, rather than try to craft new ones?

Monday, November 15, 2010

A Basket of Gold

Reuters: World Bank Chief Surprises with Gold Standard Idea
The National: Obama Defensive in Face of World Bank
Financial Times: The G20 Must Look Beyond Bretton Woods II
Financial Times: Zoellick Seeks Gold Standard Debate

The President of the World Bank, Robert Zoellick, has called for reform of international exchange rate policy. His most striking comment was the suggestion that the world use gold as a reference point for inflation, deflation, and determining future currency values. Many financiers, and even textbook writers, view gold as “old money” with no place in modern, computer-driven finance. Zoellick’s rationale is that many countries, especially in the West, still hold massive amounts of gold in reserve as secure assets; it should be formally put to use. Gold is viewed as a safe asset, so its value goes up when the economy is in recession, or when people think the economy is slowing. Thus, its use as an indicator is that its value is inversely related to general economic trends.

Although Zoellick’s recommendation that gold regain some of its lost importance was surprising to many, it was part of a more important statement. Zoellick outlined a system bringing together a basket of currencies, plus gold, into a fixed relationship with each other to create greater stability to the global monetary system. The system would not leave currencies totally fixed in value with one another, rather the currencies would be adjusted to allow for changes in economic conditions.

The primary reason for Zoellick’s recommendation is the current instability in currency markets. Although initial signs indicate the United States’ second quantitative easing is having positive effects, many nations have voiced their discontent or condemnation of American monetary policy. The Federal Reserve bought $600 billion in various bonds to increase the money supply in an effort to strengthen the American economy. Buying bonds, and thus increasing their price, causes the interest rate to fall. When the interest rate falls, holding dollars is less profitable, and investors move their money elsewhere. China, Germany, Russia, India, and many emerging nations worry the excess money will gather in their economies where the interest rates are higher, creating fears of inflation and asset price bubbles.

The German Finance Minister also noted that it is inconsistent for the U.S. to criticize China for currency manipulation and then use the Federal Reserve to lower the value of the dollar. The G-20 Summit, occurring November 11th-12th, will focus mostly on currency disputes. Zoellick’s proposal is certain to add to the discussion.

1. Other developed nations have not greeted the recent expansion of the American money supply with the same harshness as the developing world. Why is Germany the exception?
2. How would American interests be damaged by the world shifting away from using the U.S. dollar as the main reserve currency?
3. Given the tension among the G-20 members on various issues regarding the world economy, how will this latest dispute affect the talks?

Friday, November 12, 2010

UK Tuition Hike Spurs Protests

NYT: Protest in London Turns Violent
Financial Times: London Street Protest Turns Violent
WSJ: UK Students Protest Higher Tuition Fees
BBC: Q&A: University Funding

In an effort to curb Government spending and balance the budget, the UK Government has proposed to cut funding for higher education by 40%. These cuts include the elimination of teaching grants in all areas except for science and math. Under the new proposal, a tuition hike that will be implemented in 2012 will cover these costs. The education cuts are part of a larger UK spending plan to cut $130 billion by 2015.

The proposal will allow universities to charge £6,000 to £9,000 ($9,600 to $14,400) in tuition per year. This is a significant increase from the current caps on university tuition, which is £3,290 ($5,264) per year. The hike is even more significant in light of the fact that until the late 1990s, college tuition was free. It wasn't until the Labor Government introduced tuition fees in 1997, requiring all students to pay £1,000 in tuition fees per year of study, that British students had to pay anything at all to attend a university. Under the new plan, the Government will continue to loan students money to cover tuition costs; graduates will have to start paying their loans once they earn £21,000 or more per year, up from £15,000; and graduates will be required to pay up to 9% of their monthly income towards their student loan debts. The interest rate at which the repayments will be made, currently at 1.5%, will be raised according to a progressive tapering system: interest rates will not increase at all for anyone making less than £21,000, but will increase to 3% or more for those making more than £41,000.

The Government has traditionally subsidized higher education in the UK and many students are protesting this transition with great fervor. An estimated 52,000 people came together near Parliament on Wednesday to protest the new education proposals. Fourteen people, including seven police officers, were injured, and thirty-five were arrested. The protests turned violent when the protesters attempted to storm the Milbank Building that houses the Conservative Party. Protesting students set fires, smashed windows, fought police, and eventually made their way to the roof of the Milbank building, from which they threw down water, paper, and even a fire extinguisher, onto crowds of people below.

The protest was organized by the National Union of Students and the University and College Union, the academics' trade union, and was intended to be peaceful. NUS president Aaron Porter claimed that a "small minority" undermined the efforts of the rest of the group that sought to maintain a peaceful protest. Porter and others argued that the violence would undermine their message. One vice-chancellor from a London university making this point stated "[the protest] could not have gone better for the Government. George Osborne [the current Chancellor of the Exchequer] will be delighted."

Discussion questions: Given the state of the economy in the UK, are the protesters overreacting to the Government's decision to increase tuition? What could the UK do to avoid increasing costs for students?

Thursday, November 11, 2010

Tanzania Announces Plans for Large Infrastructure Development

Wikipedia: Eurobonds
Investopedia: Eurobonds
All Africa: Tanzania: Poor Infrastructure Dogs Development
Bloomberg: Tanzania May Sell $500 Million of Eurobonds in 2011 – 2012, Central Bank Says
All Africa: Tanzania: Business Confidence High Despite Impending Polls

Last June, the Finance Minster announced that Tanzania would try to borrow around $1.4 billion from lenders in order to finance massive infrastructure projects, such as building roads, expanding ports, and increasing the nation’s power generation. Eurobonds are one avenue for the country to raise these funds. Last week, the Bank of Tanzania announced this week that it was planning on selling around $500 million of Eurobonds within the next two years.

Eurobonds are bonds for an international market. The issuing country issues the bond in a foreign currency, rather than its own local currency. The bond issuer will pay the bond holder interest on the bond over time. An attractive feature of the Eurobond is that the holder does not have to pay a withholding tax on the interest. Eurobonds also draw investors because of their small par value (face value) and high liquidity (investors can easily buy and resell the bonds without affecting their price).

The bonds will help provide Tanzania with the funds to undertake massive infrastructure-building projects. Constructing roads will be one such infrastructure project. Tanzania’s road system is a network of 85,000 kilometers of roadway, but only around 5,000 kilometers are paved. This new infrastructure is important for Tanzania, because poor infrastructure has caused many problems for the county, such as inhibiting both trade and anti-poverty efforts.

Tanzania is currently one of the least developed countries in the country. The national economy relies heavily on agriculture that is not industrialized. Although there are other sectors, such as tourism, mining, construction, and manufacturing, the agriculture sector employs almost 80% of the country’s workforce. If the nation can develop better infrastructure, it will be an important step for the nation’s development and help ease the Tanzanian economy’s reliance on agriculture.

Discussion Questions:
1. What are some of the advantages and disadvantages Eurobonds have over other revenue-raising tools?
2. In what ways, other than helping trade and anti-poverty efforts, might new infrastructure affect Tanzania?

Sunday, November 07, 2010

China Makes More Investments in Greece

NYT: China, Looking for Investments, Turns to Europe
WSJ: Beijing Offers Support to Greece
China Daily: COSCO Acquires Rights to Athens Port

Since the global financial crisis, China has made huge investments in several European countries. Particularly, it has invested in those that were hit hardest by the financial downturn such as Greece and Spain. These investments are beneficial for both China, which has huge currency reserves, and the countries in which China is investing, which desperately need foreign investments. Haris Pamboukis, the Greek Investment Minister, recently said "the support of our Chinese friends is fortunate for us." But China is fortunate as well, as Greece's desperate need for financial support may benefit China financially and politically.

China has focused its investments in infrastructure; specifically, on ports in Greece and Italy along with highways between Eastern Europe, Germany and Turkey. Last month, Chinese Prime Minister Wen Jiabo visited Athens to discuss Chinese investments in Greece. Wen pledged that China would continue to buy Greek bonds and announced the creation of a $5 billion fund that shipbuilders could use, but only to buy Chinese ships. This summer, China's state-owned shipping giant Cosco acquired the rights to Athens' main port, Piraeus. Cosco signed a 35-year lease and paid $4.2 billion for the rights. Cosco is seeking to transform Piraeus into a much larger port to rival Rotterdam, which is currently the largest European port. It aims to double the traffic at Piraeus to 3.7 million containers by 2015. Cosco has also recently expanded in Italy, to the port of Naples. China has also purchased $625 million in Spanish debt, and other struggling countries such as Ireland and Hungry are hoping to persuade China to make investments there, too.

These investments may make China a more dominant player in Europe. According to one source, China is hoping to build a track record of investments that will eventually encourage Europe to support it in disputes with the World Trade Organization concerning trade and currency. Some analysts say that China is hoping to wield greater influence over the economic policies set in Europe. Investing in Greece could also be quite profitable for China. Haris Pamboukis, Greece's Investment Minister, stated investing in Greece is a good opportunity right now "because it has undervalued assets due to its systematic risk . . . [w]hen there is a crisis and risk, there is a very significant profit margin." China will continue to foster relations with Europe this week, as Hu Jintao, China's President, is scheduled to meet with officials in Portugal and France.

Discussion Questions: Should European countries be more hesitant about allowing China to make such significant investments? What are the possible downsides of these investments?

Islamic Bond Market Revival

Islamic Finance: Islamic Finance
Bloomberg Businessweek: End to Sukuk Freeze Spurs Pakistan Fund Buying: Islamic Finance
Asia Sentinel: Islamic Banking Back on Track
Bloomberg: Sudan, Albaraka, IDB, Pakistan, Thailand Plan Issuance: Islamic Bond Alert
Khaleej Times: GCC Sukuk Activity Rebounds

Islamic Governments and banks are once again issuing Islamic bonds, or sukuk, after a fourteen month hiatus. Sukuk are bonds in harmony with sharia, Islamic Law, which forbids lenders from charging interest rates on loans. However, Sukuk do provide the lender with payments similar to interest payments. The bank will invest money raised from the sukuk bonds in a company or homes, giving the mortgage payments to bond holders, instead of interest. Sukuk is thus similar to an asset backed security. The result is basically a bond with interest, but the mechanics are altered to satisfy sharia.

Sukuk were developed to allow pious Muslims to borrow but within the confines of their faith. The loans are issued and bought by banks and companies with Islamic values ( no pork, pornography, alcohol, or gossip).

The Islamic Development Bank is going to issue at least $500 million of sukuk in 2011 to achieve its funding needs of $1 billion annually. A similar amount was issued in October. The Islamic Development Bank will use the bond revenue to lend to various companies and projects across the Middle East. The largest Islamic bank in Bahrain, Albaraka Banking Group (“Albaraka”), expects to raise $200 million from issuing sukuk by the end of the year. The Albaraka sale presents a cultural fusion of the West and Islam. The bonds are Islamic, but Standard Chartered Plc, an English bank, will be one of the managers of the issuance.

Pakistan’s government will be issuing a sukuk sale worth $934 million to help cover its budget deficits. Other governments in the region will take similar steps. The Qatar Islamic bank issued $750 million sukuk and the bonds were given an “A” rating by Fitch, a rating agency, on the London Stock Exchange. The revival in Islamic Banking also represents the restoration of normalcy in the global financial system as a whole.

The fourteen month hiatus was a product of Dubai’s debt problems. From 2000-2006, Dubai greatly improved its cities and became a luxury destination for the world. Most of the developments were financed by borrowing, and Dubai still had extensive debts when the financial crisis hit. The entire region was affected, damaging economies and thus decreasing borrowing demand. Because sukuk are viewed as luxury bonds, their use is restricted by sharia, and, banks have to pay more “interest” to consumers to sell them, they were scarely used during the period of low demand when investors were looking for the safest, simplest bonds possible.

1.The Islamic Banks seem to use English banks and the London Stock Exchange. Why is there sukuk activity in England and not in the United States?
2. If governments need to borrow more because of deficits, then why use sukuk where it requires a higher interest rate than normal bonds?