Monday, October 27, 2008

Banks, Firms, Now Countries Falter

We can always be sure that when the US sinks, they drag the whole world down with them.

What would Obama do?


Source: The Scotsman

MORE countries may be forced to seek unprecedented help from the International Monetary Fund, experts warned last night, after another day of turmoil on world markets.

Hungary has followed Iceland and Ukraine in securing funding from the IMF to prevent complete financial meltdown. Pakistan and Belarus are in talks with the IMF, while glaring holes in a number of other countries' economies have led to predictions that more begging bowls may soon come out.

Experts told The Scotsman countries such as Ireland, which has guaranteed all its bank deposits, could find themselves in need of international help.

Government bail-outs of financial institutions have become almost commonplace – and now countries themselves are having to be saved.

The latest IMF guarantees came on a day of extreme volatility on world stock markets, with billions wiped off shares in leading firms and the pound sinking to a five-year low against the dollar.

In a bid to soothe the chaos, the G7 nations issued a statement pledging co-operation in the crisis. Britain, Canada, France, Germany, Italy, Japan and the United States reaffirmed their "shared interest in a strong and stable international financial system".

At the same time, they voiced concern about "excessive volatility" in the value of the Japanese yen, which on Friday hit a 13-year high against the dollar.

The yo-yoing world currencies make trading sluggish, as it is impossible to ascertain how much deals are worth.

"There's lots of volatility, not just in the equity market, but in the interest rate and currency markets too," Neil Parker, market strategist at Royal Bank of Scotland, said. "We're going to get further big swings as the markets watch for what the authorities are going to do."

On Friday, the IMF bailed out Iceland – whose swift collapse has devastated UK pension funds and investments – to the tune of £1.34 billion. Yesterday, however, Geir Haarde, its prime minister, said Iceland needed double that again.

He spoke as the fund agreed to lend to Hungary and Ukraine.

It is to offer a £10.4 billion loan to Ukraine and has agreed an as-yet undisclosed package with Hungary. David Hauner, an analyst at Bank of America, said it would probably receive about $12.5 billion (£8 billion).

Eastern Europe has suffered greatly from the global financial crisis as foreign investors who were once bullish about the region's prospects of strong economic growth and deeper integration into the European Union have dumped their assets.

In particular, there is concern that countries such as Ukraine and EU members Hungary, Romania, Bulgaria and the Baltic states may not be able to handle their large foreign debt burdens. Standard & Poor's rating agency yesterday reduced Romania's sovereign rating to junk status.

Neil Shearing, an economist at Capital Economics, said "the most vulnerable countries in the region have yet to be hit by the crisis". He added: "Accordingly, it seems that the IMF's work has only just begun."

Professor Gabriel Talmain, director of the Centre for Economic and Financial Studies at Glasgow University, said: "Countries have taken a very big gamble when they started to guarantee the banks. If the Irish government was to be called on to honour all the guarantees that it has put up for its banks, God knows what will happen. They would be the next (to seek an IMF loan]."

The Washington-based institution has said it can provide up to £128 billion in loans to countries facing financial difficulties.

Prof Talmain said European countries were not in the habit of going to the IMF for cash and warned the fund's members would probably have to cover for loans that could not be paid back.

Meanwhile, investors endured a rollercoaster ride yesterday, as London's leading share index pulled back from five-year lows. The FTSE 100 Index plunged to its lowest point since March 2003 at one point, falling 5 per cent as a sell-off in Asian markets spooked jittery traders. Japan's Nikkei index fell 6.4 per cent to reach its lowest close since 1982, while Hong Kong's Hang Seng closed 13 per cent down.

But a better-than-expected start on Wall Street and a broad hint from the head of the European Central Bank of more interest rate cuts next week helped the top-flight claw back most of the losses.

Among the shares hit in London were those of the leading banks, which have been swinging wildly for weeks. RBS, which is preparing for a big government cash injection, fell 5.92 per cent to only 57.2p a share. And HSBC, which had been flying high above other institutions, tumbled 4.74 per cent to £6.63.

Meanwhile, HBOS and Lloyds TSB were both up marginally, while Barclays dropped slightly.

Brown's famous 'golden rule' becomes early victim of Britain's slide into recession

ALISTAIR Darling, the Chancellor, is expected to consign the government's main economic rules to history tomorrow, as a result of having to borrow vast sums to keep the country afloat during the recession.

He is expected to use a set-piece speech to indicate that the "golden rule" – imposed by Gordon Brown in 1997 to win New Labour credibility in the City – has been abandoned.

The rule prevents the Treasury from using public borrowing to fund current spending, such as wages or tax cuts, over the economic cycle. It permits borrowing only for investment in major capital projects, such as schools and hospitals.

But with UK borrowing already at £37.6 billion for the first half of this financial year, experts believe the final sum will be £64 billion – compared with Mr Darling's target of £43 billion.

Mr Brown yesterday said he was prepared to allow borrowing to rise as it was the "responsible" thing to do.

The second rule he introduced as Chancellor, the sustainable investment rule, has also been broken. This requires national debt to be kept below 40 per cent of the value of the economy over the economic cycle, but the Office for National Statistics said last week it was already at 43.4 per cent.

Mr Brown, in a speech in London, departed from a prepared script that said a "temporary increase in borrowing is the right thing to do to support the economy at this time". Instead, it was only when he was answering questions from the audience, that he mentioned "borrowing" – saying that amounts would come down when the economy picked up and tax revenues increased.

Meanwhile, incapacity benefit was scrapped for new claimants under a drive to get a million more people into work by 2015. People now face a 13-week check – including a 75-minute interview – to assess what tasks they can carry out. Only those with the severest conditions will receive benefits.


What is the International Monetary Fund?

It is an organisation of 185 member countries that was established to promote monetary co-operation, foster economic growth and high levels of employment, and provide temporary financial assistance to countries.

Does it have infinite funds?

It doesn't really have much of its own resources – it has to borrow.

How does it lend money?

It has to get the approval of its board, which is made up of representatives from its 185 member states.

Where does it get the cash from?

It goes to the wholesale money markets, like any individual government or institution.

Are there any risks to its member states?

With these large sums it is now lending – potentially. Professor Gabriel Talmain, director of the centre for economic and financial studies at Glasgow University, said: "If it starts to borrow really large amounts of money, there would be the question of how much the other member countries behind the IMF will pay as a last resort."

He said the current loans were "staggering" and there was only a finite amount of funds available.

What is the advantage of going to the IMF for funds?

It's a collective institution, so one government is not relying directly on another. Such a situation would be undesirable for two reasons – it could allow for political pressure to be exerted and it would not provide as much funding.

Why are countries going to the IMF now?

Eastern Europe has run into trouble because investors believe it may not be able to cope with the foreign debt it has amassed.

What about Pakistan?

The rupee has fallen drastically against the dollar. The country is struggling to combat inflation, which is heading towards 30 per cent, and a collapsing currency. Its central bank, meanwhile, holds barely enough foreign currency to cover five weeks of imports.

Are the loans free from conditions?

Certainly not. The conditions can be quite stringent and, for the Eastern European states, they may signal the start of a new era of austerity. But it is Pakistan for which they are a real sticking point, with local analysts accusing the United States of using the IMF as a tool in its war against terror.

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Monday, October 13, 2008

IMF and G-7 Say: No More Lehmans

If the financial giants cannot take care of businesses at home, what makes them think that they are capable of giving aid at an international level?


Now the great confidence game begins. In high-powered forums that accompanied the G-7 and International Monetary Fund in Washington this past weekend, Western financial leaders sought to assure panicky bankers and money managers in no uncertain terms that all of the measures needed to halt a worldwide meltdown are in motion.

While short on the details many market analysts had hoped for, the broad brushstrokes of forceful, coordinated action by Western governments were unveiled: No more Lehman Brothers-like failures of major financial institutions will be allowed. All bank deposits will be guaranteed. The banking systems of the G-7 nations will be flooded with almost unlimited liquidity. And if all that fails, any other tool—regardless of how economically unorthodox—will be used if needed. The British government's widely anticipated move to take majority control of the Royal Bank of Scotland Group and HBOS is expected to be the first of many such actions across Europe. Fifteen European Union countries that use the euro as currency met in Paris this weekend. They pledged to provide guarantees of new bank debt through 2009, authorize the purchase of preferred shares to invest in problematic banks, and provide recapitalization funds where needed.

The message of Banque de France Deputy Governor Jean-Piere Landau at an Oct. 12 breakfast meeting at Washington's elegant Willard Intercontinental Hotel was typical. "I think the conditions for stability are met," Landau declared. "It is very difficult to see why there will be no stabilization." At a nearby hotel, Richard Fisher, president of Dallas Federal Reserve, told a crowd of international bankers that U.S. authorities "can and will restore order in the credit markets" and "will continue to pursue every avenue and every option." At a press conference at the International Monetary Fund's headquarters, IMF Managing Director Dominique Strauss-Kahn said: "I believe we have an adequate response to the crisis, and the market will reflect it."

Spillover Worldwide

When the markets open on Monday morning, it will be clear whether these verbal assurances and whatever specific measures the U.S. and individual European nations announce will be enough to ease the credit freeze and halt the stock sell-off. But even if the markets breathe a sigh of relief, the question is, how long will the calm last?

Even assuming that actions by the U.S. and Euroland are enough to get the credit markets moving again, attention is likely to shift to fathoming what lies ahead. The economic picture is dark, not only in the U.S. and Europe but also in key emerging markets that not long ago were regarded as bright spots. "As the markets move away from financial fears, they will start looking at what the spillovers will be to the real economy," says Deutsche Bank Group (DB) Chief Economist Norbert Walter.

In business forums and cocktail parties, financiers gathered in Washington mulled long-term implications that few had thought possible not long ago. What makes this financial crisis so different from many of the others faced in the past three decades is that it did not originate with peripheral emerging markets. It struck the core of global capitalism. And unlike previous U.S. recessions, this crisis cannot be fixed with changes in monetary and fiscal policy. It will require years of financial workouts and restructuring. The fallout, therefore, is likely to radiate out across the globe in countless unforeseen ways.

Long, Slow Recovery

One point of consensus is that the U.S. is heading into a very deep recession, perhaps the worst in the post-World War II era. The Institute of International Finance, which just months ago predicted the U.S. would not go into recession, now sees a contraction of at least 2% for several quarters and the jobless rate hitting 7%. And that estimate is based on the premise that the Treasury and Fed rescue efforts will work.

Don't expect the U.S. economy to roar back once recovery begins, either. Fully rebuilding the U.S. credit system and confidence will take time. JP Morgan Chase (JPM) chief economist Bruce Kasman warned that it is far too early to gauge the long-term impact on U.S. consumer behavior. In Japan, consumers held onto their cash for years, which helped delay recovery for a decade.

And don't expect emerging markets to be able to pull the global economy through. Despite falling exports, China's economy is expected to remain robust, thanks to $1.8 trillion in foreign reserves and strong domestic demand. But elsewhere a collapse in demand in the U.S. and Europe will dramatically change the dynamics even in many nations that a few months ago appeared to be in solid shape due to strong trade surpluses and foreign reserves. Emerging markets are going to be hit hard by a triple whammy: plunging manufacturing exports to the U.S., falling commodity prices, and outflows of dollars.

Plunging Oil

Let's start with foreign capital flows: Even though most developing-nation governments have dramatically slashed their dependence on foreign loans, their corporate sectors have been borrowing heavily abroad to finance everything from real estate developments to factories. In the past two months, Russia's foreign reserves have dropped by $40 billion because of capital flight. And several Persian Gulf states have had to tap into their huge sovereign wealth funds to prop up stocks and real estate projects funded by foreign capital. The IIF projects that inflows of foreign private capital to emerging markets, which hit a record $898 billion in 2007, will drop by at least $270 billion by the end of this year and contract further in 2009.

In addition, nations that depend heavily on oil and other commodities could soon be in for more trouble than they anticipated. Oil prices, for example, have already plunged from a peak of $145 a barrel this summer to near $70. That's still in the financial comfort zone of Russia, Venezuela, Iran, and other non-Mideast oil producers. But at the IIF conference, University of Calgary management professor David Mitchell, a leading authority on oil, laid out a scenario in which a sharp contraction in global demand could push crude all the way back down to $25 a barrel—a crisis level for all but Saudi Arabia and a few other Gulf nations.

The debt crash certainly will lead to a rethinking of America's financial system. But the seismic aftershocks will require revision of all assumptions about the global economy.

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Sunday, October 12, 2008

Week of Global Action Against Debt and International Financial Institutions set to begin around the world

Hundreds of networks and organizations around the world will mobilize during October 12-19 carrying out different activities for the Week of Global Action Against Debt and International Financial Institutions (IFIs).

Global hunger and the growing impact of climate change are dramatic symptoms of the persistent problem of debt domination. In this sense, the second edition of the Week of Action will place special attention to the following demands: Food and financial sovereignty and climate and economic justice. The debts used to implement harmful projects and policies that have led to the current food, climate and credit crises are illegitimate and should not be paid under any circumstances.

More then 200 global, continental and national networks, organizations and social movements from Asia and the Pacific, Africa, Latin America and the Caribbean, North America and Europe have joined the Call of Action demanding the immediate unconditional cancellation of illegitimate debts and an end to the conditionalities of the IFIs such as the IMF, World Bank and Regional Development Banks as well as the payment of the ecological debts owed to the South. The organizations summon everyone to mobilize and challenge the IFIs, transnational corporations, and governments (North and South) to acknowledge their responsibilities for the continuing problem of debt domination.

On October 13, dedicated to Climate Change and its relation to debt and the IFIs, movements and organizations in various countries have agreed to send letters to the World Bank and governments - as well as other activities – to express their opposition to the Climate Investment Funds proposed by the Bank. As well as demanding the cancellation of illegitimate debt of the Southern countries, the organizations demand the end of financing for projects and policies that exacerbate climate change. In this sense, in Jakarta, Indonesia, social movements will demonstrate in front of the World Bank office against the Bank’s role in climate change related projects.

Until now, around 200 actions in different parts of the world have been confirmed - from public demonstrations and events to demand the cancellation of all debts in more then 20 cities in India to a Peoples Rally Against Debt, IFIs and Privatization which various organizations in the Philippines will be holding. Similarly, in more then 35 districts of Bangladesh, discussions, seminars and workshops such as the workshop ‘Climate Change, the World Bank and the Multi Donor Trust Fund’ and the seminar ‘Trade & Development Finance: Inter-sectoral linkages on food, climate, debt and IFI’.

The construction of an alternative financial architecture in favor of the interests and rights of peoples and the environment will also be an issue of debate during the Week of Global Action. In the context of the current financial crisis, several Latin American networks will launch a statement on alternative mechanisms of financing for development and proposals such as the South Bank and the withdrawal from the International Centre for Investment Dispute Settlement (ICSID) of the World Bank Group, as carried out by the government of Bolivia.

A few weeks after the official presentation of the report of the debt audit carried out by the government of Ecuador through the Integral Public Credit Audit Commission (CAIC, in its Spanish abbreviation), local organizations will hold a “Citizen forum on the results of the audit” and a debate on debt illegitimacy in the city of Guayaquil. Not far from there in Colombia, activities will be held throughout the Week, such as “Debates on debt illegitimacy and the impact on the human rights of women“ and a cultural demonstration against debt and for the right to water, health, education and a healthy environment in the city of Bogotá. Organizations in Cuba have also joined the Call and are organizing an event on foreign debt and the financial crisis.

In the meanwhile in the financial centre of Buenos Aires, an open radio program and street demonstrations for the “Day of Action for Food Sovereignty and the Struggle Against the Debt” will be carried out. Campesino organizations of Paraguay prepare various events on “Social and ecological debts” and a “Tribunal against the IFIs“ in the cities of Itapua and Encarnación.

More then 20 screening of documentaries which deal with the debt issue along with open debates will be carried out in many cities around the world such as the film “¿An end to poverty?” of Philippe Diaz which will be shown in Rabat and Casablanca, Morocco. “The Congo-China contract, the IMF and the World Bank and the reimbursement conditions” will be the issue of televised public debates in the Democratic Republic of the Congo. In Togo a special radio program in be held in tribute to Thomas Sankara (ex–president of Burkina Faso who called for debt cancellation and repudiation just before being assassinated) and other leaders for global change, while a conference-debate ''China and its role in Africa´s debt situation'' will be held in Niger.

More then 40 activities in churches and communities will be organized in the United States, while in Madrid the Week of Action will begin with a bicycle ride against debt from the main square. Elsewhere,
Boldcapacity-building activities on debt and rights are being organized in Belgium and in the United Kingdom, a new email action calling on the UK to support a fair and transparent sovereign debt resolution mechanism at the Financing for Development conference in Doha will be carried, out amongst other activities.

The Week of Global Action Against Debt and the IFIs also coincides with various special dates such as: October 12 – Continental Day of Resistance Against Colonialism and Neoliberalism (in the Americas), October 15 - Anniversary of the death of Thomas Sankara,
October 16 - Day of Action for Food Sovereignty and
October 17 – Global Day of Action against Poverty.

Special activities are being planned in many other countries such as Nicaragua, Honduras, El Salvador, Brazil, Peru, Pakistan, Cameroon and Benin. A complete list of the activities can be found on the Week´s website (in English, Spanish, and French) along with the most important news on the Week, articles, graphic material and documents related to the different issues.

The Week of Global Action Against Debt and the IFIs is a part of the International Campaign on Illegitimate Debt carried out by networks and movements of the South and North, such as Jubilee South, the Committee for the Abolition of Third World Debt (CADTM), Eurodad, Jubilee USA and Eurodad, united by the struggle against illegitimate debt.

Support for the Call of Action is still being received and organizations are invited to send information on their planned activities to

The complete Call of Action can be found in:

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