|From: Sam Citron||9/23/2008 12:15:04 PM|
|Russia Appears Set for Shakeout [WSJ]|
Kremlin Announces Some New Measures to Ease Liquidity
By ANDREW OSBORN
MOSCOW -- Days after the Kremlin announced a $120 billion rescue package that steadied Russian financial markets, signs emerged that the crisis is set to spur consolidation and a slew of bankruptcies. Monday, a billionaire businessman bought a 50% stake in one of Russia's largest investment banks in what he said was a sign of things to come.
Metals magnate Mikhail Prokhorov paid $500 million for new equity equal to a 50% stake in Renaissance Capital, the investment-banking business of Moscow-based Renaissance Group. Analysts said Mr. Prokhorov got a bargain, since Renaissance's value had been estimated to be at least several billion dollars before the crisis.
The deal came as the Kremlin announced fresh measures to ease liquidity, suggesting it believes the banking system remains fragile. State-controlled banks have begun to throw lifelines to smaller private rivals that have run into trouble, in some cases with a view to acquiring them. Leading retailers have also begun to change hands or strike emergency refinancing deals. Cellphone retailer OAO Euroset, one of the country's biggest, got a new owner Monday, while closely held electronics retailer, Eldorado, accepted a loan that its creditor says may be converted into an ownership stake.
"The strongest companies will survive, and others will cease to exist," predicted Mr. Prokhorov, regularly listed as one of Russia's wealthiest individuals. The crisis was a "peak time" for acquisitions, he added, singling out banks, real estate and construction firms as particularly vulnerable.
Mr. Prokhorov and Renaissance Group said they had been discussing the deal for "several months," but that market turmoil last week -- when Russian markets suffered their biggest drop in a decade -- had "accelerated" the process.
"The rules for investment banking have been totally rewritten," said Stephen Jennings, chief executive of Renaissance Group. He said he was keen to share risk, find fresh capital and gain strong local partners. Alexander Pertsovsky, CEO of the banking business, said the freshly refinanced entity would occupy a "unique niche," possibly boasting more capital than any other investment bank in the world because of global restructuring.
The banking sector had already begun to feel the pinch. Last week, the pension-fund arm of energy titan OAO Gazprom agreed to buy brokerage business KIT Finance after it failed to meet some of its obligations. Moody's Investor Services Monday cut debt ratings for Svyaz-Bank, saying the bank had defaulted on its obligations and that its capital had been "significantly damaged." It added that it understood the bank was in talks with "publicly undisclosed parties with regard to possible mechanisms for further support." A Svyaz-Bank representative declined to comment.
Renaissance's Mr. Jennings said the crisis was spurring "long overdue" consolidation. "Russia doesn't need 900 banks," he said in an interview. "It needs about 10 big banks."
Analysts said the crisis might also affect a fierce shareholder conflict at OAO Norilsk Nickel, where two wealthy businessmen are vying for control. The company's share price has fallen so low that it could be a great chance for either of the businessmen to snap up shares at bargain prices. "It could change things tactically," said Steven Dashevsky, head of equities at Unicredit Aton brokerage in Moscow.
Meanwhile, Russian stocks inched higher Monday after bouncing back Friday following a week of heavy losses. The ruble-denominated MICEX index finished 0.62% higher, while the dollar-denominated RTS index was up 1.05%.
Analysts said markets would likely start making solid gains though only when the situation in the U.S. became more stable. "Russia cannot detach itself from the global economy," Mr. Dashevsky said.
Last week, the government assembled a rescue package valued at $120 billion to shore up the banking system. Monday, it offered greater relief, suggesting that liquidity levels haven't been fully restored. The government extended a deadline for value-added-tax payments by three months to ease liquidity. Prime Minister Vladimir Putin ordered the Finance Ministry to consider raising the size of bank deposits covered by government guarantees.
Mr. Putin told a cabinet meeting that the Kremlin's anticrisis measures were working. "The market situation has stabilized," he said.
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|To: lukematt who wrote (196)||9/30/2008 2:40:15 PM|
|From: Sam Citron|
|Even better than privatization:|
A Mittal secret from the ‘rust buckets’ of Kazakhstan
Satish John & Vivek Kaul
Monday, April 21, 2008 04:00 IST
Prof Pankaj Ghemawat says it was not steel that got the richest Indian his first billions
MUMBAI: Know how Lakshmi Mittal made his first few billions? Of course through steel!
Coal from the ‘rust buckets’ of Kazakhstan is more like it, says Pankaj Ghemawat, one of the youngest-ever Harvard Business School professors.
Ghemawat, who is currently on leave from the ivy tower, and is working as a full-time professor at the IESE Business School, Barcelona, along, with some of his students, conducted some “forensic examination” of Mittal’s past acquisitions. They deconstructed annual reports till 2004.
“I was struck when I went through this exercise around a couple of years ago, as basically one-third of Mittal’s operating profits were coming from Kazakhstan,” he said.
He credits Mittal for using his imagination.
“Mittal’s strategy was to buy up old public sector steel mills across the world. These mills, which Mittal turned around, were derisively known as “rust buckets”.
Kazakhstan was no different. “What he basically bought was a Soviet era township, along with 70,000 employees. One of the pre-conditions of the deal was that Mittal couldn’t reduce employment by much as it was the Kazakh president’s pet project. Hence, it came along with huge political problems,” said Ghemawat.
And this is where Mittal was “very, very clever”. The steel mill in Kazakhstan, a huge country, has vast reserves of coal and the rail links to China were just across the road, as it were.
Mittal had known all along China’s massive need for the fuel. He sold huge quantities of coal across the border.
“In privatisation processes people generally focus on what’s the price per tonne of steel-making capacity. But people give the raw material rights and whatever else the buyer insists on, which is why you see the jockeying that you see in Orissa. And smart steel makers - not just Mittal, but also the likes of Posco —- understand this.”
Steelmakers across the globe, including the Tatas, are vying to set up operations in the backward states of Chhattisgarh, Orissa and Jharkhand, India’s richest regions in terms of iron ore and coal.
“But,” says Ghemawat, “to be fair to Mittal, he is just looking at multiple revenue sources and deserves the credit for being imaginative.”
“They may have been too creative in terms of having cultivated relationships with governments —- the Tony Blair letter to the Romanians on behalf of the Mittals is an example. I have seen protocols of some of the eastern European deals and they have been very creative at structuring the deals,” Ghemawat said.
“The other thing worth noting is that there were two Mittal-vested entities that were operating and he then sold one to the other and this is where he got his $2 billion of cash-out,” says the professor. “It is interesting to note that since then, the price he is willing to pay for a tonne of capacity has escalated significantly since he got his cash out of the business.”
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|From: Sam Citron||10/2/2008 11:46:50 PM|
|Life in Zimbabwe: Wait for Useless Money [NYT]|
By CELIA W. DUGGER
HARARE, Zimbabwe — Long before the rooster in their dirt yard crowed, Rose Moyo and her husband rolled out of bed. “It is time to get up,” intoned the robotic voice of her cellphone. Its glowing face displayed the time: 2:20 a.m.
They crept past their children sleeping on the floor of the one-room house — Cinderella, 9, and Chrissie, 10 — and took their daily moonlit stroll to the bank. The guard on the graveyard shift gave them a number. They were the 29th to arrive, all hoping for a chance to withdraw the maximum amount of Zimbabwean currency the government allowed last month — the equivalent of just a dollar or two.
Zimbabwe is in the grip of one of the great hyperinflations in world history. The people of this once proud capital have been plunged into a Darwinian struggle to get by. Many have been reduced to peddlers and paupers, hawkers and black-market hustlers, eating just a meal or two a day, their hollowed cheeks a testament to their hunger.
Like countless Zimbabweans, Mrs. Moyo has calculated the price of goods by the number of days she had to spend in line at the bank to withdraw cash to buy them: a day for a bar of soap; another for a bag of salt; and four for a sack of cornmeal.
The withdrawal limit rose on Monday, but with inflation surpassing what independent economists say is an almost unimaginable 40 million percent, she said the value of the new amount would quickly be a pittance, too.
“It’s survival of the fittest,” said Mrs. Moyo, 29, a hair braider who sells the greens she grows in her yard for a dime a bunch. “If you’re not fit, you will starve.”
Economists here and abroad say Zimbabwe’s economic collapse is gaining velocity, radiating instability into the heart of southern Africa. As the bankrupt government prints ever more money, inflation has gone wild, rising from 1,000 percent in 2006 to 12,000 percent in 2007 to a figure so high the government had to lop 10 zeros off the currency in August to keep the nation’s calculators from being overwhelmed. (Had it left the currency alone, $1 would now be worth about 10 trillion Zimbabwean dollars.)
In fact, Zimbabwe’s hyperinflation is probably among the five worst of all time, said Jeffrey D. Sachs, a Columbia University economics professor, along with Germany in the 1920s, Greece and Hungary in the 1940s and Yugoslavia in 1993.
Making matters worse, cash itself has become scarce. Business executives and diplomats say Zimbabwe’s central bank governor, Gideon Gono, desperate for foreign currency to stoke the governing party’s patronage machine, sends runners into the streets with suitcases of the nation’s currency to buy up American dollars and South African rand on the black market — drying up Zimbabwean dollars that would otherwise go to the banks.
Because of the cash shortage, the government strictly limits the amount people can withdraw. Even so, Zimbabweans say they often wait in vain for hours at banks that send their customers away empty-handed.
Mr. Gono, who blames Western sanctions for the nation’s troubles, did not respond to requests for an interview. But he was quoted in the state media this week as saying, “I am going to print and print and sign the money until sanctions are removed.”
Political Solution Needed
Economists say that the only thing that can halt Zimbabwe’s inflationary spiral is a political solution that takes control over the country’s economy out of the hands of Robert Mugabe, the 84-year-old president who still maintains a viselike hold on power after 28 years in office.
“This is the end of the endgame,” Professor Sachs said.
Mr. Mugabe, who lives in splendor here in a mansion hidden behind high walls, returned to Harare on Monday from the United Nations General Assembly meeting in New York. He and the opposition leader, Morgan Tsvangirai, signed a power-sharing agreement, but they are still deadlocked over the division of the ministries. So far, Mr. Mugabe has refused to give up control of the crucial Finance and Home Ministries.
Basic public services, already devastated by an exodus of professionals in recent years, are breaking down on an ever larger scale as tens of thousands of teachers, nurses, garbage collectors and janitors have simply stopped reporting to their jobs because their salaries, more worthless literally by the hour, no longer cover the cost of taking the bus to work.
“It’s scary and it’s pathetic,” said Tendai Chikowore, president of the Zimbabwe Teachers Association, the largest and least radical of the teacher unions. She said a teacher’s monthly pay was not even enough to buy two bottles of cooking oil. “This is a collapse of the system, and it’s not only for teachers,” she said. “At the hospitals, there are no nurses, no drugs.”
Those who continue to show up often make a little extra on the job. Teachers sell their students candy and cookies, for example, or accept payment from parents in cornmeal or cooking oil, said Raymond Majongwe, secretary general of the Progressive Teachers Union.
Zimbabweans have a legendary ability to make do despite extraordinary hardship, and the money sent home by millions of their compatriots who have fled abroad to escape political repression and economic deprivation continues to sustain many of them. But the deteriorating conditions are creating pressures for a renewed exodus, even as people employ all their entrepreneurial creativity to stay alive.
Among those thinking of leaving is Fortunate Nyabinde, whose salary of $3,600 Zimbabwean dollars a month (or $36 trillion before the government rejiggered the currency in August) does not even pay for four days of bus fare to her job at Parirenyatwa Hospital, one of Zimbabwe’s leading public institutions.
Yet, for now, she keeps going to work, wheeling a trolley of cornmeal porridge from ward to ward, mostly because she can eke out an extra 20 cents a day by selling basic necessities to patients that the hospital usually does not have in stock: toilet paper, toothpaste, soap.
“If they come to the hospital without anything, they will have to buy from us,” Ms. Nyabinde said.
Signs of a Calamity
Clues to the calamitous state of the country can be found even in recent articles tucked into Mr. Mugabe’s mouthpiece, The Herald, the only daily newspaper he has allowed to keep publishing.
The bodies of paupers in advanced states of decay were stacking up in the mortuary at Beitbridge District Hospital because not even government authorities were seeing to their burial.
Harare Central Hospital slashed admissions by almost half because so much of its cleaning staff could no longer afford to get to work.
Most of the capital, though lovely beneath its springtime canopy of lavender jacaranda blooms, was without water because the authorities had stopped paying the bills to transport the treatment chemicals. Garbage is piling up uncollected. Sixteen people have died in an outbreak of cholera in nearby Chitungwiza, spread by contaminated water and sewage.
Vigilantes in Kwekwe killed a man suspected of stealing two chickens, eggs and a bucket of corn.
And traditional chiefs complained about corrupt politicians and army officers who sold grain needed for the hungry to the politically connected instead.
Zimbabweans standing in bank lines across the capital offer their own stratagems for survival. At the Avondale shopping center, a strip mall with a cafe serving cappuccinos and a multiplex showing “Sex and the City,” more than 200 sweaty, grumpy people lined up one recent morning to withdraw whatever they could from the bank.
Mrs. Moyo, the early riser, had her usual sought-after, low number — 26 — while Mrs. Nyabinde, the hospital worker on the overnight shift, was far back at No. 148 because she had arrived late — about 5:15 a.m.
No. 132 was Stanford Mafumera, 35, a security guard who spends most of his time at his job or in line at the bank; he is so poor that he sleeps beneath the overhang at the mall rather than pay for bus fare home to his family. His clothes hung loose on his gaunt body, and his dusty shoes were coming apart.
“Since Monday, Tuesday, Wednesday, there was no cash here,” he said. “We started getting cash only yesterday.”
Most days, he said, he eats only a bag of corn nuts to conserve his monthly pay — worth $10 a week and a half ago, but only $5 now because of inflation.
Each day, he buys a pack of cigarettes and sells them one by one, making an extra 20 to 30 cents. But he was unable to afford the cost of taking his 5-year-old daughter to the doctor recently when she got diarrhea after drinking dirty water from an unprotected well.
Mr. Mafumera blamed the government’s land reform program for Zimbabwe’s woes. It chased away the white commercial farmers who had made the country a breadbasket, he said, as well as donors from Britain and other European countries and the United States who sustained Zimbabwe’s starving millions for years.
“A lot of people got farms, but they can’t produce anything and this is what is causing the poverty and hunger,” he said. “There’s no food.”
Chaotic Land Reform
Zimbabwe’s economic unraveling has, indeed, accelerated since the chaotic, often violent invasions of thousands of white-owned farms by Mr. Mugabe’s supporters began in 2000. The big farms now produce less than a tenth the corn — the main staple food crop here — of what they did in the 1990s, the United Nations Food and Agriculture Organization reported in June.
In the years since, the country has suffered extreme food scarcity, rampant inflation, a shrinking economy and collapsing public services. In Mrs. Nyabinde’s neighborhood, every spare spot of ground sprouts the greens people eat with cornmeal porridge, evidence of the scramble for food.
And in a country that used to have an education system that was the pride of the continent, the schools that Mrs. Nyabinde’s children — Chenai, 10, and Darlington, 6 — attend are now empty of teachers. So she sends them to Stella Muponda, a teacher who quit her public school job last year, for a couple of hours of instruction a day. The money Mrs. Nyabinde pays Mrs. Muponda for the children’s lessons is now worth only about 40 cents, enough for a single bread roll.
Mrs. Muponda, a widow with twin, 14-year-old boys, said she and her sons grew thinner, weaker and more sickly last year, unable to eat enough on her meager pay. When she no longer had the strength for the five-mile walk to and from school, she quit.
Gaunt and exhausted, she kept saying, “I only wish I could get a decent job.”
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|From: lukematt||10/4/2008 8:39:08 AM|
|ON THE MARKET: Komercni Banka|
Komercni Banka is currently traded on these markets:
Prague; U.S. Pink Sheets (symbol: [t]KMBNY[/t])
[Note: There are only 14 companies on the Prague Stock Exchange. Four of these companies also trade on the U.S. Pink Sheets. They are four of the strongest companies in the Czech Republic.]
• Komercni Banka is one of the three companies still listed on the Prague Stock Exchange that also originally appeared on the market in 1993-94.
• I don’t know its “numbers” because, as I wrote in the blog “Prague Stock Exchange—Roots”, I don’t invest in any of the currently listed Czech companies. However, I can give you non-financial tidbits.
• My general impression of Komercni Banka…it’s a typical stodgy, conservative, old-style bank. That’s a compliment. (It’s better than an imprudent manager of money such as IndyMac, etc.)
• My family does not have an account at Komercni Banka because the service charges are too high. Better deals exist at other banks. At the same time, “Komercni” means “Commerce/Commercial”, so maybe they’re not interested in individual accounts.
• This summer (2008), I needed to get some Japanese yen. I looked on a special Czech website that lists best exchange rates by banks. Komercni Banka was number 6 or 7 for yen. However, when I tried the first 5 or 6 banks, nobody handled Japanese yen (I don’t know why they were even listed on the website). Finally, I went to Komercni Banka. Although the Brno branch did not have yen “on hand”, they took my order, and in one business day, I had it. Excellent service.
• My brother-in-law was an upper-middle-level manager at Komercni Banka’s headquarters in Prague for many years. He never had any bad words about Komercni Banka (but, of course, he’s a sell-your-soul-to-the-company kind of guy :-) ).
• Does Komercni Banka have any skeletons in the closet? Of course.
o During privatization (mid 1990s), Komercni Banka’s largest shareholder was Bank of New York. Then, in July 2001, Komercni banka was suddenly sold by the Czech government to Societe Generale Group. You know—the January 2008, 4.9 billion Euro trading loss scandal Societe Generale Group.
o From the Prague Post (May 10, 2000).
“Former Komercni banka (KB) director general Richard Salzmann said May 7 that charges brought in connection with KB's loss-making deals with Austrian firm B.C.L. Trading and the Frantisek Chvalovsky financial group may involve all members of KB's former management and other KB employees. He said that while he hasn't yet been questioned about the matter, he believes that he, too, might be accused. KB launched a risky deal with B.C.L. Trading in 1996, when KB was managed by Salzmann. The loss of about 8 billion Kc ($195 million) that KB suffered in the deal was the biggest loss in the Czech Republic's history. Salzmann is now a senator with the Civic Democratic Party (ODS).”
From Radio Prague (December 6, 2005)
“Former Komercni Banka board of directors acquitted of fraud charges. A court has ruled that nine former members of the board of directors of the Komercni Banka bank are not guilty of fraud. They were accused of helping Austria's BCL Trading (owned by entrepreneur Barak Alon) defraud the bank of eight billion crowns (a little under 330 million US dollars). Komercni Banka is one of the Czech Republic's biggest banks.”
I have 17+ years of investment experience in the Czech Republic. Komercni Banka’s 8 billion Kc scandal and the subsequent acquittal of its accused directors clearly signal to me that Komercni Banka has links to organized crime. Of course, we could ask—do any financial institutions nowadays not have such links?
Would I recommend that somebody buy shares in Komercni Banka? Well, it’s not **my** type of investment. I really don’t see any growth potential. However, if the financials are good and the share price is low, I wouldn’t tell somebody, “Never buy Komercni Banka shares”.
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|From: Sam Citron||10/17/2008 2:08:12 PM|
|Putin May Use Credit Squeeze to `Destroy' Oligarchs (Update1)|
By Torrey Clark and Henry Meyer
Oct. 17 (Bloomberg) -- Vladimir Putin came to power in 2000 vowing to destroy Russia's oligarchs ``as a class.'' Within two years, he'd driven two into exile and imprisoned another.
Now, he may use the global markets meltdown to finish the job.
The $50 billion that the prime minister and President Dmitry Medvedev have pledged to lend cash-strapped companies will extend state control over business leaders. Billionaires seeking bailouts -- including Oleg Deripaska, Russia's richest man, and Mikhail Fridman -- will have to give authorities veto power over their companies' financing decisions.
``This will give the state more leverage over the country's biggest companies and main industries,'' said Chris Weafer, chief strategist at UralSib Financial Corp in Moscow. ``In 2008, there is only one real oligarch: the state.''
All this marks a reversal from a decade ago, when oligarchs bankrolled Boris Yeltsin's almost-insolvent government. As recently as April, Russia's 100 wealthiest citizens had a combined fortune equivalent to about a third of the economy, Forbes magazine estimated.
The nation's 25 wealthiest businessmen have seen their worth shrink by $230 billion, or 62 percent, according to Bloomberg calculations. And Putin controls the strings on the biggest remaining purse -- $531 billion in government reserves, which he is doling out through state-run Vnesheconombank, or VEB, where he presides as chairman of the supervisory board.
The oligarchs made their fortunes in the 1990s, as the government moved corporate ownership into individuals' hands and state authority was weak. They subsequently loaned the government money to prop up Yeltsin in return for shares in choice assets, including OAO Norilsk Nickel, Russia's biggest mining company.
Their support didn't prevent the government from defaulting in 1998 on $40 billion of domestic debt and devaluing the ruble. Putin came to power as president less than two years later with the help of Boris Berezovsky, a businessman and politician in Yeltsin's inner circle who popularized the term ``oligarch.'' Berezovsky's influence was chronicled in ``Godfather of the Kremlin,'' by Paul Klebnikov, the Forbes Russia editor slain in 2004.
A few months after taking office in July 2000, Putin told Mikhail Khodorkovsky, at the time Russia's richest man, and about two dozen other business leaders that their wealth was safe as long as they stayed out of politics and refrained from influencing national policy.
Berezovsky, now 62, became an early victim of Putin's anti- oligarch crusade. Berezovsky fled to London in 2001 in the face of Russian fraud charges he calls politically motivated. By the end of 2003, Putin had brought the nation's business leaders to heel.
The most celebrated case involved Khodorkovsky. He was arrested and convicted of tax evasion and fraud. OAO Rosneft, the state-run oil company, took control of most of his OAO Yukos Oil Co., once Russia's biggest crude exporter. The government now controls about 44 percent of oil production and all natural-gas exports. Khodorkovsky called the case against him retribution for political opposition to Putin, who denied that accusation.
In the years that followed, the number of dollar billionaires swelled from a handful to more than 100, as prices for oil and other commodities surged to records and companies opened up ownership to passive foreign investors.
Now, the tables have turned.
Lobbying for Loans
``The oligarchs are lobbying the government for access to state funds,'' said Alexander Lebedev, 49, a billionaire who owns 30 percent of state-run airline OAO Aeroflot. ``It's not freely available to anyone who comes along.''
The attached strings are short.
Central Bank First Deputy Chairman Alexei Ulyukayev said Oct. 1 that Vnesheconombank would gain the right to bar borrowers from seeking other loans ``to avoid increasing the level of liabilities.''
The effect, according to Weafer: The state will ``dictate'' how companies invest and develop.
Vnesheconombank has received applications for more than $50 billion in loans, chairman Vladimir Dmitriev said on Oct. 13. The government has also pledged more than $13 billion to buy stocks and bonds through Vnesheconombank this year and next and $36 billion in emergency subordinated loans to other banks.
State-owned companies and producers of oil, gas, metals and fertilizers will get most of the government money, said UniCredit SpA analysts Julia Bushueva and Elena Myazina in Moscow. Rosneft, chaired by Deputy Prime Minister Igor Sechin, may receive 47 percent of $9 billion in loans allocated to oil companies, the Kommersant newspaper reported Oct. 14.
With competition for government loans stiff, frozen credit markets also may force Russian companies to pay off creditors by selling assets to cash-rich investors, including the government, Bushueva and Myazina said. More than $363 billion of corporate and bank debt is due to be repaid by July 2009, a third to foreign banks, they said.
Gazenergoprombank, a lender controlled by state-run Gazprom Group, said on Oct. 15 it will acquire all of Moscow-based Sobinbank. Vnesheconombank is in talks to buy Globex, a Russian bank that's having difficulties because of investments in real estate, Kommersant reported today.
Businesses caught in that potential credit squeeze include Deripaska's Basic Element, Fridman's Alfa Group, and Vladimir Yevtushenkov's AFK Sistema, Bushueva and Myazina said. Already this month, the value of Deripaska's stakes in Canadian auto-parts maker Magna International Inc. and German builder Hochtief AG sank so much that he ceded the shares to foreign banks that had accepted them as loan collateral.
The state's growing sway over oligarchs extends beyond how they run their businesses. Putin and other top officials met individually with about 50 of the country's wealthiest businessmen and ordered them ``dump money into Russia's financial system'' to prop up the sinking stock market, says a report by Stratfor, a U.S.-based risk advisory group.
The initial injection of private funds, together with government measures sent the benchmark Micex Index almost 30 percent higher on Sept. 19 in a short-lived rally. Since then, the index has dropped 43 percent.
``Going after their personal finances, especially money they hold abroad, is a whole new level of control,'' said Lauren Goodrich, a Stratfor analyst.
Spokesmen for Medvedev and Putin declined to comment on the matter.
While the U.S. and European governments also are increasing oversight of their economies by buying stakes in financial institutions, growing state dominance in Russia threatens to increase corruption and reduce corporate disclosure, said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow.
That view was echoed by Berezovsky, the businessman who fled to London. ``This time, the corrupt bureaucrats will win,'' Berezovsky said.
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|From: Sam Citron||10/19/2008 2:05:11 PM|
|Rebuffed by China, Pakistan May Seek I.M.F. Aid [NYT]|
By JANE PERLEZ
ISLAMABAD, Pakistan — President Asif Ali Zardari returned from China late Friday without a commitment for cash needed to shore up Pakistan’s crumbling economy, leaving him with the politically unpopular prospect of having to ask the International Monetary Fund for help.
Pakistan was seeking the aid from China, an important ally, as it faces the possibility of defaulting on its current account payments.
With the United States and other nations preoccupied by a financial crisis, and Saudi Arabia, another traditional ally, refusing to offer concessions on oil, China was seen as the last port of call before the I.M.F.
Accepting a rescue package from the fund would be seen as humiliating for Mr. Zardari’s government, which took office this year.
An I.M.F.-backed plan would require Pakistan’s government to cut spending and raise taxes, among other measures, which could hurt the poor, officials said.
The Bush administration is concerned that Pakistan’s economic meltdown will provide an opportunity for Islamic militants to capitalize on rising poverty and frustration.
The Pakistanis have not been shy about exploiting the terrorist threat to try to win financial support, a senior official at the I.M.F. said.
But because of the dire global financial situation, and the reluctance of donor nations to provide money without strict economic reforms by Pakistan, the terrorist argument has not been fully persuasive, he said.
“A selling point to us even has been, if the economy really collapses this is going to mean civil strife, and strikes, and put the war on terror in jeopardy,” said the official, who declined to be identified because he was not authorized to speak to the news media.
“They are saying, ‘We are a strategic country, the world needs to come to our aid,’ ” he said.
Pakistani officials said they had received promises from the Chinese to help build two nuclear power plants, and pledges for business investment in the coming year.
But Pakistan had also hoped China would deposit $1.5 billion to $3 billion in its central bank, according to senior officials at the I.M.F. and Western donor countries.
The infusion of cash would have helped with payments for oil and food as currency reserves dwindle, officials said.
Shaukat Tareen, the new Pakistani financial adviser who accompanied Mr. Zardari to China, began to prepare the public for an I.M.F. program on Saturday, saying for the first time at a news conference that if Pakistan could not stabilize its economy within 30 days, it “can go to the I.M.F. as a backup.”
“We may have to go to Plan B,” he said.
Economic hardship has been mounting across Pakistan for several months. Electricity shortages have become so dire that even middle-class families in big cities have to ration supply, with power cuts for 12 of every 24 hours, with one hour on, and one hour off.
Food prices have soared, making some basics, even flour, too expensive for the poorest to afford. No large-scale riots have occurred, but concern is mounting that such protests are not far off.
The new government has reduced subsidies on fuel and food, and the central bank moved on Friday to ease an intrabank liquidity crisis.
In addition, new rules were imposed several weeks ago on the Karachi stock exchange to stop sell-offs.
But none of those steps have stanched the crisis in confidence.
The central bank’s currency reserves have dipped to $4 billion, enough to cover payments for oil and other imports for about two months. As it became clear over the past two days that the Chinese were not going to provide a cushion for Pakistan, the rupee slumped to a record low.
The thin results from the China trip were of little surprise to Western donors.
Asked about the likelihood of Pakistan winning the direct cash infusion it was seeking, a senior Chinese diplomat was reported by Western officials to have said, “We have done our due diligence, and it isn’t happening.”
“What we needed is $3-to-$4 billion,” said Sakib Sherani, a member of the government’s economic advisory panel and chief economist at ABN Amro Bank in Pakistan. That amount was necessary “to build confidence,” he said.
The central bank governor, Shamshad Akhtar, said in a telephone interview on Saturday, “We are very open to all kinds of financial support.” She added, “We’ve taken a lot of corrective actions, and we plan to take more.”
But Zubair Khan, a former commerce minister and a critic of the government’s economic management, said confidence would improve once Pakistan arranged an I.M.F. rescue package. Mr. Khan said that the alternative would be the imposition of controls on imports and capital flows that could do long-term harm to the economy.
Meanwhile, the American financial crisis is also expected to hurt ordinary Pakistanis.
Remittances from Pakistanis living abroad to their relatives in Pakistan were expected to be about $7 billion this year, about $3 billion of that from Pakistanis living in the United States. But those remittances are likely to dwindle, affecting real estate values in Pakistani cities and families who live in poorer rural areas.
Mr. Zardari had approached the China trip with considerable fanfare, saying he was looking forward to visiting a country that had enjoyed a warm relationship with Pakistan, particularly during the rule of his father-in-law, Zulfikar Ali Bhutto.
His visit to Beijing followed a trip there by the chief of the army, Gen. Parvez Kayani, and came at a time when the relationship between Washington and Pakistan was strained over how to deal with the escalating threat from the Taliban and Al Qaeda.
Javed Burki, a former Pakistani finance minister, said China had provided $500 million in balance-of-payments support in 1996, when Pakistan was on the brink of default. He had flown to Beijing to ask for the money and his request was fulfilled.
But those days are over, he said, because China is no longer inclined to grant cash outright without structural reforms from the receiving government, he said.
|RecommendKeepReplyMark as Last Read|
|From: Sam Citron||12/19/2008 11:40:36 AM|
|More California Towns Face Bankruptcy [wsj]|
By BOBBY WHITE
RIO VISTA, Calif. -- California may soon have more bankrupt towns on its hands.
The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.
Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.
"We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.
California's troubled towns can't expect much help from the state. A state board voted Wednesday to shut off $3.8 billion in financing to hundreds of infrastructure projects to preserve cash, as the nation's most populous state struggles under a budget deficit that officials say could balloon to more than $40 billion over the next two years.
"California's fiscal house is burning down," State Treasurer Bill Lockyer said in a statement.
The plights of Isleton and Rio Vista highlight the difficulties small California municipalities face as revenue falls. Vallejo, just a few miles west of the two towns, filed for bankruptcy in May after its tax revenue sank with the economy, while wages and benefits for police and other services rose. Vallejo instantly became the nightmare scenario for towns across the state facing a similar toxic mix of foreclosures, debts, pension obligations and the inability to raise money on bond markets.
California also makes it hard for municipalities to quickly raise taxes to cover shortfalls: In most instances, state law requires them to place increases in utility rates and taxes before voters for their approval.
Rio Vista began to see the trouble last year, when property-tax revenue began to falter. The city lacks revenue sources such as big-box retailers and depends heavily on two auto dealerships for sales-tax revenue, Mr. De La Rosa says. But the dealerships have hit hard times.
Rio Vista has cut a third of its city workers and slashed its recreation budget to $29,000 from about $250,000. The city is looking into selling more than 100 acres of its land for revenue. Since July 2007, Rio Vista has cut $1 million from its $7 million budget but still faces an $800,000 shortfall. "The fact we are a small town makes it more difficult to handle this slide we are on," says Rio Vista Mayor Jan Vick. "We don't have that much to cut."
In September, Rio Vista contacted law firm Orrick, Herrington & Sutcliffe, which handled the Vallejo bankruptcy, and requested guidance, says former Mayor Eddie Woodruff.
The thought of bankruptcy doesn't sit well with some residents. "When I first heard the council was considering bankruptcy, I was all for it," says Howard Lamothe, owner of Foster's Bighorn restaurant, whose family has lived here for seven generations. "But after I learned about what it means and how it affects business and service, I changed my mind," he says. "I can't support that."
John Knox, a partner at Orrick Herrington, says he expects to see several more municipal bankruptcies in California next year. But "there is no capacity at the state level to write a check to aid our financially burdened local governments," says Marie Ann O'Malley, a policy analyst with the state's Legislative Analysts Office, a nonpartisan financial and policy-advisory agency.
The state's Pooled Money Investment Board Wednesday halted the flow of money to highway, prison and schools projects, among others, until June, so the state can pay for public safety, health care and other crucial services for as long as Sacramento lawmakers remain stalemated over how to close the budget gap.
Ms. O'Malley says that distressed cities could turn to county governments to take over some services. But with many counties also hurting financially, that option is limited. Another option: Cities could dissolve themselves, she says. But dissolution also involves county officials taking over city services and orchestrating a recovery, and lenders would still be left holding the bag for debts.
Isleton's city manager, Bruce Pope, says the town owes $950,000 for an assortment of services including trash pickup and electricity. With Isleton's operating budget of about $1 million, interest on unpaid bills could overpower the city's budget, he says.
Some county leaders are pressuring Mr. Pope to dissolve Isleton. But the town, with about 1,000 residents, doesn't have the money to cover the fees to do so, he says.
|RecommendKeepReplyMark as Last Read|
|From: Sam Citron||12/27/2008 1:09:26 PM|
|The Isle That Rattled the World [WSJ]|
Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped
By CHARLES FORELLE
REYKJAVIK, Iceland -- A boy charged to the front of an angry crowd here recently and tossed a carton of skyr, a popular local yogurt-like snack, at the Parliament building. It splattered on the rough-hewn stone.
He and thousands of Icelanders were protesting one of the strangest economic failures of the global financial crisis. This past fall, every bank that matters in this tiny nation -- that is, all three of them -- failed. Iceland's currency, the krona, became worthless beyond its shores. The country's financial system stopped working.
"We are pissed off at the government," said one young man, pausing between fusillades of eggs. A roll of toilet paper arced across the Nordic sky.
Iceland is an extreme casualty of an era in which it became extraordinarily easy to borrow money. But it was more than that: An examination of the nation's banking system, which collapsed over about 10 days this autumn, reveals the degree to which Iceland was one of the international financial bubble's most enthusiastic players. Home to fewer people than Wichita, Kan., Iceland became so leveraged and so deeply intertwined with the global financial infrastructure that its collapse has rattled the world from Tokyo to California to the Middle East.
In Japan and Hong Kong, bond buyers got stuck holding all-but-worthless debt. In Beverly Hills, a real-estate developer was forced to default after teaming up with an Icelandic bank to build condos near Wilshire Boulevard. A German regional lender, Bayerische Landesbank, suffered big losses on its Icelandic investments contributing to its need for a €30 billion ($42 billion) bailout package.
And in recent weeks, Naomi House, a hospice in southern England, had to cancel a service in which aides made house calls to give the parents of dying children a helping hand. Some £5.7 million ($8.7 million) -- two-thirds of its available cash -- is frozen and may never be fully returned. It was deposited in an Icelandic bank.
Khalid Aziz, chairman of the hospice trust, says he didn't think twice back in 2005 when Icelanders bought the local bank. "With the globalization of markets," he says, "everybody owns everything these days, don't they?"
Until very recently, the 21st century had smiled on Iceland. Last year, it boasted the highest standard of living of any country, according to the United Nations -- outranking the U.S., for all its McMansions and drive-through coffee shops, and Sweden with its government-paid parental leave and other generous social benefits.
High interest rates set by the central bank kept foreign money flowing onto the island, strengthening the krona and making imported goods easily affordable. Iceland's ports unloaded ships full of swank Scandinavian furniture, building materials for new houses and sport-utility vehicles. Imports were boundless: Recently, cape gooseberries were a common adornment on the plates of Reykjavik's chic restaurants.
Iceland has long had many valuable natural assets. It sits amid some of the world's best fishing grounds, and that industry sustained the local economy for centuries. It is a wild, beautiful place where some people still believe in alfar, or elves.
The cinematic landscape of fjords, glaciers and reindeer attracts adventurous tourists and their dollars. The earth's innards bubble to the surface in volcanoes and geysers -- a product of Iceland's location atop the violent meeting point of the North American and Eurasian tectonic plates.
But in the early 1990s, some people felt Iceland could be more than a showcase for nature and producer of salt cod.
Leading the charge was David Oddsson. A shaggy-haired former mayor of Reykjavik, Mr. Oddsson was an Icelandic character: a writer of short stories and religious hymns, the one-time host of a comic radio program and, as a youth, an aspiring actor who dressed as Santa Claus to earn pocket money at Christmas.
He was known for his wit, says Hannes Gissurarson, a member of Mr. Oddsson's inner circle at the time. When Shimon Peres, the Israeli politician, visited Iceland, Mr. Oddsson jokingly said to him: "You are the chosen people, we are the frozen people," according to Mr. Gissurarson.
Mr. Oddsson became prime minister in 1991 promising to bring an end to the country's boom-and-bust cycles tied to the fish catch. He blamed the trouble on the state-controlled economy, which put bureaucrats in charge of fishing, the media, even a travel agency.
Within a few years, Iceland had sold off companies worth a combined $2 billion, a big sum for the small economy, says Mr. Gissurarson.
For Mr. Oddsson, what most held Iceland back was government control of banking, which put politicians in the position of determining how capital should be allocated. "The crucial factor," he said in a 2004 speech, "was the iron grip that the Icelandic state had on all business activity through its ownership of the commercial banks."
He sold them all.
From Fish to Finance
Icelanders embraced change. The highly educated populace launched biotechnology and software companies. Ossur hf, an Icelandic maker of artificial limbs, grew into a global supplier of high-tech prosthetics. At this year's Beijing Paralympic Games, the South African sprinter Oscar Pistorius won three gold medals wearing Ossur's "Cheetah" brand legs, running the 100-meter dash in 11.17 seconds.
Industrialists harnessed the energy of volcanoes and waterfalls to power aluminum smelters. Alcoa Inc. built a giant smelter among Iceland's eastern fjords.
But Iceland's biggest foray was into banking. Almost immediately, the newly privatized banks started looking overseas for growth. There was a simple reason: The local economy is small. With only 300,000 citizens, there aren't enough Icelanders to open new accounts.
In 2000, Kaupthing Bank, Iceland's biggest, had assets of just 208 billion kronur. By June 30 of this year, its assets had ballooned some 30 times, to 6.6 trillion kronur.
By earlier this year, the three main banks had grown so much that they accounted for around three-quarters of Iceland's stock-market value. Their loans and other assets totaled about 10 times Iceland's gross domestic product.
Central Reykjavik has a small-city feel -- rows of gabled houses and lamplit streets. But driven by banking, it became a mini financial capital.
Icelandic tycoons held court at hotel bars and hip eateries that overshadowed the port city's seafood shacks. At one, Sjávarkjallarinn, or Seafood Cellar, chefs put Icelandic fish in outré combinations with exotic ingredients. Its signature appetizer: a Mason jar of lobster, cauliflower and a truffle-flecked foie gras sauce.
Universities lured the children of fishermen and trained them in finance. In 2005, Silja Sigurdardottir, 26 years old, was an engineering student, then switched to financial math. "The banks were really big, and everything was going up," she says.
Ms. Sigurdardottir got her masters in 2007, and worked for Kaupthing for one year. During that time, "I didn't really worry about money," she says.
Those days are over. She was laid off in October. Next year she plans to begin studying for a new degree, in sustainable development. "Now I have to go back to being a poor student," she says.
Much of Iceland is on a similar trajectory. After years of growth, Iceland's GDP is forecast to shrink by 8% next year. Inflation, at 18% and expected to rise, is gutting the value of regular Icelanders' assets and crimping their once-flush household budgets.
"We have a major macroeconomic problem on our hands," says Geir Haarde, the country's prime minister.
To a degree, the wealth Iceland enjoyed during the boom years was a mirage. It was conjured by high interest rates, which attracted vast sums of foreign money.
Paradise of Returns
Iceland became a paradise of high returns, even for individual foreigners simply looking for a bank account. For instance, in July, Kaupthing's Isle of Man subsidiary offered 7.15% on one-year deposits.
High interest rates kept the currency, the krona, strong. The strong krona, in turn, made the prices of imported goods -- flat-screen television sets, SUVs -- low. So Icelanders went on an epic shopping spree. They dodged the expense of borrowing at those rates, though, by instead borrowing at lower interest rates in foreign currencies (Japanese yen, Swiss francs) to finance homes and other big purchases.
Like Americans who rode a housing bubble thanks to the U.S. Federal Reserve's maintaining low interest rates for years, Icelanders had found a cheap source of borrowing to finance their consumption.
As long as foreign money kept flowing into Iceland, everything remained fine. But an outflow would dangerously reverse the equation, and set the stage for calamity.
Iceland isn't the only small country to be whipsawed by foreign money flooding in, then gushing out. Hungary and Latvia were similarly hit.
What makes Iceland different: It tried to build a global banking center on top of a tiny currency. So when foreign investors tried to pull out -- converting kronur back into dollars or euros en masse -- its currency fell like a rock, spurring more withdrawals.
Amid Iceland's euphoria, there were warnings. In 2006, analysts at Danske Bank wrote a paper titled "Geyser Crisis" saying that Iceland's banks had grown too much, and the country was dangerously reliant on the willingness of foreigners to keep sending money.
Hedge funds attacked the Icelandic krona. The banks weathered the assault, and the krona bounced back. Fatally, Iceland viewed its successful defense as proof of the banks' resilience.
But the Danske Bank team wasn't wrong, just early.
Meantime, Iceland's new breed of tycoons was living large.
Among them was Jón Ásgeir Jóhannesson. He traveled by yacht, jet and helicopter all emblazoned "101" -- the name of a chic Reykjavik hotel owned by his wife.
Mr. Johannesson, who parlayed a discount-grocery business into a empire that spanned frozen food and high-end retail, went on a global acquisition spree.
In 2006, he scooped up famed London retailer House of Fraser. His holding company also owned a big chunk of Iceland's third-largest bank, Glitnir Bank hf.
One of Glitnir's predecessor institutions had been the state's Fisheries Investment Fund, which helped fisherman buy trawlers. In recent years, Glitnir became much more complex, borrowing heavily from European banks to finance a global expansion. It financed Mr. Johannesson's House of Fraser deal.
By mid-2008, strains in Iceland were starting to show. As the financial crisis simmered in the U.S., banks world-wide were getting warier of lending to each other.
They particularly worried about the remote and deeply indebted island nation of Iceland.
Days of High Crisis
In a matter of just days starting in late September, Iceland's entire banking system failed. This account of the final days is based on documents and interviews with a dozen or so people close to the banks and the government.
Inside Glitnir's headquarters in mid-September, CEO Lárus Welding and his deputies faced a problem: The bank had issued bonds five years earlier, to pay for its expansion, that were now coming due. Glitnir had to make a payment of €600 million on Oct. 15.
Glitnir feared it didn't have the cash.
Mr. Welding, silver-haired at age 32, had taken his job just a year earlier. Previously, he ran the London branch of Iceland's second-biggest bank, Landsbanki Islands hf, and helped run one of its most-popular products, "Icesave," a service that led Britons to sock away money at high interest rates. Hundreds of thousands of them did, pouring in billions of pounds.
Glitnir, however, didn't have access to piles of pounds or euros to pay back creditors. Unlike Landsbanki and Kaupthing, Glitnir hadn't bulked up on foreign deposits.
Mr. Welding's bankers tried everything to raise cash: They attempted to sell Norwegian subsidiaries. They tried to borrow foreign currency. But no one wanted the krona-denominated mortgages and car loans that Glitnir could offer as collateral.
Indeed, suddenly no one wanted kronur at all. The exchange rate was in freefall.
The mid-September collapse of Lehman Brothers in New York had panicked financial firms world-wide -- bringing lending between banks to a standstill. Given Glitnir's acute need for a loan, that was very bad news.
Glitnir hoped Bayerische Landesbank would let it be late with a €150-million payment on a loan, freeing up some cash for the bond repayment. No dice. On Sept. 24, the Germans asked to be paid on time.
Mr. Welding phoned Glitnir's chairman, Thorsteinn Már Baldvinsson. "This has not been a good day," he said.
Iceland was beginning to be cut down to size.
The Krona Crumbles
Mr. Haarde, the prime minister, spent Sept. 24 in New York City at the United Nations General Assembly. The talk there was of the financial crisis then laying waste to Wall Street. Yet while Lehman Brothers had just gone bankrupt, Europe hadn't yet felt the full force.
The Icelandic delegation headed across town to Nasdaq headquarters, where Mr. Haarde, smiling for the photo op, rang the closing bell.
Back in Reykjavik, however, Iceland's own Glitnir bank was flirting with disaster. With Mr. Haarde out of town, Messrs. Welding and Baldvinsson turned for help to Mr. Oddsson, the former prime minister.
In 2005, Mr. Oddsson had moved across town to another position of power: chairman of the central bank's board of governors. The Glitnir men said they could need between €500 million and €600 million.
Mr. Oddsson didn't commit. "Let's keep in touch," he said, according to a person familiar with the matter.
There was a problem: Iceland's central bank -- which is supposed to act as a lender of last resort when banks get into a bind -- hadn't stockpiled very many euros to lend. By the middle of this year, it held just €2 billion in foreign-currency reserves. By contrast, Iceland had more than $70 billion (€49.9 billion) in debts to foreign banks.
It had plenty of kronur. But nobody wanted those.
That weekend, Iceland's political and banking leaders scrambled to avert cataclysm. The chiefs of the three banks met at the offices of the state banking regulator to hammer out a shotgun merger. The most likely deal -- a tie-up of Landsbanki and Glitnir -- would still require the government to provide euros so Glitnir could make its payments.
Euros, of course, were just about as scarce in Iceland as cape gooseberries had once been.
Within the government, a split emerged about what to do with the few euros Iceland did have. Some advocated in effect lending Glitnir the money. But central-bank officials said a loan would be a waste: Glitnir would just be back later for more, they argued.
Instead, they proposed the government make a large investment directly in Glitnir, in return for equity.
This had its risks. The prime minister's chief economic adviser, Tryggvi Thor Herbertsson, worried that diluting Glitnir's shareholders would torpedo other banks' shares.
The evening of Sunday, Sept. 28, Mr. Oddsson summoned the top Glitnir officials. As Messrs. Welding and Baldvinsson arrived at the central-bank headquarters to learn Glitnir's fate, Mr. Welding turned to his colleague. "Do you realize," he said, "It's over."
Mr. Oddsson said the government would be willing to take a 75% stake in Glitnir for €600 million.
Monday morning, when the deal was announced, bank shares collapsed. Rating agencies knocked down the debt ratings of Glitnir, Iceland's other banks, and Iceland itself. The krona dropped like a stone.
Britons Take a Hit
In Spain, watching television at his home, Daniel Herzberg caught a news report about Iceland's banks. He got worried.
A few years ago, he and his wife had deposited £10,000 in the Guernsey branch of a British savings bank. A year later, Landsbanki bought the branch.
Mr. Herzberg, a 39-year-old expatriate Briton who organizes bicycle and walking tours, emailed the bank to ask whether his money was safe. He and his wife, Lucy, were saving for home renovations to accommodate their 2-year-old, Oliver.
On Friday, Oct. 3, Mr. Herzberg got an encouraging reply: Landsbanki would back foreign depositors. The email also pointed out that Icelandic bank regulators just a few weeks earlier had found Landsbanki "strong enough to withstand a severe shock to the financial system."
"Everything's fine," Mr. Herzberg said to his wife.
Except it wasn't.
The bad news about Iceland had startled many Brits with money in Landsbanki's Icesave accounts. That weekend, they withdrew some £200 million.
Alarmed, British banking authorities told Landsbanki it had until Monday afternoon to replenish the London branch with about the same amount.
The UK Financial Services Authority declined to discuss the Icesave sequence of events.
A couple of hundred million pounds was something Landsbanki didn't have just lying around. Like any bank would, it had lent or invested the deposits it had taken in over the years.
Landsbanki had little choice but to turn to its lender of last resort, Iceland's central bank. Saturday, major shareholder Björgólfur Thor Björgólfsson paid a visit to Mr. Oddsson to ask for a loan. Mr. Björgólfsson and his father, Björgólfur Gudmundsson, are perhaps Iceland's most prominent tycoons. In 2006, the father purchased West Ham United, a top British soccer club.
Meantime, Prime Minister Haarde and other top officials -- bankers, regulators, labor-union leaders, parliamentarians and pension-fund administrators -- scrounged everywhere for euros that might be used to prop up the banks.
Brief Midnight Hope
Around midnight on Sunday, there was a burst of hope. Mr. Haarde told a small crowd gathered in the lobby of Iceland's Parliament building about a new plan taking shape: Iceland's pension funds would sell some overseas investments to raise foreign currency, then let the government buy the foreign currency for kronur.
By Monday morning, that idea was dead. The pension funds weren't eager to sell assets at fire-sale prices into a global crisis.
Iceland had run out of moves.
Monday afternoon, a weary-looking Mr. Haarde addressed his countrymen. He warned that the banks' grave troubles threatened the whole island. "The Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool," he announced on television.
The solution: Iceland would seize the banks. That evening, Parliament passed a new law enabling this to happen.
The next morning, Tuesday, Oct. 7, Landsbanki was nationalized. Iceland's depositors would be protected from losses, the government said.
In the U.K., banking authorities didn't like the sound of that. British depositors had billions of pounds in Icesave -- and no one was saying anything about protecting them.
In a heated phone call, British Treasury chief Alistair Darling asked Iceland's finance minister if British depositors were getting left out in the cold. "Do I understand that you guarantee the deposits of Icelandic depositors?" Mr. Darling asked, according to a transcript published in the Icelandic press.
"Yes," replied Arní Mathiesen.
"But not the branches outside Iceland?" Mr. Darling asked.
"No," Mr. Mathiesen said, not beyond the €20,000 minimum prescribed by European regulations. Later in the call, Mr. Mathiesen said Iceland probably didn't even have enough money to meet the €20,000 minimum.
"Well," said Mr. Darling, "that is a terrible position to be in."
Mr. Darling's office didn't respond to a request for comment. In public remarks, he has recounted a version of the call that is consistent with the transcript. Mr. Mathiesen couldn't be reached.
Despite the Landsbanki debacle, executives at Kaupthing remained hopeful about survival. Kaupthing hadn't seen massive outflows from its own British deposit service (which, luckily, didn't have "Ice" in its name). And Iceland's government had agreed to give Kaupthing the €500-million loan it needed.
Working late Tuesday at the bank's headquarters -- an airy glass building with a waterfall in the atrium -- they hammered out a proposal to take over Glitnir and sell its foreign assets. Thus, two of Iceland's three banks would pull through.
Early Wednesday morning, Kaupthing's chairman was working with his bankers to try to sell some UK assets, when bad tidings flashed across his TV screen: British authorities, worried about the solvency of Kaupthing's U.K. subsidiary, had seized its assets and transferred them to the Dutch bank ING.
The seizure would trigger a cascade of defaults for Kaupthing, blows it simply couldn't survive.
The next morning, Iceland's government took over what was left of Kaupthing. Glitnir, too, was eventually brought under government control.
In Iceland, the reaction has been shame and anger. Popular targets are British Prime Minister Gordon Brown and Mr. Darling, blamed for precipitating Kaupthing's collapse. They are also reviled for using an anti-terror law to seize other Icelandic assets. Also attracting a helping of blame is Mr. Oddsson.
His spokesman declined several requests for comment.
In a brief telephone interview in October, Mr. Oddsson said Iceland's foreign-currency reserves per capita were greater than most other countries. And in a spirited October interview on Icelandic television, he said it was the banks that should have been made smaller, not the currency reserves larger.
In a November speech to an Icelandic business gathering, Mr. Oddsson rejected blame for the crisis, saying the central bank had limited supervisory authority over banks, and that he had, in fact, warned of the banks' profligacy.
Blaming Mr. Oddsson is "totally unjustified," says his friend Mr. Gissurarson, also a member of the central bank's supervisory board." The currency crisis was brought about by Gordon Brown," he says. When the U.K. seized Kaupthing's assets, that ended Iceland's best hope keep that institution alive itself.
Mr. Brown has vigorously defended Britain's moves, saying they were necessary to protect British savers after Iceland signaled it would back local depositors but not foreigners.
Iceland's Global Fallout
One thing that might have saved Icelandic capitalism was joining the euro. Appealing to national pride, Mr. Oddsson long resisted moves to join the European Union and adopt the common currency. Perhaps most crucially, joining the EU would have meant bureaucrats in Brussels would then regulate Iceland's use of its fishing stocks -- a political third rail in Iceland.
In the October TV interview, Mr. Oddsson was unbowed in his views of the euro. "If we were tied to the euro, for instance, we would just have to succumb to the laws of Germany and France," he said.
The growth of Iceland's banks abroad was astonishing. When they fell, they left a mess to clean up that spills across the globe.
Glitnir owned two Norwegian banks. Landsbanki took deposits across the Atlantic in Nova Scotia -- then spread halfway across Canada to open a private-banking office in Winnipeg.
Kaupthing launched operations in Luxembourg, and raised an investment fund and bought a power plant in India. Two weeks before it collapsed, Kaupthing also wooed a Qatari sheikh, Mohammed Bin Khalifa Al-Thani, into buying a 5% bank stake for 25.6 billion kronur. A spokeswoman says the stake is now virtually worthless.
Kaupthing also hired a real-estate banker to drum up business. Among the resulting projects was the Beverly Hills condo development. Kaupthing teamed up with land developer CPC Group, and borrowed $365 million to help finance the purchase of eight acres of land abutting Wilshire Boulevard.
The loan was due Oct. 9 -- the day Kaupthing was seized by Iceland. CPC was unable to make the whole payment. The project is in turmoil.
In most countries, deposit-protection schemes cover at least some money lost by savers, at significant cost to local treasuries. Britain and the Netherlands are putting up billions of euros to cover their depositors. Iceland will reimburse some funds, but not for years.
Mr. Herzberg and the 2,000 other depositors in Landsbanki Guernsey have been paid 30% of their £120 million in deposits. But the bank's court-appointed administrator isn't optimistic that they'll get the rest back. Guernsey has no deposit-guarantee protection.
Account holders with large balances, like Naomi House, the British children's hospice, are out of luck. Some 250 children suffering from cancer and other diseases come to Naomi House each year. Many pass through its doors only for a temporary stay. Others come there to die.
In better times -- in fact, just three years ago -- Naomi house decided to start building a second facility, for teenagers. Construction isn't finished, so to keep the project going, Mr. Aziz, the charity's chairman, says the trust may be forced to sell its stocks and other investments.
Mr. Aziz hopes the government can help his charity, given that it is spending billions on bank bailouts. "Against the eye-watering sums that are being bandied around," Mr. Aziz says, "this is nothing."
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|From: Sam Citron||12/30/2008 11:59:00 PM|
|Gazprom, Once Mighty, Is Reeling [NYT]|
By ANDREW E. KRAMER
MOSCOW — A year ago, Gazprom, the Russian natural gas monopoly, aspired to be the largest corporation in the world. Buoyed by high oil prices and political backing from the Kremlin, it had already achieved third place judging by market capitalization, behind Exxon Mobil and General Electric.
Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company’s shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world’s largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom’s big private sector competitors in the West is looking for one.
That Russia’s largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state’s rapid economic decline.
During the boom times, Gazprom and the other Russian state energy company, Rosneft, became vehicles for carrying out creeping renationalization.
As oil prices rose, so did their stocks. But rather than investing sufficiently in drilling and exploration, Russia’s president at the time, Vladimir V. Putin, used them to pursue his agenda of regaining public control over the oil fields, and much of private industry beyond.
As a result, by the time the downturn came, they entered the credit crisis deeply in debt and with a backlog of capital investment needs. (Under Mr. Putin, now the prime minister, Gazprom and Rosneft are so tightly controlled by the Kremlin that the companies are not run by mere government appointees, but directly by government ministers who sit on their boards.)
“They were as inebriated with their success as much as some of their investors were,” James R. Fenkner, the chief strategist at Red Star, a Russian-dedicated hedge fund, said of Gazprom’s ambition to become the world’s largest company. “It’s not like they’re going to produce a better mousetrap,” he said. “Their mousetrap is whatever the price of oil is. You can’t improve that.”
Investors are now fleeing Gazprom stock, once such a favorite that it alone accounted for 2 percent of the Morgan Stanley index of global emerging market companies. Gazprom is far from becoming the world’s largest company; its share prices have fallen more quickly than those of private sector competitors. The company’s debt, amassed while consolidating national control over the industry, is one reason.
After five years of record prices for natural gas, Gazprom is $49.5 billion in debt. By comparison, the entire combined public and private sector debt coming due for India, China and Brazil in 2009 totals $56 billion, according to an estimate by Commerzbank.
Mr. Putin used Gazprom to acquire private property. Among its big-ticket acquisitions, in 2005 it bought the Sibneft oil company from Roman A. Abramovich, the tycoon and owner of the Chelsea soccer club in London, for $13 billion. In 2006 it bought half of Shell’s Sakhalin II oil and gas development for $7 billion. And in 2007, it spent more billions to acquire parts of Yukos, the private oil company bankrupted in a politically tinged fraud and tax evasion case.
Rosneft is deeply in debt, too. It owes $18.1 billion after spending billions acquiring assets from Yukos. And in addition to negotiating for a government bailout, Rosneft is negotiating a $15 billion loan from the China National Petroleum Corporation, secured by future exports to China.
Under Mr. Putin, more than a third of the Russian oil industry was effectively renationalized in such deals. But unlike Hugo Chávez of Venezuela or Evo Morales of Bolivia, who sent troops to seize a natural gas field in that country, the Kremlin used more sophisticated tactics.
Regulatory pressure was brought to bear on private owners to encourage them to sell to state companies or private companies loyal to the Kremlin. The assets were typically bought at prices below market rates, yet the state companies still paid out billions of dollars, much of it borrowed from Western banks that called in the credit lines in the financial crisis.
Rosneft, which was also held up as a model of resurgent Russian pride and defiance of the West as it was cobbled together from Yukos assets once partly owned by foreign investors, was compelled to meet a margin call on Western bank debt in October.
Critics predicted Russia’s policy of nationalization would foster inefficiency, or at the very least disruption as huge companies were bought and sold, divided up and repackaged as state property. At stake were assets worth vast sums: Russia is the world’s largest natural gas producer and became the world’s largest oil producer after Saudi Arabia reduced output this summer to support prices.
A deputy chief executive of Gazprom, Aleksandr I. Medvedev, predicted the company would achieve a market capitalization of $1 trillion by 2014. Instead, its share price has fallen 76 percent since the beginning of the year and its market cap is now about $85 billion.
By comparison, Exxon’s share price Monday of $78.02 is down 18 percent since January. The company’s market capitalization is $393 billion. And the Standard & Poor’s 500-stock index stocks is down more than 40 percent for the year
Mr. Medvedev, the Gazprom executive, defended Gazprom’s performance and attributed the steep drop in its share price relative to other energy companies to the company’s listing on the Russian stock exchange, which is volatile and lacks investors who put their money into companies for the long term.
Mr. Medvedev said the share price “does not reflect the company’s value” and blamed the financial crisis that began on Wall Street for the company’s woes.
It is true that Gazprom is far from broke. The company made a profit of 360 billon rubles, or $14 billion, from revenue of 1,774 billion rubles, or $70 billion, in 2007, the most recent audited results released by the company.
Valery A. Nesterov, an oil and gas analyst at Troika Dialog bank in Moscow, said Gazprom’s ratio of debt to revenue — before interest payments, taxes and amortization — was 1 to 5 in 2007, high by oil industry standards but not so excessive as to jeopardize the company’s investment grade debt rating.
The company, meanwhile, says it will go ahead with capital spending to develop new fields in the Arctic, and continues to pour money into subsidiaries in often losing sectors like agriculture and media. It is also assuming, through its banking arm, a new role in the financial crisis of bailing out struggling Russian banks and brokerages.
Investors say an unwillingness to cut costs in a downturn is a common problem for nationalized industries, and another reason they have fled the stock. When oil sold for less than $50 a barrel in 2004, Gazprom’s capital outlay that year was $6.6 billion; for 2009, the company has budgeted more than $32 billion.
Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company’s reliance on Ukraine as a transit country for about 80 percent of exports to Europe. Gazprom and Ukraine are again locked in a dispute over pricing that Gazprom officials say could prompt them to cut supplies to Ukraine by Thursday.
“All our major projects in our core business — upstream, midstream and downstream — will continue with very simple efforts to meet demand both in Russia and in our export markets,” Mr. Medvedev said.
But revenue is projected to fall steeply next year. Gazprom received an average of $420 per 1,000 cubic meters for gas sold in Western Europe this year; that is projected to fall to $260 to $300 in 2009.
“For them, like everybody else, sober realism has intruded,” Jonathan P. Stern, the author of “The Future of Russian Gas and Gazprom” and a natural gas expert at Oxford Energy, said in a telephone interview.
A significant portion of the country’s corporate bailout fund — about $9 billion out of a total of $50 billion — was set aside for the oil and gas companies. Gazprom alone is seeking $5.5 billion.
For a time, Gazprom, a company that evolved from the former Soviet ministry of gas, had been embraced by investors as the model for energy investing at a time of resource nationalism, when governments in oil-rich regions were shutting out the Western majors. In theory, minority shareholders in government-run companies would not face the risk their assets would be nationalized.
But with 436,000 employees, extensive subsidiaries in everything from farming to hotels, higher-than-average salaries and company-sponsored housing and resorts on the Black Sea, critics say Gazprom perpetuated the Soviet paternalistic economy well into the capitalist era.
“I can describe the Russian economy as water in a sieve,” Yulia L. Latynina, a commentator on Echo of Moscow radio, said of the chronic waste in Russian industry.
“Everybody was thinking Russia had succeeded, and they were wondering, how do you keep water in a sieve?” Ms. Latynina said. “When the input of water is greater than the output, the sieve is full. Everybody was thinking it was a miracle. The sieve is full! But when there is a drop in the water supply, the sieve is again empty very quickly.”
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|From: Sam Citron||1/4/2009 3:03:47 PM|
|Brazilian Companies Step In To Educate Future Workforce|
By Joshua Partlow
Washington Post Foreign Service
Tuesday, December 9, 2008; A01
VITORIA, Brazil -- Fabiana Nunes Rodrigues didn't know much about trains. But she wanted a good job, she said, something stable, maybe as a mechanic, like her grandfather. Brazilian college courses didn't offer much in the way of technical instruction. But one company in her home town did, and she already knew it well.
Since she was 15, Rodrigues had spent her afternoons in technical classes sponsored by the mining giant Vale, the world's largest producer of iron ore. So it made sense that when she graduated from high school she would enroll in Vale's nine-month train maintenance course on this vast corporate campus on a rise above the Atlantic Ocean.
"I've always wanted to work for Vale," said Rodrigues, 18, standing in a maintenance facility where cranes were lifting hulking metal tubing from a train engine. "Now many of my friends want to take this class, too."
Vale also wants people like Rodrigues, and is willing to do a lot to get them. With more than 150,000 employees worldwide, it is one of several large corporations in fields such as mining, aerospace and construction that are driving Brazil's ascent in the world economy. But the firms' ambitious plans for growth have bumped into a problem hampering development across Latin America: a higher education system that does not churn out enough engineers and others with technical skills, even as the global economic crisis depresses demand.
Despite being one of the world's most populous countries, Brazil does not have a single university ranked in the top 100 internationally. Of its college graduates, 5 percent are engineers, far below the rates of countries such as China and South Korea, according to Brazilian businesses.
Since Brazil's education system is falling short, Vale, like several other Brazilian companies, has decided to build its own.
"For years, technical education was not the main focus of the government," said Marco Dalpozzo, Vale's global human resources director. "Mining was not seen for the last 20 years as a great opportunity or a vocational business opportunity for the country. So you have professions for which Vale had to create their own entire system of education."
Over the past few years, several Latin American countries have enjoyed soaring growth rates as they exported oil, minerals and agricultural products around the world. In Brazil, gross domestic product more than doubled, to $1.3 trillion, in the five years ending in 2007, while inflation dropped to 3.6 percent, a quarter of the 2003 level.
Yet recent studies have shown that workers in Latin America have less education than those in East Asia and Eastern Europe and that the percentage of students enrolled in high school is far lower than in developed countries. In Colombia, one out of every 700,000 people receive PhDs, compared with one in 5,000 in developed countries, wrote Jeffrey M. Puryear and Tamara Ortega Goodspeed in a contribution to a book published this year titled "Can Latin America Compete?"
"The region's limited number of scientists and advanced degree recipients weakens the region's competitiveness by limiting countries' ability to use and generate knowledge, and to carry out research," they wrote.
For younger students, Latin American countries have focused in recent years on building schools and expanding access to public education, rather than improving the quality of that education, said Emiliana Vegas, a senior education economist at the World Bank. Teachers' pay raises are based on longevity rather than performance, and few parents are used to demanding more rigorous standards.
"Most Latin American parents have less education than their kids. They feel their kids are already receiving an advantage they didn't get," said Vegas, who co-authored the book "Raising Student Learning in Latin America." In the most recent results of the Organization for Economic Cooperation and Development's triennial tests of 15-year-olds from 57 countries, the Latin American countries that participated, including Brazil, Argentina and Colombia, consistently scored near the bottom. "It's not just that kids need to go to school, they need to learn in school," Vegas said.
Poor education leads to a lack of skilled workers. A survey of more than 1,700 industrial firms by Brazil's National Confederation of Industry last year found that more than half could not find enough trained workers. The biggest companies in Brazil, as well as elsewhere in Latin America, have taken it upon themselves to change this dynamic.
For the past several years, Embraer, an airplane manufacturer, has partnered with Brazilian universities to train thousands of engineers, and in June, the company opened an educational headquarters at its Eugenio de Melo plant in Sao Paulo state.
The declining global demand for minerals amid the financial crisis has recently slowed Vale's rapid growth. The company said last week that it would cut 1,300 jobs and that about 5,000 workers would take enforced holidays in coming months to slow production. But the company said it is still investing heavily in its future employees.
Over the next five years, Vale estimates it will need 62,000 new workers. This year, about 7,000 students are taking courses in its schools and training programs, from graduate studies for engineers and geologists to technical courses for high school graduates. The company has opened three schools and is building a fourth to educate potential employees. It pays students salaries and health benefits, provides food and dental care, and sometimes offers bus passes and hotel rooms to students who don't live close to their classes, all part of the fierce competition for skilled local labor.
"The biggest companies woke up in the past years, and they all need these kind of professionals," Dalpozzo said. "So the companies that want to have a sustainable future need to invest in that."
In Vale's sprawling compound in Vitoria, students in matching brown short-sleeve shirts and pants gathered in a classroom last month to discuss their training before heading off to work alongside their mentors repairing trains.
"When they arrive they don't know anything about trains," said Rosimar Mario Pignaton, 44, a 24-year Vale employee who is a mentor.
For three months, the students learn theory in the classroom, and for six months, they work alongside technicians to get a practical feel for the job. They work seven hours a day and are paid $170 to $510 a month. "It wasn't like I had a specific interest in Vale, but it was the course that attracted me. It is a very good course," said Acy de Vasconcelos Almeida, 28, as he twisted a wrench on a 2,300-gallon fuel tank. "But if I become an employee here, I would be happy to work here my whole career."
Vale says it hires nearly 70 percent of the students who complete its training programs. In another company class in Vitoria, students learned about railroad line signals and data transmission in preparation for working on a line from Vitoria to the nearby state of Minas Gerais. Monik Rodrigues Espirito Santo, 21, said she had always enjoyed math and physics and became excited about electrical circuits in high school. She hopes to eventually study engineering in college but decided to enroll with Vale first.
"Most of the people want to work as fast as possible, so the fastest path is to do a technical course and get right into the market," she said.
"The private colleges are very expensive, especially in engineering," said another student, Leonardo Pereira Alves, 27. "For someone who makes the minimum wage, the cost of university is terrible."
Educating a workforce also opens up marketing opportunities. The construction and plumbing supply company Amanco has launched a series of classes in 56 hardware stores to teach construction technique -- using Amanco products -- via lessons broadcast from a studio in Sao Paulo. About 26,000 students have completed the two-month course so far and graduated as "construction doctors."
"There are a lot of people who are working now without any kind of training. They learn with their fathers or uncles and do things the way that they did before, but have no formal training," said Marise Barroso, director of marketing for Amanco. "In Brazil, 80 percent of the construction business is informal."
If construction workers know how to use Amanco pipe fittings and tubing, she said, they will recommend these products to their customers. Amanco has found that sales of its products are 26 percent higher in stores where the classes are offered.
"There is nothing like this in any other country in Latin America," said Luiz Ros, a manager at the Inter-American Development Bank, which supports the Amanco project. He said that construction companies typically pitch their advertisements to the consumer but that it is often the construction worker who actually decides what materials to buy.
"What's fascinating is they're doing this for profit . . . by understanding who decides and who doesn't," Ros said. "The ultimate result is they are creating a community of well-trained and qualified production workers in Brazil when it is facing a huge bottleneck in terms of qualified construction workers."
At a recent Amanco-sponsored class in the city of Cabo Frio, outside Rio de Janeiro, students practiced using a table-mounted device that melted the ends of polypropylene tubing to quickly fuse sections of pipe. "This is really innovative technology," said the teacher, Alcides Jose Sampaio.
This chance to learn a trade has inspired Antonio Carlos Alexandre da Conceicao. In his 33 years, he had worked as a janitor, office boy, doorman, security guard, farmhand, ice cream vendor -- basically any form of day labor he could find.
"And now this is an opportunity for me to say: 'Oh I have this profession, a fixed profession. I'm in this career. I'm a plumber,' " he said.
He still wasn't sure what job, if any, awaited him.
"When you have a background like I have, working as a farmer, or those simple kind of things, it's hard for me to dream about something else," he said. "But learning these things and listening to people talk about new things happening, I'm allowing myself for the first time to dream."
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