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From: Sam Citron3/1/2009 8:50:00 AM
   of 264
Juarez, Mexico: Becoming a Failed State

With Force, Mexican Drug Cartels Get Their Way [NYT]

CIUDAD JUÁREZ, Mexico — Mayor José Reyes Ferriz is supposed to be the one to hire and fire the police chief in this gritty border city that is at the center of Mexico’s drug war. It turns out, though, that real life in Ciudad Juárez does not follow the municipal code.

It was drug traffickers who decided that Chief Roberto Orduña Cruz, a retired army major who had been on the job since May, should go. To make clear their insistence, they vowed to kill a police officer every 48 hours until he resigned.

They first killed Mr. Orduña’s deputy, Operations Director Sacramento Pérez Serrano, together with three of his men. Then another police officer and a prison guard turned up dead. As the body count grew, Mr. Orduña eventually did as the traffickers had demanded, resigning his post on Feb. 20 and fleeing the city.

Replacing Mr. Orduña will also fall outside the mayor’s purview, although this time the criminals will not have a say. With Ciudad Juárez and the surrounding state of Chihuahua under siege by heavily armed drug lords, the federal government last week ordered the deployment of 5,000 soldiers to take over the Juárez Police Department. With the embattled mayor’s full support, the country’s defense secretary will pick the next chief.

Chihuahua, which already has about 2,500 soldiers and federal police on patrol, had almost half the 6,000 drug-related killings in all of Mexico in 2008 and is on pace for an even bloodier 2009. Juárez’s strategic location at the busy El Paso border crossing and its large population of local drug users have prompted a fierce battle among rival cartels for control of the city.

“Day after day, there are so many horrible things taking place there,” said Howard Campbell, an anthropologist at the University of Texas at El Paso who studies Mexico’s drug war. “The cartels are trying to control everything.”

<>Nothing is surprising in Chihuahua anymore. Gunmen recently shot at one of three cars in Gov. José Reyes Baeza’s motorcade, killing a bodyguard and wounding two agents. The drug cartels routinely collect taxes from business owners, shooting those who refuse to pay up. As for the Juárez mayor, who has made cleaning up the notoriously corrupt police department his focal point, the cartel recently threatened to decapitate him and his family unless he backed off.

The handwritten threat that it issued went further than that. Like many people in Juárez, Mayor Reyes has homes on both sides of the border, splitting his time between El Paso and Juárez. The note threatening him made it clear that the assassins going after him would have no qualms about crossing into the United States to finish off the mayor and his family.

“We took the threat seriously,” said Chris Mears, a spokesman for the El Paso Police Department. “I’m not going to tell you what actions were taken, but we’ve taken actions.”

In an interview in his wood-paneled office overlooking the United States, Mr. Reyes, 46, whose father was mayor in the early 1980s, said he was not going to allow criminals to run the city, despite the inroads they are making. He said he initially opposed his police chief’s decision to resign because he did not want the outlaws to feel empowered. He acceded only as a life-saving gesture, he said.

“I’m not going to give in,” he vowed in an interview, welcoming the arrival of soldiers so that the traffickers will feel the heat even more.

Right now, the Juárez police are no match for the outlaws. Last year, the senior uniformed officer was killed, one of 45 local police officers killed since January 2007, and a former police chief pleaded guilty to charges of smuggling a ton of marijuana from Juárez to El Paso. Mr. Orduña, who lived at the police station to avoid being killed, had replaced another chief who fled to El Paso after receiving threats last year. If the army had not come in, the mayor would no doubt have had a difficult time finding somebody to head the department.

Introducing a nationwide police recruitment campaign, the mayor has raised salaries and benefits enough that he is attracting new recruits to replace the many officers being fired for their links to organized crime.

“I know the dangers and I accept them,” said José Martín Jáuregui López, one of the 289 cadets now being trained at Juárez’s police academy. “There are a lot of people afraid for me: my mom, my relatives. But this is what I want to do.”

As a sign to the traffickers that he was not running from them, Mr. Reyes appeared Friday to be like any other mayor, giving a speech at the opening of a shopping center, signing a memorandum of understanding with a developer, reassuring residents that he would keep loiterers from gathering in front of their homes.

But the bodyguards holding assault rifles who clung close to him made it clear that Juárez remained a city under siege.

“There’s no square inch of the city that has been untouched by the violence,” said Lucinda Vargas, an economist who works by day to remake the city as executive director of Juárez Strategic Plan, but retreats to El Paso at night. “There’s a lot of evidence that Juárez, in a micro sense, is becoming a failed state. But I still think we haven’t failed yet and that we could still rescue ourselves.”

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From: Sam Citron3/2/2009 8:35:57 AM
   of 264
Growing Economic Crisis Threatens the Idea of One Europe [NYT]

PARIS — The leaders of the European Union gathered Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps.

An urgent call from Hungary for a large bailout for newer, Eastern members was bluntly rejected by Europe’s strongest economy, Germany, and received little support from other countries. Chancellor Angela Merkel of Germany, facing federal elections in September, said countries must be dealt with on a case-by-case basis.

“Saying that the situation is the same for all Central and Eastern European states, I don’t see that,” Mrs. Merkel told reporters. She spoke after Prime Minister Ferenc Gyurcsany of Hungary warned, “We should not allow that a new Iron Curtain should be set up and divide Europe.”

With uncertain leadership and few powerful collective institutions, the European Union is struggling with the strains this crisis has inevitably produced among 27 countries with uneven levels of development.

The traditional concept of “solidarity” is being undermined by protectionist pressures in some member countries and the rigors of maintaining a common currency, the euro, for a region that has diverse economic needs. Particularly acute economic problems in some newer members that once were part of the Soviet bloc have only made matters worse.

Europe’s difficulties are in sharp contrast to the American response. President Obama has just announced a budget that will send the United States more deeply into debt but that also makes an effort to redistribute income and overhaul health care, improve education and combat environmental problems.

Whether Europe can reach across constituencies to create consensus, however, has been an open, and suddenly pressing, question.

The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny,” said Stefan Kornelius, the foreign editor of the German newspaper Süddeutsche Zeitung. “We always said you can’t really have a currency union without a political union, and we don’t have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud.”

Thomas Klau, Paris director of the European Council on Foreign Relations, an independent research and advocacy group, said, “This crisis affects the political union that backs the euro and of course the E.U. as a whole, and solidarity is at the heart of the debate.”

The crisis also has implications for Washington, which wants a European Union that can promote common interests in places like Afghanistan and the Middle East with financial and military help.

“All of that is in doubt if the cornerstone of the E.U. — its internal market, economic union and solidarity — is in question,” said Ronald D. Asmus, a former State Department official who runs the Brussels office of the German Marshall Fund.

The problems are basically twofold: within the inner core of nations that use the euro as their common currency, which together have an economy roughly the size of the United States’; and within the larger European Union.

The 16 nations that use the euro — introduced in 1999, and one of the proudest European accomplishments — must submit to the monetary leadership of the European Central Bank. That keeps some members hardest hit by the economic downturn, like Ireland, Spain, Italy and Greece, from unilaterally taking radical steps to stimulate their economies.

Germany once vowed never to bail out weaker members in return for giving up its strong national currency, the deutsche mark. But German leaders are now faced with the unpalatable prospect of having to put German money at risk to bail out less responsible partners that do not adhere to European fiscal rules.

Within the larger European Union, fissures are growing between older members and newer ones, especially those that lived under the yoke of Soviet socialism. Some countries of Central Europe, like the Czech Republic and Poland, are doing relatively well. Others, including Hungary, Romania and the Baltic states, are in a state of near-meltdown.

But only two newer members — tiny Slovenia and Slovakia — are protected by being among the countries that use the euro, and there was little support on Sunday for changing the rules to allow more to join quickly.

Many new members have seen their currencies plummet against the euro. That has made their debt repayments to European banks, their primary lenders, a much greater burden even as the global recession has meant a plunge in orders from consumers in the West. Some countries are asking for aid, both from their European partners and from the International Monetary Fund, to prop up their currencies and the banks.

While Western European countries are reluctant, with their own problems both at home and among the countries using the euro, there is a deep interconnectedness in any case.

Much of the debt at risk in Eastern Europe is on the books of euro zone banks — especially ones in Austria and Italy. The same is true of problems farther afield, in Ukraine, which is not yet a member.

Having watched the Soviet Union collapse, the countries of Central and Eastern Europe embraced the liberal, capitalist model as the price of integration with Europe. That model is now badly tarnished, and the newer members feel adrift.

Before the larger European summit meeting on Sunday, the Poles called an unprecedented meeting of nine of the new member nations in the East to discuss common grievances.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the rotating presidency of the European Union, tried to ease tensions, insisting that no member would be left “in the lurch.”

“We do not want any dividing lines; we do not want a Europe divided along a north-south or east-west line, pursuing a beggar-thy-neighbor policy,” Mr. Topolanek said.

But his Hungarian colleague, Mr. Gyurcsany, called for a special European Union fund of up to $241 billion to protect the weakest members. His government circulated a paper on Sunday suggesting that Central Europe’s refinancing needs this year could total $380 billion.

“Failure to act,” the paper said, “could cause a second round of systemic meltdowns that would mainly hit the euro zone economies.”

Mrs. Merkel opposed an undifferentiated package, although she suggested on Thursday that targeted help might be offered to specific countries, like Ireland.

Governments of the countries of the European Union have already spent a total of $380 billion in bank recapitalizations and put up $3.17 trillion to guarantee banks’ loans and try to get credit moving again.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they would jointly provide $31.1 billion to support Eastern European nations, but much more will be needed.

Mr. Klau, of the European Council on Foreign Relations, sees a worrying loss of faith in a certain brand of capitalism. “It’s politically dangerous there since they’ve just emerged from an ultraregulated and stifling system, were confronted with shock therapy that created great hardship, and are just beginning to recover and stabilize,” he said. “Now they’re thrown back into an economic and political cauldron.”

The new members are finding that their European partners are putting their own national interests ahead of “collective and necessary solidarity,” Mr. Klau said.

Charles Grant, director of the Center for European Reform, a research group in London, is more sanguine, however. “My expectation is that the euro zone countries, out of pure self-interest, will bail each other out,” he said. “For Central and Eastern Europe it is too early to say there won’t be solidarity. But non-E.U. countries in the east — particularly Ukraine — seem to be the No. 1 worry.”

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To: Sam Citron who wrote (225)3/2/2009 11:50:19 AM
From: Sam Citron
   of 264
EU Rejects a Rescue of Faltering East Europe [WSJ]

BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.

The global recession has greatly strained the bonds holding together the 27 nations that now make up the European Union, formed in the wake of World War II, and poses the most significant challenge in decades to its ideals of solidarity and common interest.

Ms. Merkel said she couldn't see the need for a broad grant of aid to Eastern Europe. "The situation is very different" in Europe's economies. "We cannot compare Slovakia nor Slovenia with Hungary," she told reporters.

Hungarian Prime Minister Ferenc Gyurcsany, who proposed a bailout package of up to €190 billion ($240.84 billion), warned that without aid a "new Iron Curtain" would descend on Europe and again separate East from West. Hungary has been battered by declining demand for its exports and a plummeting currency -- straining Hungarians who borrowed in euros to buy houses that have now sunk in value.
[German Chancellor Angela Merkel holds a press conference on March 1, 2009 at the end of an Economic summit of European leaders at the EU Council headquarters in Brussels.] Getty Images

German Chancellor Angela Merkel holds a press conference at the end of an Economic summit of European leaders in Brussels.

The summit was originally called by Czech Prime Minister Mirek Topolanek to discuss concerns about rising protectionism in stimulus plans being proposed by individual nations. With the recent collapse of the government in Latvia, Eastern Europe's growing problems became the main focus. But leaders left Brussels with few concrete decisions and no indication that the richer EU states of Western Europe would be white knights for the East.

Consensus was hard to find even in Eastern Europe: leaders of relatively stronger countries -- fearful of appearing weak and being tarnished by international markets to which they need access for borrowing -- split with their neighbors over the wisdom of bailouts.

"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said. Poland, which benefited from years of healthy economic growth, is in better shape that some of its more-indebted neighbors. But it has seen a substantial fall in the value of its currency as investors scramble out of the region.

Hungary also proposed speeding up adoption of the euro -- now generally used by the Western European countries -- in the East.

Strict EU rules meant to maintain the euro's strength require that countries have strong fiscal positions before adopting the common currency. That has left out Eastern European nations grappling with budget deficits, inflation -- or both.

The fall of Iceland -- whose banks failed in part because Iceland's currency collapsed -- has reinvigorated calls by a number of countries to make it easier to join the safety and stability of the euro.

But both the bailout and calls for Eastern European countries to join the euro sooner were coolly received by Western European nations. Ms. Merkel and French President Nicolas Sarkozy both separately suggested that Eastern countries should look elsewhere -- to the International Monetary Fund, for instance -- for help.

Behind the tensions: The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.

The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk.

And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10% of gross-domestic product. A protest last month in Dublin drew more than 100,000 people.

Other large countries, such as France and the U.K., face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own.

The EU's disinclination to fund a regional bailout suggests that the IMF and other multilateral institutions will take on an even larger role in coming months -- a role that IMF officials have said they recognize. The IMF is looking to double its war chest for lending to $500 billion, and the EU is weighing whether or not to make a loan for that purpose. Last week, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank said they would provide €24.5 billion in financing for banks in Eastern Europe.

The IMF has been active on Europe's periphery: Iceland, Hungary, Latvia and Ukraine have turned to the agency for aid.

Most critical was the cold shoulder from Germany, which, as Europe's largest economy and the one with most access to borrowing, would play the largest role in financing any aid. Germany, the EU's strongest economy, is unwilling to unwind its own fiscal discipline to pay for the spending excesses of others. Admitting countries with weaker finances could hurt the strength of the euro or push up inflation across the euro zone.

At present, 16 of the 27 EU members use the euro. In Eastern Europe, only Slovakia and Slovenia do. To join, countries must keep budget deficits, government debt and inflation below specified ceilings. The recession has complicated some of those aims, particularly as some governments take on more debt. Another requirement calls for countries to hold their currencies within a preset range to the euro for two years.

That has wreaked havoc on euro-adoption plans in Hungary and Poland, where currencies have tumbled. Of the 11 EU members that don't use the euro, only Denmark could be reasonably close to adopting it. The misadventures of Iceland have provided an ample demonstration of the safety the euro offers in a storm. The North Atlantic island is not an EU member, though it shares many EU rules as part of the European Economic Area.

Iceland's three big banks -- virtually the country's entire banking system -- had expanded abroad by borrowing heavily in euros and sterling. When the credit crunch cut off their funding and the Icelandic krona fell precipitously, Iceland found itself without enough foreign currency to bail out the banks, a situation possibly avoidable if Iceland had used the euro. All three banks collapsed, and some on the island are pushing for quick accession to the EU.

Mr. Topolanek of the Czech Republic, whose country is among the strongest in Eastern Europe, said "the EU is going to leave no one in the lurch." Mr. Topolanek also said leaders had agreed to have further discussions about the EU rules for euro adoption, but that there was "broad agreement" that "it would be an error to change the rules of the game now."

The EU resolved one contentious issue on the eve of the summit: It approved France's much-criticized plan to give €6 billion in low-interest loans to domestic car makers. The French plan had drawn howls of protectionism -- particularly from the Czech Republic, where PSA Peugeot Citroen SA makes small cars -- since it made the aid contingent on the car makers keeping French factories open.

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From: Sam Citron3/4/2009 11:46:23 AM
   of 264
Reports of New Stimulus in China Lift Shares [NYT]

Stocks rose around the world on Wednesday, as investors reacted to speculation that China may expand its stimulus measures.

Shares increased on reports that Premier Wen Jiabao of China was considering new spending measures on top of the $585 billion plan already proposed. An announcement could come as early as Thursday in China.

In early trading, the Dow Jones industrial average was 75 points or 1.1 percent higher, while the Standard & Poor’s 500-stock index rose 1.3 percent, climbing above 700. The Nasdaq rose 1.6 percent.

Producers of basic materials like steel, chemicals and plastic, which could benefit from government-financed construction projects, rose in early trading in New York. Energy shares also climbed as crude oil prices rose $2.41 to $44.06 a barrel.

The morning’s gains pared two days of losses that dragged two major stock indexes to their lowest levels since 1997. On Monday, the Dow fell below 7,000, and a day later, the S.&P. 500 fell 0.6 percent to dip below 700, taking its 2009 loss to 23 percent.

In afternoon trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.9 percent, while the FTSE 100 index in London increased 2.7 percent. The CAC 40 in Paris was up 2.4 percent and the DAX in Frankfurt 3.3 percent.

Most Asian markets were higher, breaking a three-day losing streak. The Tokyo benchmark Nikkei 225 stock average rose 0.9 percent, while the Hang Seng index in Hong Kong rose 2.5 percent, and the Shanghai Stock Exchange composite index gained 6.1 percent.

The S&P/ASX 200 in Sydney fell 1.6 percent, after a report showed the Australian economy contracted 0.5 percent in the fourth quarter. It was the first such decline in eight years, and came as a surprise to most economists, who had been expecting the country to eke out positive growth in the period.

Investors seemed to shrug off a report by ADP Employer Services that private sector job losses increased in February. Index futures fell slightly after the report, but eventually came back. ADP said private employers cut 697,000 jobs in February compared with a revised 614,000 jobs lost in January. The January job cuts were originally reported at 522,000.

Investors were bracing for another bleak monthly unemployment report to be released on Friday. The national unemployment rate has climbed to 7.6 percent since the recession began in December 2007, and economists expect it to reach 7.9 percent for February.

Market participants were also focused on the interest rate policy meetings Thursday of the European Central Bank and the Bank of England.

The dollar gained against most major currencies. The euro fell to $1.2532 from $1.2562 late Tuesday in New York, while the British pound rose to $1.4105 from $1.4051.

Prices of most government bonds slipped. The yield on the 10-year Treasury, which moves in the opposite direction of the price, ticked up one-tenth of a percent to 2.98 percent.

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To: Sam Citron who wrote (227)3/4/2009 11:52:12 AM
From: Sam Citron
   of 264
Economy to Dominate Annual Chinese Gathering [NYT]

BEIJING — China’s national Legislature begins its tightly scripted annual meeting on Thursday with an agenda dominated by the ruling Communist Party’s two overriding concerns: riding out the global economic crisis and keeping citizens’ unhappiness with their lot from boiling over into public unrest.

In the nine-day session of the National People’s Congress, about the only suspense involves whether the government will propose to add still more stimulus spending to the $584 billion that China’s leaders already have pledged to help the slumping economy. On Wednesday, Asian and European stocks rose in part on hopes that it would.

Prime Minister Wen Jiabao is to speak early on Thursday to the 3,000-odd delegates, and is expected by many analysts to set a target for 8 percent growth of China’s gross domestic product in 2009, the same as in previous years. The government has long said that that rate is needed to hold down unemployment and the potential for social unrest. The economy logged a 9 percent rate last year, even after a sharp slowdown in the last quarter.

But a number of experts believe that a 2009 growth rate of 6.5 percent or 7 percent, meager by recent Chinese standards, is increasingly likely. Some financial analysts predicted this week that the government will propose spending vast new amounts to head off a sharper decline, although the consensus view is that new spending, if any, will be more modest.

“The government could enlarge the plan a bit,” Shen Minggao, the chief economist for Caijing, a Chinese business magazine, said in an interview. But he said that fiscal conservatives would be wary of increasing a 2009 budget deficit that already appeared to be headed for a record.

The projected deficit is widely expected to reach 950 billion yuan, or nearly $140 billion, about 3 percent of China’s GDP. The previous record deficit, about 2.6 percent of a far smaller economy, was recorded in 2002.

One certainty is that whatever is proposed will be adopted.
The delegates, the handpicked cream of the Communist Party establishment, have little taste for revolt. On Thursday, they will gather in the wedding-cake Great Hall of the People, on Tiananmen Square, for Mr. Wen’s two-and-a-half hour overview of China’s domestic and foreign-policy goals. Much of the rest of the session will be spent giving those goals ritual approval.

The lockstep is likely to be especially tight this year, because the government wants to present a united and confident front to a public battered by rising unemployment and falling incomes. The government estimated a month ago that 20 million of the nation’s 130 million migrant workers — the cheap-labor force that powered much of China’s construction and export booms — had lost their jobs.

A signal goal of China’s stimulus program is to ensure that the idle jobless do not become an engine of social unrest.
Protests by laid-off or cheated workers are a not-infrequent occurrence, and the government has suggested that demonstrations will increase this year.

Already, the Beijing authorities have rounded up hundreds of would-be petitioners who traveled from other cities to the capital, many hoping to present grievances personally to the National People’s Congress delegates.

But if the National People’s Congress suffers a rubber-stamp image, its deliberations remain likely to illuminate the government’s still-murky plans toward economic and social stability — and, perhaps, a bit of its political calculation as well.

Experts will be watching Wen’s proposals closely to see not only how the proposed 4 trillion yuan stimulus will be spent, but how much is actually genuinely new spending. China’s central government is allotting only about 1.2 trillion yuan , or $175 billion, of the total; the rest is supposed to come from banks, investors and local governments, whose finances are especially opaque.

Most of the money is set to go to infrastructure projects, like roads and dams, that pump money quickly into the economy. But many outside experts and some party figures are calling for more money to be spent directly on people’s basic needs, from medical care to education to poverty, and the need for more social spending is likely to be vigorously debated at the meeting.

The delegates will consider one bill that would pour 850 billion yuan, or about $124 billion, into health care reform, setting up a national health insurance program and overhauling the medical care system. But even that amount would only boost annual health care spending to about 120 yuan, or $20, per person, a sum some analysts say is too little to provide meaningful relief.

“There’s an overinvestment in infrastructure,” Mao Yushi, the respected 80-year-old head of a Beijing research organization, said in an interview this week. “Money should be directed to help small businesses, for employment and social security, for medical insurance.”

In the past, such decisions have been the exclusive purview of party leaders. As this People’s Congress convenes, there are small signs that that is slowly changing.

On Sunday, Wen went on the Internet for nearly two hours to answer questions from Web-surfing citizens, issuing his own call for the government to be more transparent in its dealings. This week, the National Development and Reform Commission — the government body that is directing much of the stimulus spending — announced that it will post details of its spending plans on the Internet.

The delegates themselves also plan to engage in Internet chats with citizens, a Congress spokesman said this week.

Chinese stocks rose the most in four months on Wednesday as investors bet that further economic stimulus measures would be announced and that a wide range of Chinese companies would benefit. The Shanghai stock market gained 6.1 percent on Wednesday.

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From: Sam Citron3/5/2009 7:36:31 AM
   of 264
China's 'Missing' Stimulus [WSJ]

While the U.S. government is being accused of socialism, China's Communist Party isn't being as socialist as some expected.

Absent from Chinese Premier Wen Jiabao's keynote speech to China's National People's Congress on Thursday was the announcement of any major new fiscal stimulus plan. Confident that one was coming, investors bid up share prices around the world in anticipation.

In retrospect, those hopes were always overdone.

Beijing's existing $585 billion stimulus plan, unveiled last November, is barely out of its wrapping: while China's capacity to absorb it fully is already in doubt.

Less than a third of the $15 billion slated for disbursement in 2008's fourth quarter was actually spent by the end of December, a government official said Wednesday. Worries that corruption in the localities will cause stimulus funds to be wasted are also leading Beijing to keep a grip on the fiscal tap.

And spending isn't all that China's offered up in defense of its economy. Banks, encouraged to lend by Beijing, have begun to do so in earnest, while specific measures to support ten different industries are in the pipeline.

The government is now waiting to see if all this is enough for Chinese economy to grow by its perennial 8% target in 2009. Meanwhile, it doesn't want to give the impression of panic by adding another major initiative before the impact of the first is clear.

One worry: Isolated green shoots of recovery could be leading to unwarranted complacency in Beijing's hierarchy. China's purchasing managers' index has risen for three months in a row, for example, but it's still in contractionary territory. Bank lending is up, but anecdotal evidence suggests some of that is flowing into stocks, or simply being hoarded.

So ruling out the eventual addition of another stimulus plan would be a mistake -- if only because China still has room to do more. Even with the current plan, government debt is projected to remain under 3% of GDP this year -- a level that's surely envied by some of the world's biggest economies.

Still, China does few things hastily.
Including, as investors learned Thursday, pouring money onto a plan that's hardly had time to work.

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From: Sam Citron3/7/2009 2:24:49 AM
   of 264
Japan’s Crisis of the Mind [NYT Op-Ed]

Yokohama, Japan

RECENT events mark Japan’s return to the world’s stage, or at least so it seems. Tokyo was Secretary of State Hillary Clinton’s inaugural overseas destination. Last week, Prime Minister Taro Aso was the first foreign leader to visit the Obama White House. All this suggests that Washington sees Japan, the world’s second-largest economy, as a powerful nation. If only we saw ourselves the same way.

The truth is, Japan is a mess. Mr. Aso’s approval rate recently hit 11 percent, and his ruling Liberal Democratic Party is in open disarray. His predecessor barely lasted a year. The opposition Democratic Party of Japan just offers more of the same. This is largely because we have become a nation of bureaucrats. What passes for national policy is the sum of various ministerial interests, often conflicting or redundant, with jealously guarded turfs and budgets.

There can be no justification for all those mostly unused airports. Or for roads that lead nowhere. Or for the finance minister who appeared to be drunk at the Group of 7 meeting this month in Rome. Our problem is so deep that it sometimes seems that no political party can tame the bureaucracy and put in place a coherent national agenda.

But what most people don’t recognize is that our crisis is not political, but psychological. After our aggression — and subsequent defeat — in World War II, safety and predictability became society’s goals. Bureaucrats rose to control the details of everyday life. We became a nation with lifetime employment, a corporate system based on stable cross-holdings of shares, and a large middle-class population in which people are equal and alike.

Conservative pundits here like to speak of this equality and sameness as being cornerstones of “Japanese” tradition. Nonsense. Throughout much of its history, Japan has had social stratification and great inequality of wealth and privilege. The “egalitarian” Japan was a creature of the 1970s, with its progressive taxation, redistribution of wealth, subsidies and the dampening of competition through regulation. This all seemed to work just fine until our asset-price bubble popped in the 1990s. Today, the hemmed-in Japanese seem satisfied with the knowledge that everyone around them is equally unhappy.

Since the middle of the 19th century, our economic success has relied on the availability of outside models from which to choose. Our model for social security took inspiration from Bismarck’s Germany, state planning from the Soviet Union, public works from the Tennessee Valley Authority, automobile assembly and manufacturing from Ford. Much of Japanese innovation has involved perfecting what others have created. Sony is famous for its Walkman, but it didn’t invent the tape recorder. Japan’s rise to economic greatness was basically a game of catch-up with the advanced West.

So what happened once we caught up? Over the past two decades, the answer has largely been paralysis. Japan’s ability to imitate outside models was mistaken for progress. But if progress is defined by pursuing a vision of a desirable future, then the Japanese never progressed. What we had was a concept of order and placement, which is essentially stasis.

In the West, on the other hand, the idea of progress rests on establishing individual autonomy and liberty. In Japan, bureaucratic rule offered security and predictability — in exchange for personal freedom. The problem is that our current political leaders can’t keep their side of the bargain. Employment security can no longer be guaranteed. The national pension and health plans seem to be insolvent in the long run. People feel both insecure and unfree.

Signs of despair are everywhere. Japan has one of the highest suicide rates among rich countries. There may be as many as one million “hikikomori,” from teenagers to those in their 40s, who shut themselves in their rooms for years on end. Then there are all those “parasite singles” — or unmarried adults living with their parents. But by far our most serious problem is a declining and aging population. Given present trends, total population will likely decline from around 130 million to under 90 million in 50 years or so. By that same time, 40 percent of Japanese could be over 65.

If we want to survive as a nation, we must shed our deeply rooted resistance to immigration. Contrary to widespread prejudices in favor of keeping Japan “pure,” we desperately need to dilute our blood. Our aging nation will need millions of university-educated middle-class immigrants with high productivity, people who will put down roots and raise families, whose pride and success will be the affirmation of new Japanese values.

Japan desperately needs change, and this will require risk. Risk-taking is not common among the bureaucratically controlled. You won’t find many signs on Japanese beaches saying, “Swim at your own risk. No lifeguard on duty.” If that sign were to appear, many Japanese would likely ask the authorities to tell them if it is safe to swim. This same risk aversion translates into protectionism and insularity. The ministry of agriculture, for example, wants to increase self-sufficiency in food. There is not nearly enough critical thinking and dissent in the Japanese news media.

Still, the idea that the Japanese are afraid of risk has no basis in history, for better or for worse. Remember Pearl Harbor? In fact, Japan’s passiveness today is in large measure a calculated and reasonable reaction to its behavior during the Second World War. But today, this emphasis on safety and security is long past its sell-by date.

We have run out of outside models to imitate. We must start from scratch, embracing an idea of progress that is based on innovation, ambition and dynamism. Doing so will take risk — and extraordinary leadership. But the alternative is to continue stumbling down a path of decline.

Masaru Tamamoto is a senior fellow at the World Policy Institute.

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From: Sam Citron3/10/2009 7:46:47 AM
   of 264
A closer look at the Swedish model of bank nationalization:

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From: Sam Citron3/10/2009 8:01:29 AM
   of 264
No help in sight for sinking [Swedish] krona [FT]
By Peter Garnham
Published: March 9 2009 20:00 | Last updated: March 9 2009 20:00

The Swedish krona has suffered its steepest fall since it was allowed to float in 1992 and has been the worst performing major currency during the financial crisis.

Since the collapse of Lehman Brothers last September, the krona has dropped almost 20 per cent against the euro, last week falling to a record low of SKr11.7860, and has declined 27 per cent against the dollar.

Typically, the krona performs badly when global stocks markets come under pressure. “We are talking about a relatively small, illiquid market, which investors leave quickly in case of rising risk or deteriorating sentiment,” says Antje ­Praefcke at Commerzbank.

But support for the currency has also been undermined by deteriorating conditions in Sweden’s export-driven economy, especially in the automobile sector.

Saab, the carmaker, has sought protection from its creditors and is hoping to restructure with the help of a $647m loan from the European Investment Bank. Ford wants to sell Volvo Cars and cut jobs at the company.

Swedish industrial production and new orders slumped far beyond expectations in December, while fourth quarter gross domestic product figures revealed a 4.9 per cent annualised fall.

This has heightened expectations that the Swedish central bank, which slashed interest rates by 100 basis points to 1 per cent this month, will have to cut rates again by at least a further 25bp at its next policy meeting, scheduled for April 21.

“Quantitative easing will also have to be contemplated in the course of 2009,” says Audrey Childe-Freeman at Brown Brothers Harriman.

It is not just sentiment on equity markets or worries over the economy that is driving the krona lower. The high exposure of Swedish banks to a potential collapse in the Baltic states is also adding pressure.

Ms Praefcke says the issue represents a “sword of Damocles” for the krona. “While uncertainty on the markets regarding eastern Europe as a whole remains high, the krona remains vulnerable to further losses.”

Many observers believe the Riksbank, Sweden’s central bank, has been complicit in the krona’s fall.

Dan Katzive at Credit Suisse says the current crisis is perfectly designed to derail the Swedish currency. “Perhaps most damaging to the krona, the central bank has not objected to its weakness and, indeed, has appeared to encourage it at times,” he says.

Robert Stenram, a former senior Swedish banker, says Sweden is carrying out a competitive devaluation, something that is not appreciated in the outside world. “Sweden is experiencing a currency crisis, with the Riksbank the only global central bank talking down its own currency,” he says.

While a moderate devaluation could help exporters, the recent fall in the krona risks sucking in imported inflation, which would only exacerbate Sweden’s problems, Mr Stenram says.

“There is a limit to how far a devaluation can go without damaging the country,” he says. “This is a very dangerous situation.”

So far, the Riksbank has shown little willingness to intervene to stem the krona’s fall, even verbally.

Lars Svensson, deputy governor of the Riksbank, even floated the possibility of intervening to weaken the currency in a bid to stimulate the country’s economy.

Mr Svensson has also noted that it would be possible to view an appreciation of the exchange rate as evidence that anti-deflation efforts were failing.

“The clear message from the Riksbank is one of minimal concern ... an apparent preference not to see this depreciation reversed,” says Mr Katzive.

The authorities expect the krona’s weakness to be temporary and for it to appreciate once the worst of the crisis is over, partly because Sweden has a stable surplus in foreign trade.

But last week, Svante Öberg, first deputy governor of the Riksbank, admitted there was a risk that the krona’s weakness could be more prolonged. “This would lead to exports strengthening and imports slowing down, but at the same time provide an inflationary impulse... This may be an advantage in the short term, as economic activity is now weak and inflation is low,” he said.

“But in the longer term, a currency that fluctuates substantially can be a problem. It increases uncertainty.”

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From: Sam Citron3/10/2009 8:13:26 AM
   of 264
Subprime Europe [NYT Op-Ed]
Published: March 7, 2009

THE 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression. Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.

You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse. Well, believe it or not, Europe’s current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent’s problems are politically harder to solve, and their consequences may prove to be much worse.

Much as in our subprime mess, Eastern Europe’s problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit. In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate.

When the music stopped last year and banks retrenched, the flow of new capital to Eastern Europe came to an abrupt halt, and then reversed direction. This credit crunch hit the region just as its main export markets in Western Europe were going into free fall. Moreover, with so much of the debt denominated in foreign currencies, everyone in Eastern Europe has been scrambling to get their hands on foreign exchange and local currencies have collapsed.

Most of the Eastern European debt is held by Western European banks. It also turned out that some of the biggest lenders to Eastern Europe were Austrian and Italian banks — for example, loans by Austrian banks to Eastern European countries are almost equivalent to 70 percent of Austria’s G.D.P. Now, Italy and Austria can’t afford to bail out even their own banks.

The debt crisis in Eastern Europe is much more than an economic problem. The wrenching decline in the standard of living caused by this crisis is provoking social unrest. American subprime borrowers who have had their houses foreclosed on are not — at least not yet — rioting in the streets. Workers in Eastern Europe are. The roots of democracy in the region are not deep and the specter of right-wing nationalism remains a threat.

So what is to be done? The potential approaches essentially mirror those that have been attempted in response to America’s subprime problem.

The first approach is to deal with the short-run liquidity problem. In the same way that the Federal Reserve expanded its own lending last year to compensate for the collapse in private lending, the International Monetary Fund is providing funds to Eastern Europe, and Hungary has proposed that the European Central Bank lend to borrowers who use non-euro assets as collateral. But given the state of the rest of the world, Eastern Europe will not be able to export its way out of its troubles in the immediate future.

The debts of many Eastern European countries and some banks will have to be written off. Ultimately, as in the case of the American subprime debts, taxpayers will have to foot the bill. But which taxpayers? The taxpayers of Austria and Italy certainly can’t. So the burden will have to fall on the rich countries of Europe, especially Germany and France.

There are two approaches to taxpayer-financed bailouts. The first is to go case by case. This is being proposed by the Germans. The problem here, as we discovered after the Bear Stearns rescue last March, is that the case-by-case approach does nothing to establish confidence in the system and prevent contagion.

The best choice would be a fund that provides bailout money and a protective umbrella to banks and countries, even those that don’t seem to need it now. Hungary has proposed the creation of such a fund with roughly $240 billion at its disposal. Though the proposal has already been rejected by stronger European economies, the American experience of last year in which the Treasury finally had to ask Congress for $700 billion for a similar fund suggests that this is where Europe will end up.

The response of the American government to the financial crisis has been criticized for being too slow and inadequate. But at least we have a federal budget, the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of homeowners in California and Florida, or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require leadership of the highest order from officials in Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.

The Great Depression was largely caused by a failure of intellectual will. In other words, the men in charge simply did not understand how the economy worked. Now, it is the failure of political will that could lead to economic cataclysm. Nowhere is this danger more real than in Europe.

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