|From: Sam Citron||5/13/2009 11:06:28 PM|
|Thriving Norway Provides an Economics Lesson [NYT]|
By LANDON THOMAS Jr.
When capitalism seemed on the verge of collapse last fall, Kristin Halvorsen, Norway’s Socialist finance minister and a longtime free market skeptic, did more than crow.
As investors the world over sold in a panic, she bucked the tide, authorizing Norway’s $300 billion sovereign wealth fund to ramp up its stock buying program by $60 billion — or about 23 percent of Norway ’s economic output.
“The timing was not that bad,” Ms. Halvorsen said, smiling with satisfaction over the broad worldwide market rally that began in early March.
The global financial crisis has brought low the economies of just about every country on earth. But not Norway.
With a quirky contrariness as deeply etched in the national character as the fjords carved into its rugged landscape, Norway has thrived by going its own way. When others splurged, it saved. When others sought to limit the role of government, Norway strengthened its cradle-to-grave welfare state.
And in the midst of the worst global downturn since the Depression, Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent and its ledger is entirely free of debt.
By comparison, the United States is expected to chalk up a fiscal deficit this year equal to 12.9 percent of its gross domestic product and push its total debt to $11 trillion, or 65 percent of the size of its economy.
Norway is a relatively small country with a largely homogeneous population of 4.6 million and the advantages of being a major oil exporter. It counted $68 billion in oil revenue last year as prices soared to record levels. Even though prices have sharply declined, the government is not particularly worried. That is because Norway avoided the usual trap that plagues many energy-rich countries.
Instead of spending its riches lavishly, it passed legislation ensuring that oil revenue went straight into its sovereign wealth fund, state money that is used to make investments around the world. Now its sovereign wealth fund is close to being the largest in the world, despite losing 23 percent last year because of investments that declined.
Norway’s relative frugality stands in stark contrast to Britain, which spent most of its North Sea oil revenue — and more — during the boom years. Government spending rose to 47 percent of G.D.P., from 42 percent in 2003. By comparison, public spending in Norway fell to 40 percent from 48 percent of G.D.P.
“The U.S. and the U.K. have no sense of guilt,” said Anders Aslund, an expert on Scandinavia at the Peterson Institute for International Economics in Washington. “But in Norway, there is instead a sense of virtue. If you are given a lot, you have a responsibility.”
Eirik Wekre, an economist who writes thrillers in his spare time, describes Norwegians’ feelings about debt this way: “We cannot spend this money now; it would be stealing from future generations.”
Mr. Wekre, who paid for his house and car with cash, attributes this broad consensus to as the country’s iconoclasm. “The strongest man is he who stands alone in the world,” he said, quoting Norwegian playwright Henrik Ibsen.
Still, even Ibsen might concede that it is easier to stand alone when your nation has benefited from oil reserves that make it the third-largest exporter in the world. The money flowing from that black gold since the early 1970s has prompted even the flintiest of Norwegians to relax and enjoy their good fortune. The country’s G.D.P. per person is $52,000, behind only Luxembourg among industrial democracies.
As in much of the rest of the world home prices have soared here, tripling this decade. But there has been no real estate crash in Norway because there were few mortgage lending excesses. After a 15 percent correction, prices are again on the rise.
Unlike Dublin or Riyadh, Saudi Arabia, where work has stopped on half-built skyscrapers and stilled cranes dot the skylines, Oslo retains a feeling of modesty reminiscent of a fishing village rather than a Western capital, with the recently opened $800 million Opera House one of the few signs of opulence.
Norwegian banks, said Arne J. Isachsen, an economist at the Norwegian School of Management, remain largely healthy and prudent in their lending. Banks represent just 2 percent of the economy and tight public oversight over their lending practices have kept Norwegian banks from taking on the risk that brought down their Icelandic counterparts. But they certainly have not closed their doors to borrowers. Mr. Isachsen, like many in Norway, has a second home and an open credit line from his bank, which he recently used to buy a new boat.
Some here worry that while a cabin in the woods and a boat may not approach the excesses seen in New York or London, oil wealth and the state largesse have corrupted Norway’s once-sturdy work ethic.
“This is an oil-for-leisure program,” said Knut Anton Mork, an economist at Handelsbanken in Oslo. A recent study, he pointed out, found that Norwegians work the fewest hours of the citizens of any industrial democracy.
“We have become complacent,” Mr. Mork added. “More and more vacation houses are being built. We have more holidays than most countries and extremely generous benefits and sick leave policies. Some day the dream will end.”
But that day is far off. For now, the air is clear, work is plentiful and the government’s helping hand is omnipresent — even for those on the margins.
Just around the corner from Norway’s central bank, for instance, Paul Bruum takes a needle full of amphetamines and jabs it into his muscular arm. His scabs and sores betray many years as a heroin addict. He says that the $1,500 he gets from the government each month is enough to keep him well-fed and supplied with drugs.
Mr. Bruum, 32, says he has never had a job, and he admits he is no position to find one. “I don’t blame anyone,” he said. “The Norwegian government has provided for me the best they can.”
To Ms. Halvorsen, the finance minister, even the underside of the Norwegian dream looks pretty good compared to the economic nightmares elsewhere.
“As a socialist, I have always said that the market can’t regulate itself,” she said. “But even I was surprised how strong the failure was.”
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|From: Sam Citron||5/23/2009 8:41:08 PM|
|As Economy Struggles, Russia’s Market Has Surged|
By ANDREW E. KRAMER
MOSCOW — Despite continuing weakness in the Russian economy, the stock exchange here has surged to become the best performing in the world, after being the worst last fall.
After the sell-off last year pushed the valuations of Russian companies to record lows, rising energy prices in recent months have drawn investors back into the market, traders said, even as the government has twice downgraded its expectations for growth this year.
Other big emerging markets, including China, India and Brazil, have rebounded sharply in recent months on signs that the fractured global economy may be beginning to heal, but none have been more buoyant than Russia.
When the authorities reported this month that industrial output declined 16.9 percent in April, the stock market still continued a five-day streak.
“Investors are not analyzing macroeconomics when deciding whether to invest in Russia,” the chief economist in Moscow for Merrill Lynch, Yulia Tseplayeva, said.
“They look at oil prices, and believe that when oil prices rise so will the Russian market,” she said. “And that is true.”
Officials now expect a contraction of more than 6 percent in the Russian economy before it begins to improve. Yet investors who braved the yo-yo bounce in the Russian market have profited handsomely.
The Micex index of major Russian company shares, for example, is up 105 percent after bottoming out on Oct. 27. It rose 19.66 points, or 1.9 percent, on Friday to close at 1,054.03.
For some investors, the very air of dismal news hanging over the country inspired contrarian bets in February and March that shares were oversold.
“It seemed a consensus emerged generally that Eastern Europe was going to hell,” Ian Hague, a partner at Firebird Capital Management, a New York hedge fund that focuses on the former Soviet Union, said by telephone. “When you see that, it is very bullish. Because the reality is never as bad as people’s fears.”
Firebird, after selling Russian shares in the second half of 2008, reinvested in February, he said.
But for all Moscow’s effort to diversify the economy, the rise in Russian equity values has closely tracked the price of oil, by far its largest export commodity — much as the market plunge last fall coincided with the collapse of oil prices.
In the second half of last year, oil prices declined 75 percent and the RTS index fell by 72 percent, said an investor note from UralSib, a Moscow brokerage firm. This year, crude prices have risen 59 percent and the RTS index 58 percent. The RTS is denominated in dollars and its fluctuations reflect both share prices and the ruble-dollar exchange rate, unlike the Micex.
Still, Russian stocks plunged last fall not only because of oil price declines, but also because many Russian industrialists had pledged shares as collateral for loans, and were required to sell when credit lines were called in.
Then, uncertainty over the stability of the ruble prompted foreign investors to sell shares.
By late January, however, the ruble had stabilized and the forced selling was over, eliminating two Russia-specific risks and leaving a very depressed market behind. Then oil prices ticked back up.
Money is trickling back into Russian investments. For now, the inflow has not balanced the outflow of capital as companies repay foreign banks for loans that are not being rolled over. But the new money coming in was very nearly equal to the outflow in April, according to an estimate by Merrill Lynch.
In that month, the central bank reported a net loss of $2 billion of capital. Since roughly $10 billion in loan payments came due in April, the investor inflow probably was about $8 billion for the month, the bank said.
And the Russian stock market bounce came in spite of looming troubles in the real economy that analysts say make it look tenuous.
But given Russia’s dependence on the boom-and-bust commodity price cycles, a lack of so-called long money investing in the economy and a good deal of jitters about political stability and relations with the West, Russia’s stock market probably will remain highly volatile.
In fact, since its inception after the collapse of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to Renaissance Capital, a Moscow brokerage.
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|From: Sam Citron||6/17/2009 10:12:14 AM|
|Iran’s Latest Protests Seen as the Toughest to Stop [NYT]|
By NEIL MacFARQUHAR
In an iconic photograph of antigovernment demonstrations in Iran, a student with flowing black hair and a headband held aloft the bloody T-shirt of a wounded protester. After his face appeared on the cover of The Economist magazine in July 1999, Ahmad Batebi paid dearly for it, enduring nearly a decade of imprisonment and torture before fleeing into exile.
On Tuesday, as he watched the swelling antigovernment protests in Iran from suburban Virginia, Mr. Batebi described a sense of dread mixing with happiness. “Every society has to make their own version of freedom and democracy, and that is what the Iranian people are doing right now,” he said through a translator. “But I know that people are being beaten, some are going to jail and some will be killed.”
The Iranian government tolerated student-led uprisings in 1999 and 2003 for only a few days before unleashing fearsome crackdowns, sending Basij vigilantes onto campuses, where they flung a few students from the windows; bloodied as many heads as they could with bricks, chains or truncheons; and jailed scores.
Similar intimidation tactics have been on display over the past few days with little result, as Iranian state news reports of seven people killed in various cities did not deter another major antigovernment rally on Tuesday. This time, analysts say, the government will have trouble bringing about a swift, sharp end to the demonstrations over the contested presidential election results in the same way it had shut down previous eruptions.
First, there is the sheer size of these demonstrations, with protests that are not limited to students, but cut across generations and economic classes. Second, there is a more pronounced, if still nebulous, leadership centered around the leading opposition candidate, Mir Hussein Moussavi, who has adopted an openly hard-edged attitude toward the government. Third, the current crisis was inspired by common anger over a national election, not the more narrow issues students took to heart.
The question mark remains how long Iran’s rulers will tolerate the demonstrations, and indeed how long the protesters will stay in the streets until what many analysts expect will be a “Tiananmen moment.” They fear a replay of the Chinese government’s rolling out tanks to ruthlessly crush pro-democracy demonstrations in 1989 — China’s economic growth and centralized control being something of a model for the mullahs.
“This is an order of magnitude different from those earlier demonstrations,” said Juan Cole, a professor of Middle East history at the University of Michigan, who has been tracking the upheaval on his Informed Comment blog. “In the earlier student demonstrations, people were saying that the hard-liners were doing things that were wrong. What these demonstrators are saying is that the regime has become so corrupt and so dictatorial that it has become rotten to the core.”
In the earlier protests, the middle class extended something like drive-by support, honking their horns or flashing their high-beam headlights as they drove past the chanting students. Iran’s supreme leader, Ayatollah Ali Khamenei, spoke like a rueful patriarch, saying he regretted the few student deaths and that people who criticized him should not be chastised. After the initial spasms of violence the president at the time, Mohammad Khatami, fearing wider bloodshed, declined to call his followers out in support.
The general sentiment was that everyone should go home and try to solve problems through the ballot box, noted Ervand Abrahamian, an expert on Iranian opposition movements at Baruch College. But the chance of that kind of compromise has been soured by the sentiment that Friday’s election was stolen.
“Those arguments don’t work now because the ballot box has proved to be a cul-de-sac,” said Mr. Abrahamian.
Mr. Moussavi was a staunch leftist in an era when such leaders admired Che Guevara, and he served as prime minister of Iran during the 1980s when postrevolutionary battles with guerrilla movements left between 10,000 and 20,000 people dead, noted Professor Cole. He is viewed as a much tougher fighter than Mr. Khatami, an ayatollah who came from the very clerical class that runs the country.
“Moussavi was around in some tough times, he has not shown any signs of being intimidated by all this,” said Gary Sick, a senior scholar at Columbia University who runs the Persian Gulf research and information Web site called Gulf 2000. Just how far Mr. Moussavi takes the mantle of leadership is another unanswered question — the demonstrations will have to continue for the demands for change to yield results, he said.
Finally, there has been a critical shift in alliances. In the earlier uprisings, it was basically the reformists calling for change, opposed by both the religious hard-liners and the more pragmatic conservatives. This time, the pragmatists and the reformists have joined forces against the hard-liners, analysts said.
With that, the route to any workable compromise over demands by demonstrators for a new election is difficult to envision, analysts said. One reason Mr. Moussavi and other leaders have labored to keep the chants focused on the election result is to avoid giving the government the excuse to open fire because the demonstrators want to topple the system.
“I expect the situation to polarize further, and given the character of this regime, I think it is a matter of time before they roll in the tanks,” said Professor Cole.
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|From: Sam Citron||9/3/2009 12:31:03 PM|
|Spain's Solar-Power Collapse Dims Subsidy Model [WSJ]|
By ANGEL GONZALEZ and KEITH JOHNSON
Spain's hopes of becoming a world leader in solar power have collapsed since the Spanish government slammed the brakes on generous subsidies.
The sudden change has rippled across the global solar industry, in a warning of the problems that government-supported renewable-energy programs can encounter.
In 2008, Spain accounted for half the world's new solar-power installations in terms of wattage, thanks to government subsidies to promote clean energy. But late last year, as the global economic crisis worsened, the government dramatically scaled back those subsidies and capped the amount of subsidized solar power that could be installed.
Factories world-wide that had ramped up production of solar-power components found that demand for solar panels was plummeting, leaving a glut in supply and pushing prices down. Job cuts followed.
"The solar industry in 2009 has been undermined by [a] collapse in demand due to the decision by Spain," says Henning Wicht, a solar-power analyst at research group iSuppli.
Spain is providing important lessons for the U.S., where lawmakers are engaged in a debate about how to support renewable energy. Boosters of clean energy, including President Barack Obama, have pointed to Spain as a success story showing how government policies jump-started renewable energy, created new industries, and helped the environment.
Spain's early bet on wind power paid off: The country is one of the world leaders in generating such power, only recently eclipsed by the U.S. Spanish wind-power companies have become global players. In 2008, wind power accounted for 11% of Spanish electricity production, compared to less than 1% for solar power.
Reyad Fezzani, chief executive of BP Solar, a unit of oil giant BP PLC, said that despite the current crisis, the Spanish model succeeded in creating a solar industry from scratch. "Once you pay for the infrastructure, you have a skilled work force and you can expand and contract very easily," he said.
Clean-energy skeptics, however, point to Spain as a cautionary tale of a government policy that created a speculative bubble with disastrous consequences. Some Republicans have cited Spain's solar bubble and bust as an example of how unsustainable government clean-energy pushes are.
[Cloudy Outlook chart]
The U.S. is experimenting with different ways to promote clean energy, including tax incentives and direct federal subsidies to defray installation costs, and mandates for utilities to get a certain amount of their power from renewable energy.
California and New Jersey, which lead the U.S. in solar power, are among states that have used subsidies similar to the ones in Spain to make solar power more attractive. Two House Democrats, Jay Inslee of Washington and Bill Delahunt of Massachusetts, are drafting legislation that would create European-style tariffs for solar power.
The industry's fundamental problem is that, without subsidies, it's still not economically viable.
Mike Ahearn, chief executive of Tempe, Arizona-based First Solar Corp., says solar power could be competitive "within a couple of years" -- but only if the industry gains scale. That would require generous government subsidies and other forms of support, Mr. Ahearn says: "It's a chicken-and-egg problem."
Spain's solar ambitions started as an outgrowth of its earlier push to become a global player in wind power. By offering generous long-term support for wind power, Spain became a world leader. Companies such as Iberdrola SA and Gamesa Corp. catapulted from their home market to the U.S.
Wind energy was a cheaper renewable option than solar, so the Spanish government sought to make solar power more attractive by increasing subsidies, just as other countries, particularly Germany, were scaling back support.
As a result, Spain's solar capacity last year increased to 3,342 megawatts from 695 megawatts, the size of a coal plant, a year earlier. Government subsidies for solar power jumped to €1.1 billion ($1.6 billion) in 2008 from €214 million in 2007.
Solar power "was a financial product, not an energy solution," says Ignacio Sánchez Galán, chairman of Iberdrola, the world's biggest renewable-energy company. Iberdrola has largely shunned solar because wind power is cheaper and requires less land.
That's especially true of the new wave of large-scale solar power, known as solar thermal power, which uses the sun to heat water into steam which runs turbines. That technology offers the potential for much bigger clean-energy projects than silicon-coated photovoltaic panels, and has attracted interest from utilities in Spain and the U.S., especially. But solar thermal power is far from being cost-competitive with traditional power sources, and it requires large swathes of empty land, such as those found in parts of Spain and the U.S. Southwest.
Faced with the unraveling world economy and a deepening budget deficit, the Spanish government late last year reduced the money it paid for solar electricity and capped the amount of subsidized solar power installed each year at 500 megawatts. Spain's solar-power capacity has actually shrunk this year as a result.
The effects have been felt far beyond Spain. China's Yingli Green Energy Holding Co., which makes solar-power components for export, posted a 43% slide in first-quarter earnings, in large part because Spain was no longer buying.
Yiyu Wang, Yingli's chief strategic officer, said the Spanish experience could teach governments around the world to undertake "more practical, more stable plans."
Solar makers such as Norway's Renewable Energy Corp., China's LDK Solar Co. and JA Solar Holdings Co. posted big second-quarter losses. German giant Q-Cells posted a first-half net loss of €697 million and plans to cut about 500 workers, about a fifth of its work force.
"We are without a doubt in a difficult situation," Q-Cells CEO Anton Milner wrote in a report to shareholders.
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|From: Sam Citron||10/1/2009 1:43:10 PM|
|With Help of Russian Business Leaders, M.B.A. School Opens in Moscow|
By THE ASSOCIATED PRESS
MOSCOW — A handful of top Russian business figures have created a Master of Business Administration program that tackles the issues they faced themselves: bribery, relentless bureaucracy and imperfect laws.
Supporters of the Moscow School of Management Skolkovo say it will fill an important niche by getting students ready for the unpredictable, sometimes corrupt world of emerging market economies.
“We’d like to change the whole model,” said the school’s dean, Wilfried Vanhonacker. “It doesn’t make sense for us, nor are we interested in competing with Harvard. That’s a business school of the past, I have to say. But a business school of the future has to be different.”
With construction not quite finished on its $250 million glass-and-steel campus just outside the Moscow city limits, the school began its full-time, 16-month M.B.A. program this month, with classes temporarily in the five-star Hotel Baltschug Kempinski near the Kremlin.
Mr. Vanhonacker, the former director of the doctoral program at the Insead business school in France, said that developing economies provided the biggest business opportunities but schools did not prepare students to work in them.
“We looked and we didn’t see any business school preparing this talent, even though in most corporate sectors this is where we expect the growth to come from,” he said.
Other business schools do offer some focus on emerging markets. Insead, for example, offers field work in China, India and Middle East. Loïc Sadoulet, academic director of the Insead Africa Initiative, said one optional course focuses on developing countries and deals with issues like foreign direct investment, corruption and health.
The Skolkovo program includes classroom courses in management theory but also will invite dozens of guest speakers to provide the students with examples of the challenges of emerging economies. And part of their training consists of working at companies solving real-world problems.
After three months of studying management theory, students will be placed with a government department or company in Russia, China, India or the United States.
“It’s learning by doing, not learning by acting or playing,” said Serge Hayward, director of the M.B.A. program. “We’re trying to put them in an environment where they are going to function rather than tell them about this environment.”
Mr. Hayward said that he had considered asking officials in police agencies and private security companies to speak to the business students, and might even invite an organized crime boss to talk about the challenges of management.
One of the aims of putting students into the world of business and government, Mr. Vanhonacker said, is to break down their preconceptions. “We want to shock them that there is a reality out there which is very different from what they think it is,” he said.
Last week, 40 students in their 20s and 30s, most dressed casually in sport shirts and jeans, listened to a professor, Pierre Casse, lecture on leadership. Mr. Casse used a hypothetical murder case to illustrate how judgment depends on a person’s point of reference and how leadership is about rallying people around one reference point.
Julia Davis, an American student, said she had chosen the Moscow school because it was a “forward-looking” institution with no preconceived notion of either business education or the nature of the global economy. Ms. Davis said she was glad the Skolkovo instructors talked about topics like corruption, flawed legislation and the role of ruling political parties in emerging economies.
Among the patrons of the school are some of the biggest names in the Russian business world, like Ruben Vardanian, founder of Troika Dialog investment bank, as well as global companies like Credit Suisse and industrial giants like Severstal, the Russian steel maker.
Roman Abramovich, the billionaire investor and owner of the Chelsea soccer team in Britain, donated 26 hectares, or 64 acres, of land for the campus.
President Dmitri A. Medvedev of Russia, who has spoken of the need to fight corruption, sits on the advisory board and spoke at the program’s inaugural ceremony. Mr. Vardanian said that only private money had been involved in starting the school, but approval from the higher authorities had spared the project bureaucratic hurdles that it might otherwise have faced.
Although there are M.B.A. programs at a handful of universities in Russia, few of them attract professors with global credentials and most of the programs are taught in Russian. Classes in Skolkovo are conducted in English.
Skolkovo’s training is not cheap. Fees for the full-time M.B.A. program, including accommodation and flights to India, China and the United States, are €50,000, or about $74,000. The sum will sound daunting for many in Russia, where the national average for a monthly salary is 18,000 rubles, or about $600, and 33,000 rubles in Moscow.
Alexandra Dronova, a student, said she had chosen Skolkovo because she wanted an education relevant to life in Russia. “There’s not much point to be educated somewhere in the States,” she said. “There are excellent schools there, but how do you apply this in Russia?”
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|From: Sam Citron||10/19/2009 3:38:54 PM|
|Einhorn bets on major currency 'death spiral'|
Major institutions should be broken up if necessary, Greenlight manager says
By Alistair Barr, MarketWatch
NEW YORK (MarketWatch) -- Greenlight Capital is betting on the possibility of a major currency collapse and a surge in interest rates, the hedge-fund firm's manager David Einhorn said Monday, citing ballooning government deficits in some of the world's most developed countries.
Einhorn, who warned about Lehman Brothers' frailty before it collapsed last year, also said financial institutions that are deemed as "too big to fail," such as Citigroup Inc. , should be broken up.
Greenlight has been buying physical gold this year because Einhorn is concerned that efforts to save the financial system and fuel economic recovery are undermining the value of such currencies as the U.S. dollar.
On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted.
"Japan may already be past the point of no return," he said during a presentation at the Value Investing Congress in New York.
'Lehman shouldn't have existed in any size to threaten the financial system.'
Japan's debt is equal to 190% of the country's gross domestic product and its government deficit will be 10% of GDP this year, according to Einhorn.
Japan has been able to borrow money at roughly 2% a year to finance these deficits, partly because the country has many savers willing to buy low-yielding government bonds. However, some of these savers may begin spending instead as they enter retirement, Einhorn argued.
"When the market refuses to refinance at cheap rates, problems emerge," he said, adding that this could trigger a "currency death spiral."
Interest rates have been very stable in Japan for years, so the options on higher rates that Greenlight bought were relatively cheap. Einhorn said the "asymmetry" of that trade was interesting: If rates were to jump suddenly in Japan, Greenlight stands to make "multiples" on its positions.
"There remains a possibility that I'm wrong, and I hope I am," he commented. But earlier in the speech he remarked: "Just because something hasn't happened before, that doesn't mean it won't."
Remedy to shore up system
Einhorn also compared potential problems in sovereign-debt markets to the financial crisis that engulfed markets last year.
When Lehman collapsed, investors reacted by dramatically increasing the cost of borrowing for rival Wall Street firms to the point where their business models were threatened, he Einhorn. The collapse of any major currency could have same impact of rerating the cost of financing governments in deficit.
Unlike Japan, the United States isn't past the point of no return, the fund manager stressed. However, he criticized financial-reform proposals pushed by Treasury Secretary Timothy Geithner, arguing they provide a government backstop for the largest institutions, entrenching them further.
No institution should be too big to fail, Einhorn contended. "The real solution is to break up anything that fails that test. Lehman shouldn't have existed in any size to threaten the financial system."
The same applies to Citigroup and Bear Stearns, which J.P. Mortgage Chase & Co. acquired, as well as American International Group Inc. and "dozens" of other firms, he said.
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|From: Sam Citron||10/21/2009 10:46:38 AM|
|Rising Debt a Threat to Japanese Economy [NYT]|
By HIROKO TABUCHI
TOKYO — How much debt can an industrialized country carry before the nation’s economy and its currency bow, then break?
The question looms large in the United States, as a surging budget deficit pushes government debt to nearly 98 percent of the gross domestic product. But it looms even larger in Japan.
Here, years of stimulus spending on expensive dams and roads have inflated the country’s gross public debt to twice the size of its $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory.
Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget.
Yet, the finance minister, Hirohisa Fujii, suggested Tuesday that the government would sell 50 trillion yen, about $550 billion, in new bonds — or more.
“There’s no mistaking the budget deficit stems from the past year’s global recession. Now is the time to be bold and issue more deficit bonds,” Mr. Fujii told reporters at the National Press Club in Tokyo. “Those who may call this pork-barrel spending — that’s a total lie.”
For jittery investors, Japan’s rising sea of debt is the stuff of nightmares: the possibility of an eventual sovereign debt crisis, where the country would be unable to pay some holders of its bonds, or a destabilizing collapse in the value of the yen.
In the immediate term, Mr. Fujii’s remarks prompted concerns of a supply glut in bond markets, sending prices on 10-year Japanese government bonds down 0.087 yen, to 99.56 yen, and yields to their highest point in six weeks.
The Obama administration insists that it understands the risks posed by deficits and ever-increasing debt. Its critics are doubtful. But as Washington runs up a trillion-dollar deficit this year, with trillions in debt for years to come, it need look no farther than Tokyo to see how overspending can ravage an economy.
Tokyo’s new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.
“Public sector finances are spinning out of control — fast,” said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. “We believe a fiscal crisis is imminent.”
One of the lessons of Japan’s experience is that a government saddled with debt can quickly run out of room to maneuver.
“Japan will keep on selling more bonds this year and next, but that won’t work in three to five years,” said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. “If you ask me what Japan can resort to after that, my answer would be ‘not very much.’ ”
How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.
The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.
The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.
The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.
“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.
Still, officials insist that Japan is better off than the United States by some measures.
One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America’s debt is held overseas by countries such as China and Japan.
Moreover, half of Japan’s government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.
All of this makes a sudden sell-off of government bonds unlikely, officials argue.
“The government is just borrowing from one pocket and putting it in the other,” said Toyoo Gyohten, a former top finance ministry official and a special currency adviser to Mr. Fujii. “Although the numbers appear very fearsome, we have some leeway.”
Many analysts agree that during a recession, Japan, like the United States, should worry less about trying to cut debt. But they say Tokyo should at least concentrate on making sure that spending does not get out of hand.
“The government needs to stabilize the debt, first and foremost. Only then can it start setting other targets,” said Randall Jones, chief economist for Japan and Korea at the Organization for Economic Cooperation and Development.
A credible plan to pare down spending is important “to maintain public confidence in Japan’s fiscal sustainability,” said the O.E.C.D.’s economic survey of Japan for 2009.
In the long run, even Japan’s sizable assets could fall and eventually turn negative. Japan’s rapidly aging population means retirees are starting to dip into their nest eggs — just as government spending increases to cover their rising medical bills and pension payments.
The fall in public and private savings could eventually reverse Japan’s current account surplus, possibly driving up interest rates as the public and private sectors compete for funds. Higher interest rates would increase the cost of servicing the debt, and raise Japan’s risk of default.
In a worst case, Japan’s currency could suffer as more investors switch away from Japan to other assets. And if Japan were to print more money and set off inflation to reduce its debt burden, the supply of yen would shoot up, lowering the currency’s value further.
In recent months, the yen’s surge on major markets as the dollar weakened has sent a false sense of security. The currency recently touched a seven-month high of about 89 yen to the dollar before easing slightly, as near-zero interest rates in the United States prompted investors to take their money elsewhere. Many strategists expect the yen to strengthen further, at least in the short term.
“In 10 or 20 years, Japan’s current-account surplus will fall into deficit, and that will lead to a weaker yen,” said Mr. Morita at Barclays Capital. “But if investors become pessimistic about Japan before that, the yen will weaken earlier than that.”
For all the recent talk of a shift away from the dollar as the reserve currency of choice, it is the yen that is becoming increasingly irrelevant, analysts say. The yen made up 3.08 percent of foreign currency reserves in mid-2009, down from 3.29 percent the same time last year and down from 6.4 percent in 1999. In mid-2009, the dollar still accounted for almost 63 percent of global foreign reserves.
“The yen is set to enter a long decline” in both stature and value as investors lose confidence in Japan, said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo.
Considering the state of Japan’s finances and economy, Mr. Kumano said, the yen’s recent strength against the dollar “isn’t an affirmation of Japan — it’s the yen’s last hurrah.”
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|From: Sam Citron||12/7/2009 12:25:59 PM|
|In Russia, New Times Are Reason for Debate [NYT]|
By CLIFFORD J. LEVY
MOSCOW — Vadim V. Vodyanitsky runs a fish processing plant in Russia’s Far East, and one question looms over his day, as crucial as the trawler schedules or the Pacific tidal patterns. What time is it in Moscow, 5,000 miles away?
There are many ways to measure Russia’s girth, but Mr. Vodyanitsky can speak to one of the most compelling: it has 11 time zones, from the Polish border to near Alaska, a system so vast that you can get a walloping case of jet lag from a domestic flight.
The time zones, set up by the Soviets to showcase the country’s size, have long been a source of national pride, but the government is now viewing them as a liability and is considering shedding some.
In today’s economy of constant communication, it is hard to manage businesses and other affairs when one region is waking up and another is thinking about dinner. Mr. Vodyanitsky, for example, has his plant on the Kamchatka Peninsula, nine hours ahead of Moscow, and his office in Vladivostok, seven hours ahead. But his business often depends on decisions by regulatory and banking officials in the capital. “It’s extremely inconvenient getting anything done through Moscow,” he said in a telephone interview. “For any activity, we often have to wait a day, wasting a whole 24 hours.”
Mr. Vodyanitsky, 35, favors reducing the time difference between the Far East and Moscow to ease the strain on industry, but others are not so sure. In fact, the issue has blossomed in recent days into an intense debate across the country about how Russians see themselves, about how the regions should relate to the center, about how to address the age-old problem of creating a sense of unity in this land.
Governments have long tinkered with time zones for political purposes, and at the other extreme from Russia stands China. After Mao and the Communists seized power in 1949, they tried to cement control by mandating one countrywide time zone.
Everyone in China is supposed to live on Beijing time, even though the country is wide enough to have as many as four or five time zones.
Nobody is seriously promoting the idea of a single time zone for Russia, which might lead to all sorts of absurdities (breakfast in the middle of the night in the Far East). But when President Dmitri A. Medvedev suggested last month that the country should contemplate scaling back the zones, he appeared to be offering support for proposals from senior officials in the Far East to trim the system by a few hours.
Mr. Medvedev emphasized that the government had not made a decision yet. But he indicated that revamping the time zones could play an important role in the push to modernize Russia’s economy.
Gennady I. Lazarev, a prominent Vladivostok academic who is a proponent of the change, said in an interview that Russia should undertake an experiment, shifting the Far East closer to Moscow by one hour, waiting a year to allow people to adapt, then moving another hour closer. Further changes would be more drastic but should be evaluated, he said.
“If the time differences were less, then Russia would be perceived by people as a more compact, more manageable place,” said Mr. Lazarev, who is also a governing party member of the regional legislature.
Mr. Lazarev said he believed that the Far East was already two hours off what he referred to as the correct biological time — meaning the time most appropriate for the human body’s internal clock.
The current system does have a crazy-quilt feel. For example, when it is noon in Vladivostok, it is 10 a.m. just over the border in China. In Tokyo, it is 11 a.m., even though Tokyo is farther east than Vladivostok.
Still, proposals to modify the time zones have stirred deep suspicions, especially in the Far East and Siberia, where people have long resented Moscow, much the way people in places like Idaho distrust the goings-on in Washington.
The Far East has a weak economy and a sparse and shrinking population. Residents there often complain about the lack of federal support.
Andrei Gordeyev, 25, an illustrator in Khabarovsk, the second most populous city in the Far East, said that by raising the issue of reducing the time zones, Mr. Medvedev was “throwing dust in our eyes,” an expression that implies an attempt to impress someone with something that in truth is of little value.
“They can say, ‘Oh, we are doing this to help the economy out there,’ ” Mr. Gordeyev said. “But the reality is that if they really want to help us, there are a lot of other, more significant things that they can do.” Others worried that shifting the time closer to Moscow might assist business and government but would hurt people’s well-being, forcing them to spend more of their waking hours in the dark. That factor is already critical in winter, when at the worst there are just a handful of daylight hours.
“We have to look at this from a biological standpoint, how it is going to affect health,” said Yekaterina Degtyareva, 27, a personnel manager who lives in Novosibirsk, the most populous city in Siberia, and often travels to the Far East and Moscow. “If it is going to be a centralized, so-called totalitarian decision, then nothing good will come of it.”
In his remarks last month, Mr. Medvedev mentioned that while the 11 time zones were often portrayed as “a vivid symbol of our country’s greatness,” that notion might need to be discarded.
Perhaps not, said Elia Kabanov, 26, director of a public relations agency in Novosibirsk.
“Eleven time zones — it is an endearing feature of Russia, part of our national idea, if you would,” Mr. Kabanov said. “It is something that distinguishes us from China or the U.S.A., and something that we need to preserve for future generations.”
But Mr. Vodyanitsky, the owner of the fish processing factory in the Far East, said the situation was increasingly untenable. He said the time difference not only caused inefficiencies, but also gave rise to estrangement between parts of Russia.
He said he regularly received calls at his office in the middle of the night from people in Moscow. “They have no idea that we are seven hours ahead in Vladivostok,” he said. “And they get outraged that I don’t answer my phone. They say, ‘How come you people are not working? What are you, lazy?’ ”
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|From: Sam Citron||12/20/2009 8:57:43 PM|
|As China Exports Labor, a Backlash Grows [NYT]|
By EDWARD WONG
TRUNG SON, Vietnam — It seemed as if this village in northern Vietnam had struck gold when a Chinese and a Japanese company arrived to jointly build a coal-fired power plant. Thousands of jobs would start flowing in, or so the residents hoped.
Four years later, the Haiphong Thermal Power Plant is nearing completion. But only a few hundred Vietnamese ever got jobs. Most of the workers were Chinese, about 1,500 at the peak. Hundreds of them are still here, toiling by day on the dusty construction site and cloistered at night in dingy dormitories.
“The Chinese workers overwhelm the Vietnamese workers here,” said Nguyen Thai Bang, 29, a Vietnamese electrician.
China, famous for its export of cheap goods, is increasingly known for shipping out cheap labor. These global migrants often work in factories or on Chinese-run construction and engineering projects, though the range of jobs is astonishing: from planting flowers in the Netherlands to doing secretarial tasks in Singapore to herding cows in Mongolia — even delivering newspapers in the Middle East.
But a backlash against them has grown. Across Asia and Africa, episodes of protest and violence against Chinese workers have flared. Vietnam and India are among the nations that have moved to impose new labor rules for foreign companies and restrict the number of Chinese workers allowed to enter, straining relations with Beijing.
In Vietnam, dissidents and intellectuals are using the issue of Chinese labor to challenge the ruling Communist Party. A lawyer sued Prime Minister Nguyen Tan Dung over his approval of a Chinese bauxite mining project, and the National Assembly is questioning top officials over Chinese contracts, unusual moves in this authoritarian state.
Chinese workers continue to follow China’s state-owned construction companies as they win bids abroad to build power plants, factories, railroads, highways, subway lines and stadiums. From January to October 2009, Chinese companies completed $58 billion of projects, a 33 percent increase over the same period in 2008, according to the Chinese Ministry of Commerce.
From Angola to Uzbekistan, Iran to Indonesia, some 740,000 Chinese workers were abroad at the end of 2008, with 58 percent sent out last year alone, the Commerce Ministry said. The number going abroad this year is on track to roughly match that rate. The workers are hired in China, either directly by Chinese enterprises or by Chinese labor agencies that place the workers; there are 500 operational licensed agencies and many illegal ones.
Chinese executives say that Chinese workers are not always less expensive, but that they tend to be more skilled and easier to manage than local workers. “Whether you’re talking about the social benefits or economic benefits to the countries receiving the workers, the countries have had very good things to say about the Chinese workers and their skills,” said Diao Chunhe, director of the China International Contractors Association, a government organization in Beijing.
But in some countries, local residents accuse the Chinese of stealing jobs, staying on illegally and isolating themselves by building bubble worlds that replicate life in China.
“There are entire Chinese villages now,” said Pham Chi Lan, former executive vice president of the Vietnam Chamber of Commerce and Industry. “We’ve never seen such a practice on projects done by companies from other countries.”
At this construction site northeast of the port city of Haiphong, an entire Chinese world has sprung up: four walled dormitory compounds, restaurants with Chinese signs advertising dumplings and fried rice, currency exchanges, so-called massage parlors — even a sign on the site itself that says “Guangxi Road,” referring to the province that most of the workers call home.
One night, eight workers in blue uniforms sat in a cramped restaurant that had been opened by a man from Guangxi at the request of the project’s main subcontractor, Guangxi Power Construction Co. Their faces were flushed from drinking Chinese rice wine. “I was sent here, and I’m fulfilling my patriotic duty,” said Lin Dengji, 52.
Such scenes can set off anxieties in Vietnam, which prides itself on resisting Chinese domination, starting with its break from Chinese rule in the 10th century. The countries fought a border war in 1979 and are still engaged in a sovereignty dispute in the South China Sea.
Vietnamese are all too aware of the economic juggernaut to their north. Vietnam had a $10 billion trade deficit with China last year. In July, a senior official in Vietnam’s Ministry of Public Security said that 35,000 Chinese workers were in Vietnam, according to Tuoi Tre, a progressive newspaper. The announcement shocked many Vietnamese.
“The Chinese economic presence in Vietnam is deeper, more far-reaching and progressing faster than people realize,” said Le Dang Doanh, an economist in Hanoi who advised the preceding prime minister.
Conflict has broken out between Vietnamese and Chinese laborers. In Thanh Hoa Province in June, a drunk Chinese worker from a cement plant traded blows with the husband of a Vietnamese shopkeeper. The Chinese man then returned with 200 co-workers, igniting a brawl, according to Vietnamese news reports.
One reason for the tensions, economists say, is that there are plenty of unemployed or underemployed people in this country of 87 million. Vietnam itself exports cheap labor; a half-million Vietnamese are working abroad, according to a newspaper published by the Vietnam General Confederation of Labor.
Populist anger erupted this year over a contract given by the Vietnamese government to the Aluminum Corporation of China to mine bauxite, one of Vietnam’s most valuable natural resources, using Chinese workers. Dissidents, intellectuals and environmental advocates protested. Gen. Vo Nguyen Giap, the 98-year-old retired military leader, wrote three open letters criticizing the Chinese presence to Vietnamese party leaders.
No other government in the world so closely resembles that of China as Vietnam’s, from the structure of the Communist Party to economic policies and media controls. Vietnamese leaders make great efforts to ensure that China-Vietnam relations appear smooth. So over the summer, the central government shut down critical blogs, detained dissidents and ordered Vietnamese newspapers to cease reporting on Chinese labor and the bauxite issue.
But in a nod to public pressure, the government also tightened visa and work permit requirements for Chinese and deported 182 Chinese laborers from a cement plant in June, saying they were working illegally.
Vietnam generally bans the import of unskilled workers from abroad and requires foreign contractors to hire its citizens to do civil works, though that rule is sometimes violated by Chinese companies — bribes can persuade officials to look the other way, Chinese executives say.
At the Haiphong power plant, the Vietnamese company that owns the project grew anxious this year about the slow pace of work. It sided with the Chinese managers in pushing government officials to allow the import of more unskilled workers.
The Chinese here are sequestered in ramshackle dorm rooms and segregated by profession: welders and electricians and crane operators.
A poem written on a wooden door testifies to the rootless nature of their lives: “We’re all people floating around in the world. We meet each other, but we never really get to know each other.”
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|From: Sam Citron||1/11/2010 11:24:22 PM|
|As China Rises, Fears Grow on Whether Boom Can Endure [nyt]|
By MICHAEL WINES
BEIJING — As much of the world struggles to clamber out of a serious recession, a gradual flow of economic power from West to East has turned into a flood.
New high points, it seems, are reached daily. China surged past the United States to become the world’s largest automobile market — in units, if not in dollars, figures released Monday show. It also toppled Germany as the biggest exporter of manufactured goods, according to year-end trade data. World Bank estimates suggest that China — the world’s fifth-largest economy four years ago — will shortly overtake Japan to claim the No. 2 spot.
The shift of economic gravity to China has occurred partly because growth here remained robust even as the world’s developed economies suffered the steepest drop in trade and economic output in decades.
But that did not happen by chance: China’s decisive government intervention in the economy, combined with the defiant optimism of its companies and consumers, has propelled an economy that until recently had seemed tethered to the health of its major export markets, including the United States.
Beijing’s state-run news media, indulging in a moment of self-congratulation, have hailed China’s new economic prominence as proof of national superiority.
The country’s economic miracle, the newspaper People’s Daily boasted last week, exists because its leaders — unlike those in other, unnamed nations — can make quick decisions and ensure underlings carry them out. The Great Recession, the newspaper said, has laid bare cracks in plodding Western-style capitalism.
Yet China confronts a number of challenges about its recent surge, including whether its formula for growth is sustainable, and how it will manage its increasingly strained economic relations with the outside world. Those are likely to prove challenging issues for a leadership unaccustomed to making policy under an international spotlight.
Sustaining a global-size economy is nowhere near as simple as building one, some Chinese and Western economists say. As the Chinese navigate toward a bigger role in the world financial system, they are already running into diplomatic and political headwinds.
At home, ordinary citizens and economists alike worry that the government’s decision to flood the economy with cash has created speculative bubbles — in housing, in lending — that could burst with disastrous effect. But curbing speculation requires moves, such as raising interest rates, that could crimp the sprees of investment and industrial expansion that are the main contributors to growth.
Abroad, the pressure on China to revalue its currency, the renminbi, is strengthening, and it seems sure to intensify after trade statistics released Sunday showed that China’s yearlong downturn in export growth reversed in December. Keeping the renminbi fixed at a low rate against the dollar boosts China’s exports and its economy. But increasingly, it angers its trade partners.
China once could wave off complaints about its currency policies, arguing that it was a developing nation entitled to a bit of slack from its Western customers. But with the world’s fastest-growing economy — and more than $2 trillion in foreign reserves — that argument looks increasingly untenable.
“At a time when you’ve got 10 percent unemployment in the U.S. and a very slow and gradual global recovery — and China seems to be skyrocketing — the pressure on the Chinese to change some of these policies, including the exchange-rate policy, is really going to grow this year,” said Nicholas Consonery, a China analyst at Eurasia Group, a New York-based political risk research firm.
In theory, China’s growing economic clout should benefit everyone: in an interconnected world, growing trade creates jobs and money everywhere.
“China’s extremely important, no doubt about it. And over all, the more important China becomes, the better it is for the American economy,” Scott Kennedy, who heads the Research Center for Chinese Politics and Business at Indiana University, said in an interview.
That Shanghai-assembled iPod, Mr. Kennedy said, is the product of American research and design and marketing, and most of the proceeds from its sale go back into American coffers. But China’s rise also poses new risks both for Beijing and for its trading partners.
Its largely bruise-free journey through last year’s economic crisis aside, not everyone is convinced that Beijing has eliminated threats to its financial and economic health.
Hit hard by an initial drop in exports that was frighteningly steep for a leadership that has long promised and delivered fast growth, China poured $585 billion in stimulus money into its domestic economy. Officials also ordered state-run banks to increase their lending by double that amount, triggering a spree of easy money that created jobs for migrant factory workers and fueled rises in the price of assets, like stocks and real estate.
Some experts fear that too much of the stimulus money was put into unprofitable projects and bad loans that will be exposed in a few years. In that view, China’s 2009 boom, in which automakers sold nearly 14 million cars and trucks, and housing prices doubled, is really a sign of an overheated economy at risk of serious recession down the road.
Judged by the numbers, China’s economy still looks robust. In Beijing, officials said, per capita gross domestic product is expected to exceed $4,000 this year, a 10 percent jump from 2009. Last month, the value of China’s exports leaped by nearly a third over the same month in 2008 — and imports jumped 55 percent, pointing toward growth in manufacturing.
But a Chinese economic crisis, which could have been shrugged off a few years ago, would be a considerably more serious event in a world in which Beijing runs the second-largest economy.
The government appears concerned. Last week, the central bank edged up the rate on an often-watched interbank loan, the first such hike in five months. That seemed to signal concern that the economy was expanding too quickly.
Many experts see few signs of immediate danger. After all, they note, China has gone on splurges before — building too many steel mills, and too many office buildings — only to see the nation’s breakneck growth sop up the excess capacity. With nearly a billion people still clawing to advance beyond peasant status, they say, China’s growth story has many chapters ahead.
Mr. Kennedy, the Indiana University expert, said he was less certain that endless growth is such a panacea. “No one defies economic laws,” he said. “Eventually you get it, whether you want it or not.”
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