Linking Up with the World

Here is the Friday, January 1st, 2010 edition of what's making news and interesting reads from around the world.

Iceland Votes to Repay Billions
Iceland's parliament narrowly approved by 33 to 30 vote a repayment scheme to pay back 3.4 billion pounds ($5 billion USD) to Britain and the Netherlands after the Icesave bank collapsed in late 2008 in the wake of the global financial crisis. The money will reimburse the British and Dutch governments which stepped in to compensate depositors with Icesave after its parent bank Landsbanki failed last year. The bank's collapse affected more than 320,000 savers. There has been strong opposition to the measure in Iceland, amid fears the country would not be able to afford repayments. But the leftist government of Prime Minister Jóhanna Sigurðardóttir hopes the move will help boost the country's bid to join the European Union and repair its battered economy.

Charges Against Five Blackwater Employees Dismissed
A federal judge has dismissed all charges against five Blackwater Worldwide security guards charged in a deadly Baghdad shooting. More from the New York Times. In Iraq, the news was received with disbelief, anger and bitter resignation.

US Drone Strike in North Waziristan
The second US drone strike in as many days has killed three militants in North Waziristan, part of the Tribal areas of Pakistan. The unmanned US predator drone fired two missiles against a suspected militant hideout in Ghundikala village, 15 kilometres east of Miramshah, the main town of North Waziristan and close to the Afghan border. The story in Pakistan's Dawn newspaper.

Israeli Settlement Construction Continues Unabated
The Israeli newspaper Haaretz reports that despite a temporary ban on construction in Israeli settlements in the West Bank, hundreds of housing units remain under construction in isolated settlements.

Germany Inc. - A Radical Restructuring Needed
The German news magazine Der Spiegel finds that German economy performed "astonishingly well" against the backdrop of the global financial crisis in 2009. Still the staff writers of Der Spiegel believe that Germany "will need to lay the foundations for a radical restructuring" in 2010 if the country is to " fend off powerful new competitors from China and India." They ask if Germany needs a new business model. It's a question we might ask here in the United States.

DPRK Calls for an End to "The Hostile Relationship"
The New York Times reports that  North Korea called for an end to “the hostile relationship” with the United States, issuing a New Year’s message that highlighted the reclusive country’s attempt to readjust the focus of six-party nuclear disarmament talks.

In an editorial carried by its major state media outlets, North Korea said that its consistent stand was “to establish a lasting peace system on the Korean peninsula and make it nuclear-free through dialogue and negotiations.” The editorial added that “the fundamental task for ensuring peace and stability” was “to put an end to the hostile relationship” with the United States.

The sequence of easing tension with Washington, establishing a peace regime and then denuclearizing the Korean peninsula has been shaping up as the North’s policy approach before it re-engages in talks about giving up its nuclear weapons, according to officials and analysts in Seoul.

However, the Korea Times reports that a South Korean think tank published a paper arguing that North Korea may detonate a third nuclear device and provoke border clashes to escalate tension on the Korean Peninsula next year. The Korea Institute for Defense Analyses (KIDA) reported that through a third nuclear test, Pyongyang could show the world that it has no plans to scrap its atomic weapons program. On Thursday, President Lee Myung-bak noted that although there was little progress in inter-Korean relations in 2009, he believe that his government has laid the groundwork for developing relations in a positive direction.


Iceland Veers Left

Though progressive by any standard, Iceland is a relatively conservative country befitting a thousand year old country that seen its share of hardships. Its latest round of hardship, a spectacular economic collapse, is today the catalyst for Iceland's leftward turn at the polls. Free-market conservatives were trounced.

Since 1991 until very recently, the Independence Party, a right-wing party with a neo-liberal free-market ideology influenced by Margaret Thatcher and Ronald Reagan, had dominated Icelandic politics. Under longtime Independence Party Prime Minister David Oddsson, Iceland privatized the country's state-owned businesses, remaking the economy along Thatcherite lines. Traditionally, the Icelandic economy had been more regulated than in most other Western economies but the Independence Party would open the country to a liberalized investment environment. As entire sectors were privatized, regulations were erased.

The privatization  would include the state-owned banks, which under private owners grew massively by borrowing and lending overseas. In effect given the lax regulatory environment, Iceland's bank sector become one giant hedge fund. When it was all said and done, Iceland's banks would hold liabilities twelve times of Iceland's GDP. Iceland has been mired in crisis since late September, when the country's three largest banks collapsed under the weight of these debts. Cleaning up this mess has not been cheap for the small mid-Atlantic island nation of 320,000. Current estimates run to $10 billion, or about $30,000 for every man, woman and child in the country. The collapse of the banks alone is expected to cost taxpayers nearly $3 billion, on top of another $3 billion the government has invested in the new nationalized banks to keep them afloat.

There's more...

Global Banking - Regulator Envy.

(cross posted at kickin it with cg and motley moose)

Amid a global economic meltdown - Canada - with its highly regulated banking system has become the envy of the world.  In a survey by the World Economic Forum in October, with the financial crisis and bank failures that have shaken world markets - Canada was voted to have to world's soundest banking system followed by Sweden, Luxembourg and Australia.

Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a 50 billion pound ($86.5 billion) pledge this week by the government to bolster bank balance sheets.  The United States, where some of Wall Street's biggest financial names have collapsed in the fall, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.

The World Economic Forum's Global Competitiveness Report based its findings on opinions of executives, and handed banks a score between 1.0 (insolvent and possibly requiring a government bailout) and 7.0 (healthy, with sound balance sheets).  Canadian banks received 6.8, just ahead of Sweden (6.7), Luxembourg (6.7), Australia (6.7) and Denmark (6.7).  UK banks collectively scored 6.0, narrowly behind the United States, Germany and Botswana, all with 6.1. France, in 19th place, scored 6.5 for soundness, while Switzerland's banking system scored the same in 16th place, as did Singapore (13th).

The Globe and Mail's Report on Business created a neat little chart that summarizes how some banks around the world are doing:  

Ranked tops in the world by the World Economic Forum for soundness of banks. Canada's big five lenders all reported healthy profits in their most recent quarter, generally beating analysts' expectations. Tightly regulated, with cash-spewing retail banks that can offset losses in other areas of the business.

United States
There are 252 problem banks being tracked by the government's bank insurance program. In 2008, 25 banks failed, including household names like Washington Mutual. The government has rolled out numerous programs and spent at least $1-trillion (U.S.) in a bid to prop up the financial system, but there are no sure signs that the bailouts are working. The Federal Deposit Insurance Co. is now on track to seize 100 failed banks in 2009.

The big economies in South America have had little trouble with bank failures resulting from stumbles on risky assets such as subprime mortgages. Still, they won't be immune to rising defaults from slowing economies, which will be a test of how far financial regulation and bank management have come in recent years.  

The banking system of this tiny island nation -- which boasts a population half the size of Winnipeg -- represents probably the most spectacular rise and fall of the global financial meltdown. In 2003, Iceland's three main banks had just a few billion dollars of assets, but by 2006 this hit $140-billion (U.S.). Today, all three have failed and been nationalized in a bailout that's cost about $330,000 per citizen, leading to the collapse of the country's currency and economy.  

Sweden faced a banking crisis in the 1990s, and was forced to remake its financial sector. This time around, while one bank has failed because of toxic assets, the country has mostly dodged the problems and Sweden's banking sector was ranked second only to Canada's for stability by the World Economic Forum. Exposure at some big banks to Eastern Europe could lead to loan losses.

The British government has been forced to bail out big lenders such as Lloyds Banking Group, Northern Rock Plc and Royal Bank of Scotland, which have been crippled by forays into risky mortgage products before the property market in the UK and in the U.S. fell apart.

The country's reputation as the home of the quiet, prudent banker is in shambles after gambles by Swiss giants UBS AG and Credit Suisse led to massive losses totalling more than $65-billion (U.S.). The government is now looking to write new rules to keep the financial sector out of trouble.

Austria has historically been the bridge between Western Europe and Eastern Europe. In recent years some of its largest lenders focused on expansion in such countries as Czech Republic, Romania and the Ukraine. Lending to the Central and Eastern European region amounts to almost 70 per cent of Austria's gross domestic product, according to Moody's. That was great when those countries were booming, but Eastern Europe is hurting badly and now many loans are likely to go bad.

Spain's banking system has held up better than most with banks reporting gains in profit in large part because of strict regulatation when it comes to high risk assets, a legacy of a banking crisis in the 1970s. As a result, big Spanish banks like Banco Santander focus mostly on low-risk retail banking. Still, there are signs it may not last. The country's swooning property market could lead to loan defaults, and the government and some bank executives warn that the domestic banking sector may have to be restructured should the global financial crisis deepen.

Namibia has the highest-ranked banking system in Africa for stability, well ahead of Spain, the U.S. and Britain. According to the International Monetary Fund, the country's banks entered the financial crisis very profitable and well capitalized. And while the country is being buffeted by the global troubles, the resource-based economy is still expected to grow 1 per cent this year, according to Namibia's central bank.

The Russian government has already invested about $11-billion to try to aid banks, and is looking at another $55-billion stimulus package to restart the economy and support the country's ailing banking system. Lenders are suffering from a fast downturn in the oil-powered economy of Russia.  

China's big banks have avoided troubles with subprime and other toxic assets, and may benefit as the government unveils a big stimulus package designed to keep the country's economy growing quickly. If that doesn't work, though, expect the banks to face bigger loan losses.

Japan's response to the banking bust of the 1990s was a `What not to do' lesson. The country put off dealing with bad loans and propped up bad banks for too long. Just as the country finally started to take big steps to fix the problem, this financial crisis cropped up. So far, Japanese banks have avoided the worst of it, signalling perhaps they've learned from experience.  

Ranked fourth by the World Economic Forum for soundness of banks, Australia's system shares many attributes with Canada's. It's centralized, with a few big players that are making money. The big problem for Australia is an economic one: its banks may not be big enough to take up the slack as global lenders cut back on lending, leaving the country's borrowers in the lurch.  

Maybe government regulation is the way to go - don't you think?

There's more...

A Cacerolazo In Reykjavik

Thousands of angry citizens have joined noisy weekly protests against the government's handling of the economy, clattering pots and kitchen utensils in what some commentators called the "Saucepan Revolution."

A cacerolazo in Reykjavik? Not surprising given the depths to which Iceland has been plunged. Iceland has been mired in crisis since late September, when the country's three largest banks collapsed under the weight of debts (more on 'securitization' below the fold) amassed during years of rapid expansion. The value of the country's krona currency has plummeted over 30%, hitting many Icelanders who took out special loans denoted in foreign currencies for new homes and cars during the boom years. In addition, Iceland must repay billions of dollars to Dutch and British citizens who held accounts with subsidiaries of collapsed Icelandic banks. Prime Minister Geir Haarde's government attempted to combat the crisis by nationalizing the banks and negotiating about $10 billion in bailout loans from the International Monetary Fund and from a number of countries, including other Nordics, Russia and the United Kingdom. Still, economists expect the Icelandic economy to contract 9.6%. Life for an Icelander may yet again be just "salted fish". The above clip is from the second day of the biggest protests against the government in Iceland since 1949 when people protested against Iceland joining NATO.

A cacerolazo (cacerola is Spanish for pot) is a form of popular street protest and demonstrations in Latin America which consists in a group of people creating noise by banging pots, pans and other utensils in order to call attention to political and social grievances. Cacerolazos date back to Salvador Allende's Chile when housewives took the streets of Santiago and other major Chilean cities to protest stagflation and severe shortages in 1970-1973. The empty pots weren't good for anything else. The practice remains fairly common in Latin America and has spread elsewhere. Cacerolazos erupted last Spring when Argentine President Cristina Fernández de Kirchner attempted to raise export tariffs on a variety of agricultural commodities setting off six months worth of political and social unrest in the South American country. Now cacerolazos have come to Reykjavik.

There's more...

Roubini: 'Sheer panic may force market shutdown...'

Nouriel Roubini, the prescient NYU Economics Professor and former Clinton administration economist who's maintained a more accurate forecast of our global financial crisis for a longer period of time than just about anyone, today predicted on Bloomberg TV  that the markets have reached a situation of "sheer panic."

Bloomberg (October 23, 2008): Roubini Says `Panic' May Force Market Shutdown...Sees Crisis Worsening, Hurting Emerging Markets.

There's more...


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