Obama to Visit India, and Both Sides Hope to Expand Ties

The New York Times

MUMBAI, India — As President Obama pays his first visit to India this weekend, he may want to take his lead from Mary Kay. Or Harley-Davidson, Cinnabon or Bristol-Myers Squibb.

Since Mr. Obama took office two years ago, America’s top economic policy makers have visited India numerous times but left with little to show for their long flights. This time, too, officials on both sides have tried to temper expectations, given the geopolitical and trade tensions between the two nations.

But, even without a big policy push from Washington, companies from both countries have already been forging deals at a fast and furious pace.

American brands as diverse as Mary Kay cosmetics, Harley-Davidson motorcycles and Cinnabon sticky buns have recently set up shop or expanded in India, often with local partners helping them navigate this country’s notoriously convoluted bureaucracy. Meanwhile, American corporate giants like General Motors and the drug maker Bristol-Myers are expanding factories, sales outlets and research laboratories in India.

As a result of such moves, American exports to India in the first six months of 2010 hit $14.6 billion, up 14 percent from the period a year earlier and nearly five times what it was a decade earlier.

Corporate America mainly hopes the visit by the president, with more than 200 American executives in tow, can help better define the common economic interests of the United States and India and build on the trade and investment foundations the business community has already laid.

“Business had been leading the way from the very beginning,” said Ron Somers, the head of the United States India Business Council, a business advocacy group. Now, Mr. Somers said, “we want to crown that with a genuine strategic partnership.”

Harold McGraw 3rd, the chairman of McGraw Hill and one of the executives in the Obama entourage, said the visit was “all about economic and job growth for both the U.S. and India.” India is America’s 14th-largest trade partner, he noted, but “should be a lot higher.”

For many American executives, India seems to have become the “new China” — a place where they feel compelled to do business, lest they miss getting a foothold in a nation with low-cost labor and a potentially billion-person consumer market.

But American government officials still seem to be struggling to define India’s role, beyond saying that “it’s not China.”

India, with its lively democracy and messy infrastructure, is certainly no China, with its forced-march development model. In fact, encouraging India as a counterweight to China — both economically and militarily — is a motive for President Obama’s visit, with potential sales of military technology high on the American agenda.

Compared with China, trade between India and the United States is relatively balanced. In 2009, America bought only $7.2 billion more in goods and services from India than it sold. Total trade between the countries was $60.2 billion. But that is just a small fraction of the $434 billion annual trade between China and the United States, which is lopsided $262 billion in China’s favor.

On paper, at least, India and the United States already have many shared interests and common goals. But Mr. Obama and his New Delhi counterpart, Prime Minister Manmohan Singh, have few significant bilateral achievements on economic issues. And one promising partnership, involving nuclear energy, may not even get off the ground.

In 2005, President George W. Bush and Mr. Singh announced what is considered the most ambitious agreement yet between their countries. The United States would remove restrictions on the export of civil nuclear technology to India and American companies would sell power equipment to India, which hopes to increase its nuclear power generation more than tenfold.

This past August, though, the Indian Parliament set that deal back by voting to make contractors and suppliers partly liable for any damages from nuclear accidents that might occur at the new plants. American companies say the new law deviates from international nuclear norms and would keep them from selling power equipment. Many economists and corporate executives say the power plant impasse and other tensions between the countries — most notably Washington’s continued, if wary, military embrace of Pakistan — suggest that Mr. Obama and Mr. Singh may be unable to reach any meaningful economic concord on this trip.

Both leaders face difficult economic and political realities at home. High unemployment, concern over the outsourcing of American jobs and the threat of a more confrontational Congress will limit Mr. Obama’s ability to strike deals with India.

Mr. Singh, meanwhile, is hemmed in by a coalition government that is conflicted about its relationship with the United States and is uncertain about the pace at which India should open its economy to the world.

“There is a limited amount that the visit can achieve,” said Arvind Panagariya, an economist at Columbia University and an India expert. “As long as they give a good communiqué and send some positive signals, that’s the best we can expect.”

Analysts say the more concrete results may come from corporate, not government, meetings. The chief executives accompanying Mr. Obama will include Jeffrey R. Immelt of General Electric and Indra K. Nooyi, the Indian-born head of PepsiCo. They will meet with the likes of Ratan Tata, chairman of the multinational conglomerate Tata Group, and Mukesh Ambani, head of India’s biggest company, Reliance Industries.

Various events will also give executives from smaller companies a chance to mingle.

“The most immediate benefit of the visit could be that another group of American industry executives become aware of the India opportunity,” said one of the scheduled attendees, Gunjan Bagla, the managing director of Amritt Ventures, which advises American companies coming to India.

Trade and investment between the countries has grown sharply since the Indian government began easing state control of its economy in 1991.

But disagreements between the United States and India have been a big roadblock in negotiations in the Doha round of global trade talks, which have been stalled since 2008. American officials have been pushing for India and other developing nations to open more industries like financial services to foreign competition, while the Indians are seeking reductions in American farm subsidies.

American jobs are also a sore point. In Washington, Democratic lawmakers earlier this year pushed through a $2,000 increase in fees for employment visas, writing the law in such a way that it primarily hurt Indian technology companies. Mr. Obama has also advocated changing tax law to make it more expensive for American companies to outsource work to India and other countries.

That is why President Obama will probably focus his talks here on securing deals for American companies that can demonstrably create jobs in the United States, according to administration officials. Some of those deals, which might include the sale of Boeing cargo planes to India’s military forces, have been in negotiation for some time.

American companies like Wal-Mart are also hoping that New Delhi will allow them to set up retail stores in India. Right now, foreign companies cannot operate retail stores that sell products from multiple brands. Indian officials have recently signaled that they might soon change those rules.

The Indians, for their part, have said they hope Mr. Obama will agree to ease export restrictions on so-called dual-use technologies, like cryptography, that can be used for both military and civilian purposes.

Pakistan 'welcomes' $5m flood aid from rival India

The Guardian

Pakistan has accepted a "very welcome" offer of financial aid for flood victims from its neighbour and perennial rival India, a donation indicating improving relations between the regional powers despite the relatively modest sum involved.

The $5m (£3.2m) donation was made as "a goodwill offer for solidarity", a spokesman for India's foreign ministry said.

Pakistan's foreign minister, Shah Mehmood Qureshi, told Indian television that his government was happy to take the money. "I think this initiative of India is a very welcome initiative," he said from New York, where he is attending a special UN assembly on the floods, which have spread across a fifth of the nation. At least 8 million people are in urgent need of humanitarian aid.

The move came a day after India's prime minister, Manmohan Singh, spoke to his Pakistani counterpart, Yousuf Raza Gilani, to express his condolences.

India had previously faced criticism for not joining in the international efforts to help its neighbour.

The two countries have experienced turbulent relations since partition in 1947, fighting two wars over the disputed territory of Kashmir. Relations plummeted anew in 2008 when Islamist militants who, according to India, were assisted by Pakistan's security services, undertook a bloody terrorist raid on Mumbai.

While offers of aid are continuing to arrive from around the world – the UK has now pledged almost £65m in direct assistance – relief agencies warn that rapid action is needed. The UN's World Food Programme has called for more helicopters to deliver aid to remote areas, saying it currently had the use of just 10.

The need is all the more urgent amid increasing fears of major outbreaks of disease. "With over 38,000 reported cases of acute diarrhoea already and at least one confirmed cholera death, the spectre of major cholera outbreaks is real," Professor Zulfiqar Bhutta of the women and child health division at Aga Khan University in Karachi wrote in the Lancet medical journal.

Pakistan's government moved to try and assuage fears that militant Islamist groups could fill the vacuum caused by aid not arriving and exploit anger against the civilian administration.

"The banned organisations are not allowed to visit flood-hit areas," Pakistan's interior minister, Rehman Malik, told Reuters. "We will arrest members of banned organisations collecting funds and will try them under the anti-terrorism act."

The country's president, Asif Ali Zardari, has warned that militants are trying to use the floods to promote their agendas, as they did after a devastating earthquake in Kashmir in 2005.

The US has now promised almost £100m in assistance, while the UN says it has received pledges for about 60% of its appeal for around £300m to help flood victims.

According to forecasters, the floods could begin to recede in Punjab province but there is a danger of more rain in Sindh over the next week. These provinces, where the majority of Pakistanis live, have been hit hardest by the floods.

China and India: Contest of the century

The Economist

As China and India rise in tandem, their relationship will shape world politics. Shame they do not get on better
Aug 19th 2010

A HUNDRED years ago it was perhaps already possible to discern the rising powers whose interaction and competition would shape the 20th century. The sun that shone on the British empire had passed midday. Vigorous new forces were flexing their muscles on the global stage, notably America, Japan and Germany. Their emergence brought undreamed-of prosperity; but also carnage on a scale hitherto unimaginable.

Now digest the main historical event of this week: China has officially become the world’s second-biggest economy, overtaking Japan. In the West this has prompted concerns about China overtaking the United States sooner than previously thought. But stand back a little farther, apply a more Asian perspective, and China’s longer-term contest is with that other recovering economic behemoth: India. These two Asian giants, which until 1800 used to make up half the world economy, are not, like Japan and Germany, mere nation states. In terms of size and population, each is a continent—and for all the glittering growth rates, a poor one.

Not destiny, but still pretty important

This is uncharted territory that should be seen in terms of decades, not years. Demography is not destiny. Nor for that matter are long-range economic forecasts from investment banks. Two decades ago Japan was seen as the main rival to America. Countries as huge and complicated as China can underachieve or collapse under their own contradictions. In the short term its other foreign relationships may matter more, even in Asia: there may, for instance, be a greater risk of conflict between rising China and an ageing but still powerful Japan. Western powers still wield considerable influence.

So caveats abound. Yet as the years roll forward, the chances are that it will increasingly come down once again to the two Asian giants facing each other over a disputed border (see article). How China and India manage their own relationship will determine whether similar mistakes to those that scarred the 20th century disfigure this one.

Neither is exactly comfortable in its skin. China’s leaders like to portray Western hype about their country’s rise as a conspiracy—a pretext either to offload expensive global burdens onto the Middle Kingdom or to encircle it. Witness America’s alliances with Japan and South Korea, its legal obligation to help Taiwan defend itself and its burgeoning friendships with China’s rivals, notably India but also now Vietnam.

This paranoia is overdone. Why shouldn’t more be asked from a place that, as well as being the world’s most-populous country, is already its biggest exporter, its biggest car market, its biggest carbon-emitter and its biggest consumer of energy (a rank China itself, typically, contests)? As for changing the balance of power, the People’s Liberation Army’s steady upgrading of its technological capacity, its building of a blue-water navy and its fast-developing skills in outer space and cyberspace do not yet threaten American supremacy, despite alarm expressed this week about the opacity of the PLA’s plans in a Pentagon report. But China’s military advances do unnerve neighbours and regional rivals. Recent weeks have seen China fall out with South Korea (as well as the West) over how to respond to the sinking in March, apparently by a North Korean torpedo, of a South Korean navy ship. And the Beijing regime has been at odds with South-East Asian countries over its greedy claim to almost all of the South China Sea.

India, too, is unnerved. Its humiliation at Chinese hands in a brief war nearly 50 years ago still rankles. A tradition of strategic mistrust of China is deeply ingrained. India sees China as working to undermine it at every level: by pre-empting it in securing supplies of the energy both must import; through manoeuvres to block a permanent seat for India on the United Nations Security Council; and, above all, through friendships with its smaller South Asian neighbours, notably Pakistan. India also notes that China, after decades of setting their border quarrels to one side in the interests of the broader relationship, has in recent years hardened its position on the disputes in Tibet and Kashmir that in 1962 led to war. This unease has pushed India strategically closer to America—most notably in a controversial deal on nuclear co-operation.

Autocrats in Beijing are contemptuous of India for its messy, indecisive democracy. But they must see it as a serious long-term rival—especially if it continues to tilt towards America. As recently as the early 1990s, India was as rich, in terms of national income per head. China then hurtled so far ahead that it seemed India could never catch up. But India’s long-term prospects now look stronger. While China is about to see its working-age population shrink (see article), India is enjoying the sort of bulge in manpower which brought sustained booms elsewhere in Asia. It is no longer inconceivable that its growth could outpace China’s for a considerable time. It has the advantage of democracy—at least as a pressure valve for discontent. And India’s army is, in numbers, second only to China’s and America’s: it has 100,000 soldiers in disputed Arunachal Pradesh (twice as many as America will soon have in Iraq). And because India does not threaten the West, it has powerful friends both on its own merits and as a counterweight to China.

A settlement in time

The prospect of renewed war between India and China is, for now, something that disturbs the sleep only of virulent nationalists in the Chinese press and retired colonels in Indian think-tanks. Optimists prefer to hail the $60 billion in trade the two are expected to do with each other this year (230 times the total in 1990). But the 20th century taught the world that blatantly foreseeable conflicts of interest can become increasingly foreseeable wars with unforeseeably dreadful consequences. Relying on prosperity and more democracy in China to sort things out thus seems unwise. Two things need to be done.

First, the slow progress towards a border settlement needs to resume. The main onus here is on China. It has the territory it really wants and has maintained its claim to Arunachal Pradesh only as a bargaining chip. It has, after all, solved intractable boundary quarrels with Russia, Mongolia, Myanmar and Vietnam. Surely it cannot be so difficult to treat with India?

That points to a second, deeper need, one that it took Europe two world wars to come close to solving: emerging Asia’s lack of serious institutions to bolster such deals. A regional forum run by the Association of South-East Asian Nations is rendered toothless by China’s aversion to multilateral diplomacy. Like any bully, it prefers to pick off its antagonists one by one. It would be better if China and India—and Japan—could start building regional forums to channel their inevitable rivalries into collaboration and healthy competition.

Globally, the rules-based system that the West set up in the second half of the 20th century brought huge benefits to emerging powers. But it reflects an out-of-date world order, not the current global balance, let alone a future one. China and India should be playing a bigger role in shaping the rules that will govern the 21st century. That requires concessions from the West. But it also requires commitment to a rules-based international order from China and India. A serious effort to solve their own disagreements is a good place to start.

Law and globalisation: Not entirely free, your honour

The Economist

The legal profession, like the clients it serves, is well on the way to going global—but especially in India, obstacles to its spread remain
Jul 29th 2010

LAW is supposed to be about universal principles: rules that apply without prejudice to a broad category of human beings, regardless of sex, culture or economic status. So in a world where barriers to the transfer of goods, expertise and people are coming down, you might expect that the legal profession would be among the first to fuse into a seamless transnational fraternity. In history, whenever cross-border commerce has flourished, as in medieval Venice, so too have trade lawyers with broad horizons, like the ones pictured above. And today, at least from the vantage-point of the ambitious practitioner, the legal profession seems to have little respect for borders.

A talented graduate from any of the world’s top law schools can expect a life of globe-trotting. A single month’s work can include writing the small print on a Saudi investment in Africa, helping an Indonesian firm to market its shares in New York, and writing a contract under English law between two companies in Russia. Humanitarian law, as well as the commercial sort, is going global: these days nobody would be surprised to see an American lobby group test the principle of “universal jurisdiction” (for egregious crimes) by trying to get an African dictator arrested on a shopping trip to Europe.

But that is not the whole story. On one hand, international lawyers are at least as ingenious as their customers when it comes to overcoming obstacles to transnational operations; on the other, lawyers have always been skilful at limiting access to their own profession, both within their own countries and globally. And when there are big barriers to professional mobility inside a country, it is less likely to open up to foreign competition.

Eyes on the prize

By global standards, the glittering prize of practising law in New York is fairly accessible to anybody with the brains (and a green card). If you come from another American state, or from another country that practises English-style common law (in which precedents set by judges are all-important), it is a matter of mugging up and passing the New York bar exam. If you come from a country that practises civil law (where a written legal code holds sway), then you must spend first spend a year getting a Master of Laws at an American university.

As this arrangement implies, there are big similarities between the precedent-based systems of law that prevail in the Anglophone world, and a wide difference between them and the civil-law tradition of continental Europe. So it might be expected that lawyers could slide easily from one English-speaking or Commonwealth country to another, while finding it harder to leave the Anglo-sphere. It is true that most global law firms are British- or American-based. But Commonwealth countries have not always offered an open environment; among the things they learned from British mentors—along with ideals like the presumption of innocence—was how to protect the profession from pesky competitors. And some non-Commonwealth countries are now surprisingly open.

In China and Brazil foreign firms have flourished by offering advice on international law, but they cannot provide legal representation in local courts. (An exception is Hong Kong, which has recently seen a spurt in foreign lawyers taking the local bar exam.) If a Chinese lawyer takes a job with a foreign law office in Beijing, he or she will temporarily forfeit the right to practise Chinese law. But a Russian lawyer who wants to work for a foreign employer faces no such disincentive.

South Korea has promised to open up its legal market to outsiders under a Free Trade Agreement with the European Union that should be ratified later this year. And in 2008 Singapore became more foreign-friendly; certain firms from other countries can practise domestic law in some areas, as long as the lawyers they use have local qualifications. Japan opened up its legal-services market in 1999, despite great nervousness from its own lawyers. Since 2005, foreign firms have been able to set up partnerships employing Japanese lawyers, who (in contrast with Singapore) need not give up their national licence.

But there is one determined outlier among fast-growing Asian economies: India, the only big country that is closed to foreign lawyers in any capacity. A powerful lobby—ranging from hundreds of thousands of small (often husband-and-wife) practices to a handful of leading partnerships—resists change. Foreigners who tried venturing into the Indian market are still reeling from a decision in December by the Bombay High Court which deemed illegal the “liaison offices” that some outsiders had opened. The Indian government said (rather half-heartedly) that it would appeal against this ruling. But the climate in which law-related work could be undertaken by outsiders has gone from difficult to prohibitive. Reena Sengupta, a London-based consultant, says she used to see foreign-owned legal-research operations in India where beds, not desks, greeted the visitor; such was the keenness to dispel the impression that law was being practised. Now those offices have simply closed.

Indians who need world-class legal advice lose out, says Stuart Popham, a senior partner in Clifford Chance, a London firm, who this week accompanied David Cameron, the British prime minister, on a tour of India. The effect is “to restrict supply and competition and raise prices…you have to fly clients out to meet lawyers elsewhere.” A lot of Indian-related work is done in the more liberal climate of Singapore. Mr Popham says he is frustrated by some Indians’ contention that firms like his own will inevitably take away local jobs. “Liberalisation does not take away anyone’s job…the evidence is that no country has ended up with a smaller domestic legal community after opening up.”

For the Law Society of England and Wales, getting the Indians to free up their market is high on the wish-list. “We want to invest in India’s potential to become a global legal player…this means new work coming to India,” insists Alison Hook, the society’s head of international activities.

But much of her target audience is, as yet, unpersuaded. “The Indian profession will rise up in arms if [foreigners] want to open offices here,” says Lalit Bhasin, head of the Society of Indian Law Firms. He accuses the British government and profession of “trying to emasculate the Indian legal community” by pressing a “one-point agenda” of liberalisation. In practice, India’s legal world is unlikely to let outsiders participate unless restrictions on the country’s own lawyers are eased. Indian firms may not advertise their services, and only the simplest websites are permitted; until recently the number of partners was capped at 20. Cyril Shroff, managing partner at Amarchand Mangaldas, India’s biggest law firm, says a more liberal regime, both internally and externally, is inevitable—but he would oppose opening the field to foreigners unless life was also made easier for locals. “The real question is how we can modernise the Indian legal market.” Ms Hook says her society agrees with the idea of India undertaking “holistic” reform, domestic as well as external.

Wading through maple syrup

Another big Commonwealth country, Canada, is less restrictive than India—but not as open as England or Australia either. It is fairly rare for lawyers to move between Canadian provinces, and a switch from Quebec to an English-speaking province involves a change of legal tradition as well as language. Meanwhile, foreign lawyers who want to practise Canadian law face two evaluations—one at federal level, the other provincial—and most fail. Between 1999 and 2009, the Federation of Law Societies received 4,515 applications from foreign advocates and issued only 1,708 certificates. Of the 1,027 English lawyers assessed, only 375 got the desired bit of paper. Paul Paton, a Canadian-born law professor, believes that governments, not lawyers, deserve the credit for opening up the profession in England and Australia—and he hopes for a similar change in Canada. English and Australian lawyers were forced to abandon the idea of self-regulation when “the public saw something wasn’t right and the government had to step in,” says Mr Paton, who now works at California’s University of the Pacific.

Canadian lawyers could benefit from a more liberal legal-services regime, he believes. Already, some Canadians find ways around the obstacles which they, like everybody, face in India. Stikeman Elliott, a Canadian firm with about 500 lawyers worldwide, trawls for contacts among the Indian diaspora in Toronto and Vancouver, and it stands ready to assist Indian investors with an eye on Canada’s resources. But it avoids giving even a whisper of advice on Indian soil.

While some countries still hesitate to enter the global contest for legal services and talent, the competition itself is changing, says John Conroy, chairman of Baker & McKenzie, an American firm which went global before anybody else. It was no longer a question of vying to help Western investors with their activities in emerging economies; the real prize in those markets was “outbound” work—for example, advising on investment by Chinese concerns in Africa and Latin America, or on rights issues for Chinese banks. (His firm’s China-based partners have recently done both.) The other change was that firms based in Asia were bidding for Anglo-Saxon talent. Chinese firms were hiring lawyers from English-speaking countries, while Japanese law firms—so risk-averse only a decade ago—were consolidating and girding themselves for international work. As Mr Conroy notes, it takes time for an institution based in the Anglophone world to be acculturated in Asia or Latin America; winning local trust is as crucial as passing exams or gaining licences. And even in countries where trust has been established, the climate can change, as Baker & McKenzie is finding in the anti-American atmosphere that now rages in Venezuela, where it has worked since the 1950s. The situation there is “really testing our mettle, and I call our Caracas partners heroes,” Mr Conroy says. Whether administrative or just cultural, barriers can go up as well as down.

David Cameron starts mission to boost trade in India

The Guardian

David Cameron will take a planeload of cabinet ministers and business leaders to India next Wednesday as he seeks to boost trade links with the former "jewel in the crown" of the British empire.

In the first example of the new focus on trade in foreign policy, the group will meet up in Delhi "in an unprecedented attempt to woo this rising world power", according to the Tory MP Jo Johnson, brother of Boris and a former FT India correspondent.

Cameron has been highly critical of the last government's approach to the so-called Bric emerging economies – Brazil, Russia, India and China. Tony Blair and Gordon Brown visited India but failed to create what Cameron is dubbing a "special relationship".

Johnson writes in this week's Spectator: "By dispatching himself and so many of his most senior colleagues to India, and so early on, Cameron is making a clear signal of his intent to revitalise a critical, bilateral relationship – and repair what he regards as a decade of neglect."

Indian Soldiers Are Deployed to Restore Order in Kashmir

The New York Times

NEW DELHI — The Indian Army deployed on the streets of the disputed region of Kashmir on Wednesday, seeking to quell angry street protests that have convulsed the valley.

The protests, aimed at forcing India to withdraw its paramilitary forces from the predominantly Muslim Kashmir Valley, have raged for weeks, killing at least 13 people and paralyzing life in the region, which is claimed by both India and Pakistan.

The streets of Srinagar, the state capital, were deserted as the authorities enforced a strict curfew. The army presence was light and limited to a few patrols, officials in Kashmir said.

“The army has been asked to stand by to help the civil administration,” said Taj Mohi-ud-Din, a senior minister in the state government.

Demonstrations in the streets of towns and cities across Kashmir are a regular feature of the summer months in the valley, but they have become particularly heated in recent weeks in the wake of allegations that police officers and soldiers brutalized civilians. The police and paramilitary forces have fired on groups of stone-throwing youths, and television news channels showed Indian forces firing directly into crowds of protesters.

The state government has struggled to maintain order. Kashmir’s chief minister, Omar Abdullah, has called for calm but has been criticized by many analysts for taking a course that they say is too passive. Separatist leaders led huge marches in the streets of Srinagar on Tuesday, and three people were killed when paramilitary forces opened fire.

A separatist insurgency seeking to create an independent state in Kashmir has raged since 1989, killing tens of thousands of civilians, but in recent years violence in the state has sharply dropped. The armed insurgency has largely given way to one led by stone-throwing youths, which has made containing the violence much tougher for Indian security forces. Many of the recent clashes between protesters and the police have come as a result of the shooting deaths of Kashmiri youths by Indian police officers.

India’s home minister, P. Chidambaram, accused the banned Pakistani militant group Lashkar-e-Taiba of fomenting the violence in Kashmir, leading to worries that the protests could upset efforts to restart peace negotiations between Pakistan and India, nuclear-armed neighbors.

U.N. Security Council Passes New Sanctions Against Iran

The New York Times

Ambassadors to the United Nations, from right, Susan E. Rice of the United States, Mark Lyall Grant of Britain and Ruhakana Rugunda of Uganda voted to affirm a U.N. Security Council resolution on Iran while Turkish Ambassador to the U.N. Ertugrul Apakan voted against it on Wednesday.

UNITED NATIONS — The United States, moving firmly away from the Obama administration’s previous emphasis on wooing Iran, pushed through a new round of United Nations sanctions against the nation on Wednesday, taking aim at its military in yet another attempt to pressure Tehran over its nuclear program.

The new sanctions, a modest increase from previous rounds, took months to negotiate but still did not carry the symbolic weight of a unanimous Security Council decision. Twelve of the 15 nations voted for the measure, while Turkey and Brazil voted against and Lebanon abstained.

Beyond the restrictions imposed by the sanctions themselves, the vote sets stage for harsher measures that the United States and the European Union have promised to enact on their own once they had the imprimatur of the United Nations. European leaders are likely to discuss new measures at a summit meeting this month.

Iran has defied repeated demands from the Security Council to stop enriching nuclear fuel. It has built new, sometimes secret, centrifuge plants needed to enrich uranium — and has enriched it at higher levels. These actions have raised suspicions in the West that Iran is pursuing a nuclear weapon, although leaders in Tehran insist their nuclear program is peaceful.

Susan E. Rice, the United States ambassador to the United Nations, said the body had “risen to its responsibilities” by approving the measure, and that “now Iran should choose a wiser course.”

“Until the world’s concerns with Iran’s nuclear defiance are fully resolved, we must work together to ensure that the sanctions in this resolution are fully and firmly implemented,” she told the Security Council after the vote.

Diplomats from Brazil and Turkey, which negotiated a deal with Iran last month to send some of its low-enriched uranium abroad in exchange for access to fuel for a medical reactor, criticized the sanctions, saying they could undermine further attempts at diplomacy.

Maria Luiza Ribeiro Viotti, Brazil’s representative to the United Nations, said, “We do not see sanctions as an effective instrument in this case.”

Even as the Security Council was on the verge of voting, Iran was attempting to show that it was cooperating with the negotiation track. Ali Akbar Salehi, Head of Iran’s Atomic Energy Organization, announced that the International Atomic Energy Agency had responded positively to the latest proposals negotiated by Brazil and Turkey.

The deal, first proposed by the major powers in October as a confidence-building measure and then resurrected by Brazil and Turkey, was shunted aside by the United States and its allies because Iran said it would not stop enriching uranium.

“This is a sign of the confusion of the great powers,” Mr. Salehi said. “On the one hand they send a response letter while on the other hand they take negative steps.”

The five permanent Security Council nations that negotiated the new sanctions — Britain, China, France, Russia and the United States — along with Germany, also left the door open to new diplomacy. The resolution contained the full text of a 2008 offer for increased civilian nuclear cooperation in exchange for Iran stopping enrichment.

The main thrust of the sanctions is against military, trade and financial transactions carried out by the Islamic Revolutionary Guards Corps, which controls the nuclear program and has taken a more central role in running the country and the economy.

The sanctions ratchet up the measures previously taken against 40 individuals, putting them under a travel ban and asset freeze, but adds just one name to the list — Javad Rahiqi, 56, the head of the Isfahan Nuclear Technology Center.

The sanctions require countries to inspect ships or planes headed to or from Iran if they suspect banned cargo is aboard, but there is no authorization to board ships by force at sea. Another added element bars all countries from allowing Iran to invest in nuclear enrichment plants, uranium mines and other nuclear-related technology.

The United States had sought broader measures against Iran’s banks, insurance industry and other trade, but China and Russia were adamant that the sanctions not affect Iran’s day-to-day economy. Washington and Beijing were wrangling down to the last day over which banks to include on the list, diplomats said, and in the end only one appeared on the list of 40 new companies to be blacklisted.

The Chinese ambassador, Li Baodong, said his country’s conditions on the sanctions were that they not harm the world economic recovery and not affect the Iranian people or normal trade.

Even after China agreed to negotiate with the other Security Council members, its opening position opposed any new sanctions, said a United States official involved in the negotiations. That stance meant new measures took months to negotiate and required significant concessions by the United States.

“With time we got a resolution that we felt was very meaningful and credible and significant,” Ms. Rice said in an interview before the vote. “But had we wanted a low-ball, low-impact resolution we could have had that in a very short period of time.”

In the end, both the energy sector and the Central Bank were mentioned with somewhat tortured wording in the opening paragraphs. That is enough to pursue companies dealing with both, American officials said.

The sanctions include a ban on selling heavy weapons to Iran, including battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, missiles and missile systems.

But so far, three previous rounds of sanctions have failed to halt Iran’s nuclear ambitions, leading some skeptics to question whether the latest measures would be able to apply real pressure on Tehran.

“Nobody is suggesting that these sanctions are not going to have an impact, said Ray Takeyh, an Iran expert at the Council on Foreign Relations and former State Department adviser on the Gulf. “The question is whether they will put sufficient pressure on Iran to come back to the negotiating table in a more earnest and a more compromising mood.” Mr. Takeyh questioned whether measures like the weapons ban could have the unintended consequence of driving Iran toward developing a nuclear weapon because it cannot get other arms.

In a recent report, international nuclear inspectors said that Iran had produced a stockpile of nuclear fuel that experts say would be enough, with further enrichment, to make two nuclear weapons.

The World Trade Organization and other economic figures indicate that Iran’s economy grew at a healthy clip over much of the past decade, suffering like everyone else after 2008. Its exports and imports both grew by an annual rate of at least 19 percent in that period.

Restricting a few dozen additional companies seemed unlikely to cause serious pressure given the size and growth of the oil-rich Iranian economy, some analysts said.

“It would seem like a thin reed on which to base a policy,” said Steven E. Miller, the director of the International Security Program at Harvard University’s Belfer Center for Science and International Affairs. “I think that by default we end up with sanctions because we don’t know what else to do.”

Studies by the United States government have questioned the efficacy of sanctions, especially given Iran’s weight as an oil exporter. Iran will likely be able to use its oil and other important trade to blunt the latest measures.

“Iran’s global trade ties and leading role in energy production make it difficult for the United States to isolate Iran,” said a 2007 report by the General Accounting Office.

Accurate trade figures are hard to pin down exactly because Iran ships billions of dollars of goods each year through Dubai in the United Arab Emirates. But China is believed to have surpassed the European Union as Iran’s major trade partner with exchanges surpassing the body’s $35 billion.

China imports some 11 percent of its oil needs from Iran and has signed more than $120 billion in oil industry deals in recent years. At one point Iran imported some 40 percent of its refined gasoline needs, but it has been reducing that through deals with China to expand its refining capacity and by signing agreements with countries like Venezuela.

The World Trade Organization’s Web site indicates that other major buyers of Iranian exports include Japan, Taiwan, the European Union, China and India.

“Not too shabby for an alleged pariah state,” said Mr. Miller. “It does sort of raise the question of who exactly we are persuading with our relentless campaign to isolate Iran.”

Taking a high road

The Economist

A strong, well-balanced recovery
Jun 1st 2010 | From The Economist online

ATHLETES competing in this year’s Commonwealth Games held in Delhi will travel to the stadium along the Barapullah Elevated Road, one of many transport projects sprouting up in India’s capital city. Half-built sections of the road loom dramatically over the streets below, as if straining to reach the concrete supports on the other side.

India’s economy has taken a similarly elevated route through the global financial turmoil. Its growth never fell below 5.8% (see chart), thanks to a timely fiscal splurge. But just as a cantilever cannot extend too far before it buckles, so an economy cannot place too much weight on a single source of support. India’s merits special caution, its budget deficit topping 10% of GDP in the fiscal year that ended on March 31st.

The growth figures released on May 31st were therefore doubly welcome. They showed that India’s GDP expanded by 8.6% in the year to the first quarter. And as heartening as the rate of growth was its source: investment in fixed assets (such as elevated roads) accounted for more than half of it; government consumption contributed hardly at all.

By “stepping up” its investments, “industry has shown its confidence in the economic recovery," said Chandrajit Banerjee of the Confederation of Indian Industry (CII). The biggest bets are being placed by India’s mobile-telephone operators, who bid no less than 677.2 billion rupees ($14.6 billion) between them in the government’s recent auction of the airwaves for speedy third-generation (3G) networks. A second auction now under way may raise another 300 billion rupees from firms seeking to offer broadband internet over wireless networks.

This windfall, far exceeding the government’s target of a total 350 billion rupees, will help it narrow its budget gap this year. But the government’s gain was the telecoms industry’s loss. To compete in the auction, mobile operators have borrowed heavily, some from overseas. Instead of India’s government owing money to sleepy domestic bondholders then, India’s most dynamic companies now owe money to foreign creditors. Whether this helps the economy or not will depend on whether the government spends the auction proceeds better than the telecoms companies would have done.

If a slowdown in government outlays was welcome, a slowdown in private consumption, which grew by only 2.6% in the year to the first quarter, was not. The CII blamed this weakness on high prices, which have dogged the government’s second term. In a press conference on May 24th, Manmohan Singh, India’s prime minister, singled out inflation as a "matter of deep concern", but pointed to signs of a "moderating trend".

He’s right to point out that wholesale-price inflation has eased, from over 10% in February to 9.6% in April, compared with a year earlier. But even as the cost of foods (including manufactured foods, such as sugar and dairy) begins to fall, the price of other manufactured goods is gathering some momentum. The Reserve Bank of India (RBI), which has raised interest rates twice this year, still has work to do.

The pace of rate hikes will be governed by two imponderables: the monsoon, which is now sweeping up the coastal state of Kerala, and the squalls on world financial markets, which have swept outwards from Greece. If the monsoon lives up to expectations, the prospect of a good summer harvest will help to quell food inflation. That will, in turn, lower inflation expectations, making the RBI’s life easier. By the same token, bad financial weather may keep interest rates low around the globe. If so, the RBI will be wary of raising its own rates too far ahead of other central banks.

The RBI worries that higher rates could invite heavier inflows of foreign capital. This would push up the rupee, damaging India’s exporters. Overseas investors traditionally flee emerging markets in periods of global financial angst. But an economy growing at 8.6% may look a safer bet than the moribund markets of Europe and America. Rohini Malkani of Citigroup points out that Indian companies were able to borrow $4.3 billion overseas in March, the most they have in two years. Prominent among the companies raising money were India’s infrastructure firms and its telephone operators.

That leaves India’s policymakers with a big strategic decision. They could rebuff this foreign capital, by tightening caps, regulations and other restrictions on foreign investment. Or they could take advantage of it, betting that a stronger rupee is a worthwhile price to pay for faster telecoms networks and elevated roads over India’s congested city streets.

Brasil tem 2º maior crescimento global

O Estado de S. Paulo

SÃO PAULO - O Brasil deve ocupar o segundo lugar no ranking das maiores taxas de crescimento do mundo no primeiro trimestre, à frente até mesmo da China. O dado oficial só será divulgado pelo Instituto Brasileiro de Geografia e Estatística (IBGE) na terça-feira da semana que vem, mas, levando-se em conta as projeções do mercado financeiro, já é possível cravar que o País será um dos líderes em expansão no período.

O Itaú Unibanco, por exemplo, estima uma alta do Produto Interno Bruto (PIB) de 3% nos três primeiros meses do ano, na comparação com o quarto trimestre do ano passado. É uma das projeções mais elevadas de todo o mercado. Em um cálculo anualizado – ou seja, assumindo que o ritmo se manteria pelo resto do ano –, seria o equivalente a crescer 12,6% em 2010.

Para ter uma ideia, a China se expandiu a um ritmo anual de 11,2% entre janeiro e março. O líder do ranking deve ser a Índia, que avançou a uma taxa anual de 13,4%. Os Estados Unidos, que ainda lutam para se recuperar da forte crise que atingiu o país em 2008, cresceram 3%.

O economista-chefe do Itaú Unibanco, Ilan Goldfajn, observa que há risco de a expansão brasileira no trimestre ser ainda mais forte. O departamento econômico da instituição calcula a alta do PIB mensalmente. Considerando os resultados de janeiro, fevereiro e março nesse levantamento, o crescimento no trimestre seria de 3,6%. Ele admite que os próprios analistas se surpreenderam com o número. Por isso, preferiram optar por uma estimativa mais conservadora.

Recuo

Independentemente da posição do Brasil nesse hipotético ranking global, o fato é que a expansão no trimestre foi bastante superior ao que praticamente todos os analistas esperavam. Por isso, sem uma única exceção, eles projetam uma desaceleração daqui para a frente.

O próprio Itaú acredita que o ritmo de crescimento do PIB vai cair da faixa de 12% para algo como 4% ou 5% no último trimestre do ano. É essa freada que explica a projeção de alta para 2010 inteiro, hoje em 7,5%.

Os especialistas argumentam que, nesse cenário, a expressiva desaceleração é bem-vinda. O Brasil, dizem, não consegue crescer a uma taxa superior a 4% ou 5% de forma sustentável – ou seja, sem uma alta da inflação para um nível acima da meta estabelecida pelo governo e/ou sem abrir um rombo nas contas externas.

"O risco de acelerar demais é sair da estrada e ser obrigado a voltar para trás para retomar a rota", diz o economista-chefe da Sul América Investimentos, Newton Rosa. Por isso, avalia, o Banco Central (BC) acertou ao iniciar no mês passado o ciclo de elevações da taxa básica de juros (a chamada Selic subiu de 8,75% para 9,50% ao ano).
Se o BC demorasse para agir, diz Rosa, seria obrigado a retrair a economia de uma forma mais intensa, o que poderia causar até mesmo retração do PIB em algum trimestre.

Indian train crash: Leaders under pressure over Maoist attack

The Guardian

Link to the video

India's leaders were under pressure tonight to clarify their strategy to tackle extremist leftwing violence after at least 80 people died and 200 were injured when suspected Maoist rebels derailed a passenger train in West Bengal state.

Even as rescuers were working desperately to free hundreds of passengers from the twisted wreckage of the Gyaneshwar Express near Sardiha, 100 miles south-west of Kolkata, in the early hours of this morning, the Congress party-led administration of Manmohan Singh was under attack for being unable to stop a string of increasingly violent attacks.

"They are looking quite helpless. There's a sense of administrative collapse," said MJ Akbar, the influential editor of the Sunday Guardian. Manoj Joshi, editor of the Mail Today, said the attack undermined a government already accused of a lackluster performance after a year in power.

The opposition Hindu nationalist Bharatiya Janata party took a step away from its bipartisan approach with Ravi Shankar Prasad, chief spokesperson, saying it was "high time" the government ended discussions over strategy and implemented a firm response.

Public disagreements between cabinet ministers and senior figures within the Congress party over the right strategy to deal with the Maoists have hit front pages. The home minister, Palaniappan Chidambaram, has made little secret of his desire for a strong coercive response, advocating the deployment of tens of thousands of paramilitary policemen and air power to combat what he sees as a major threat to internal security.

Others, including the Congress party president Sonia Gandhi and finance minister Pranab Mukherjee, favour a broader strategy based in economic development to combat the "alienation" they see as the root of the problem.

Further confusion has been sowed by the differing agendas of the governments of the five states where the Maoists have a presence. Some have developed links while others are close to mining companies with interests in the mineral resources of the remote areas where the rebels are based.

To complicate matters further, governments in several affected states are run by parties in opposition to the ruling coalition in Delhi. A series of government offers to talk with the rebels — all rebuffed — have added to the sense of confusion.

Senior officials have predicted that the most violent phase of the conflict is still to come and that defeating the Maoists will take many years.

Au moins 80 morts dans l'attaque de deux mosquées au Pakistan

Le Monde

Une dizaine d'hommes armés, dont au moins trois kamikazes, ont attaqué, vendredi 28 mai, deux mosquées appartenant à la minorité religieuse des ahmadis dans deux quartiers de Lahore, dans le nord-est du Pakistan, prenant des otages et tuant au moins 80 personnes, d'après la municipalité. Selon les médias pakistanais, c'est le Mouvement des talibans du Pakistan (TTP) qui serait responsable de ces deux attaques. Au moins 80 autres personnes ont été blessées dans les deux attaques.

Les assaillants ont ouvert le feu peu après les prières du vendredi, lancant des grenades et prennant des fidèles en otages. L'attaque sur la première mosquée, dans le quartier chic de Model Town, a été très rapide, alors que les combats ont duré plus de quatre heures dans la deuxième, dans le quartier populaire et fréquenté de Garhi Shahu. Au moins deux assaillants, lourdement armés et équipés de vestes bourrées d'explosifs, ont été arrêtés.

La chaîne de télévision Geo a, elle, montré des images en direct de policiers agitant leurs armes en signe de victoire sur le toit de la seconde mosquée attaquée. "Nous [y] avons découvert de 40 à 50 cadavres", a déclaré le chef de l'administration de la municipalité de Lahore.

PLUS DE 200 MORTS À LAHORE DEPUIS UN AN

Il s'agit d'une des attaques la plus meurtrières contre la minorité ahmadi, et la première fois que des militants armés mènent des attaques coordonées contre une minorité religieuse. On estime qu'il y a près de 5 millions d'amadhis au Pakistan. Ils sont considérés comme des hérétiques par certains musulmans, qui estiment que le fondateur de la secte est un faux prophète selon le Coran.

Le pays est en proie depuis bientôt trois ans à une vague d'attentats et d'attaques-commando, qui ont fait plus de 3 300 morts dans tout le pays. Perpétrées la plupart du temps par le TTP, certaines de ces attaques visent des communautés minoritaires de l'islam au Pakistan : les chiites essentiellement, mais aussi les ahmadis qui prônent un islam moderniste et libéral et œuvrent principalement dans le développement et l'aide aux défavorisés.

Lahore a été, ces derniers mois, l'un des principaux théâtres des attaques perpétrées par les talibans ou des groupes insurgés qui leurs sont liés. Le 12 mars, 57 personnes avaient été tuées et plus de 130 blessées après un double attentat-suicide visant des véhicules de militaires à proximité d'un marché très fréquenté de la ville, où les passants se pressaient pour la prière du vendredi. En un peu plus d'un an, les attaques et attentats à Lahore ont fait plus de 200 morts.

Rescuing the rescuers

The Economist

Having saved the banks, governments now find themselves under the wary eye of the markets
May 26th 2010 | From The Economist print edition

IF BULLISH investors had been given two Christmas wishes at the end of 2009, they probably would have asked for booming profits and a continuation of ultra-low interest rates. Their wishes have been granted. According to Morgan Stanley, the first-quarter profits of companies in the S&P 500 have been more than 12% better than expected. Meanwhile, few expect the Federal Reserve, the European Central Bank (ECB) or the Bank of England to raise rates this year. Some think rates will stay where they are in 2011, too.

So why is the MSCI World index of global equities down by more than 10% this year, with emerging markets showing double-digit losses and European bourses shedding more than 20% in dollar terms? On May 25th the FTSE 100 index closed below 5,000 for the first time since last October. The next day the Dow Jones Industrial Average closed below 10,000 for the first time since February.

This latest setback may simply be a reaction to the phenomenal rally that has taken place since March 2009. Back then, fears of a second Depression were widespread. As confidence returned, the S&P 500 index jumped by 80% to its most recent high in late April. Eventually, all the good news was priced in and there were signs of complacency: in early May a survey by Investors Intelligence, a research firm, found that three times as many American financial advisers were bulls (54%) as were bears (18%).

The latest market worry is North Korea's sabre-rattlingMay has seen the re-emergence of a number of worries that had been beneath the surface. The latest is geopolitical risk, in the specific form of rising tension in the Korean peninsula. Reports that Kim Jong Il, the North Korean dictator, had placed his forces on a war footing caused Asian markets to fall sharply on May 25th. The erratic actions of North Korea, a country with too many weapons and not enough food, are akin to Middle East politics: a wild card that can occasionally upset investors.

However, investors’ biggest financial concern is sovereign debt, notably that of some southern European countries. In recent weeks the European Union has been forced both to rescue Greece and to unveil a general bail-out package, worth up to €750 billion ($920 billion) including a contribution from the IMF, for struggling countries. Investors seem to be in two minds on sovereign debt. They worry that individual countries may default if they do not cut their deficits and that banks holding their debt will be clobbered. They think that Greece’s debt crisis has been postponed rather than solved. But investors are also concerned that, if several governments try to tighten fiscal policy at once, the global economy will take a hit.

Europe is expected to experience sluggish growth in the medium term as it struggles with its debts. But in recent weeks worries have also emerged about growth in Asia and America. In Asia, the question is whether China’s attempts to rein in its housing market will prompt a broader slowdown. In America, momentum seems to have faded a little after a strong performance in the last quarter of 2009. Some data, such as initial jobless claims and the Conference Board leading indicator, have been disappointing.

All this has led to a sell-off of the “risk basket”—those assets that seem most correlated with global growth, such as the Australian dollar, copper and emerging-market equities (see chart 1). Oil has been another casualty, with crude prices falling by around 20% in May alone. This week the price of a barrel slid below $70. Investors have headed away from risk, flocking into the bonds of what they deem the safest governments: German ten-year bond yields fell to 2.58% on May 25th, the lowest in recent memory, while the yields on ten-year American Treasury bonds dropped to close to 3%.

Blaming the markets
A further complication of the debt crisis is that governments have turned from trying to support financial markets to blaming them for the world’s ills. Rather than accepting rising government-bond yields in southern Europe as a rational response to worsening public finances, politicians believe that troubled countries have been unfairly targeted by speculators. That seems to explain Germany’s hastily imposed restrictions on short-selling of government bonds and on buying sovereign credit-default insurance without owning the underlying bond. In response to market criticism of the ban, Wolfgang Schäuble, Germany’s finance minister, quipped: “If you want to drain a swamp, you don’t ask the frogs for an objective assessment.”

However, it seems unwise for European governments to start bashing the very people from whom they need to borrow hundreds of billions of euros. Investors do not need to sell bonds short—bet on a falling price—to cause governments trouble. All they need to do is to shun bonds in governments’ frequent auctions (Germany, Italy and Portugal all held auctions on May 26th, for example). A failed auction would quickly cause bond yields to soar, increasing the cost of servicing those huge deficits.

The impression of erratic government policy has been bolstered by the tortured negotiations over America’s finance-reform bill and Europe’s Alternative Investment Fund Managers Directive. Taxes on banks and financial transactions are being discussed. Such measures may never be agreed on by the G7 or the G20, but given the financial industry’s unpopularity, countries or regions may act on their own. On May 26th the European Commission proposed a levy on banks to pay for future failures. Mr Schäuble has said that the German government will seek a “European solution” to a transactions tax if the G20 cannot agree on one. Last autumn there was a sense that global governments were co-ordinating their actions; now they seem to be dashing off in different directions in an attempt to appease their voters.

Viewed politically, in fact, the recovery in profits that has given encouragement to the bulls has been a mixed blessing. With growth in the rich world sluggish, the corollary of the rise in profits has been a fall in the share of income going to labour, because of job losses and stagnant wages. To the ordinary voter, the picture seems perverse: the bankers and bosses who caused the crisis and were then bailed out by taxpayers are now reaping a disproportionate share of the rewards. Meanwhile, public services and public-sector pensions and wages face deep cuts—seemingly at the insistence of the same financial elite. No wonder voters are angry.

Watch the banks
Although falling stockmarkets may capture most headlines, a less obvious alarm signal is probably more unsettling. This is the sharp rise in the rate at which banks borrow and lend to each other, known as LIBOR (London Interbank Offered Rate). On May 26th three-month dollar LIBOR was 0.54%, its highest since last July (see chart 2 below). Although this is still a long way below the near-5% reached in 2008, the trend is worrying. It indicates that the health of the banking system is once more being called into question.

Indeed, much bigger rate moves are priced into the forward market. And Pavan Wadhwa, a strategist at JPMorgan, points out that LIBOR measures the funding cost for only 16 big banks; smaller banks have to pay a premium. The Eurodollar future that shows the cost of borrowing dollars for the average bank in the three months between September and December is already 1.1%. European banks, which seem desperate to get their hands on the American currency, have to pay a further half a percentage point, making their total cost 1.6%.

Central banks have tried to ease the pain. A swap deal between the Federal Reserve and the ECB, intended to last until January 2011, allows banks to borrow dollars for seven days at 1.25%. But the rise in LIBOR creates a number of potential difficulties. Mr Wadhwa points out that, as banks become more concerned about their own borrowing costs, they become more reluctant to lend. That was precisely what caused the interbank markets to freeze in 2008. Meanwhile, an increase in LIBOR squeezes the profits of even healthy banks, since they had been borrowing cheaply from the money markets and investing in higher-yield assets such as government bonds.

There is a strange symbiosis between governments and banksThere is a strange symbiosis between governments and banks. It may have been governments that rescued banks in the autumn of 2008. But governments rely on banks to market and indeed to buy their debt. The one cannot survive without the other. A big reason why EU politicians raced to push through the €750 billion bail-out package was that a default by a southern European government would create a severe funding crisis for banks. Royal Bank of Scotland reckons that foreign banks own about €1 trillion of the sovereign debt of Greece, Portugal and Spain. There would be a risk of another crisis in the style of 2008, in which the markets would be uncertain which banks were most exposed to the defaulting assets, and would therefore apply a general boycott.

Spain has been in the spotlight in recent days. The government has had to rescue CajaSur, a small savings bank, and four other savings banks have chosen to join forces. An IMF report on Spain, published on May 24th, gave warning that the risks for banks “remain elevated and unevenly distributed across institutions” and recommended consolidation “to reduce overcapacity and produce more robust institutions.” The Spanish stockmarket is one of Europe’s worst performers, having fallen by around a third, in dollar terms, since the start of 2010.

Andrew Smithers of Smithers & Co, a firm of consultants, points out another problem. If governments now strive to reduce their fiscal deficits (and contingent liabilities), this limits their ability to bail out the private sector, including banks. In addition, recent political discussions about financial reform have centred on the desire to avoid future bank bail-outs; Barack Obama has said as much. Markets may be taking politicians at their word.

There was a contradiction at the heart of the market's rally from March 2009's lowsThese tensions illustrate a contradiction at the heart of the market’s rally from the lows of March 2009. Governments and central banks have supported the recovery with huge fiscal deficits and near-zero interest rates. Yet the sheer scale of these measures should have given investors cause for concern, as they indicate how fearful the authorities had become.

At some point, if the economy recovers, the stimulus will have to be withdrawn, leaving the markets facing higher interest rates and tighter fiscal policy. And if the stimulus fails to work, market hopes of future profits growth (double-digit gains are expected in 2011 and 2012) would clearly be disappointed. Governments have shown they can support consumption in specific areas, such as the cash-for-clunkers subsidy in cars or the homebuyers’ tax credit. But sales have fallen back quickly once the subsidies end.

Lacking strong demand at home, governments are tempted to let their currencies depreciate so that their exporters can grab a bigger share of the global market. The problem is that not all currencies can fall at once. Britain stole a march when the pound fell sharply in 2008. Now the euro is taking a battering, hitting a four-year low against the dollar. With China seemingly unwilling to let the yuan appreciate, the danger is that a series of beggar-thy-neighbour competitive depreciations create protectionist pressures. This is a particular danger in America, where congressional elections take place in November.

Governments ought also to consider the creditors’ point of viewGovernments ought also to consider the creditors’ point of view. Deficit countries are all competing for the good opinion of global savers. Depreciation may help the domestic economy, but it inflicts a loss on foreign holders of local-currency government bonds. Rationally, investors should eventually respond by demanding higher yields to compensate for the currency risk. It seems rather surprising, for example, that Britain can still borrow for ten years at 3.5% when its central bank has been so relaxed about letting its currency depreciate and its budget deficit is among the highest in Europe.

In addition, government borrowing could crowd out the private sector. That may not be a problem at the moment, when companies and consumers are so reluctant to borrow. But it could become one if deficits do not fall substantially in the medium term, beyond a mere reflection of a cyclical improvement in the economy. “We’ve long held the view that risk assets could see crowding-out over the next few years as there is more and more Western government debt to finance,” says Jim Reid, a strategist at Deutsche Bank. “It makes perfect sense that risk assets would trade at lower levels than they would do if governments had less [debt] to issue.”

But the absence of crowding-out at the moment is hardly a matter for rejoicing. It simply indicates that the private sector is not yet ready to shoulder the burden of recovery from the public sector. Demand for credit remains low. Companies have issued just $47 billion of bonds so far in May. They are on course for the lowest monthly total since December 1999, according to Bloomberg. And earlier this month Volkswagen was forced to postpone a bond issue of nearly €700m, backed by Spanish car loans. Yields on corporate bonds have been rising again, discouraging companies from raising money. Broad-money supply was flat in the euro zone in the 12 months to the end of March. America’s measure of broad money rose by only 1.6% in the year to April, and fell slightly in the second half of that period.

The bears come out of the woods
The latest market setback has given heart to those bearish commentators who were looking out of touch towards the end of last year. Albert Edwards of Société Générale has long believed in an “ice age” in which deflationary pressures drag down equity valuations, as they have in Japan over the past 20 years. He believes the recovery will be short-lived. “Renewed recession awaits,” he says. With core measures of consumer-price inflation in both America and the euro area below 1%, “the icy tentacles of outright deflation are now just within reach.”

Bears would also argue that shares do not look cheap. This may seem remarkable, given that profits are close to a 50-year high as a proportion of American GDP and the S&P 500 index is back at levels it first reached in March 1998. But chart 3, from a website updating “Irrational Exuberance”, a book by Robert Shiller of Yale University, shows the best long-term valuation measure, the cyclically adjusted price-earnings ratio. On this indicator, which smooths profits over a ten-year period, shares are still trading at 20 times earnings, more than double the ratio of the 1930s or early 1980s. “These types of brutal downdraughts coupled with intense volatility are generally the hallmark of overvalued markets as we saw in 1990, 1998, 2000 and again in 2007,” says David Rosenberg of Gluskin Sheff, a Canadian asset-management firm.

But the bulls will continue to take comfort from those low rates and booming profits. Company finances are improving. The default rate on speculative corporate bonds has been steadily declining; according to Standard & Poor’s, only 7% of issuers defaulted in the past 12 months, down from almost 10% in the year to November. With companies still churning out cash and paying dividends, bulls say investors will eventually be tempted to put their money back into the stockmarket, especially given the tiny yields on cash. Some see good signs in the mad dash into Treasuries: American mortgage rates will drift lower, supporting the housing market.

When investors get a few days without bad political news, bulls argue, the markets will rebound. Ian Harnett of Absolute Strategy Research spies a buying opportunity in the turmoil, because the underlying economic situation is improving and the monetary authorities may provide further support, such as asset purchases by the ECB. A slowdown in Europe is not as important as it used to be, given Asia’s strength. On May 26th the OECD raised its forecasts for global GDP growth to 4.6% for this year and 4.5% for 2011. That is largely because of optimism about China, India, Brazil and, to some extent, America; its predictions for euro-area growth rose only from 0.9% to 1.2% this year and from 1.7% to 1.8% next.

Markets are thus trying to make sense of a world in which political and regulatory risks are balanced by strong profits growth and low interest rates. No wonder they have been volatile. That is also the picture that emerges from the VIX, a measure of volatility that shows how much investors are prepared to pay to insure themselves against extreme market outcomes. After a long period of calm, the VIX has soared again (see chart 4 above). Investors are clearly expecting a bumpy ride.

Obama abandona la "guerra contra el terrorismo"

El País

La Administración de Obama tiene previsto presentar hoy su nueva doctrina de seguridad que se centrará en dejar atrás la política antiterrorista de su antecesor, George W. Bush, y buscar alianzas globales con potencias emergentes como China e India.

Según el documento obtenido por la agencia Reuters, Obama abandona la terminología de "guerra contra el terrorismo", utilizada por el anterior Gobierno, dentro de una la nueva estrategia estadounidense que abarcará la necesidad de aunar el compromiso diplomático y la disciplina económica con el fin de mejorar y reforzar la reputación de Estados Unidos en el mundo. De esta forma, Obama quiere romper con el reciente pasado estadounidense, marcado por la doctrina de Bush. En su estrategia de 2002, el entonces presidente, George W. Bush (2001-009), incluyó una doctrina en la que sostenía que EE UU. tenía la potestad de lanzar guerras preventivas.

Al poco de llegar a la Casa Blanca, Obama ya revisó los abusos cometidos en la era Bush en su lucha contra el terrorismo. Muchos fueron los excesos que se cometieron en nombre de la seguridad nacional tras los atentados terroristas de Washington y Nueva York de 2001, como las cárceles secretas, los interrogatorios bajo tortura, Guantánamo o derechos suspendidos.

Frente a una economía en graves dificultades y una situación de déficits récords, la Administración de Obama también reconoce que EE UU debe hacer frente como una prioridad nacional de seguridad las tareas de impulsar el crecimiento y conseguir poner en orden su situación fiscal. "En el centro de nuestros esfuerzos es el compromiso de renovar nuestra economía, que es la fuente de poder de Estados Unidos", recoge el texto.

El documento, de 52 páginas y requerido por ley a todos los presidentes, suele ser una reafirmación de las posiciones de EE UU, pero es importante porque puede influir en los presupuestos y la legislación y es seguido de cerca a nivel internacional.

Por su parte, su principal asesor en la lucha contra el terrorismo, John Brennan, indicó que el documento pondrá el énfasis, entre otras cosas, en la lucha contra los extremistas locales. "Hemos visto un número cada vez mayor de individuos aquí en EE UU que se ven cautivados por las causas o las actividades extremistas", señaló Brennan en una conferencia. Brennan aludía así a incidentes como el intento de hacer estallar un coche bomba en pleno centro de Nueva York a principios de este mes, en un atentado del que se responsabiliza al paquistaní nacionalizado estadounidense Faisal Shahzad.

"Esta es la primera estrategia de seguridad nacional de cualquier presidente que integra la seguridad interna como parte de la estrategia de seguridad global", agregó el alto funcionario.