"Accident at Michigan Central R.R. depot, Detroit"
Ilargi: This will have to be short, since I’m about to board another train for a day-long (12-hour) journey. It promises to be an uneventful day, anyway, if you ask me, in the financial world, so taking a breather may not be the worst recipe. Enjoy spring, that kind of thought. Then again, major events more often than not happen out of the blue. If there's such an event today, I’ll have to read about it late tonight.
Have a good day.
Way Too Big to Save
by Simon Johnson
Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that "too big to fail" adequately describes our most serious future systemic banking problems. It does not.
In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure -- and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role.
The Bush administration threw a small fiscal stimulus into the mix in early 2008, hoping to stave off recession; the Obama administration committed a much larger package at the start of 2009, aiming to prevent anything like a Second Great Depression. This fiscal policy response was in direct reaction to problems caused by the overextension and near failure of the financial system
Do not make the mistake -- for example of Secretary Geithner, talking to the New Yorker -- of thinking (or implying) that "saving the financial system" did not involve spending a lot of taxpayer money to support the real economy. Remember that if the economy crashes, asset prices fall, and banks' problems become even more severe.
And try to avoid three further mistakes that are currently common.
1. "Because the government will lose little on its TARP capital injections into banks, the financial rescue ends up not being costly." The true fiscal cost arising from our recent financial excesses is the increase in net government debt held by the private sector. This will likely amount to around 40 percentage points of GDP (i.e., relative to what the Congressional Budget Office's baseline would have been otherwise). That's a huge fiscal cost.
2. "Deficits don't matter." Eventually deficits matter -- the fiscal costs incurred in saving our financial system mean higher taxes, relative to what would otherwise have been the case, for you and your children. This is not a call for precipitate fiscal austerity; that would be a disaster. But eventually we will get our fiscal house in order - and then don't send to know for whom the tax bell tolls; it doesn't doesn't tinkle for Hank Paulson.
3. "We can save our financial system in the future, if we have the right tools - in the form of an appropriately designed resolution authority."
- Such an authority is impossible to achieve, because it would require cooperation between governments (known as a cross-border resolution authority) and that is impossible. (If you don't know why, here's the explanation.)
- Even if you had an authority that worked, e.g., for purely domestic financial entities, it is a leap of faith to assume it would not be compromised by our political process (again, more background explanation here.)
Let's take that leap of faith and say we use the favorite scheme of Gerald Corrigan from Goldman Sachs -- he is widely promoting conservatorship as a transition to wind-down for large complex financial institutions -- and let's say that it "works". Presumably this would mean something like the situation with AIG since September 2008, run somewhat more effectively -perhaps without the obnoxious bonuses. But would that really lower the fiscal costs of stabilizing the economy in the face of a major financial shock? And could we afford those fiscal costs?
Maybe. But the experience in Europe is definitely not encouraging. The Irish state is in serious trouble because major banks failed and were "saved"; let's not even talk about Iceland (where banks assets peaked around 11-13 bigger than GDP, i.e., the size of the entire economy). And Switzerland faces serious risks -- with banks that had peak assets over 8 times GDP -- that the international community apparently just wants to ignore (perhaps because Switzerland is not in the G20 or the even the European Union).
In the UK, one bank (RBS) had assets that were more than GDP (1.25 times, by some estimates). Ask yourself this: if Citigroup, which was around $2.5 trillion before the crisis (including the off-balance sheet commitments, let's call that just under 20 percent of GDP) had actually been $5 trillion, would our problems now be larger or smaller? What if Citigroup -- or whoever becomes our biggest bank -- reaches $10 trillion or $15 trillion in today's dollars and then fails, how would you feel about that?
The administration proposes -- in one part of the Volcker Rules -- to cap the size of individual banks relative to total nominal liabilities of the financial system. That makes no sense at all -- go talk to the Irish, the British, the Swiss, or the Icelanders (when they become less furious and are willing to talk).
Big banks have a funding advantage -- the implicit government guarantee makes it easier for them to raise capital and cheaper for them to borrow money. They will become larger. There are no economies of scale in banking above $100 billion in total assets, but this is not about economics. It's the politics of becoming large in order to become even bigger -- building your empire, and paying yourself and your people a lot more money (in the good times) and making it more likely your fiefdom survives (in bad times).
The biggest banks in some European countries today are already too big to save. Unless we take immediate and real action to reduce the power -- and size -- of our largest banks, we are heading in exactly the same direction.
Is the Senate finally ready to address this issue?
The rise and certain fall of the American Empire
"One of the disturbing facts of history is that so many civilizations collapse," warns anthropologist Jared Diamond in "Collapse: How Societies Choose to Fail or Succeed." Many "civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power." Now, Harvard's Niall Ferguson, one of the world's leading financial historians, echoes Diamond's warning: "Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice." Yes, America is on the edge.
Dismiss his warning at your peril. Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history. The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse. Ferguson is brilliant, prolific and contrarian. His works include the recent "Ascent of Money: A Financial History of the World;" "The Cash Nexus: Money and Power in the Modern World;" "Colossus: The Rise and Fall of The American Empire;" and "The War of the World," a survey of the "savagery of the 20th century" where he highlights a profound "paradox that, though the 20th century was 'so bloody,' it was also 'a time of unparalleled progress.'"
Why? Throughout history imperial leaders inevitably emerge and drive their nations into wars for greater glory and "economic progress," while inevitably leading their nation into collapse. And that happens suddenly and swiftly, within "a decade or two." You'll find Ferguson's latest work, "Collapse and Complexity: Empires on the Edge of Chaos," in Foreign Affairs, the journal of the Council of Foreign Relations, a nonpartisan think tank. His message negates all the happy talk you're hearing in today's news -- about economic recovery and new bull markets, about "hope," about a return to "American greatness" -- from Washington politicians and Wall Street bankers.
'Collapse of All Empires:' 5 stages repeating through the ages
Ferguson opens with a fascinating metaphor: "There is no better illustration of the life cycle of a great power than 'The Course of Empire,' a series of five paintings by Thomas Cole that hangs in the New York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in 'The Course of Empire,' he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day. Each of the five imagined scenes depicts the mouth of a great river beneath a rocky outcrop." If you're unable to see them at the historical society, they're all reproduced in Foreign Affairs, underscoring Ferguson's warnings that the "American Empire on the precipice," near collapse.
First. 'The Savage State,' before the Empire rises
"In the first, 'The Savage State,' a lush wilderness is populated by a handful of hunter-gatherers eking out a primitive existence at the break of a stormy dawn." Imagine our history from Columbus' discovery of America in 1492 on through four more centuries as we savagely expanded across the continent.
Second. 'The Arcadian or Pastoral State,' as the American Empire flourishes
"The second picture, 'The Arcadian or Pastoral State,' is of an agrarian idyll: the inhabitants have cleared the trees, planted fields, and built an elegant Greek temple." The temple may seem out of place. However, Cole's paintings were done in 1833-1836, not long after Thomas Jefferson built the University of Virginia using classical Greek and Roman revival architecture. As Ferguson continues the tour you sense you're actually inside the New York Historical Society, visually reminded of how history's great cycles do indeed repeat over and over. You are also reminded of one of history's great tragic ironies -- that all nations fail to learn the lessons of history, that all nations and their leaders fall prey to their own narcissistic hubris and that all eventually collapse from within.
Third. Consummation of the American Empire
"The third and largest of the paintings is 'The Consummation of Empire.' Now, the landscape is covered by a magnificent marble entrepôt, and the contented farmer-philosophers of the previous tableau have been replaced by a throng of opulently clad merchants, proconsuls and citizen-consumers. It is midday in the life cycle." 'The Consummation of Empire' focuses us on Ferguson's core message: At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation. They have it all.
But more-is-not enough as greed, arrogance and a thirst for power consume them. Back in the early days of the Iraq war, Kevin Phillips, political historian and former Nixon strategist, also captured this inevitable tendency in Wealth and Democracy: "Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out." We sense the "consummation" of the American Empire occurred with the leadership handoff from Bill Clinton to George W. Bush.
Unfortunately that peak is behind us: Clinton, Bush, Henry Paulson, Ben Bernanke, Sarah Palin, Barack Obama, Mitt Romney and all future American leaders are merely playing their parts in the greatest of all historical dramas, repeating but never fully grasping the lessons of history in their insatiable drive for "economic progress," to recapture former glory ... while unwittingly pushing our empire to the edge, into collapse.
Four. Destruction of the Empire
Then comes 'The Destruction of Empire,' the fourth stage in Ferguson's grand drama about the life-cycle of all empires. In "Destruction" "the city is ablaze, its citizens fleeing an invading horde that rapes and pillages beneath a brooding evening sky." Elsewhere in "The War of the World," Ferguson described the 20th century as "the bloodiest in history, one hundred years of butchery." Today's high-tech relentless news cycle, suggests that our 21st century world is a far bloodier return to savagery.
At this point, investors are asking themselves: How can I prepare for the destruction and collapse of the American Empire? There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history's inevitable cycles. But there is one in "Wealth, War and Wisdom" by hedge fund manager Barton Biggs, Morgan Stanley's former chief global strategist who warns us of the "possibility of a breakdown of the civilized infrastructure," advising us to buy a farm in the mountains. "Your safe haven must be self-sufficient and capable of growing some kind of food ... well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson." And when they come looting, fire "a few rounds over the approaching brigands' heads."
Five. Desolation ... after the Empire disappears
"Finally, the moon rises over the fifth painting, 'Desolation,'" says Ferguson. There is not a living soul to be seen, only a few decaying columns and colonnades overgrown by briars and ivy." No attacking "brigands?" No loveable waste-collecting robots from Wall-E? The good news is the Earth will naturally regenerate itself without savage humans, as we saw in Alan Weisman's brilliant "The World Without Us:" Steel buildings decay. Microbes eat indestructible plastics. Eons pass. And Earth reemerges in all its glory, a Garden of Eden.
Epilogue: 'All Empires ... are condemned to decline and fall'
In a Los Angeles Times column, Ferguson asks: "America, a Fragile Empire: Here today, gone tomorrow, could the United States fall that fast?" And his answer is clear and emphatic: "For centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms ... we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted."
We are deceiving ourselves, convinced "the challenges that face the United States are often represented as slow-burning ... threats seem very remote." "But what if history is not cyclical and slow-moving but arrhythmic?" asks Ferguson. What if history is "at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?" What if the collapse of the American Empire is dead ahead, in the next decade? What if, as with the 2000 dot-com crash, we're in denial, refusing to prepare?
Ferguson's final message about America's destiny comes from Foreign Affairs: "Conceived in the mid-1830s, Cole's great five-part painting has a clear message: all empires, no matter how magnificent, are condemned to decline and fall." Throughout history, empires function "in apparent equilibrium for some unknowable period. And then, quite abruptly ... collapse," a blunt reminder of the sudden, swift, silent, certain timetable in Diamond's "Collapse" where a "society's demise may begin only a decade or two after it reaches its peak population, wealth and power."
You are forewarned: If the peak of America's glory was the leadership handoff from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 ... tick ... tick ... tick ...
Public Pensions Are Adding Risk to Raise Returns
States and companies have started investing very differently when it comes to the billions of dollars they are safeguarding for workers’ retirement. Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds. But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.
“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.” Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.
The Texas teachers’ pension fund recently paid Chicago to receive a stream of payments from the money going into the city’s parking meters in the coming years. The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the bidding for the 2016 Olympics. A spokeswoman for the Texas teachers’ fund said plan administrators believed that such alternative investments were the likeliest way to earn 8 percent average annual returns over time.
Pension funds rarely trumpet their intentions, partly to keep other big investors from trading against them. But some big corporations are unloading the stocks that have dominated pension portfolios for decades. General Motors, Hewlett-Packard, J. C. Penney, Boeing, Federal Express and Ashland are among those that have been shifting significant amounts of pension money out of stocks. Other companies say they plan to follow suit, though more slowly. A poll of pension funds conducted by Pyramis Global Advisors last November found that more than half of corporate funds were reducing the portion they invested in United States equities.
Laggards tend to be companies with big shortfalls in their pension funds. Those moving the fastest are often mature companies with large pension funds, and who fear a big bear market could decimate the funds and the companies’ own finances. “The larger the pension plan, the lower-risk strategy you would like to employ,” said Andrew T. Ward, the chief investment officer of Boeing, which shifted a big block of pension money out of stocks in 2007. That helped cushion Boeing’s pension fund against the big losses of 2008.
Shedding stocks gave Boeing “material protection right when we needed it most,” Mr. Ward said. By the time the markets had bottomed out last March, Boeing’s pension fund had lost 14 percent of its value, while those of its equity-laden peers had lost 25 to 30 percent, he said. “We estimated that the strategy saved our company in the short term right around $4 or $5 billion of funded status,” he said. Boeing and other companies seeking to reduce their investment risk are moving into fixed-income instruments, like bonds — but not just any bonds. They are buying and holding bonds scheduled to pay many years in the future, when their retirees expect their money.
The value of the bonds may fall in the meantime, just like the value of stocks. But declining bond prices are not such a worry, because the companies plan to hold the bonds for the accompanying interest payments that will in turn go to retirees, not sell them in the interim. Towers Watson, a big benefits consulting firm, surveyed senior financial executives last year and found that two-thirds planned to decrease the stock portion of their companies’ pension funds by the end of 2010. They typically said their stock allocations would shrink by 10 percentage points.
“That’s 10 times the shift we might see in any given year,” said Carl Hess, head of Towers Watson’s investment consulting business. Economists have speculated that a truly seismic shift in pension investing away from stocks could be a drag on the market, but they say it would not be long-lasting. Corporate America’s change of heart is notable all on its own, after decades of resistance to anything other than returns like those of the stock markets. But it’s even more startling when compared with governments’ continued loyalty to stocks. When governments scale back on the domestic stocks in their pension portfolios these days, it is often just to make way for more foreign stocks or private equities, which are not publicly traded.
Government pension plans cannot beef up their bonds that mature many, many years from now without dashing their business models. They use long-range estimates that presume high investment returns will cover most of the cost of the benefits they must pay. And that, they say, allows them to make smaller contributions along the way. Most have been assuming their investments will pay 8 percent a year on average, over the long term. This is based on an assumption that stocks will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix. (Corporate plans do their calculations differently, and for them, investment returns are a less important factor.)
The problem now is that bond rates have been low for years, and stocks have been prone to such wild swings that a 60-40 mixture of stocks and bonds is not paying 8 percent. Many public pension funds have been averaging a little more than 3 percent a year for the last decade, so they have fallen behind where their planning models say they should be. A growing number of experts say that governments need to lower the assumptions they make about rates of return, to reflect today’s market conditions. But plan officials say they cannot. “Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.
The $30 billion Colorado state pension fund is one of a tiny number of government plans to disclose how much difference even a slight change in its projected rate of return could make. Colorado has been assuming its investments will earn 8.5 percent annually, on average, and on that basis it reported a $17.9 billion shortfall in its most recent annual report. But the state also disclosed what would happen if it lowered its investment assumption just half a percentage point, to 8 percent. Though it might be more likely to achieve that return, Colorado would earn less over time on its investments. So at 8 percent, the plan’s shortfall would actually jump to $21.4 billion. Contributions would need to increase to keep pace.
Colorado cannot afford the contributions it owes, even at the current estimated rate of return. It has fallen behind by several billion dollars on its yearly contributions, and after a bruising battle the legislature recently passed a bill reducing retirees’ cost-of-living adjustment, to 2 percent, from 3.5 percent. Public employees’ unions are threatening to sue to have the law repealed. If Colorado could somehow get 9 percent annual returns from its investments, though, its pension shortfall would shrink to a less daunting $15 billion, according to its annual report. That explains why plan officials are looking everywhere for high-yielding investments.
Mr. May, in Wyoming, said many governments were “moving away from the perceived safety and liquidity of the investment-grade market” and investing money offshore, but he said he was aware of the risks. “There’s a history of emerging markets kind of hitting the wall,” he said. Last year, the North Carolina Legislature enacted a measure to let the state pension fund invest 5 percent of its assets in “credit opportunities,” like junk bonds and asset-backed securities from the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an emergency program created to thaw the frozen markets for such securities.
The law also lets North Carolina put 5 percent of its pension portfolio into commodities, real estate and other assets that the state sees as hedges against inflation. A summary of the bill issued by the state’s treasurer and sole pension trustee, Janet Cowell, said it would provide “flexibility and the tools to increase portfolio return and better manage risk.”
But some think they see new risks. “It doesn’t pass the smell test,” said Edward Macheski, a retired money manager living in North Carolina. “North Carolina’s assumption is 7.25 percent, and they haven’t matched it in 10 years.” He went to a recent meeting of the state treasurer’s advisory board, armed with a list of questions about the investment policy. But the board voted not to permit any public discussion.
Wisconsin, meanwhile, has become one of the first states to adopt an investment strategy called “risk parity,” which involves borrowing extra money for the pension portfolio and investing it in a type of Treasury bond that will pay higher interest if inflation rises. Officials of the State of Wisconsin Investment Board declined to be interviewed but provided written descriptions of risk parity. The records show that Wisconsin wanted to reduce its exposure to the stock market, and shifting money into the inflation-proof Treasury bonds would do that. But Wisconsin also wanted to keep its assumed rate of return at 7.8 percent, and the Treasury bonds would not pay that much.
Wisconsin decided it could lower its equities but preserve its assumption if it also added a significant amount of leverage to its pension fund, by using a variety of derivative instruments, like swaps, futures or repurchase agreements. It decided to start with a small amount of leverage and gradually increase it over time, but word of even a baby step into derivatives elicited howls of protest from around the state.
The big California pension fund, known as Calpers, was already under fire for losing billions of dollars on private equities and real estate in the last few years. So far it has stayed with those asset classes, while negotiating lower fees and writing off some of the most troubled real estate investments. It announced in February that it had started looking into whether it should lower its expected rate of investment return, now 7.75 percent a year. It has embarked on a study, but a spokesman said that process would not be done until December, safely after the coming election.
Most Americans still unprepared for retirement
The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday. The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans. Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009. Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.
"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI's research director and co-author of the survey, in a statement. The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009. While VanDerhei attributed the decline in current savings rates to job losses, mortgage problems and the suspension of corporate 401(k) matches in 2009, he said the economy isn't entirely to blame. "In previous years, there were a whole lot of people who had nothing to begin with," said VanDerhei.
The gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years. According to the survey, 24% of workers said they have postponed their planned retirement age in the past year, up from 14% in 2008. But even as fears over health care costs and job prospects mount, the survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years. "People just don't want to think about this," said VanDerhei. "Everybody thinks they're too young to think about it, until suddenly they're too old to do anything about it."
In general, financial planners say that retirement savings, including Social Security benefits and pension, should be large enough to provide about 80% of pre-retirement income. To reach that target, "most Americans need to be saving within the healthy range of 6% - 10% (of their salary)," said Beth McHugh, vice president of workplace investing for Fidelity Investments. But the survey found that 54% of the workers with some form of savings said that they have less than $25,000 stowed away.
Delaying retirement, though not ideal, is a good sign that people are finally facing reality. "People have figured out that they don't have enough money," VanDerhei said. "Still, I'd rather they bite the bullet today, rather than take the chance that they'd have a job when they are 65." The EBRI surveyed 1,153 U.S. workers and retirees, age 25 and older, in January.
U.K. Banks May Need to Cut Assets by $792 Billion
U.K. banks including Barclays Plc may need to shrink their balance sheets by as much as 530 billion pounds ($792 billion) to meet new liquidity and capital requirements, according to Credit Suisse Group AG analyst Jonathan Pierce. Banks may have to reduce their existing balance-sheet assets by 6 percent to 18 percent because they will be unable to raise the 420 billion pounds to 750 billion pounds of extra long-term capital likely to be required by regulators, Pierce wrote in a note entitled “Elephants in the Room” sent to clients today. The contraction in assets could mean a 10 percent to 25 percent drop in net interest income, the note said.
“We believe banks must improve balance sheet structures over the next three to four years,” Pierce said. “This will be difficult through term issuance alone, and we believe that balance sheet footings will have to shrink markedly to compensate.” Governments are stepping up regulation of banks, forcing them to curb riskier activities such as proprietary trading and to hold more capital to avoid a repeat of the credit crisis. The Basel Committee on Banking Supervision, which sets minimum standards for banks in 27 countries and territories, in December proposed changes requiring lenders to hold more and better- quality assets as a cushion against short-term liquidity needs.
The U.K.’s three “domestic banks,” also including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, may struggle to shrink their balance sheets so aggressively and so could be forced to raise expensive longer-dated capital to meet the regulatory requirements, according to Credit Suisse. “Regardless of the transmission mechanism, our point is the same,” Pierce said. “Balance sheet issues continue to post considerable risk to the revenue potential of the sector.”
The implementation of rule changes should take two years, or longer if the economic recovery is slower, the Basel Committee said last year. The organization’s working group will consider the broader effect of rules to ensure the accumulation of regulations doesn’t hobble lenders. British banks and lenders that haven’t improved their funding position may have their financial-strength ratings cut as government support for the industry is withdrawn, according to a report by Moody’s Investors Service today.
Europe bars Wall Street banks from government bond sales
European countries are blocking Wall Street banks from lucrative deals to sell government debt worth hundreds of billions of euros in retaliation for their role in the credit crunch. For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10. Goldman Sachs doesn't make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn't appear this year.
"Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit," said Arlene McCarthy, vice chair of the European parliament's economic and monetary affairs committee. "It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments."
European sovereign bond league tables are now dominated by European banks such as Barclays Capital, Deutsche Bank, and Société Générale, the Dealogic table shows. Their business model is usually seen as more relationship-based, while US investment banks have traditionally been focused on immediate deal-making. Being left out of government bond sales means missing out on one of the top fee-earning opportunities this year, given the relative drought in mergers and acquisitions and stock market flotations. Western European governments need to raise an estimated half a trillion dollars this year to refinance debts and pay for bank bailouts and rising unemployment.
Banks typically take a percentage of the total deal value for underwriting a bond issue, which could run into tens of millions given the ballooning sovereign debt sales this year. On a 1% fee, Barclays Capital would have pocketed $92m (£61m) from the $9.2bn European bonds it helped sell this year. Barclays may have profited as a domestic anchor of UK debt sales, as a certain level of "nationalism" has surfaced according to Philip Augar, author of Chasing Alpha and other books about investment banking. "People have done as much as possible to take care of their own financial institutions," Augar said.
The National Bank of Greece featured in the top 10 for the first time in at least five years, according to Dealogic. Greece left Goldman and Morgan Stanley out of its most recent bond sale, and also dropped hedge funds from its list. Petros Christodoulou, the head of Greece's debt management office, told the Guardian the bond issue had been directed to more "long-term" investors as they were seeking market stability. Greece has had tense relationships with Goldman recently after it emerged that the US bank had helped hide the real level of the country's public debt with derivatives contracts. The country also denied reports about the bank selling a stake of its debt to the Chinese government fund.
Investment banks insist their business areas are separated by confidentiality walls, but countries have been furious about some of their trades appearing to conflict – either on their own books, or on behalf of clients. Goldman Sachs said its overall position in the European sovereign bond market had improved this quarter once US dollar denominated deals were included. It said its own data showed it ranked fourth in European sovereign bond sales this year. Greece, Spain, Germany and France are also pushing for changes in the credit default swap market, where investors can bet against the possible default of a country, ultimately bringing more instability.
Britain, Spain, Ireland and Belgium have not used Wall Street firms in the largest 10 deals of the year, according to Dealogic. Britain used Barclays, Deutsche, RBS and Royal Bank of Canada in its $7bn issue last month, the data shows. Spain has also used Santander, as well as Barclays, Citi and SocGen in recent issues. Goldman Sachs, JP Morgan and Morgan Stanley have exploded in wealth and power over the past decade. In their glass towers in Canary Wharf, or in Goldman Sachs' European headquarters on Fleet Street, reception rooms regularly welcome prime ministers, world business leaders and multibillion-pound investors.
"The power of big investment banks was a factor in the banking crisis, and it's up to regulators and customers to stand up to them, and not picking them is one of the ways," Augar said. But the power accumulated is too large to wane, the author said. "I doubt this will last," he said. "The US investment banks will be back in Europe before too long because they are very powerful and they have a very big footprint in Europe." The EU is also trying to curb US financial power by creating its own monetary fund – a replica of the Washington-based IMF.The need of a European fund has emerged during the Greek crisis, as European politicians have insisted financial troubles should be resolved at home.
EU executive mulls ban on naked CDS selling
The European Commission said on Tuesday it will consider banning the naked selling of derivatives contracts some EU politicians say were used by speculators to bet on a Greek bond default. Commission President Jose Manuel Barroso also said the European Union's executive would like the G20 group of developed and developing nations to discuss speculation in credit default swaps (CDS), a form of insurance against default. Naked selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond will end up on the rocks. "A new, ad hoc reflection is needed on credit default swaps regarding sovereign debt," Barroso said.
"In this context, the Commission will examine closely the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt," he said. EU finance ministers and the Commission are expected to discuss ways to dampen speculation on sovereign credit default swap markets at a meeting on March 16. Barroso said the 27-nation bloc should tackle naked CDS selling in a coordinated way -- a sign the executive does not want a repeat of unilateral moves by member states to ban shortselling in bank shares in 2008 which confused markets.
Analysts say the CDS market is too small to drive down underlying bonds or the euro and warn that a ban could backfire by sparking sales in government debt. The noose is tightening around the sector, however, as French Economy Minister Christine Lagarde said proposals on CDS selling would be unveiled in coming days. Germany and Eurogroup President, Jean-Claude Juncker, have said they back such plans but so far Britain, the EU's main derivatives center, has not signaled any public support.
The G20 agreed last September that derivatives like CDS should be traded on an exchange and centrally cleared, where appropriate, in order to cut risk and improve transparency. The Commission has already said it will propose a draft law this summer to turn those pledges into EU law but Greece, France and Germany want the bloc to go a step further and crack down on naked CDS selling. A Commission proposal would have to be approved by a majority of EU finance ministers and the European parliament.
Barroso said transatlantic cooperation among CDS regulators also needed raising and that a study of the CDS market should look for any "questionable practices" which could be dealt with under the bloc's competition rules. In Washington, Greek Finance Minister George Papaconstantinou piled the pressure on its EU partners by calling for an outright ban on naked selling of CDS. "What has become very clear in this affair is that over and above the fiscal problems that any particular country...there are kinds of questions about what kinds of use people make of things like credit derivative swaps, how opaque these markets are, how it's not clear who's trading what and how these can push countries...to the brink," Papaconstantinou said in an interview on CNBC television.
"(There should be) more transparency, a ban on naked selling, for example," Papaconstantinou said. Britain is the EU's biggest CDS center and a bloc-wide initiative from the Commission -- as opposed to one from euro zone countries like France -- would likely have a bigger impact. Barroso said that before the end of 2010, EU Internal Market Commissioner Michel Barnier will also propose beefing up the bloc's market abuse directive, which tries to prevent insider trading among other practices. Two central bankers also stressed on Tuesday the need for central clearing of derivatives as part of wider efforts to make markets safer and learn from the financial crisis.
Chicago Federal Reserve Bank President, Charles Evans, said there was a need to study the CDS market carefully and that such products can offer hedges that can be valuable to firms.
Proposals to net CDS positions in a clearing house would be useful, Evans told reporters in Arlington, Virginia. Bank of France Governor and European Central Bank Governing Council member, Christian Noyer, said clearing houses should be set up in each major currency area where CDS contracts are transacted and be locally supervised.
Can California Declare Bankruptcy? What about Greece?
by Christopher Beam
California passed a gas tax last week to help make up for its nearly $20 billion budget gap, the latest in a series of measures to right the state's teetering economy. The country of Greece is in even worse shape, with accumulated debt higher than 110 percent of GDP, set to reach 125 percent this year. Can a state declare bankruptcy? Can a country?
No and no. Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn't include states. (The statute defines "municipality" as a "political subdivision or public agency or instrumentality of a State"—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can't be sued. In other words, they don't need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.
Say the state can't make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state's debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors' committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state's budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)
Greece is in a slightly different situation. There's no international bankruptcy court for countries that can't pay their debts. Instead, other EU countries that depend on Greece's solvency, such as Germany or France, would have to agree to bail it out. (When the economy of one member of the Eurozone sinks, it drags the euro down across the continent.) In return for loans, Greece would agree to implement austerity measures, such as hiking the price of gas, freezing government salaries, and raising the retirement age, to steer the country toward solvency.
Whichever countries bail out Greece may not get their money back. But at the very least, Greece wouldn't pull the European economy down with it. Another option would be a bailout funded by the International Monetary Fund or the World Bank, which have stepped in when the economies of Ecuador, Russia, and numerous African countries have tanked. But their leaders seem reluctant. Worst-case scenario, the EU could expel Greece—Greece's deficit is already four times higher than what the EU allows. But that could hurt the euro as well by signaling to investors that the EU is unstable and thus a risky bet.
$11 billion budget shortfall projected for Texas
The Texas Legislature will face a budget shortfall of at least $11 billion when it meets to write the next state budget in 2011, a key state official said Monday. The shortfall is the projected difference between available revenue and the cost of maintaining services at their current levels in the next two-year budget. The shortfall is mainly a result of lower-than-expected sales tax receipts. John O'Brien, director of the Legislative Budget Board, told a committee of House budget writers that the estimate is conservative and could grow to as much as $15 billion.
The available revenue also will have to be used to cover any holes in the current budget, including a Health and Human Services Commission shortfall of more than $1.3 billion caused by a recession-induced surge in Medicare enrollment. State agencies have submitted proposals to cut their current-year budgets by 5 percent. But those savings will only amount to about $1.7 billion, O'Brien said. John Heleman, the state's chief revenue estimator, said sales tax returns are beginning to rebound after months of double-digit declines. February sales taxes declined 8.8 percent compared to February of 2009, he said.
"It's certainly still down from last year, however, it's down less than 10 percent," Heleman said. "One month certainly doesn't make a trend, but it's encouraging to see we've now begun to move in the right direction." The state's Rainy Day Fund is expected to have a balance of about $8.2 billion.
Just how low does sterling have to go to boost exports?
So much for hopes of an export led recovery. You might have thought that by now the 25 per cent devaluation in sterling seen since the beginning of the crisis would have shown up in a narrowing trade gap, but no, there is still no sign of it whatsoever. Even allowing for the icy weather, which may have disrupted exports, January’s trade figures make disappointing reading. Britain’s trade deficit, both with Europe and the rest of the world, widened considerably in January to its highest level since August 2008. Exports dropped sharply, and despite the supposed pricing disavantage of the exchange rate, imports were up too. The pound has duly taken another beating. Just how low does it have to go before there is any noticeable effect on trade?
There are a number of explanations for why the devaluation is having so little effect. The charitable one is that slow growth elsewhere makes it difficult for the UK to achieve any improvement in its external balance, however cheap, relative to others, its goods and services become. Yet this doesn’t provide a complete answer. Some emerging European markets are beginning to perform well on the back of strong exports to the eurozone. As Kate Barker, a member of the Bank of England’s Monetary Policy Committee, pointed out in a speech on Monday, the trouble is that “manufacturing output in the UK has not so far performed any better in the early stages of recovery than has the US, Germany and France”, even though it has the advantage of a devalued currency.
Recent surveys suggest exports should soon be on an improving trend. For example, the February 2010 CIPS/Markit survey of manufacturing suggested that last month export orders grew at their fasterst pace since the survey began in 1996. So there may be a lag effect. Rather more worrying, however, is the explanation recently ventured by Mervyn King, Governor of the Bank of England, that British companies are merely taking the extra margin in export markets afforded by the lower pound and banking the proceeds, rather than using the advantage to generate sales growth.
This is, unfortunately, what you would expect in the “deleveraging” environment we now find ourselves in. Both companies and individuals are happier to pay down debt and save than invest and spend. The effects of this phenomenon are not entirely negative. For instance, the City, which does most of its business in dollars and euros but whose costs are largely in sterling, has suddenly found itself fantastically more profitable, so much so that the benefits of devaluation counters the supposed tax disadvantages of being in London by a considerable margin. As long as the pound remains so weak, you’ll not see the mass exodus of top bankers that some have threatened.
Yet it also highlights part of the problem. Britain’s manufacturing base has been run down to such a degree that it struggles to capitalise on the pricing advantages of devaluation. We simply don’t produce enough manufactured goods any longer. And the sort of stuff we do produce, mainly services, is not particularly price sensitive. It becomes more profitable as a result of devaluation, but does not necessarily generate more volume.
The difficulty the UK economy faces is that it is not just the private sector which is seeking to restore balance sheet health. The public sector too is desperate to reduce its deficit. If there is to be no improvement in the UK’s external balance to compensate, then prospects for growth are not good. The only way growth could be achieved is by a further deterioration in household and corporate sector balance sheets, and we certainly don’t want to go back to that.
Fitch warns Britain and questions Greek rescue as sovereign risks grow
by Ambrose Evans-Pritchard
Fitch Ratings has delivered a serious blow to the credibility of the Government's budget plans, warning that Britain risks a loss of investor confidence and erosion of its AAA rating unless it maps out clear austerity measures. Brian Coulton, the agency's head of sovereign ratings, said the UK has seen "the most rapid rise in the ratio of public debt to GDP of any AAA-rated country" and is courting fate with its leisurely plan to halve the deficit by the middle of the decade. "It is frankly too slow, a pedestrian pace. Why the UK thinks it has more time than other countries , we're not sure. This needs to be reoriented," he told the Fitch forum on sovereign hotspots.
A string of European states are stepping up the pace of retrenchment, aiming to cut deficits to 3pc of GDP within three years. The risk is that Britain will soon stick out like a sore thumb, left behind with a shockingly large deficit long after such loose fiscal policy can be justified as a crisis measure. The UK deficit this year is 12.6pc of GDP, the highest among G10 states. The Government is clearly counting on a "Korean" recovery, modelled on Korea's fast return to trend growth following the Asian crisis in 1998. It relies on rising output and tax revenues to plug much of the deficit. "This is an optimistic assumption," said Fitch.
There is a "distinct possibility" that Britain will face something closer to Japan's 'Lost Decade' when a bursting debt bubble left the country on a permanently lower growth path. "The UK faces the same massive deleveraging by the private sector," said Mr Coulton. Separately, Fitch said it is too early to judge whether Greece can deliver on EU austerity demands once the social and political pain begins in earnest. "The first year is fiscally the easiest. Next year they have to cut another 3pc of GDP, and the following year a further 3pc," said Chris Pryce, the agency's Greece expert. "The great question mark is whether the Papandreou government is going to conform. There is already dissent in the cabinet," he said.
"Greece has an appalling record. Underneath this fiscal crisis is a failing political system. Politicians regard the public sector as a something to exploit for their own enrichment, but also for votes," he said. Fitch is not counting on an EU bail-out for Greece in assessing credit risk. While the EU game of 'constructive ambiguity' has succeeded in calming the markets, the agency noted that not a single "hard cent" has been put on the table so far. The outcome hangs on legal realities in Germany, not rhetoric from Brussels. "Even if German politicians wanted to bail out Greece, they know it would probably be overturned by Germany's constitutional court," said Mr Pryce.
Fitch said the risk of Greek contagion to Spain and Portugal has been exaggerated, but concerns about Italy may have been underplayed. While Italy avoided a financial and fiscal crisis, it started with high public debt and has seen the worst loss of export competitiveness of any EMU state. "The country that stands out is Italy. It has been losing world share for years but the market has not focused on it," said the agency. Few of the rich economies are in good fiscal shape. Their public debt is jumping from a two-decade average of 75pc of GDP to105pc by next year. Unlike the rising powers of Asia and Latin America, they have not built up a reserve buffer to absorb shocks.
"Advanced economies haven't self-insured, and that underscores the need for fiscal consolidation. Even a temporary loss of confidence can lead to financing problems," said Fitch. The paradox is that what may be good medicine for one fiscal sinner cannot be good for half the world economy simultaneously. If everybody tightens together, the global recovery may stall. The rating process itself risks becoming the enforcer of destructive debt deflation.
Freddie Mac Will Buy Out 120-Day Delinquent Mortgages
by Diana Golobay
Government-sponsored mortgage securitizer Freddie Mac (FRE: 1.18 -0.84%) said today it will buy “substantially all” mortgages delinquent by at least 120 days from the company’s related fixed-rate and adjustable-rate mortgage (FRM and ARM) Participation Certificate (PC) securities.
Freddie said the loan purchases will show up in the PC factor report published after March 4, 2010. The corresponding principal payments on affected PCs will pass through to FRM and ARM PC holders on March 15 and April 15, respectively.
“[T]he cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company’s mortgage-related investments portfolio as a result of the required adoption of new accounting standards and changing economics,” Freddie said in the announcement today.
New Financial Accounting Standards (FAS) 166 and 167 affected the transfer of financial assets and the consolidation of variable interest entities. Essentially, the standards require financial firms to bring securitized assets onto balance sheets.
Because of the standards, it would be more expensive to maintain guarantee payments to security holders than simply purchasing most delinquent loans out of PCs and holding them in portfolio, Freddie said.
The company said it expects to report the number of loans 90+ days delinquent in related 15- and 30-year FRM PCs and in ARM PCs in the monthly volume summary by April 2010.
According to data on delinquency rates in PC loan pools as of Dec. 31, 2009 (download here), 2.46% of Freddie’s FRM PC pool is 120+ days delinquent – or $49.8bn by unpaid principal balance. Another 12.54% of Freddie’s ARM PC pool is 120+ days delinquent – or $19.1bn of unpaid principal balance. The total dollar volume of loans applicable under Freddie’s announcement is nearly $69bn, although a Freddie spokesperson told HousingWire not all of the delinquent loans may necessarily be purchased.
The US Treasury Department on December 24th announced it was raising GSE portfolio caps. The potential for voluntary buyouts of delinquent loans by GSEs also rose since the Treasury’s announcement, according to global financial services firm Credit Suisse. The firm said in early January a swift buyout of the entire delinquent pipeline was possibly in the works. Since then, the industry has kept its eyes and ears open for a surge in delinquent buyouts.
The Federal Reserve is wrapping up $1.25trn of mortgage-backed securities (MBS) purchases from Freddie, Fannie Mae (FNM: 1.00 -0.99%) and Ginnie Mae. Analysts have suggested private capital will not fill in for the Fed’s demand soon.
The Fed has considered extending and expanding asset-purchase programs, including the MBS program, if its exit this quarter is not replaced with private investor demand, causing MBS spreads to treasuries to blow out again.
How food and water are driving a 21st-century African land grab
We turned off the main road to Awassa, talked our way past security guards and drove a mile across empty land before we found what will soon be Ethiopia's largest greenhouse. Nestling below an escarpment of the Rift Valley, the development is far from finished, but the plastic and steel structure already stretches over 20 hectares – the size of 20 football pitches. The farm manager shows us millions of tomatoes, peppers and other vegetables being grown in 500m rows in computer controlled conditions. Spanish engineers are building the steel structure, Dutch technology minimises water use from two bore-holes and 1,000 women pick and pack 50 tonnes of food a day. Within 24 hours, it has been driven 200 miles to Addis Ababa and flown 1,000 miles to the shops and restaurants of Dubai, Jeddah and elsewhere in the Middle East.
Ethiopia is one of the hungriest countries in the world with more than 13 million people needing food aid, but paradoxically the government is offering at least 3m hectares of its most fertile land to rich countries and some of the world's most wealthy individuals to export food for their own populations. The 1,000 hectares of land which contain the Awassa greenhouses are leased for 99 years to a Saudi billionaire businessman, Ethiopian-born Sheikh Mohammed al-Amoudi, one of the 50 richest men in the world. His Saudi Star company plans to spend up to $2bn acquiring and developing 500,000 hectares of land in Ethiopia in the next few years. So far, it has bought four farms and is already growing wheat, rice, vegetables and flowers for the Saudi market. It expects eventually to employ more than 10,000 people.
But Ethiopia is only one of 20 or more African countries where land is being bought or leased for intensive agriculture on an immense scale in what may be the greatest change of ownership since the colonial era. An Observer investigation estimates that up to 50m hectares of land – an area more than double the size of the UK – has been acquired in the last few years or is in the process of being negotiated by governments and wealthy investors working with state subsidies. The data used was collected by Grain, the International Institute for Environment and Development, the International Land Coalition, ActionAid and other non-governmental groups.
The land rush, which is still accelerating, has been triggered by the worldwide food shortages which followed the sharp oil price rises in 2008, growing water shortages and the European Union's insistence that 10% of all transport fuel must come from plant-based biofuels by 2015. In many areas the deals have led to evictions, civil unrest and complaints of "land grabbing".
The experience of Nyikaw Ochalla, an indigenous Anuak from the Gambella region of Ethiopia now living in Britain but who is in regular contact with farmers in his region, is typical. He said: "All of the land in the Gambella region is utilised. Each community has and looks after its own territory and the rivers and farmlands within it. It is a myth propagated by the government and investors to say that there is waste land or land that is not utilised in Gambella. "The foreign companies are arriving in large numbers, depriving people of land they have used for centuries. There is no consultation with the indigenous population. The deals are done secretly. The only thing the local people see is people coming with lots of tractors to invade their lands.
"All the land round my family village of Illia has been taken over and is being cleared. People now have to work for an Indian company. Their land has been compulsorily taken and they have been given no compensation. People cannot believe what is happening. Thousands of people will be affected and people will go hungry." It is not known if the acquisitions will improve or worsen food security in Africa, or if they will stimulate separatist conflicts, but a major World Bank report due to be published this month is expected to warn of both the potential benefits and the immense dangers they represent to people and nature. Leading the rush are international agribusinesses, investment banks, hedge funds, commodity traders, sovereign wealth funds as well as UK pension funds, foundations and individuals attracted by some of the world's cheapest land.
Together they are scouring Sudan, Kenya, Nigeria, Tanzania, Malawi, Ethiopia, Congo, Zambia, Uganda, Madagascar, Zimbabwe, Mali, Sierra Leone, Ghana and elsewhere. Ethiopia alone has approved 815 foreign-financed agricultural projects since 2007. Any land there, which investors have not been able to buy, is being leased for approximately $1 per year per hectare. Saudi Arabia, along with other Middle Eastern emirate states such as Qatar, Kuwait and Abu Dhabi, is thought to be the biggest buyer. In 2008 the Saudi government, which was one of the Middle East's largest wheat-growers, announced it was to reduce its domestic cereal production by 12% a year to conserve its water. It earmarked $5bn to provide loans at preferential rates to Saudi companies which wanted to invest in countries with strong agricultural potential .
Meanwhile, the Saudi investment company Foras, backed by the Islamic Development Bank and wealthy Saudi investors, plans to spend $1bn buying land and growing 7m tonnes of rice for the Saudi market within seven years. The company says it is investigating buying land in Mali, Senegal, Sudan and Uganda. By turning to Africa to grow its staple crops, Saudi Arabia is not just acquiring Africa's land but is securing itself the equivalent of hundreds of millions of gallons of scarce water a year. Water, says the UN, will be the defining resource of the next 100 years. Since 2008 Saudi investors have bought heavily in Sudan, Egypt, Ethiopia and Kenya. Last year the first sacks of wheat grown in Ethiopia for the Saudi market were presented by al-Amoudi to King Abdullah.
Some of the African deals lined up are eye-wateringly large: China has signed a contract with the Democratic Republic of Congo to grow 2.8m hectares of palm oil for biofuels. Before it fell apart after riots, a proposed 1.2m hectares deal between Madagascar and the South Korean company Daewoo would have included nearly half of the country's arable land. Land to grow biofuel crops is also in demand. "European biofuel companies have acquired or requested about 3.9m hectares in Africa. This has led to displacement of people, lack of consultation and compensation, broken promises about wages and job opportunities," said Tim Rice, author of an ActionAid report which estimates that the EU needs to grow crops on 17.5m hectares, well over half the size of Italy, if it is to meet its 10% biofuel target by 2015.
"The biofuel land grab in Africa is already displacing farmers and food production. The number of people going hungry will increase," he said. British firms have secured tracts of land in Angola, Ethiopia, Mozambique, Nigeria and Tanzania to grow flowers and vegetables.
Indian companies, backed by government loans, have bought or leased hundreds of thousands of hectares in Ethiopia, Kenya, Madagascar, Senegal and Mozambique, where they are growing rice, sugar cane, maize and lentils to feed their domestic market. Nowhere is now out of bounds. Sudan, emerging from civil war and mostly bereft of development for a generation, is one of the new hot spots. South Korean companies last year bought 700,000 hectares of northern Sudan for wheat cultivation; the United Arab Emirates have acquired 750,000 hectares and Saudi Arabia last month concluded a 42,000-hectare deal in Nile province.
The government of southern Sudan says many companies are now trying to acquire land. "We have had many requests from many developers. Negotiations are going on," said Peter Chooli, director of water resources and irrigation, in Juba last week. "A Danish group is in discussions with the state and another wants to use land near the Nile."
In one of the most extraordinary deals, buccaneering New York investment firm Jarch Capital, run by a former commodities trader, Philip Heilberg, has leased 800,000 hectares in southern Sudan near Darfur. Heilberg has promised not only to create jobs but also to put 10% or more of his profits back into the local community. But he has been accused by Sudanese of "grabbing" communal land and leading an American attempt to fragment Sudan and exploit its resources. Devlin Kuyek, a Montreal-based researcher with Grain, said investing in Africa was now seen as a new food supply strategy by many governments. "Rich countries are eyeing Africa not just for a healthy return on capital, but also as an insurance policy. Food shortages and riots in 28 countries in 2008, declining water supplies, climate change and huge population growth have together made land attractive. Africa has the most land and, compared with other continents, is cheap," he said.
"Farmland in sub-Saharan Africa is giving 25% returns a year and new technology can treble crop yields in short time frames," said Susan Payne, chief executive of Emergent Asset Management, a UK investment fund seeking to spend $50m on African land, which, she said, was attracting governments, corporations, multinationals and other investors. "Agricultural development is not only sustainable, it is our future. If we do not pay great care and attention now to increase food production by over 50% before 2050, we will face serious food shortages globally," she said. But many of the deals are widely condemned by both western non-government groups and nationals as "new colonialism", driving people off the land and taking scarce resources away from people.
We met Tegenu Morku, a land agent, in a roadside cafe on his way to the region of Oromia in Ethiopia to find 500 hectares of land for a group of Egyptian investors. They planned to fatten cattle, grow cereals and spices and export as much as possible to Egypt. There had to be water available and he expected the price to be about 15 birr (75p) per hectare per year – less than a quarter of the cost of land in Egypt and a tenth of the price of land in Asia. "The land and labour is cheap and the climate is good here. Everyone – Saudis, Turks, Chinese, Egyptians – is looking. The farmers do not like it because they get displaced, but they can find land elsewhere and, besides, they get compensation, equivalent to about 10 years' crop yield," he said.
Oromia is one of the centres of the African land rush. Haile Hirpa, president of the Oromia studies' association, said last week in a letter of protest to UN secretary-general Ban Ki-moon that India had acquired 1m hectares, Djibouti 10,000 hectares, Saudi Arabia 100,000 hectares, and that Egyptian, South Korean, Chinese, Nigerian and other Arab investors were all active in the state. "This is the new, 21st-century colonisation. The Saudis are enjoying the rice harvest, while the Oromos are dying from man-made famine as we speak," he said.
The Ethiopian government denied the deals were causing hunger and said that the land deals were attracting hundreds of millions of dollars of foreign investments and tens of thousands of jobs. A spokesman said: "Ethiopia has 74m hectares of fertile land, of which only 15% is currently in use – mainly by subsistence farmers. Of the remaining land, only a small percentage – 3 to 4% – is offered to foreign investors. Investors are never given land that belongs to Ethiopian farmers. The government also encourages Ethiopians in the diaspora to invest in their homeland. They bring badly needed technology, they offer jobs and training to Ethiopians, they operate in areas where there is suitable land and access to water."
The reality on the ground is different, according to Michael Taylor, a policy specialist at the International Land Coalition. "If land in Africa hasn't been planted, it's probably for a reason. Maybe it's used to graze livestock or deliberately left fallow to prevent nutrient depletion and erosion. Anybody who has seen these areas identified as unused understands that there is no land in Ethiopia that has no owners and users." Development experts are divided on the benefits of large-scale, intensive farming. Indian ecologist Vandana Shiva said in London last week that large-scale industrial agriculture not only threw people off the land but also required chemicals, pesticides, herbicides, fertilisers, intensive water use, and large-scale transport, storage and distribution which together turned landscapes into enormous mono-cultural plantations.
"We are seeing dispossession on a massive scale. It means less food is available and local people will have less. There will be more conflict and political instability and cultures will be uprooted. The small farmers of Africa are the basis of food security. The food availability of the planet will decline," she says. But Rodney Cooke, director at the UN's International Fund for Agricultural Development, sees potential benefits. "I would avoid the blanket term 'land-grabbing'. Done the right way, these deals can bring benefits for all parties and be a tool for development."
Lorenzo Cotula, senior researcher with the International Institute for Environment and Development, who co-authored a report on African land exchanges with the UN fund last year, found that well-structured deals could guarantee employment, better infrastructures and better crop yields. But badly handled they could cause great harm, especially if local people were excluded from decisions about allocating land and if their land rights were not protected. Water is also controversial. Local government officers in Ethiopia told the Observer that foreign companies that set up flower farms and other large intensive farms were not being charged for water. "We would like to, but the deal is made by central government," said one. In Awassa, the al-Amouni farm uses as much water a year as 100,000 Ethiopians.
North Tyneside high street 'revived' by fake shop front
Fake businesses are to be used to lessen the impact of the recession on high streets in North Tyneside. With 140 empty shops in the borough, council bosses think they have come up with a unique way of ensuring shopping areas remain as vibrant as possible. The first empty shop unit to be given a makeover with a "flat pack" shop front is in Whitley Bay. North Tyneside Council said the move was cost-effective and would help to attract new investment. The council said the fake shop in Whitley Bay - which alone has 49 empty units - has been welcomed by traders and shoppers.
Judith Wallace, North Tyneside Council's deputy mayor said: "The economic climate has forced many businesses to bring down the shutters. "We need to ensure that the remaining businesses continue to survive and that means ensuring our high streets look attractive to both shoppers and potential business investors. "This is a simple and cost-effective approach that keeps the retail unit available for potential new uses and in the meantime also contributes to the street scene."
Empty shops in Wallsend and North Shields are now being earmarked for similar treatment, which costs about £1,500 a time. The government-funded project involves colourful graphic designs featuring a range of different shop types, which are either taped inside the windows or screwed to the fascia so they can be removed and reused as required. Karen Goldfinch, chair of Whitley Bay Chamber of Trade, said: "It's an excellent way of promoting how a unit can be used, perhaps inspiring new businesses to come into the town."