Serbia Crisis: Not Over Yet

Serbia Crisis: Not Over Yet

new_york_times:http://query.nytimes.com/gst/fullpage.html?res=9C06E3D9173CF935A35751C0A961958260&sec=&spon=
By CHRIS HEDGES
Published: February 6, 1997
Although the opposition appears to have won a tremendous victory in its 78-day confrontation with President Slobodan Milosevic, the crisis that has rocked Serbia is far from over.
The opposition coalition that now takes control of Serbia's 14 largest cities -- and aspires to wrest power from Mr. Milosevic -- has yet to come up with a vision for this country, which is mired in economic collapse and political turmoil that shows no signs of abating.
Although opposition leaders talk frequently of their plans for a market economy and a ''civil society,'' their commitment to those ideas remains unproven.
The predominant desire among workers who have lived for months without salary and among hard-pressed retirees is for a strongman to impose order.
Rather than spell out austerity measures and painful reforms, opposition leaders rely on the same images and slogans of Serbian nationalism that ignited the war in Yugoslavia six years ago and made Serbia an international pariah.
Tonight, for example, one of the leading opposition figures, Zoran Djindjic, lambasted the government for abandoning Serbs in the last Serbian-held enclave in Croatia, due under the Dayton peace agreement to be returned to Croatian control in July.
The plight of Serbs living outside Serbia's borders was a key issue for Mr. Milosevic as he transformed himself from Communist leader to popularly elected nationalist.
''Our political opposition, as has been the pattern for most of our history, simply mirrors the government,'' said Latinka Perovic, who was purged in 1971 from her post as head of the Communist Party in Yugoslavia when she began to push for liberal reforms. ''It refuses to mention our problems in public.
''No one is attempting to build a rational political program, to be self-critical. Instead the opposition, like the government, rejects gradual, systematic change for this archaic, romantic Serbian nationalism that belongs in the 19th century.''
Mr. Djindjic insists that he is not a nationalist and that he is using such oratory only because it is essential to building any political movement in Serbia. There are limits, he said in a recent interview, on how quickly his countrymen can be persuaded to follow the path blazed by others in the region.
''I have to believe that the majority of Serbs want to become Western,'' he said, referring to European political systems, ''but we must also address those who are afraid of the West. It will be devastating for us if we make the wrong estimation, if we turn sharply toward the West and discover that only a minority of the Serbs want to go in this direction.''
Mr. Djindjic says he hopes to privatize industry, foster a free press and build an independent judiciary, but his is only one voice among an opposition that covers the spectrum from Belgrade intellectuals who genuinely espouse democracy to ardent nationalists.
''For the moment our concern is with the cities we will control,'' Mr. Djindjic said. ''But we are fighting a system that has a total monopoly on all exports, all production, all state and local expenditures, all credits and the media. For now we can't even control city clerks, who have the power to sign away a 200-million-dinar building for a 1-million-dinar bribe.''
Unlike many of its neighbors, Serbia has not even begun to dismantle the political and economic underpinnings of Communism. Most people work for companies controlled by a government that dominates every aspect of commerce, from banking to exports.
Staggered by an economic embargo during the years of the war in Bosnia, Serbia's economy and its bleak, polluted cities and towns are sad testaments to Communist mismanagement and post-Communist corruption.
Trains, which rarely break 40 miles an hour on old tracks, can no longer effectively transport goods. Factories, saddled with obsolete technology from two decades ago, limp along at 10 or 20 percent of capacity. Roads are collapsing into yawning potholes, and the currency, bloated with a government decision to print money freely, is barreling daily toward hyperinflation

serbia crisis

Serbia's two largest opposition parties have called for early elections amid a deepening political crisis.
They released a joint statement demanding the elections, which are not due for another year.
As the political crisis bites, there are daily attacks on politicians on all sides.

Djindjic's assassination has sent politics spiralling deeper into crisis Major scandals tear every day at the heart of government.
Politics was never particularly pleasant under the former Prime Minister Zoran Djindjic.
But since his assassination in March the atmosphere has worsened.
Now, the joint statement says the situation is so "grave that only early parliamentary elections" can help.
Prime Minister Zoran Zivkovic has dismissed the call. But it is sure to add to pressure on his administration.
The latest polls suggest that most people feel there should be early elections. But with public trust in politicians at its lowest ever, few know who they would vote for.
Unity plea
As if to underline the political problems facing Belgrade the prime minister has sent a letter to all the parties in his ruling coalition urging them to continue their work together.
Mr Zivkovic knows that if some of the parties leave the coalition he may well be forced into early elections.
The two opposition parties now callomg for elections were once part of the ruling coalition which overthrew the former President Slobodan Milosevic in 2001.
They represent different ends of the political spectrum.
But they are so angry about the current state of Serbian politics, they seem prepared to bury former differences, and work together, at least for now.

[PS]: Russian Intervention in South Ossetia

August 9, 2008

[PS]: Russian Intervention in South Ossetia
Ossetia,Russia,NATO,OSCE
Russia's ambassador to Nato, Dmitry Rogozin, said no "consultations" would be possible until Georgian forces withdraw from South Ossetia. The crisis began spiraling when Georgian forces launched a surprise attack on August 7, 2008 against the de facto independent South Ossetia.
The moved followed by heavy fire, artillery bombardment and air strikes against the Russian-backed separatists. In response Russia has sent armoured units across the border.
On August 9, Georgia's parliament accepted President Mikheil Saakashvili's declaration of martial law as its country battled Russian forces for control over South Ossertia.
According to Russian reports, Tbilisi launched ground and air strikes in an attempt to seize control of south Ossetia, killing around 1,500 civilians. The ongoing operation is the most severe since South Ossetia fought for independence form Georgia in 1992.
Russian Deputy Air Force Commander Col. Gen. Anatoly Nogovitsyn said "We are only seeking to ensure peace." as Russian sent in paratroopers from the Ivanovo, Moscow and Pskov airborn divisions to liberate South Ossetia's capital, Tskhinvali.
The Russian government has warned that a humanitarian crisis was developing, 30,000 South Ossetian's have fled across the border into Russia. The South Ossetian Prime Minister Yury Morozov confirmed that the capital Tskhinvali was presently under Russian control. While the current conflict is expected to rise as year of tensions between Russia and Georgia are encouraged by the arriving NATO deligation.
Russia has deployed T-80U and T-90S main battle tanks, MSTA-S self propelled gun mount, SU-27 and Tu-22 to the region.
Spotlight Tu-90
Weighing 50 metric tons, max speed of 65 km/h and a range of 550-650 km, the Tu-90 is Russian's modern main battle tank. Its main weapon is a 125mm 2A46M-2 smoothbore with a rate of 6-8 rounds per minute and a 7.62mm remotely-controlled AAMG machine gun.

OTC derivatives played important role in Asian crisis

OTC derivatives played important role in Asian crisisIn a contribution to a leading economics journal, Prof. JanKregel highlights the role played by derivatives, particularlyover-the-counter (OTC) derivatives, in the Asian financialcrisis. OTC derivatives, which are structured to clients'particular needs by banks which themselves assume little risk,hamper efficient capital allocation and prudent riskassessment. The volatility generated by the use of suchinstruments necessitates the need for financial-sector reform.by Chakravarthi Raghavan
GENEVA: While not all the difficulties created by volatilecapital flows in Asia were due to the increased use ofderivative instruments or structured derivative packages byforeign banks, they did play an important role in theunexpected declines and excessive volatility of currency andasset markets in Asia during the crisis, according to Prof. JanKregel.In an article on derivatives and global capital flows in theOxford Journal of Economics November 1998 issue devoted to theAsian crisis, Kregel (who at that time was teaching at BolognaUniversity, but is now on the staff of UNCTAD) points to fourpuzzles in the East Asia crisis that have caused surprise, andsuggests that the understanding or explanation lies in thewidespread use of structured over-the-counter (OTC)derivatives.Puzzling elementsThere are at least four puzzling elements in the Asian crisis,he says:First, after the Latin America debt crisis of 1982,developing countries were encouraged to increase reliance onnon-bank lending, in particular FDI, and the instance of suchflows to a number of Asian economies was used as an example ofthe greater stability of such lending. Yet the Asian crisisseems to have been precipitated by the reversal of short-termprivate bank lending which had come to dominate capital flowsto the region.Second, capital flows to Asia have been used as an exampleof the benefits of international capital markets in directingresources to the most productive uses. Yet in the aftermath ofthe crisis, it appears that total returns on equity investmentsin Asia have been lower than in most other regions throughoutthe 1990s.Third, in a number of Asian countries, the majority ofinternational lending was between foreign and domestic banks.It has been suggested that the major cause of the crisis isunsafe lending practices by Asian banks, due to inadequatenational prudential supervision.But the developed-country lenders were large global banks,employing highly sophisticated risk-assessment procedures,which continued to lend well after the increased risks in theregion had become apparent.This shows that even the most sophisticated operators in theglobal financial markets have difficulties in assessing risk,and that the Asian country regulators were no more successfulin imposing prudent limits than those in most advancedcountries.Finally, private portfolio and FDI flows were consideredto be preferable to syndicated bank lending because they werethought to segregate the problem of foreign exchangeinstability from asset market instability.... Yet, the linkagebetween the collapse in exchange rates and that in equitymarkets appears to have been even closer in Asia than in otherexperiences of financial crises.One explanation offered for the crisis in foreign markets,Kregel notes, is that a large proportion of foreign borrowingby corporations was unhedged because of expectations of stablecurrency rates, and when these were disappointed, there was ascramble for foreign currency to repay the debts and thiscreated the massive market imbalance and collapse of foreignexchange markets.And the absence of generalized hedging in foreign exchangemarkets has been interpreted to mean that financial derivativescontracts played no role in the crisis - a view reinforced byreferences to the IMF study that global hedge funds were notactive catalysts in the Asian crisis.However, points out Kregel, the quarterly reports (fourthquarter of 1997 and first quarter of 1998) of US money centrebanks suggest that most of their initial losses have beenrelated to derivative-based credit swap contracts. And at leastin the case of US banks, such derivative contracts played somerole in the flow of funds to Asia and thus in the instabilityof such flows. There is also evidence that the German andFrench banks were also involved in derivatives trading in theregion.Over-the-counter derivativesThe standard derivative contracts - such as forwards, futuresand options - are used for hedging risks. Foreign currencyforwards remain the province of bank foreign exchange dealers.Most basic futures and options contracts are standardized andtraded in organized, regulated markets. But banks also offerderivative contracts to their clients in the "over-the-counter"market. These are not derivatives on organized markets, butrather individually tailored, often highly complex,combinations of standard financial instruments, packagedtogether with derivative contracts designed to meet particularneeds of clients. Such contracts involve very little directlending by banks to clients, and generate little net interestincome to the banks. They are often executed through specialpurpose vehicles - specialized investment firms that areseparately capitalized and thus, in terms of the Basle capitaladequacy requirements, need little or no capital or areclassified as off-balance-sheet items, involving no direct riskexposure of the bank. They generate, though, substantial feeand commission income - with the bank committing none of itsown capital, but serving as an intermediary matching borrowersand lenders.The major objective of active, global financial institutionsis thus no longer the maximization of profits by seeking thelowest-cost funds and channelling them to areas of highestrisk-adjusted return, but rather maximizing the amount offunds intermediated to maximize fees and commissions, thusmaximizing the rate of return on bank capital. This means ashift from continuous risk assessment and risk monitoring offunded investment projects that produce recurring flows ofinterest payments over time to the identification of riskless"trades" that produce large, single payments, with as much ofthe residual risks as possible carried by purchasers of suchpackages. This process has been accelerated by the introductionof risk-weighted capital requirements.This has resulted in banks coming to play a declining rolein the process of efficient international allocation ofinvestment funds, but serving to facilitate this process bylinking primary lenders and final borrowers. This means thatthe efficient allocation of funds to the highest risk-adjustedrate of returns depends on an assessment of risks and returnsby the lender.But the role of most derivative packages is to mask theactual risk involved in an investment, and to increase thedifficulty in assessing the final return on funds provided.As a result, certain types of derivatives may increase thedifficulties faced by private capital markets in effecting theefficient allocation of resources. And by making investmentevaluation more difficult for primary lenders, they create alsodifficulties for financial market regulators and supervisors.Circumventing prudential restrictionsMost institutional investors in the US do not face unlimitedinvestment choices, but are limited to investing in assets witha minimum of risk represented by the investment-grade creditrating on the issue. They are precluded from risks such asforeign exchange risks or foreign credit risks.This means that a large proportion of professionally managedinstitutional investment funds cannot invest in emergingmarkets or in particular asset classes such as foreignexchange."Structured derivative packages, created by globalinvestment banks, have often provided the means to circumventthese restrictions."Some of these packages, Kregel explains, might involve USgovernment agency dollar-denominated structured notes with theinterest payments, or the principal value, linked to an indexrepresenting some foreign asset, such as the Thai baht/dollarexchange rate, and derivative contracts enabling a Thai bank toget below-market-rate funds, US investors above-market returns,and the banks fees and commissions for arranging the trade, butwith no commitment of capital.Kregel points out that it is virtually impossible (in suchcontracts) for the US investor to evaluate the use of funds bythe Thai bank, and there is little incentive for the US bank todo so: for, once the structured note issue is sold, the foreigncredit and exchange risks are borne by the US investor, who isnot only subverting prudential controls, but in all probability evaluating the return without any adjustment for foreignexchange risk, even if that risk is recognized as such."There is thus little economic interest or possibility forthe market to assess either the risk or the returns of theinvestment, and thus no incentive for market agents to act soas to ensure that capital is allocated globally to those usesproviding the highest risk-adjusted rates of return."Kregel explains the use of OTCs for "credit enhancement" inlending and investing in Mexico for Brady bonds and J PMorgan's use of them for the issuance of Aztec bonds in 1988,and more recently investment banks applying this principle toother types of developing-country debt to enable USinstitutional investor funds to invest in emerging-market debt,earning above-market interest rates, with no risk to theintermediary "unless the bank was required to guarantee toconvert interest payments (in local currency) into dollars, anda risk only if the foreign currency were to becomeinconvertible - not a devaluation risk but a risk that thecurrency could not be sold at any price."Kregel comments that this provides one possible explanationwhy so much effort was made to prevent Mexico from suspendingconvertibility in 1994, and notes that structures similar tothat used in Mexico were used in Asia as well as Latin America.The structured note and the credit-enhanced Brady structureswere used to move funds from developed to developing countries,despite the existence of prudential regulatory barriers.Kregel notes that information about the various derivativesis not easy to come by, but some of the litigations between UScentre banks like JP Morgan and some Korean counter-partiesthrow some light.And in the case of Thailand, the profits from derivativesand current revaluations far exceed the total amounts owed fortraditional lending. This suggests that a majority of thefunds that entered Thailand were linked to derivativecontracts. For Korea, the profit figures were well over halfthe amount of total lending, leading to a similar conclusion. And in Indonesia, they are roughly two-thirds.Thus, in all the three countries that had to seek IMFsupport, derivatives sold by US banks to domestic institutionsappear to have played as large a part as traditional financingactivities.The Kregel article was contributed in April 1998, and thusmakes no reference to the evolution of the financial crisisafter that date - its spread to Russia and Latin America, andthe scandal in the US itself of the Long-Term CapitalManagement Fund (LTCM) and its operations and collapse, and theNew York Federal Reserve-engineered rescue of the LTCM.But some of Kregel's views on OTC derivatives and their rolein Asia, and banks assuming no real risks except when acurrency becomes inconvertible, may perhaps explain the howlsraised in Washington and elsewhere against Malaysia and itsdecision in September to make the ringgit non-convertible andimpose capital controls.The strong criticism of Malaysian controls possibly reflectsworries and fears that Indonesia and other developing countriesmight follow the Malaysian example, if there is no quickturnaround in their economies under the IMF conditionedprogrammes.Capital controlsIn the OJE, in other articles, Prof. Robert Wade and othersin fact advocate capital controls and restrictions.Wade argues that capital account convertibility bringseconomic policy in developing countries under the influence ofinternational capital markets - and a small number of countryanalysts and fund managers in New York, London, Frankfurt andTokyo.Even if free movement of capital leads to efficiency inallocation of capital and as such maximizes returns to capitalworldwide, "governments have much more than the interests ofthe owners of capital in view - or ought to have.... They wantto maximize the returns to labour, to entrepreneurship, totechnical progress and to maximize them within their ownterritory rather than somewhere else; they want to providepublic goods that contribute to the good life.""Only blind faith in the virtues of capital markets couldlead one to think that maximizing the returns to capital andpromoting development goals generally coincide," Wade adds.But regional economists like Prof. Jomo Sundaram of theUniversity of Malaya believe that capital controls can avert acrisis but not overcome it. Currency measures in Malaysia werenecessary to regain control over monetary policy and kill theoverseas market in ringgit (especially in Singapore). Butcapital controls are a means and not an end in itself, andcould be messy and discourage FDI as well, he adds.The full contours of the LTCM and its operations in the USare yet to come out fully - the involvements of various banksand bank regulators (in the US and Europe, and their failures),and the LTCM rescue, justified by the Federal Reserve asnecessary to safeguard the financial system but viewed by manyothers as US crony capitalism and an attempt to bury themistakes of the regulators.The LTCM has forced regulators, under prodding fromCongress, to sit up and take note of such funds and theiroperations. But even when trying to respond to Congress, the USregulators are fighting their own turf battles: there are threeof them - the US Federal Reserve, the Securities and ExchangeCommission and the Commodities and Futures Trading Commission -and each has a constituency that uses its campaign financingto line up Congressional support too.But many of the arguments of the US and of the IMF againstover-regulation and controls, and why hedge funds cannot becontrolled or regulated (since they will shift their operationsto offshore centres, like the Cayman Islands, and thus escapesupervision) don't really stand up to much scrutiny.After all, Mr. George Soros or Mr. Meriwether of the LTCMand his like may locate their funds in offshore centres, butthey and their staff won't go and live in these places withtheir families and send their children to school there. Theoffshore centres will only be "name-plate" funds andenterprises, in fact run from desks in the US, UK and so on.Two schools of thoughtThere are two schools of thought in the US: one that advocatesthat derivatives traded on regular markets, and OTCs (whosedaily turnover is not over a trillion dollars), need to beregulated and controlled in the same way new drugs are by theUS Food and Drug Administration: each one needs prior approvaland clearance before being put on the market.The other approach is for regulators to give clearinstructions to the banks on the extent of risks they will beallowed and not allowed, and rely on their internal oversightsystems. If these systems are found to have failed, then thebanks will be forced to set aside heavy capital adequacyrequirements.But either way, it will only safeguard the interests of thefinancial and money centres, not the host developing countries.For the latter to be served, any reform or any new financialarchitecture must be seen not in separate compartments, dealingwith financial and trading systems, but together in one piece.The starting point for this, to ensure that their voices areheard and accommodated, is not to treat "trading in widgets asthe same as trading in dollars", adapting the title of a recentarticle by Prof. Jagdish Bhagwati.Developing countries may not be able to block changes at theIMF, but they can do so at the WTO (and use the consensusprocess to reject accords). They might regain some bargainingleverage at the WTO by not ratifying the 1997 financialservices accord, and insisting on changes in the financialservices agreements or, at the minimum, their being enabled torewrite their schedules with new conditions under which thedictum for foreign financial services operators would be thatthey can do only what they are specifically permitted to do,and anything not allowed would be illegal.This would not be an issue of market vs. command economy -but rather one of following the Anglo-Saxon or Napoleonic law.In the financial sector at least, the market theology needs tobe modified to the effect that any new activity notspecifically authorized would need specific approval, and theoperators would face penalties if they try to get around theregulations or help local enterprises to do so.And the home countries of these banking and financialservices enterprises should be able to raise disputes on behalfof their enterprises at the WTO only if they undertakesupervisory and regulatory obligations to ensure that theirmain offices will obey host-country rules and regulations - inthe same way the US wants countries of origin to track andcontrol production and exports of narcotic drugs. (Third World Economics No. 202, 1-15 February 1999)This article was originally published in the South-North Development Monitor (SUNS) No.4348, of which Chakravarthi Raghavan is the Chief Editor.OTC derivatives played important role in Asian crisisIn a contribution to a leading economics journal, Prof. JanKregel highlights the role played by derivatives, particularlyover-the-counter (OTC) derivatives, in the Asian financialcrisis. OTC derivatives, which are structured to clients'particular needs by banks which themselves assume little risk,hamper efficient capital allocation and prudent riskassessment. The volatility generated by the use of suchinstruments necessitates the need for financial-sector reform.by Chakravarthi Raghavan
GENEVA: While not all the difficulties created by volatilecapital flows in Asia were due to the increased use ofderivative instruments or structured derivative packages byforeign banks, they did play an important role in theunexpected declines and excessive volatility of currency andasset markets in Asia during the crisis, according to Prof. JanKregel.In an article on derivatives and global capital flows in theOxford Journal of Economics November 1998 issue devoted to theAsian crisis, Kregel (who at that time was teaching at BolognaUniversity, but is now on the staff of UNCTAD) points to fourpuzzles in the East Asia crisis that have caused surprise, andsuggests that the understanding or explanation lies in thewidespread use of structured over-the-counter (OTC)derivatives.Puzzling elementsThere are at least four puzzling elements in the Asian crisis,he says:First, after the Latin America debt crisis of 1982,developing countries were encouraged to increase reliance onnon-bank lending, in particular FDI, and the instance of suchflows to a number of Asian economies was used as an example ofthe greater stability of such lending. Yet the Asian crisisseems to have been precipitated by the reversal of short-termprivate bank lending which had come to dominate capital flowsto the region.Second, capital flows to Asia have been used as an exampleof the benefits of international capital markets in directingresources to the most productive uses. Yet in the aftermath ofthe crisis, it appears that total returns on equity investmentsin Asia have been lower than in most other regions throughoutthe 1990s.Third, in a number of Asian countries, the majority ofinternational lending was between foreign and domestic banks.It has been suggested that the major cause of the crisis isunsafe lending practices by Asian banks, due to inadequatenational prudential supervision.But the developed-country lenders were large global banks,employing highly sophisticated risk-assessment procedures,which continued to lend well after the increased risks in theregion had become apparent.This shows that even the most sophisticated operators in theglobal financial markets have difficulties in assessing risk,and that the Asian country regulators were no more successfulin imposing prudent limits than those in most advancedcountries.Finally, private portfolio and FDI flows were consideredto be preferable to syndicated bank lending because they werethought to segregate the problem of foreign exchangeinstability from asset market instability.... Yet, the linkagebetween the collapse in exchange rates and that in equitymarkets appears to have been even closer in Asia than in otherexperiences of financial crises.One explanation offered for the crisis in foreign markets,Kregel notes, is that a large proportion of foreign borrowingby corporations was unhedged because of expectations of stablecurrency rates, and when these were disappointed, there was ascramble for foreign currency to repay the debts and thiscreated the massive market imbalance and collapse of foreignexchange markets.And the absence of generalized hedging in foreign exchangemarkets has been interpreted to mean that financial derivativescontracts played no role in the crisis - a view reinforced byreferences to the IMF study that global hedge funds were notactive catalysts in the Asian crisis.However, points out Kregel, the quarterly reports (fourthquarter of 1997 and first quarter of 1998) of US money centrebanks suggest that most of their initial losses have beenrelated to derivative-based credit swap contracts. And at leastin the case of US banks, such derivative contracts played somerole in the flow of funds to Asia and thus in the instabilityof such flows. There is also evidence that the German andFrench banks were also involved in derivatives trading in theregion.Over-the-counter derivativesThe standard derivative contracts - such as forwards, futuresand options - are used for hedging risks. Foreign currencyforwards remain the province of bank foreign exchange dealers.Most basic futures and options contracts are standardized andtraded in organized, regulated markets. But banks also offerderivative contracts to their clients in the "over-the-counter"market. These are not derivatives on organized markets, butrather individually tailored, often highly complex,combinations of standard financial instruments, packagedtogether with derivative contracts designed to meet particularneeds of clients. Such contracts involve very little directlending by banks to clients, and generate little net interestincome to the banks. They are often executed through specialpurpose vehicles - specialized investment firms that areseparately capitalized and thus, in terms of the Basle capitaladequacy requirements, need little or no capital or areclassified as off-balance-sheet items, involving no direct riskexposure of the bank. They generate, though, substantial feeand commission income - with the bank committing none of itsown capital, but serving as an intermediary matching borrowersand lenders.The major objective of active, global financial institutionsis thus no longer the maximization of profits by seeking thelowest-cost funds and channelling them to areas of highestrisk-adjusted return, but rather maximizing the amount offunds intermediated to maximize fees and commissions, thusmaximizing the rate of return on bank capital. This means ashift from continuous risk assessment and risk monitoring offunded investment projects that produce recurring flows ofinterest payments over time to the identification of riskless"trades" that produce large, single payments, with as much ofthe residual risks as possible carried by purchasers of suchpackages. This process has been accelerated by the introductionof risk-weighted capital requirements.This has resulted in banks coming to play a declining rolein the process of efficient international allocation ofinvestment funds, but serving to facilitate this process bylinking primary lenders and final borrowers. This means thatthe efficient allocation of funds to the highest risk-adjustedrate of returns depends on an assessment of risks and returnsby the lender.But the role of most derivative packages is to mask theactual risk involved in an investment, and to increase thedifficulty in assessing the final return on funds provided.As a result, certain types of derivatives may increase thedifficulties faced by private capital markets in effecting theefficient allocation of resources. And by making investmentevaluation more difficult for primary lenders, they create alsodifficulties for financial market regulators and supervisors.Circumventing prudential restrictionsMost institutional investors in the US do not face unlimitedinvestment choices, but are limited to investing in assets witha minimum of risk represented by the investment-grade creditrating on the issue. They are precluded from risks such asforeign exchange risks or foreign credit risks.This means that a large proportion of professionally managedinstitutional investment funds cannot invest in emergingmarkets or in particular asset classes such as foreignexchange."Structured derivative packages, created by globalinvestment banks, have often provided the means to circumventthese restrictions."Some of these packages, Kregel explains, might involve USgovernment agency dollar-denominated structured notes with theinterest payments, or the principal value, linked to an indexrepresenting some foreign asset, such as the Thai baht/dollarexchange rate, and derivative contracts enabling a Thai bank toget below-market-rate funds, US investors above-market returns,and the banks fees and commissions for arranging the trade, butwith no commitment of capital.Kregel points out that it is virtually impossible (in suchcontracts) for the US investor to evaluate the use of funds bythe Thai bank, and there is little incentive for the US bank todo so: for, once the structured note issue is sold, the foreigncredit and exchange risks are borne by the US investor, who isnot only subverting prudential controls, but in all probability evaluating the return without any adjustment for foreignexchange risk, even if that risk is recognized as such."There is thus little economic interest or possibility forthe market to assess either the risk or the returns of theinvestment, and thus no incentive for market agents to act soas to ensure that capital is allocated globally to those usesproviding the highest risk-adjusted rates of return."Kregel explains the use of OTCs for "credit enhancement" inlending and investing in Mexico for Brady bonds and J PMorgan's use of them for the issuance of Aztec bonds in 1988,and more recently investment banks applying this principle toother types of developing-country debt to enable USinstitutional investor funds to invest in emerging-market debt,earning above-market interest rates, with no risk to theintermediary "unless the bank was required to guarantee toconvert interest payments (in local currency) into dollars, anda risk only if the foreign currency were to becomeinconvertible - not a devaluation risk but a risk that thecurrency could not be sold at any price."Kregel comments that this provides one possible explanationwhy so much effort was made to prevent Mexico from suspendingconvertibility in 1994, and notes that structures similar tothat used in Mexico were used in Asia as well as Latin America.The structured note and the credit-enhanced Brady structureswere used to move funds from developed to developing countries,despite the existence of prudential regulatory barriers.Kregel notes that information about the various derivativesis not easy to come by, but some of the litigations between UScentre banks like JP Morgan and some Korean counter-partiesthrow some light.And in the case of Thailand, the profits from derivativesand current revaluations far exceed the total amounts owed fortraditional lending. This suggests that a majority of thefunds that entered Thailand were linked to derivativecontracts. For Korea, the profit figures were well over halfthe amount of total lending, leading to a similar conclusion. And in Indonesia, they are roughly two-thirds.Thus, in all the three countries that had to seek IMFsupport, derivatives sold by US banks to domestic institutionsappear to have played as large a part as traditional financingactivities.The Kregel article was contributed in April 1998, and thusmakes no reference to the evolution of the financial crisisafter that date - its spread to Russia and Latin America, andthe scandal in the US itself of the Long-Term CapitalManagement Fund (LTCM) and its operations and collapse, and theNew York Federal Reserve-engineered rescue of the LTCM.But some of Kregel's views on OTC derivatives and their rolein Asia, and banks assuming no real risks except when acurrency becomes inconvertible, may perhaps explain the howlsraised in Washington and elsewhere against Malaysia and itsdecision in September to make the ringgit non-convertible andimpose capital controls.The strong criticism of Malaysian controls possibly reflectsworries and fears that Indonesia and other developing countriesmight follow the Malaysian example, if there is no quickturnaround in their economies under the IMF conditionedprogrammes.Capital controlsIn the OJE, in other articles, Prof. Robert Wade and othersin fact advocate capital controls and restrictions.Wade argues that capital account convertibility bringseconomic policy in developing countries under the influence ofinternational capital markets - and a small number of countryanalysts and fund managers in New York, London, Frankfurt andTokyo.Even if free movement of capital leads to efficiency inallocation of capital and as such maximizes returns to capitalworldwide, "governments have much more than the interests ofthe owners of capital in view - or ought to have.... They wantto maximize the returns to labour, to entrepreneurship, totechnical progress and to maximize them within their ownterritory rather than somewhere else; they want to providepublic goods that contribute to the good life.""Only blind faith in the virtues of capital markets couldlead one to think that maximizing the returns to capital andpromoting development goals generally coincide," Wade adds.But regional economists like Prof. Jomo Sundaram of theUniversity of Malaya believe that capital controls can avert acrisis but not overcome it. Currency measures in Malaysia werenecessary to regain control over monetary policy and kill theoverseas market in ringgit (especially in Singapore). Butcapital controls are a means and not an end in itself, andcould be messy and discourage FDI as well, he adds.The full contours of the LTCM and its operations in the USare yet to come out fully - the involvements of various banksand bank regulators (in the US and Europe, and their failures),and the LTCM rescue, justified by the Federal Reserve asnecessary to safeguard the financial system but viewed by manyothers as US crony capitalism and an attempt to bury themistakes of the regulators.The LTCM has forced regulators, under prodding fromCongress, to sit up and take note of such funds and theiroperations. But even when trying to respond to Congress, the USregulators are fighting their own turf battles: there are threeof them - the US Federal Reserve, the Securities and ExchangeCommission and the Commodities and Futures Trading Commission -and each has a constituency that uses its campaign financingto line up Congressional support too.But many of the arguments of the US and of the IMF againstover-regulation and controls, and why hedge funds cannot becontrolled or regulated (since they will shift their operationsto offshore centres, like the Cayman Islands, and thus escapesupervision) don't really stand up to much scrutiny.After all, Mr. George Soros or Mr. Meriwether of the LTCMand his like may locate their funds in offshore centres, butthey and their staff won't go and live in these places withtheir families and send their children to school there. Theoffshore centres will only be "name-plate" funds andenterprises, in fact run from desks in the US, UK and so on.Two schools of thoughtThere are two schools of thought in the US: one that advocatesthat derivatives traded on regular markets, and OTCs (whosedaily turnover is not over a trillion dollars), need to beregulated and controlled in the same way new drugs are by theUS Food and Drug Administration: each one needs prior approvaland clearance before being put on the market.The other approach is for regulators to give clearinstructions to the banks on the extent of risks they will beallowed and not allowed, and rely on their internal oversightsystems. If these systems are found to have failed, then thebanks will be forced to set aside heavy capital adequacyrequirements.But either way, it will only safeguard the interests of thefinancial and money centres, not the host developing countries.For the latter to be served, any reform or any new financialarchitecture must be seen not in separate compartments, dealingwith financial and trading systems, but together in one piece.The starting point for this, to ensure that their voices areheard and accommodated, is not to treat "trading in widgets asthe same as trading in dollars", adapting the title of a recentarticle by Prof. Jagdish Bhagwati.Developing countries may not be able to block changes at theIMF, but they can do so at the WTO (and use the consensusprocess to reject accords). They might regain some bargainingleverage at the WTO by not ratifying the 1997 financialservices accord, and insisting on changes in the financialservices agreements or, at the minimum, their being enabled torewrite their schedules with new conditions under which thedictum for foreign financial services operators would be thatthey can do only what they are specifically permitted to do,and anything not allowed would be illegal.This would not be an issue of market vs. command economy -but rather one of following the Anglo-Saxon or Napoleonic law.In the financial sector at least, the market theology needs tobe modified to the effect that any new activity notspecifically authorized would need specific approval, and theoperators would face penalties if they try to get around theregulations or help local enterprises to do so.And the home countries of these banking and financialservices enterprises should be able to raise disputes on behalfof their enterprises at the WTO only if they undertakesupervisory and regulatory obligations to ensure that theirmain offices will obey host-country rules and regulations - inthe same way the US wants countries of origin to track andcontrol production and exports of narcotic drugs. (Third World Economics No. 202, 1-15 February 1999)This article was originally published in the South-North Development Monitor (SUNS) No.4348, of which Chakravarthi Raghavan is the Chief Editor.a contribution to a leading economics journal, Prof. JanKregel highlights the role played by derivatives, particularlyover-the-counter (OTC) derivatives, in the Asian financialcrisis. OTC derivatives, which are structured to clients'particular needs by banks which themselves assume little risk,hamper efficient capital allocation and prudent riskassessment. The volatility generated by the use of suchinstruments necessitates the need for financial-sector reform.by Chakravarthi Raghavan
GENEVA: While not all the difficulties created by volatilecapital flows in Asia were due to the increased use ofderivative instruments or structured derivative packages byforeign banks, they did play an important role in theunexpected declines and excessive volatility of currency andasset markets in Asia during the crisis, according to Prof. JanKregel.In an article on derivatives and global capital flows in theOxford Journal of Economics November 1998 issue devoted to theAsian crisis, Kregel (who at that time was teaching at BolognaUniversity, but is now on the staff of UNCTAD) points to fourpuzzles in the East Asia crisis that have caused surprise, andsuggests that the understanding or explanation lies in thewidespread use of structured over-the-counter (OTC)derivatives.Puzzling elementsThere are at least four puzzling elements in the Asian crisis,he says:First, after the Latin America debt crisis of 1982,developing countries were encouraged to increase reliance onnon-bank lending, in particular FDI, and the instance of suchflows to a number of Asian economies was used as an example ofthe greater stability of such lending. Yet the Asian crisisseems to have been precipitated by the reversal of short-termprivate bank lending which had come to dominate capital flowsto the region.Second, capital flows to Asia have been used as an exampleof the benefits of international capital markets in directingresources to the most productive uses. Yet in the aftermath ofthe crisis, it appears that total returns on equity investmentsin Asia have been lower than in most other regions throughoutthe 1990s.Third, in a number of Asian countries, the majority ofinternational lending was between foreign and domestic banks.It has been suggested that the major cause of the crisis isunsafe lending practices by Asian banks, due to inadequatenational prudential supervision.But the developed-country lenders were large global banks,employing highly sophisticated risk-assessment procedures,which continued to lend well after the increased risks in theregion had become apparent.This shows that even the most sophisticated operators in theglobal financial markets have difficulties in assessing risk,and that the Asian country regulators were no more successfulin imposing prudent limits than those in most advancedcountries.Finally, private portfolio and FDI flows were consideredto be preferable to syndicated bank lending because they werethought to segregate the problem of foreign exchangeinstability from asset market instability.... Yet, the linkagebetween the collapse in exchange rates and that in equitymarkets appears to have been even closer in Asia than in otherexperiences of financial crises.One explanation offered for the crisis in foreign markets,Kregel notes, is that a large proportion of foreign borrowingby corporations was unhedged because of expectations of stablecurrency rates, and when these were disappointed, there was ascramble for foreign currency to repay the debts and thiscreated the massive market imbalance and collapse of foreignexchange markets.And the absence of generalized hedging in foreign exchangemarkets has been interpreted to mean that financial derivativescontracts played no role in the crisis - a view reinforced byreferences to the IMF study that global hedge funds were notactive catalysts in the Asian crisis.However, points out Kregel, the quarterly reports (fourthquarter of 1997 and first quarter of 1998) of US money centrebanks suggest that most of their initial losses have beenrelated to derivative-based credit swap contracts. And at leastin the case of US banks, such derivative contracts played somerole in the flow of funds to Asia and thus in the instabilityof such flows. There is also evidence that the German andFrench banks were also involved in derivatives trading in theregion.Over-the-counter derivativesThe standard derivative contracts - such as forwards, futuresand options - are used for hedging risks. Foreign currencyforwards remain the province of bank foreign exchange dealers.Most basic futures and options contracts are standardized andtraded in organized, regulated markets. But banks also offerderivative contracts to their clients in the "over-the-counter"market. These are not derivatives on organized markets, butrather individually tailored, often highly complex,combinations of standard financial instruments, packagedtogether with derivative contracts designed to meet particularneeds of clients. Such contracts involve very little directlending by banks to clients, and generate little net interestincome to the banks. They are often executed through specialpurpose vehicles - specialized investment firms that areseparately capitalized and thus, in terms of the Basle capitaladequacy requirements, need little or no capital or areclassified as off-balance-sheet items, involving no direct riskexposure of the bank. They generate, though, substantial feeand commission income - with the bank committing none of itsown capital, but serving as an intermediary matching borrowersand lenders.The major objective of active, global financial institutionsis thus no longer the maximization of profits by seeking thelowest-cost funds and channelling them to areas of highestrisk-adjusted return, but rather maximizing the amount offunds intermediated to maximize fees and commissions, thusmaximizing the rate of return on bank capital. This means ashift from continuous risk assessment and risk monitoring offunded investment projects that produce recurring flows ofinterest payments over time to the identification of riskless"trades" that produce large, single payments, with as much ofthe residual risks as possible carried by purchasers of suchpackages. This process has been accelerated by the introductionof risk-weighted capital requirements.This has resulted in banks coming to play a declining rolein the process of efficient international allocation ofinvestment funds, but serving to facilitate this process bylinking primary lenders and final borrowers. This means thatthe efficient allocation of funds to the highest risk-adjustedrate of returns depends on an assessment of risks and returnsby the lender.But the role of most derivative packages is to mask theactual risk involved in an investment, and to increase thedifficulty in assessing the final return on funds provided.As a result, certain types of derivatives may increase thedifficulties faced by private capital markets in effecting theefficient allocation of resources. And by making investmentevaluation more difficult for primary lenders, they create alsodifficulties for financial market regulators and supervisors.Circumventing prudential restrictionsMost institutional investors in the US do not face unlimitedinvestment choices, but are limited to investing in assets witha minimum of risk represented by the investment-grade creditrating on the issue. They are precluded from risks such asforeign exchange risks or foreign credit risks.This means that a large proportion of professionally managedinstitutional investment funds cannot invest in emergingmarkets or in particular asset classes such as foreignexchange."Structured derivative packages, created by globalinvestment banks, have often provided the means to circumventthese restrictions."Some of these packages, Kregel explains, might involve USgovernment agency dollar-denominated structured notes with theinterest payments, or the principal value, linked to an indexrepresenting some foreign asset, such as the Thai baht/dollarexchange rate, and derivative contracts enabling a Thai bank toget below-market-rate funds, US investors above-market returns,and the banks fees and commissions for arranging the trade, butwith no commitment of capital.Kregel points out that it is virtually impossible (in suchcontracts) for the US investor to evaluate the use of funds bythe Thai bank, and there is little incentive for the US bank todo so: for, once the structured note issue is sold, the foreigncredit and exchange risks are borne by the US investor, who isnot only subverting prudential controls, but in all probability evaluating the return without any adjustment for foreignexchange risk, even if that risk is recognized as such."There is thus little economic interest or possibility forthe market to assess either the risk or the returns of theinvestment, and thus no incentive for market agents to act soas to ensure that capital is allocated globally to those usesproviding the highest risk-adjusted rates of return."Kregel explains the use of OTCs for "credit enhancement" inlending and investing in Mexico for Brady bonds and J PMorgan's use of them for the issuance of Aztec bonds in 1988,and more recently investment banks applying this principle toother types of developing-country debt to enable USinstitutional investor funds to invest in emerging-market debt,earning above-market interest rates, with no risk to theintermediary "unless the bank was required to guarantee toconvert interest payments (in local currency) into dollars, anda risk only if the foreign currency were to becomeinconvertible - not a devaluation risk but a risk that thecurrency could not be sold at any price."Kregel comments that this provides one possible explanationwhy so much effort was made to prevent Mexico from suspendingconvertibility in 1994, and notes that structures similar tothat used in Mexico were used in Asia as well as Latin America.The structured note and the credit-enhanced Brady structureswere used to move funds from developed to developing countries,despite the existence of prudential regulatory barriers.Kregel notes that information about the various derivativesis not easy to come by, but some of the litigations between UScentre banks like JP Morgan and some Korean counter-partiesthrow some light.And in the case of Thailand, the profits from derivativesand current revaluations far exceed the total amounts owed fortraditional lending. This suggests that a majority of thefunds that entered Thailand were linked to derivativecontracts. For Korea, the profit figures were well over halfthe amount of total lending, leading to a similar conclusion. And in Indonesia, they are roughly two-thirds.Thus, in all the three countries that had to seek IMFsupport, derivatives sold by US banks to domestic institutionsappear to have played as large a part as traditional financingactivities.The Kregel article was contributed in April 1998, and thusmakes no reference to the evolution of the financial crisisafter that date - its spread to Russia and Latin America, andthe scandal in the US itself of the Long-Term CapitalManagement Fund (LTCM) and its operations and collapse, and theNew York Federal Reserve-engineered rescue of the LTCM.But some of Kregel's views on OTC derivatives and their rolein Asia, and banks assuming no real risks except when acurrency becomes inconvertible, may perhaps explain the howlsraised in Washington and elsewhere against Malaysia and itsdecision in September to make the ringgit non-convertible andimpose capital controls.The strong criticism of Malaysian controls possibly reflectsworries and fears that Indonesia and other developing countriesmight follow the Malaysian example, if there is no quickturnaround in their economies under the IMF conditionedprogrammes.Capital controlsIn the OJE, in other articles, Prof. Robert Wade and othersin fact advocate capital controls and restrictions.Wade argues that capital account convertibility bringseconomic policy in developing countries under the influence ofinternational capital markets - and a small number of countryanalysts and fund managers in New York, London, Frankfurt andTokyo.Even if free movement of capital leads to efficiency inallocation of capital and as such maximizes returns to capitalworldwide, "governments have much more than the interests ofthe owners of capital in view - or ought to have.... They wantto maximize the returns to labour, to entrepreneurship, totechnical progress and to maximize them within their ownterritory rather than somewhere else; they want to providepublic goods that contribute to the good life.""Only blind faith in the virtues of capital markets couldlead one to think that maximizing the returns to capital andpromoting development goals generally coincide," Wade adds.But regional economists like Prof. Jomo Sundaram of theUniversity of Malaya believe that capital controls can avert acrisis but not overcome it. Currency measures in Malaysia werenecessary to regain control over monetary policy and kill theoverseas market in ringgit (especially in Singapore). Butcapital controls are a means and not an end in itself, andcould be messy and discourage FDI as well, he adds.The full contours of the LTCM and its operations in the USare yet to come out fully - the involvements of various banksand bank regulators (in the US and Europe, and their failures),and the LTCM rescue, justified by the Federal Reserve asnecessary to safeguard the financial system but viewed by manyothers as US crony capitalism and an attempt to bury themistakes of the regulators.The LTCM has forced regulators, under prodding fromCongress, to sit up and take note of such funds and theiroperations. But even when trying to respond to Congress, the USregulators are fighting their own turf battles: there are threeof them - the US Federal Reserve, the Securities and ExchangeCommission and the Commodities and Futures Trading Commission -and each has a constituency that uses its campaign financingto line up Congressional support too.But many of the arguments of the US and of the IMF againstover-regulation and controls, and why hedge funds cannot becontrolled or regulated (since they will shift their operationsto offshore centres, like the Cayman Islands, and thus escapesupervision) don't really stand up to much scrutiny.After all, Mr. George Soros or Mr. Meriwether of the LTCMand his like may locate their funds in offshore centres, butthey and their staff won't go and live in these places withtheir families and send their children to school there. Theoffshore centres will only be "name-plate" funds andenterprises, in fact run from desks in the US, UK and so on.Two schools of thoughtThere are two schools of thought in the US: one that advocatesthat derivatives traded on regular markets, and OTCs (whosedaily turnover is not over a trillion dollars), need to beregulated and controlled in the same way new drugs are by theUS Food and Drug Administration: each one needs prior approvaland clearance before being put on the market.The other approach is for regulators to give clearinstructions to the banks on the extent of risks they will beallowed and not allowed, and rely on their internal oversightsystems. If these systems are found to have failed, then thebanks will be forced to set aside heavy capital adequacyrequirements.But either way, it will only safeguard the interests of thefinancial and money centres, not the host developing countries.For the latter to be served, any reform or any new financialarchitecture must be seen not in separate compartments, dealingwith financial and trading systems, but together in one piece.The starting point for this, to ensure that their voices areheard and accommodated, is not to treat "trading in widgets asthe same as trading in dollars", adapting the title of a recentarticle by Prof. Jagdish Bhagwati.Developing countries may not be able to block changes at theIMF, but they can do so at the WTO (and use the consensusprocess to reject accords). They might regain some bargainingleverage at the WTO by not ratifying the 1997 financialservices accord, and insisting on changes in the financialservices agreements or, at the minimum, their being enabled torewrite their schedules with new conditions under which thedictum for foreign financial services operators would be thatthey can do only what they are specifically permitted to do,and anything not allowed would be illegal.This would not be an issue of market vs. command economy -but rather one of following the Anglo-Saxon or Napoleonic law.In the financial sector at least, the market theology needs tobe modified to the effect that any new activity notspecifically authorized would need specific approval, and theoperators would face penalties if they try to get around theregulations or help local enterprises to do so.And the home countries of these banking and financialservices enterprises should be able to raise disputes on behalfof their enterprises at the WTO only if they undertakesupervisory and regulatory obligations to ensure that theirmain offices will obey host-country rules and regulations - inthe same way the US wants countries of origin to track andcontrol production and exports of narcotic drugs. (Third World Economics No. 202, 1-15 February 1999)This article was originally published in the South-North Development Monitor (SUNS) No.4348, of which Chakravarthi Raghavan is the Chief Editor.

Argentina: A crisis made abroad

Argentina: A crisis made abroad
Countering claims that the Argentine economic crisis was caused by extravagant government spending, a US think-tank has traced the roots of the Latin American country’s troubles to external shocks and wrong-headed policies backed by the international financial institutions.
by Chakravarthi Raghavan
GENEVA: The crisis in Argentina is not the result of profligate government spending but was caused by external shocks and failures of policies that were set or encouraged and promoted by the international financial institutions, including the International Monetary Fund, according to a briefing paper of the Centre for Economic and Policy Research (CEPR).
The briefing paper is by Mark Weisbrot and Dean Baker, co-directors of CEPR, a Washington-based think-tank, who warn that the IMF is playing with fire in trying to squeeze debt service out of Argentina’s collapsed economy.
In the briefing paper, Weisbrot and Baker have challenged reports in the US and international press of a profligate government that could not contain its spending and could not make the necessary hard choices to build confidence among investors and lenders.
It was higher interest payments on its debt, not increased government spending, that led to the higher deficits which in turn created doubts about the overvalued exchange rate, pushed interest rates higher and created larger deficits - in a hopeless spiral that ended in default and devaluation.
While policy failures played a role in the economic collapse in Argentina - and the most important was the fixed exchange rate tying the Argentine peso to the US dollar - the immediate cause of the crisis was a series of external shocks beyond the control of Argentina, CEPR says.
These shocks began with the US Federal Reserve’s decision to raise interest rates in February 1994 and were made much worse because of the fixed exchange rate.
The Argentine data do not support the idea that the government could not accept a sufficient dose of the austerity medicine or that it spent its way into a hole.
The total budget balance of Argentina over the period 1993-2000 suggests a significant loosening of fiscal policy, with the budget moving from a surplus of $2.7 billion or 1.2% of the GDP in 1993 to a deficit of $6.8 billion or 2.4% of GDP in 2000. But, for a country in deep recession, this deficit was modest.
However, even this deficit, and the shift from surplus at the beginning of the period, does not accurately represent government fiscal policy, the CEPR briefing paper points out.
The primary balance of the government - government spending other than interest payments, subtracted from revenues - moved from a surplus of $5.6 billion or 2.4% of GDP in 1993 to $2.9 billion or about 1% of GDP in 2000 - “a very modest deterioration”.
Even this movement did not occur on the expenditure side. Government spending, minus interest payments, was essentially flat over the period - 19.1% of GDP in 1993 and 18.9% in 2000 - despite the serious recession. All the deterioration was on the revenue side, as tax collections fell off during the recession.
It was thus difficult to argue, says CEPR, that the Argentine government contributed to the economic crisis through overspending, nor could the government have averted, even if it were politically possible, the default and devaluation through further fiscal tightening throughout the recession.
The government budget moved from surplus to deficit because of interest payments, which rose from $2.5 billion in 1991 to $9.5 billion in 2000 or from 1.2% to 3.4% of GDP.
With almost all of these payments in foreign currency, this itself was a significant drain on the economy. But the effect of rising interest rates, in the context of the fixed exchange rate, was much more damaging. The budget deficit increased uncertainty in the financial markets about the viability of the exchange-rate regime, and the uncertainty drove interest rates even higher.
Efforts to meet the deficit by cutting primary government spending even further during a period of recession made things worse: it directly cut demand and, by causing political instability and uncertainty, fed the fears of devaluation and/or default. The collapse of the economy occurred without any new borrowing by the government to finance its primary spending.
Interest rate hike
Argentina’s problems began when the US Federal Reserve hiked up interest rates in February 1994 and over the next year doubled the short-term rates from 3 to 6 percent. Argentina was hit immediately because of the uncertainty created over emerging markets: Argentina’s borrowing rate increased by the US Fed’s 3 percentage point increases, and the increasing spread.
The devaluation of the Mexican peso in December 1994 - partly triggered by the hike in US interest rates that attracted tens of billions of dollars away from Mexican bonds to the US - exacerbated the situation in Argentina, with the banking system losing 18% of its deposits within weeks.
The economy, which had been growing at an average annual 8% rate from the second half of 1990 to the second half of 1994, went into a steep recession. GDP contracted by 7.6% from the last quarter of 1994 to the first quarter of 1996, and there was a massive outflow of capital and shrinkage of reserves.
While recovery began in the second half of 1996, the Asian crisis of 1997 sent the Argentine risk premium and cost of borrowing up again. And the peso, tied to its fixed exchange rate with the dollar, became overvalued, with the dollar too becoming overvalued at that time.
The subsequent spread of the Asian financial crisis to Russia and then Brazil made things worse, and the Argentine economy went into recession in the second half of 1998 and has not recovered since. Efforts to restore confidence in the overvalued peso through spending cuts and IMF loans (including a $40 billion package in December 2000) could not reverse the downward spiral.
The IMF supported the fixed-rate policy of Argentina all the way into the abyss, though subsequently the Fund officials have claimed they did so at the request of the Argentine government.
Argentina’s debt to the international financial institutions increased from $15 billion to $33 billion, and throughout the IMF insisted that more fiscal tightening was the key to recovery, even though it was quite clear that no amount of budget-cutting or tax increase could have saved Argentina from default and devaluation.
Argentina is currently trying to negotiate new agreements with the IMF and the international financial institutions, and there are renewed calls for budget austerity. Though the fixed-exchange-rate system has gone, austerity cannot help Argentine recovery, says CEPR.
At the moment, with the government of President Eduardo Duhalde lacking any public backing to be able to stand up to the IMF, the Fund officials seem to have the upper hand.
However, says Weisbrot, the IMF would be playing with fire if it tries to squeeze debt service out of the collapsed economy and push more people into poverty. (SUNS5077)
From TWE No 276 (1-15 March 2002)

How the Nairobi terror attack was planned

Rating

Fazul Abdullah Mohamed

By STEPHEN MBURUPosted Wednesday, August 6 2008 at 17:50

In Summary

• Withdrawal of internal forces in Somalia prompted al-Qaeda to focus on alternative targets such as Kenya
• Wadih el-Hage, an American of Lebanese descent, took the lead in setting up al-Qaeda’s Kenyan infrastructure
• Fazul Abdullah Mohamed, a Comorean national with a Kenyan passport, replaced El-Hage as Nairobi cell commander when he returned to US.
• Travel to and from Somalia had continued in the years prior to the bombings.

The withdrawal of US and other internal forces from Somalia prompted al-Qaeda leader Osama bin Laden to shift the group’s regional focus to alternative targets, such as Kenya.

These were considered by the group as “soft” American targets, according to the International Crisis Group.

Al-Qaeda’s Somali connections were to prove instrumental in planning the major terrorist attack.

Towards the end of 1993, while conducting training in Somalia, al-Qaeda instructor Ali Mohamed was already casing targets in Nairobi. Team members rented an apartment in the Kenyan capital and by January 1994 were providing surveillance information on potential targets there and in Djibouti. In consultation with bin Laden, the US Embassy in Nairobi was identified as the target.

Wadih el-Hage, an American of Lebanese descent, took the lead in setting up al-Qaeda’s Kenyan infrastructure, establishing an NGO, Help Africa People, and becoming closely involved with the Nairobi office of Mercy International Relief Agency (MIRA), a Dublin-based organisation headed by a Saudi dissident, Safar al-Hawali.

MIRA’s Nairobi office was headed by a Somali whom captured terrorist Odeh described as a close associate of Osama during the al-Qaeda chief’s sojourn in Sudan during the early 1990s.

In Somalia, MIRA supported al-Itihaad’s regional administration in the Gedo region until it was shut down by Ethiopian raids in 1997, and apparently also served as a conduit for the travel of foreign jihadis to and from Somalia.

Grand jury

When el-Hage had to return to the US to appear before a grand jury investigating Osama, Fazul Abdullah Mohamed, a Comorean national with a Kenyan passport, replaced him as Nairobi cell commander. The cell’s direct communications with bin Laden were channelled through the leader of the Mombasa network, Saleh Ali Saleh Nabhan.

Fazul, one of the most wanted in the world, is now on the run in Kenya after escaping capture during a police raid at a Malindi hideout last Saturday.

On August 7, 1998, a massive bomb in a truck driven by “Azzam” detonated at the Nairobi embassy, and minutes later a second bomb exploded outside the Dar-as-Salaam embassy. The two bombs killed 225 people and wounded over 5,000. Only 12 of the dead were American; the vast majority were Kenyan.

Subsequent trials of al-Qaeda team members demonstrated that travel to and from Somalia had continued in the years prior to the bombings. US intelligence sources said “al-Qaeda’s residual linkages with Somalia reflected the involvement of al-Itihaad cells led by Aweys and Hassan Turki in the preparations.”

The US indicted the two for terrorism.

The Crisis Group reports that in the aftermath of the 1998 embassy bombings, several members of al-Qaeda’s East Africa cell were arrested, but Fazul and Nabhan remained at large and began assembling a new team. In November 2001, less than two months after al-Qaeda’s attacks in New York and Washington, Fazul assembled part of this new team in Mogadishu.

Regional security sources said that senior members provided small arms training, using locally bought Kalashnikovs, pistols and hand grenades, within the confines of a cramped apartment. Finances were handled by a Sudanese national, Tariq Abdullah (a.k.a. Abu Talha al-Sudani), operating between Somalia and the United Arab Emirates (UAE).

One month later the group dispersed. Fazul returned to the Kenyan coastal village of Siyu, where he had established a new identity and married a local girl. Meanwhile, under the leadership of Nabhan, one cell began to reconnoitre possible targets in the Mombasa area.

By April 2002, the choice had been made: Moi International Airport and the Paradise Hotel, a beachfront lodge in the coastal village of Kikambala, owned by Israelis and frequented by Israeli tourists. Under Nabhan’s supervision, the team began to prepare crude bombs: two propane gas cylinders filled with homemade ammonium nitrate explosives.
Back in Mogadishu, the remaining al-Qaeda team members—guided by occasional visits from Fazul—set about procuring additional materials for the operation. From the local arms market, they ordered two Strela 2 surface-to-air missiles that had found their way via Yemen onto the streets of Mogadishu.

In July 2002, the operation was nearly derailed when police reportedly arrested Fazul over a robbery in Mombasa but they did not realise he was a wanted terrorist with a $25 million bounty on his head, and he escaped the following day.
A month later, Fazul smuggled the missiles across the Somali border.

EURASIA INSIGHT

EURASIA INSIGHT
ABKHAZIA CRISIS ADDS TO RUSSIA’S POLITICAL HEADACHES IN THE CAUCASUS
Sergei Blagov 11/15/04

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Relative calm has returned to Abkhazia following a confrontation linked to the Georgian breakaway region’s disputed "presidential" election. Even though large-scale violence has been averted for now, recent developments mark a substantial blow to Moscow’s Caucasus policy.

Tension has been rising in Sukhumi, the Abkhaz capital, since the region’s presidential vote October 3. Sergei Bagapsh, a political outsider, claimed victory in the election. But the Moscow-backed political establishment has refused to recognize the results, claiming they were skewed by widespread irregularities. [For additional information see the EurasiaNet archive]. Incumbent authorities have mandated a fresh election be held in December, apparently aiming to give Moscow’s preferred candidate, Raul Khajimba, a second political chance.

Political passions flared November 12 when Bagapsh supporters stormed government offices – actions that the region’s staunchly pro-Russian "prime minister," Nodar Khashba, characterized as "an armed coup." One person was killed during the initial confrontation. Bagapsh played a key role in helping to restore order, issuing a public appeal for his supporters to disperse. By November 15, authorities were once again in possession of all government offices.

The same day Khashba expressed confidence that a political compromise on the electoral dispute was within reach. "We shall work out the only correct, common decision, making it possible to leave behind this political crisis in Abkhazia, the Itar-Tass news agency quoted Khashba as saying.

Russian pundits did not share Khashba’s optimism. The general consensus among Russian media outlets seemed to be that the November 12 events will make a political compromise between Bagapsh and Khajimba virtually impossible – at least over the near-term. A commentary in the Izvestiya daily said: "the future president of Abkhazia may take office only as a result of a minor civil war, and Abkhazia is on the brink of this."

Meanwhile, a commentary published November 15 by the state-run Rossiiskaya Gazeta expressed concern that the existing Abkhaz administration, headed by Vladislav Ardzinba, "cannot control the situation."

Russia has long regarded Abkhazia as a valuable geopolitical outpost in the Caucasus, underscored by the fact that Moscow granted Russian citizenship to a large percentage of Abkhaz residents. [For background see the Eurasia Insight archive]. Depending on the outcome of the Bagapsh-Khajimba dispute, Russia’s ability to use Sukhumi as a means for exerting pressure on Georgia could be significantly reduced.

Abkhazia has operated beyond Tbilisi’s authority since a 1992-93 conflict. Bagapsh has insisted throughout the electoral crisis that he remains loyal to Russia and has no intention of seeking a rapprochement with Georgia. "We know that nothing can be made in Abkhazia without Russia," the Rosbalt news agency quoted Bagapsh as saying November 14. Despite such statements, some observers believe that it will be hard for Bagapsh, in the event that he emerges as president, to forge a close relationship with Russian officials, given Moscow’s overt support for Khajimba during the election controversy.

Abkhazia already has complicated Moscow’s diplomacy in the Caucasus by stoking Russian-Georgian antagonism. An exchange of caustic diplomatic statements began November 12, when Russian Foreign Ministry spokesman Alexander Yakovenko indicated that Russia could intervene in Abkhazia if the post-election violence there continued. Russia could "be forced to take measures to protect its interests," he said.

Georgian officials responded sharply to Yakovenko’s comments, accusing Russia of trying to meddle in Georgia’s internal affairs. "The situation [in Abkhazia] is controllable ... if no-one from outside interferes," Georgian Foreign Minister Salome Zourabichvili said in an interview with Georgian television broadcast November 13.

Zourabichvili went on to specifically refute Russia’s claim that it had a right to concern itself in Abkhaz affairs due to the fact that many Abkhaz hold Russian passports. "This is a concept that is absolutely unacceptable," Zourabichvili said. "If we recall the past, I think this was Hitler’s concept with respect to the Sudeten Germans [in pre-World War II Czechoslovakia]."

Russia’s first deputy foreign minister, Valeri Loshchinin, initially dismissed the Georgian complaints as groundless. Then, on November 14, Russian Foreign Minister Sergei Lavrov sought to dispel the impression that Moscow was meddling in Abkhaz developments, reiterating that Moscow supported Georgia’s territorial integrity. At the same time, he cautioned Tbilisi against any attempted use of force to re-establish its authority in either Abkhazia or South Ossetia. "We [in Moscow] believe that the settlement of the problem by setting non-natural time frames on behalf of Georgia is not only impossible, but very risky, if not disastrous," Lavrov said in televised remarks.

At the same time Moscow is grappling with the Abkhazia dilemma, it is also trying to work with Tbilisi to promote stability in Georgia’s other break-away region – South Ossetia. On November 15, Georgian officials and South Ossetian representatives began implementation of a de-militarization deal reached 10 days earlier. The two sides, with Russian assistance, aim to destroy military fortifications in the region’s conflict zone.

Elsewhere in the Caucasus, Russia is grappling to address new outbreaks of discontent. In Russia’s own Karachayevo-Cherkessia autonomous republic, a scandal involving the son-in-law of regional leader Mustafa Batdyev has sparked unrest. The son-in-law, wealthy businessman Ali Kaitov, is accused of ordering the murders of seven business rivals. He is alleged to have ordered his bodyguards to shoot his rivals October 11, while the victims were attending a meeting at Kaitov’s vacation home.

Rioters seized government offices in the regional capital Cherkessk on November 9 after the charred remains of the victims were discovered. Mediation by Russian presidential envoy Dmitry Kozak helped quell the protests. Kozak pledged that those implicated in the murders would be vigorously prosecuted, while cautioning against renewed attempts to force Batdyev’s resignation.

Moscow has preferred to interpret the crisis in Karachayevo-Cherkessia as a rivalry between local clans, and not a confrontation between the local government and its people. However, tensions in Karachayevo-Cherkessia arguably indicate that Russia’s regional policies are in danger of breaking down. Some observers believe Russian policy would be better served if the Kremlin devoted less attention to Abkhazia and South Ossetia, and did more to address the complaints of those in the various Russian regions of the Caucasus.


Editor’s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.



Posted November 15, 2004 © Eurasianet
http://www.eurasianet.org

jamhuri Day drama

Radio presenter and comedian Walter Mong’are, popularly known as Nyambane, is arrested at the Nyayo Stadium as he protested against the new media law. Photo/PETERSON GITHAIGA

By MUCHEMI WACHIRA and OLIVER MATHENGEPosted Friday, December 12 2008 at 22:05

In Summary

• President forced to cut short his speech as arrests mark independence celebrations

Protests over attempts to muzzle the media, rising food prices and failure by MPs to pay taxes forced the President to cut short his speech during Friday’s Jamhuri Day celebrations.

Four television and radio personalities were among 53 people who were arrested by police in day-long protests in parts of the country.

QFM radio morning show presenter Walter Mong’are popularly known as “Nyambane”, Kiss FM’s Carolyne Mutoko, Larry Asego and Felix Odiwuor Kodhe (Jalang’o) were held by police for more than six hours before they were released.

Mr Mong’are was wrestled to the ground and kicked by senior police officers as he made his way into the stadium dressed in clothes resembling those worn by prisoners to symbolise impending imprisonment of media if a Bill passed by Parliament on Wednesday is signed into law.

Those arrested were first held at Langata, Buruburu, Gigiri and Nyayo Stadium police stations.

Mr Mong’are and Mr Frederick Odhiambo of Bunge la Mwananchi lobby were moved to Nairobi area police headquarters.

In Mombasa, journalists covering the celebrations had tape strapped around the mouth as a way of protesting the law allowing a government-appointed commission to determine broadcast content, and giving the Minister for Internal Security powers to raid media houses.

Ms Mutoko was arrested as she arrived at Nyayo Stadium dressed in a black T-Shirt with the inscription “No Tax, No Tax utado? (What will you do)?”.

Presidential security officers descended on Mr Odhiambo after he shot up from his sit and started shouting.

He was sitting about 10 metres behind the President and it is not clear how he got entry into the VIP dais. President Kibaki who presided over the ceremony was forced to cut short his speech after Mr Odhiambo caused a stir.

The Head of State had just started giving his off the cuff speech in Kiswahili when Mr Odhiambo suddenly started shouting.

Shortly before the incident, an angry President who had apparently been appalled by heckles and shouts of ‘njaa, njaa tunaka chakula na MPs walipe ushuru’, (hunger, hunger, we want food and MPs must pay taxes) had said:

“Wapigane wale wanataka kupigana.” (Let those who want to fight do so). The President had made the remarks after a section of the crowd shouted at him when he started giving his Kiswahili speech.

However, the crowd was silent when he was delivering his Jamhuri Day message to the Nation in English.

At the dais, the VIPs appeared shocked by Mr Odhiambo’s protest.

Those who sat near him had started to walk away. Others watched in horror as the security agents wrestled him covering his mouth while struggling to eject him from area.

The President, First Lady, Lucy, Prime minister Raila Odinga and Vice-President Kalonzo Musyoka immediately left the podium with other VIPs in tow.

A similar incident had taken place during the entertainments when comedian Walter Mong’are attempted to access the podium.

Zimbabwe's Cholera Crisis Spurs New Calls for Mugabe to Step Down
In the wake of Zimbabwe's cholera outbreak, worsening food shortages and political unrest, African and Western leaders are publicly urging embattled President Robert Mugabe to step down. An analyst provides an update on the situation in the embattled nation.

				JIM LEHRER: And finally tonight, cholera, chaos, and politics in the southern African nation of Zimbabwe. We begin with a report from Jonathan Miller of Independent Television News. Be forewarned: This report contains some disturbing images. JONATHAN MILLER: You really know a country is in trouble when a $10 million bank note gets dumped in the rubbish and then gets ignored by those scavenging for scraps of food in the stinking refuse. You really know a country is in trouble when you see children filling water bottles in a street-side sewer, even when everyone knows about the cholera epidemic. And most heartbreakingly, you really know a country is in trouble when you see pictures like this: a 2-year-old baby boy suffering organ malfunction and extreme symptoms of severe malnutrition. President Robert Mugabe, defiant, unmoved, now accused of condemning his people to death, death by torture, death by hunger, and death by disease. The rhetoric ratcheting up now, a growing clamor of voices, albeit from mostly Western leaders, saying enough, Mugabe must go. As the crisis in Zimbabwe continues to deepen, the most outspoken from an African leader has come from the Kenyan prime minister, who's called for military intervention. The former U.N. Secretary-General, Kofi Annan, said today that Zimbabwe was rapidly becoming a full-blown failed state. Total chaos is how the U.N. described the cholera crisis today. Officially, it's put the number of cases at close to 14,000, nearly 600 dead, but we've been told again and again that these numbers are grossly conservative. Now the projections cited by Channel 4 news 10 days ago that infections could hit 60,000 with a kill rate of 1 in 10 now being cited by U.N. agencies, too. The disease, which is treatable and preventable, continues to spread and to kill in neighboring South Africa. The hospital in the border town of Musina, which when we visited last week was overwhelmed, was visited today by South Africa's health minister, who recognizes the gravity of the situation. BARBARA HOGAN, South African health minister: We've got to accept that there is a major health crisis in Zimbabwe. And I am very encouraged by the way the people of Musina have stood together under very difficult circumstances and are helping the people of Zimbabwe. JONATHAN MILLER: Pretoria, those still unwilling to put pressure on Robert Mugabe to step down to forestall his country's return to year zero. AYANDA NTSALUBA, Department of Foreign Affairs, South Africa: If there's any pressure on President Robert Mugabe and the ZANU-PF is the pressure for them to move with greater speed to make sure that there's a successful implementation of the agreement which was signed on September 15th so that an inclusive government can be established. JONATHAN MILLER: But for Zimbabweans, that agreement is dead in the infected water. Zimbabweans live in limbo between life and death. In the countryside, they now survive on wild berries, and their government continues to blame everyone but themselves for this crisis. JIM LEHRER: And to Margaret Warner.

				Cholera epidemic spreading rapidly MARGARET WARNER: For more on Zimbabwe's cholera and governance crisis, we're joined by Stephen Morrison, who directs the Global Health Policy Center at the Center for Strategic and International Studies in Washington. He's also senior adviser to the CSIS Africa program. Mr. Morrison, thanks for being here. STEPHEN MORRISON, Global Health Policy Center: Thank you. MARGARET WARNER: First of all, this dreadful cholera epidemic and outbreak, put it in context for us. How unusual is this in its scale, let's say, compared to elsewhere in the developing world? STEPHEN MORRISON: Well, it's moved very, very rapidly. It started in August, and it's accelerated to nine of 10 provinces in Zimbabwe, so it's moved to a national scale very rapidly. The earlier outbreaks that we had, for instance, in Lima in '91 were confined to very poor, overpopulated parts of the city. In this case, it's spread into the major urban areas and into the major rural areas, and it's having, as we heard in the report, very high mortality rates. Normally you would have about a 1 percent mortality. The report cited a one in 10. Some communities, isolated rural communities, are suffering 30 percent to 40 percent mortality. MARGARET WARNER: Now, why are we seeing this outbreak now in Zimbabwe, which has been a developing essentially basket case nutritionally, in terms of sanitation, for a number of years? STEPHEN MORRISON: What we're seeing is the convergence of several failures. We're seeing a political failure, in terms of the inability for the power-sharing arrangement signed in September, in mid-September, to move forward at all, so there's a stalemate. MARGARET WARNER: That's between Mugabe and his opposition, which we'll get to in a minute.
				Health care system devastated MARGARET WARNER: That's between Mugabe and his opposition, which we'll get to in a minute. STEPHEN MORRISON: Because Mugabe and the opposition. Then we're seeing a collapse of the medical system, which at one time was among the best in Africa, so that you have hospitals closed, you have health workers who have -- 80 percent of your health workers have left the country. Those that remain are not being paid; they're not reporting to work; there are no inputs. You're seeing a collapse of basic sanitation and water purification systems. The basic chemical inputs for the water purification system are not there. And so... MARGARET WARNER: And that's the real cause of cholera? I mean, that's how it spreads? STEPHEN MORRISON: Yes, it is transmitted by water. The bacteria is transmitted principally by water. It's ingested. It sets off a massive dehydration within two to three days, and it can be spread. It's highly contagious and can be spread among families, between those that are preparing foods and others. MARGARET WARNER: Now, you said that a lot of the nurses and medical personnel have left. So who's running basic health and sanitation in the country? And are international aid workers getting in? STEPHEN MORRISON: In the last week, the Ministry of Health and Child Welfare in Zimbabwe sounded the alarm, declared a national emergency, and began to move ahead in the discussions with the World Health Organization, with UNICEF, with a number of other U.N. operations, with some NGOs, like MSF France, World Vision, and others, in trying to put an emergency consortium effort together that would begin to change the knowledge and habits of people so that they were washing their hands, boiling their water, preventing the transmission, and that they had access, if they became infected, to the kind of emergency rehydration treatments that are needed to bring down the mortality levels. MARGARET WARNER: But, I mean, why didn't people in Zimbabwe already know this? STEPHEN MORRISON: Why did they not know that this would be necessary? MARGARET WARNER: Well, you said -- yes, you mean, because they used to have a functioning clean water system. STEPHEN MORRISON: This has been predicted for some time. This began in August. There was an earlier outbreak in 2002. There was one in '98. People have been predicting that, with the collapse of water purification and the contamination of the drinking supplies, that an epidemic of this scale was going to happen. And we're not at the end.
				Politics complicate crisis MARGARET WARNER: And what is the connection between this and, as you said, there's this stalled -- they were supposed to have a unity government between Mugabe and the opposition figure that he ran against in the very contested elections early this year. One, why is it stalled? Two, what difference does that really make? STEPHEN MORRISON: The government of Robert Mugabe signed this agreement in September and has refused to implement its basic provisions in order to share the control of the ministries, normalize the status constitutionally of the new prime minister, relax the oppression, the abductions, the detentions, the torture that goes on across this country. And so we are left in a country that has a climate of pervasive fear and intimidation. This is one in which you do not have any basis of common collaborative governance in this country that might permit a common approach of mobilizing people to deal with this urgent and rather astronomical medical emergency. MARGARET WARNER: Now, as the tape pointed out, many leaders, particularly in the West, but also Bishop Desmond Tutu, Kofi Annan, have taken a step further and said, essentially, forget about the power-sharing, Mugabe ought to go. What is the impact -- does that have any impact internally? STEPHEN MORRISON: I think those that are suffering the most at the hand of this tyranny take a certain amount of comfort in the fact that people are still paying attention. I think, when President Bush spoke up today, I spoke to people in Harare this afternoon, and I asked them, what was their reaction? Suddenly, this epidemic, this cholera epidemic has sparked this dramatic explosion of condemnations from multiple sources. And the answer was: People here are in a very grievous and somber mood. Their children can't go to school. And yet they are drawing a certain hope, so there is a sustainment of hope at the street level.
				The role of Mugabe, his supporters MARGARET WARNER: But what about those that are sustaining Mugabe in power and Mugabe himself? STEPHEN MORRISON: Well, I don't think there's any evidence yet that the hardliners who are keeping Mugabe in power, who are resisting any compliance with the terms of the power-sharing, are yet changing their position at all, but they have to be worried. They have to be worried that this is going to get out of control, that it's going to carry back into the Security Council and get new momentum. There's plenty of prominent and respected African leaders who are stepping forward and saying very confrontational things about this crisis. The whole notion that this is some Western plot against Africa is losing its credibility. MARGARET WARNER: And yet, briefly, the African Union did today sort of reject that idea and say, "We've got to continue a dialogue." STEPHEN MORRISON: Well, I think the African Union position is really about whether to abandon the power-sharing agreement and shift to another path which says, "OK, Mugabe must go." That was the essence of the president's statement and President Sarkozy's statement. Let's go back to basics. Let's get him out of the way. Let's figure out some way to leverage these hardliners to move on, and then that may open the way for a settlement. Those are the two opposing views right now. MARGARET WARNER: All right, Stephen Morrison, thank you so much. STEPHEN MORRISON: Thank you.