New York Times: Senate Backs Higher Debt

Senate Backs Higher Debt
By EDMUND L. ANDREWS

WASHINGTON, Nov. 17 - Faced with the prospect of a government unable to pay its bills, the Senate voted on Wednesday to raise the federal debt limit by $800 billion.

Though an increase in the debt ceiling was never in doubt, Republican leaders in both houses of Congress postponed action on it last month, until after the elections, to deprive Democrats of a chance to accuse them of fiscal irresponsibility.

The bill, if approved by the House in a vote expected on Thursday, would authorize the third big increase in the federal borrowing since President Bush took office in 2001. Federal debt has ballooned by $1.4 trillion over the past four years, to $7.4 trillion, and the new ceiling would allow borrowing to reach $8.2 trillion.

With no end in sight to the huge annual budget deficits, which hit a record of $412 billion this year, lawmakers predicted on Wednesday that the new ceiling would probably have to be raised again in about a year.

Democrats, still stinging from their election defeats, voted against the measure and argued that it should be accompanied by rules that would force Congress to pay for new tax cuts with spending cuts or tax increases elsewhere.

"I don't remember anyone during the elections making a promise to raise the federal debt to $8.1 trillion," Senator Kent Conrad, Democrat of North Dakota, said. "What we're doing here is just writing another blank check and saying to this administration, 'Go ahead, continue to run record budget deficits.' "

Administration officials have been pleading for an increase in the debt limit since last August, and the Treasury Department has been tapping into Civil Service retirement accounts since Oct. 14 to avoid breaching the limit.

On Tuesday, Treasury Secretary John W. Snow warned that the administration had "exhausted" all the previously used financial maneuvers. The government can probably keep paying bills until early next month, but the Treasury Department would have to postpone an auction of new Treasury securities scheduled for Monday.

Raising the legal borrowing limit has long been more political theater than substantive decision making, because lawmakers ultimately have no choice in the matter if the government is to stay in operation.

The 52-to-44 vote was almost purely along party lines, with one Republican, Senator John Ensign of Nevada, voting against a higher ceiling.

Two Democrats, Senators John B. Breaux of Louisiana and Zell Miller of Georgia, voted in favor of the measure.

Some Republican lawmakers had hoped to bury the measure in a broader spending bill that would attract less attention and that many Democrats would feel compelled to support. But Senate leaders decided to vote on a stand-alone bill in exchange for a commitment from Democrats to limit the debate.

"We've come to a general agreement to move ahead today," Senator Bill Frist, the majority leader, said. "The House literally is waiting for us to act."

In a muted floor debate, Democrats did almost all the talking - all aimed at castigating the administration and its Congressional allies for indulging in "borrow and spend" policies - while Republicans grimly waited for the debate to end and the vote to begin.

Senator John Kerry of Massachusetts, in his first appearance on the floor since losing the presidential election, said the growing debt threatened economic security.

"To pay our bills, America now goes cup in hand to nations like China, Korea, Taiwan and Caribbean banking centers," Mr. Kerry said. "Those issues didn't go away on Nov. 3, no matter what the results."

Administration officials contend that the annual deficits are undesirable but necessary to help stimulate an economic recovery and fight a global war on terrorism.

Mr. Bush has promised to reduce the deficit by half over five years, though the administration is fighting to make its tax cuts permanent and may need more than $70 billion in extra money next year to support military operations in Iraq.

House Republicans said they would schedule a vote on the bill for Thursday evening.
"We'll get it done," John Feehry, a spokesman for House Speaker J. Dennis Hastert, said. "We have an obligation to keep the government in operation."

Philippine Stock Market Daily Review November 18: Foreign Buying Buoys the Phisix

Foreign Buying Buoys the Phisix

As the US dollar plumbed to its record levels, Philippine equity assets appears to be one of the beneficiaries of global portfolio diversification AWAY from the US-dollar denominated assets. The Phisix climbed an impressive 23.28 points or 1.3% on broad based heavy foreign buying to the tune of P 159.586 million ($2.835 million). Foreign capital participation represented almost half or 48.56% of today’s aggregate output.

Last week, despite the stream of foreign money flows to the Phisix on select sectors, the Philippine benchmark index succumbed to sharp sell-offs. The steep correction led by the telecom sector seemed to have placed the Phisix at the fringe of a seeming ‘inflection point’. However, robust foreign money flows managed to allay the local investors concerns and provided the structural support which apparently averted the market from further declines. As foreign money flows continue to shore up local equity assets fickle local investors appears to have rekindled their interests on the markets, hence the marked improvement in sentiments and the indices.

Significant money inflows were seen in Bank of the Philippine Islands (unchanged), PLDT (+3.8%), which denotes a reversal from the previous streak of foreign selling activities, SM Primeholdings (+4.28%), Jollibee Foods (unchanged), Ayala Corp (+1.53%), JG Summit (+11.1%), Meralco B (+1.02%), Petron Corp (+1.56%) and ABS-Preferred (unchanged). Advancing issues beat declining issues by 38 to 27, while all sectors reported advances with the Mining sector as the laggard, even as GOLD has steadily carved out a series of record breaking (16-year highs) price growth.

The easing of the sell-offs in the telecom sector and the continued foreign money inflows mostly to the banking sector and now spreading to the broader market has been providing the Phisix the necessary support to most probably carry over its ‘year end rally’ due to seasonal strengths, historical patterns and cyclical shifts while the marked decline of the US dollar has provided global investors the fundamentals for diversifying their portfolios to non-US dollar denominated assets as the Philippines.

Bloomberg: Gold Rises to 16-Year High; Dollar Falls to Record Against Euro

Gold Rises to 16-Year High; Dollar Falls to Record Against Euro

Nov. 17 (Bloomberg) -- Gold prices in New York rose to a 16- year high as the dollar fell to a record against the euro for the fourth time in two weeks, increasing the appeal of precious metals as an alternative to stocks and bonds.

U.S. Treasury Secretary John Snow signaled he won't back any agreement to stem the dollar's slide. Gold, sold in the U.S. currency, has risen 9.4 percent in the past three months as the euro climbed.

``At the moment, all the fundamentals for gold are positive,'' said Bernard Hunter, director of precious-metals marketing for the Bank of Nova Scotia's ScotiaMocatta unit. ``The world is looking for a weaker dollar'' and gold may rise to $450 an ounce by the end of the year, he said.

Gold futures for December delivery rose $4.60, or 1 percent, to $445.10 an ounce on the Comex division of the New York Mercantile Exchange. Prices earlier reached $445.40, the highest for a most-active contract since August 1988. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

The streetTRACKS Gold Trust, offered by the World Gold Council, won regulatory approval yesterday to sell as many as 120 million shares on the New York Stock Exchange. The trust first filed documents with the Securities and Exchange Commission for the sale in May 2003.

The trust plans to sell 2.3 million shares, backed by 230,000 ounces of bullion, through underwriter UBS Securities LLC. The shares, each backed by a 10th of an ounce of gold, will allow investors to avoid incurring costs of storing and transporting physical bullion.

The London-based World Gold Council is backed by some of the world's biggest producers.

`More Liquidity'

``Any product that makes the metal more freely available to the investment or the retail community has got to be good for the market,'' ScotiaMocatta's Hunter said. ``It provides more liquidity and a greater depth.''

U.S. consumer prices climbed 0.6 percent in October, the biggest gain since May, signaling accelerating inflation. Prices this year have risen at a 3.9 percent annual rate, compared with a 2.2 percent rate a year earlier. Excluding food and energy, prices are rising at a 2.4 percent annual pace, up from a 1.3 percent rate a year earlier.

``Sensitive indicators of excess monetary liquidity like gold and the dollar suggest that the Federal Reserve remains in a hyper-accommodative monetary posture,'' Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut, said in a report today.

``Price pressures are increasingly likely to be passed on, which could push year-to-year core inflation rates to 3.5 percent or higher during the next several quarters,'' Darda said.

Some investors buy gold in times of inflation, which erodes the value of fixed-income assets, such as bonds. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose 12.5 percent from the previous year.

To contact the reporter on this story:
Choy Leng Yeong in Seattle at clyeong@bloomberg.net

UPI: Global coal demand up, mining surging

Global coal demand up, mining surging

NEW YORK, Nov 16, 2004 (United Press International via COMTEX) Strong demand for coal from China and India is driving coal production to record levels, the Wall Street Journal reported Tuesday.

Last year world coal consumption rose 6.9 percent, compared with 2.1 percent for oil, according to BP, the British petroleum company.

To fill that need, in the United States coal production is expected to climb to a record of more than 1.2 billion tons, an increase of more than 3.7 percent from 2003. In China, coal production is expected to grow about 200 million tons, or 11.8 percent, this year to 1.9 billion tons.

Coal is booming because power plants are located close to the mines, reducing the plants' cost of operation, and there are still huge untapped coal reserves that can be developed at a low cost, unlike oil.

Also, the cost of producing enough coal to generate a specific level of energy is less than half the cost of producing enough oil to do the same.

By producing more coal for Chinese and Indian markets, the upward price pressure they would otherwise place on oil is relieved, thus putting a damper on petroleum prices.

TimesOnline: Funds set to plunge £76bn cash into world markets

Funds set to plunge £76bn cash into world markets

By Patrick Hosking, Investment Editor

MORE than $140 billion (£76 billion) is expected to be pumped into equities over the next few months if the world’s fund managers dip into their hefty cash piles to reduce them to neutral levels.

Fund managers currently hold an average of 4.6 per cent of their assets in cash, a full percentage point higher than what is seen as the neutral level of 3.6 per cent, according to Merrill Lynch, the investment bank.

With fund managers gaining confidence in the wake of the US presidential elections and bonds widely seen as too expensive, the main beneficiary could be equities, Merrill said.

In its monthly fund manager survey, published yesterday, the banks said fund managers were under increased pressure from customers to put their cash piles to work.

Cash levels in November grew to their third highest this year. Although by historic standards they remain low, there is far more pressure today for fund managers to invest the money in productive assets because interest rates are so low. American fund managers leaving assets in cash — typically ultra-safe money market instruments — earn interest of just 1.5 per cent, meaning the principal shrinks after adjusting for inflation.

Of the $14 trillion invested worldwide by mutual funds alone, a 1 per cent shift from cash to equities would mean a $140 billion boost to world share markets. Including pension funds, the impact would be greater still.

The survey covered 302 fund managers with assets of $931 billion of assets.

David Bowers, chief investment strategist, said: “With bonds widely perceived to be overvalued, investors may turn to equities in the short term.”

The survey — the first since the US election — found that fund managers were now looking to take more risk in the short term, although there was still great uncertainty for next year.

A net 8 per cent of fund managers were now reporting a lower than normal appetite for risk, compared with 16 per cent in October. They were also more confident about company profits.

Bonds were being widely shunned, Merrill said, with 66 per cent of fund managers believing they were overvalued, compared with just 3 per cent who thought they were undervalued.

By contrast, just 14 per cent thought equities were over-valued, compared with 24 per cent who said they were undervalued.

Telecoms, as well as energy, were most in demand by equity investors, while autos, retail and media were most disliked.

The survey painted a mixed picture for UK fund managers. A net 79 per cent said UK fundamentals were deteriorating, yet a net 22 per cent also thought UK shares were cheap.

Merrill identified a marked change in UK interest rate expectations in recent months. The net percentage expecting another rise in base rates has fallen from 82 per cent in August 43 per cent this month.

The move away from cash already appears under way in Britain, with the proportion of managers claiming to be overweight in cash falling from 39 per cent in October to 14 per cent.

In the UK, insurance, raw materials, telecoms and media were the most popular equity sectors. Fund managers were most underweight in consumer staples, technology and drugs.

Currencies: A Reversal of the Asian Currency Crisis by Stephen Jen of Morgan Stanley

A Reversal of the Asian Currency Crisis

Stephen Jen (Milan)

Similarities with the 1997-98 experience

I find striking parallels between current market conditions and sentiment regarding USD/Asia and the experience during the Asian Currency Crisis in 1997-98. Specifically, the market and some US policymakers seem to be calling for a kind of ‘Asian Currency Crisis in Reverse’. I am in no way looking for a ‘crisis’, either in terms of the magnitude of movements in USD/Asia or in terms of the general level of angst. Rather, I simply point out that the down-trade in USD/Asia that many are calling for, in a way, almost fully reverses the Asian Currency Crisis. If China moves to a ‘crawling band’ in the near future, it is likely that there be a wholesale decline in USD/Asia.

My general view on the USD

In my view, the USD index measured against the major currencies is now undervalued. This undervaluation of the USD is particularly stark against the European and commodity currencies. However, against the Asian currencies, the USD is still meaningfully overvalued. This should not be surprising, given the modest movement in the Asian currencies against a falling USD over the past three years.

However, in light of the widening US C/A deficit, particularly the imbalances run against the Asian economies, protectionist pressures will likely build in the US to indirectly force the Asian central banks to ease off on intervention and absorb a greater share of the economic costs of a weaker USD. The longer China remains robust, the harder it will be for Asia to stave off the downward pressures on the USD against their currencies. Bottom line: USD/Asia may want to trade lower because of relatively robust economic fundamentals, contrary to my expectations since May this year.

What has happened since 1997-98?

The market is increasingly looking for a correction in USD/Asia, for reasons including large and burgeoning external surpluses and high and rising official reserves. These are precisely the opposite traits of many Asian countries back in late-1996, early-1997. In many ways, Asia’s position today is a direct result of the Asian Crisis seven years ago.

The maxi-devaluation of the Asian currencies, coupled with the emergence of China as a viable production entity at around the same time, led to an Asia that is, collectively, much more competitive than it was before the Asian Crisis. At the same time, Asia’s official reserve holdings exploded, rising from US$712 billion in June 1997 to US$2.265 trillion now − an increase of some US$1.55 trillion. Thus, the Asian Currency Crisis put Asia in such a competitive position that the market is now under mounting pressure for there to be a ‘reversal’ of the effects of the Crisis.

RMB float could be the trigger for a sell-off in USD/Asia

The prospective dismantlement of the de facto dollar peg could potentially be the trigger for a broad-based move lower in USD/Asia, at least this is likely to be the knee-jerk reaction. Country-specific idiosyncratic factors may not matter much, at least in the period immediately after the RMB de facto peg is dismantled.

What happened during the Asian Crisis is also illustrative of what could happen when the RMB peg is dismantled. Before the onset of the Asian Crisis in 1997, only Thailand and the Philippines had large C/A deficits, relative to the size of the economies. Nevertheless, the run on all the Asian currencies was indiscriminate. It didn’t matter that Singapore, Taiwan, China, and Indonesia had solid external positions, good growth and low inflation, all of these currencies, with the exception of China, were pushed significantly lower by the market.

Valuation matters

However, over the medium term, valuation should matter as well: those currencies that are more misaligned should come under greater pressures.

First, all six Asian currencies (KRW, TWD, SGD, THB, PHP, and MYR) are undervalued against the USD. Second, compared to the median forecasts, KRW, TWD, SGD and THB are about 5% mis-priced, but PHP and MYR are 20-25% undervalued. Thus, from a valuation perspective, a depreciation in the USD against the Asian currencies makes sense, unlike in the cases of EUR, GBP, and AUD.

Fair values and C/A surpluses

Rather than thinking about the fair values per se, i.e., values of USD/Asia that are consistent with a set of fundamental variables, investors may be asking how low USD/Asia will need to trade in order to help narrow the US C/A deficit. If investors remain fixated on this question, most Asian currencies will likely be pushed deep into overvalued positions before investors stop selling USDs. In other words, if the dynamics of EUR/USD are of any guide, the Asian currencies are likely to be pushed beyond their fair values.

Competitors versus partners: status matters

Over the medium term, it should also make a difference whether the country in question is an economic competitor to China or an economic partner with China. If the decline in USD/RMB is large enough (this is a big ‘if’), countries that compete with China should benefit, while those that supply capital goods and raw materials to China may be hurt. There should, thus, be a disparity in the Asian currencies depending on their relationship with China.

Bottom line

The significant pressure on USD/Asia can be traced back to the Asian Crisis, which I believe was the key reason why Asia has been able to run massive trade surpluses and large foreign exchange reserve positions. In many ways, the market is looking for a reversal of the Asian Crisis. A prospective RMB float could very well be the trigger for such a USD/Asia sell-off. In that event, I expect USD/Asia (particularly USD/PHP and even USD/MRY) to move by more than USD/RMB.

November 16 Philippine Stock Market Review: Banks Lead Market Rebound

Banks Lead Market Rebound

I have stated in numerous occasions in my newsletters that foreign buying has evidently been rotating to the banking financial sectors. Today’s remarkable rebound came about as the key Phisix heavyweight components price charts have been showing signs of fissures on the downside. The Phisix’s electrifying advance of 45.08 points or 2.57% came about mostly on the foreign led buying in the banking sector (+2.92%) which posted the best gains among the industry indices.

The erstwhile leaders in the telecoms industry seemed to have been bogged down by foreign led profit taking in the recent past. Although in today’s session they remained in the lists of foreign instigated sell-offs, the palpable local support on these issues provided the framework for its notable advance, PLDT up 3.1% while Globe rallied by 2.06%.

The banking sector led by top traded Bank of the Philippine Islands (+4.21%) soaked up P 94.937 million of foreign capital representing almost 94% of today’s cumulative net foreign inflow P 100.742 million. Foreign buying was basically broad based with more than twice more issues that recorded inflows than the outflows. Foreign money accounted for the significant majority or 58.62% of today’s turnover. The foreign profit taking in SMPH, PLDT, Globe Telecoms and Digitel was more than offset by substantial inflows in ex-banking issues as Ayala Corp. (+4.76%), Jollibee Foods (unchanged), Ayala Land (+2.89%), First Philippine Holdings (+3.7%) and Petron Corp. (+6.77%) leaving the considerable foreign buying margin to the banking sector, most especially to BPI.

While today’s advances maybe an subsequent offshoot to the recent sharp selloffs, as technical indicators suggest, it remains to be seen if the banking inspired across the board rally may be able to counterbalance the still ongoing foreign led liquidations in the telecom sector. Will the banking sector take the cudgels and be the next leaders to lift the Phisix, aside from Ayala Corp? Stay tuned.

The Economist: Farewell to Powell and his doctrine

Farewell to Powell and his doctrine
Nov 15th 2004
From The Economist Global Agenda

America’s secretary of state, Colin Powell, has become the most high-profile in a number of senior officials to announce that they will not be serving in George Bush’s second term. Given that Mr Powell lost numerous battles with the administration’s hardliners, this is hardly surprising

IT IS a safe bet that Colin Powell, America’s secretary of state for the past four years, is more popular and respected around the world than his boss. Mr Powell’s more emollient, multilateralist style was much more to the liking of America’s allies and other interlocutors than the unilateralist, “my way or the highway” style of President George Bush. So those in the world’s capitals who groaned when Mr Bush beat John Kerry earlier this month are likely to have heaved a sigh of regret on hearing, on Monday November 15th, that Mr Powell was resigning.

Though it is not yet clear how willing Mr Powell might have been to serve a further term if Mr Bush had asked him not to go, his departure is hardly surprising, given how he had lost a number of crucial battles with the Bush administration’s hardliners—most notably the defence secretary, Donald Rumsfeld, and Vice-President Dick Cheney. Though in public Mr Powell maintained that some of his disagreements with the “hawks” were more perceived than real, he was widely believed to have tried to resist their plan to invade Iraq and topple Saddam Hussein. Once the hawks had persuaded Mr Bush to go ahead, Mr Powell persuaded the president to at least have a serious try at seeking a consensus at the United Nations Security Council in support of the war.

When this got nowhere, Mr Powell, like the loyal soldier that he was before entering politics, swallowed his doubts and sturdily defended his boss’s policies, maintaining that Saddam’s supposed possession of weapons of mass destruction justified the invasion. Perhaps his most memorable speech was the one he made at the Security Council in February last year, shortly before the invasion began, in which he presented the “evidence” for the Iraqi regime’s possession of illegal weapons—evidence that has since proved to be deeply flawed.

When Mr Bush was first running for president in 2000, he was critical of the idea that America should indulge in “nation-building” beyond its shores. On winning, and making Mr Powell his secretary of state, it seemed that Mr Bush was likely to follow the “Powell doctrine”, which Mr Powell had developed while he was armed forces chief of staff during the presidency of Mr Bush’s father. In essence, his doctrine states that America should only use force in defence of its vital national interests; when it does so, it should use force overwhelmingly and should have a clear exit strategy. A corollary of this is that the building of multilateral alliances and the use of “soft” power (ie, diplomatic and economic pressure) should be preferred to unilateralism and “hard” power (ie, military muscle).

But everything changed on September 11th, 2001. The subsequent invasion of Afghanistan seemed to square with the Powell doctrine, given that its regime was harbouring the people behind the massive terrorist attacks on American soil. But, whatever merits it may have had, the war in Iraq seemed rather harder to fit with the doctrine, except by overstating the reliability of evidence that Saddam had deadly weapons capable of hitting American bases in the region. As time has gone on, the Iraq venture has become harder to square with the doctrine: the military force applied by America has been less than overwhelming, and the continuing insurgency has made it harder to discern a timely and honourable exit.

Mr Powell’s resignation comes at a particularly difficult time: when American forces are attempting to break the back of the Iraqi insurgency through a bloody battle to recapture the rebel-held town of Fallujah; and when the death of Yasser Arafat is offering a chance of restarting the stalled Israeli-Palestinian peace process (see article). Mr Powell will stay on until his successor is chosen and his staff say he will continue working at full speed until then (he is due to attend talks in the West Bank next week). But it may be hard for him to make any progress while every political leader to whom he speaks is anxious to know who will replace him.

Who Mr Bush nominates as his new secretary of state is likely to be an important indicator of what he has in store for his second term. Will it be more of the same hard-power unilateralism or a swerve towards a softer, multilateral policy? The former is more likely if the job goes to John Danforth, a Republican former senator who is currently America’s ambassador at the UN. There would also seem little prospect for change if Mr Bush gives the State Department to his national-security adviser, Condoleezza Rice, who is so far the leading candidate to replace Mr Powell.

Already, Mr Bush has signalled that he is not about to go soft, by replacing John Ashcroft, his hardline attorney-general, with an equally controversial figure, Alberto Gonzales. Mr Gonzales is a long-time loyalist who served Mr Bush as legal counsel when he was governor of Texas, and was later brought to do the same job at the White House. In 2002, Mr Gonzales wrote a memo for his boss supporting the notion that the Taliban and al-Qaeda fighters captured in Afghanistan were irregular “enemy combatants” not subject to the protections of the Geneva Conventions. The new paradigm of the war on terrorism, he wrote, “renders obsolete Geneva’s strict limitations on questioning enemy prisoners”. This was seen by critics as a wink at the torture of captives for information. Once again, Mr Powell fought against this policy, and lost.

There are signs that Mr Powell’s may not be the last high-profile departure from the Bush administration. There has been speculation that one of his main foes, Mr Rumsfeld, may also be about to leave. Many (including The Economist) called on the defence secretary to resign or be sacked after the prison-abuse scandals at Abu Ghraib. But Mr Bush held on to him. This is partly because the administration is not terribly good at admitting to mistakes. But it may also be because Mr Rumsfeld is halfway through a transformation of America’s military, from a lumbering force of infantry and armoured divisions built to face the Soviets into a lighter, faster, supposedly smarter, technology-driven machine for the wars of tomorrow. Such a transformation has its opponents, and Mr Bush may conclude that the hard-charging Mr Rumsfeld needs to be kept on board to see it through, no matter whom this upsets. And a second Bush administration with Mr Rumsfeld but without Mr Powell is bound to cause dismay in many parts of the world.

Bloomberg: Greenspan, Fed Governors Warn on Spending as Succession Looms

Greenspan, Fed Governors Warn on Spending as Succession Looms

Nov. 10 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan says the growing U.S. budget deficit could destabilize the economy. Fed Governor Susan Bies says Congress spends like it's dipping into a ``a cookie jar.'' St. Louis Fed President William Poole says Social Security is in jeopardy.

In the last two months, Greenspan and at least seven other Fed officials have warned lawmakers about tax and spending policies that have led to record budget and current account gaps.

As Greenspan, 78, in January begins his last year atop the central bank, the comments suggest Fed members are concerned his successor will have less room to guide an economic expansion should they have to raise interest rates to counter a plunging dollar or surge in spending. Fed policy makers are likely to raise the benchmark rate by a quarter point to 2 percent when they meet today in Washington, a Bloomberg News survey shows.

``If you get to a point of fairly significant long-term structural budget deficits, it begins to impact on the level of long-term interest rates,'' Greenspan told the House Budget Committee on Sept. 8. That means the government must pay higher rates to borrow money, leading to even higher deficits, he said.

``If you get into that sort of debt maelstrom, it is a very difficult issue to get out of,'' he said.

Record Deficits

The policy-making Federal Open Market Committee has already raised rates three times since June to restore its benchmark rate to a level that neither slows growth nor sparks inflation. All 89 economists surveyed by Bloomberg predicted Greenspan and the FOMC will increase the overnight rate again at today's meeting because a more-than-expected gain of 337,000 jobs in October signals the economy is starting to use up spare capacity.

Budget surpluses from 1998 to 2001 helped Greenspan orchestrate the longest economic expansion in U.S. history. When the boom ended in 2001, low inflation allowed the Fed to cut the benchmark rate to 1 percent, the lowest since 1958, limiting the recession to just eight months.

Then the surpluses evaporated. President George W. Bush, who will choose the next Fed chairman, won passage of $1.85 trillion in tax cuts and raised spending for wars in Iraq and Afghanistan. Defense spending rose 12.4 percent in fiscal 2004 to $437 billion, the Congressional Budget Office said.

The budget deficit widened to a record $413 billion in the fiscal year ended Sept. 30, with government spending rising 6.2 percent from the previous year. The deficit amounted to about 3.6 percent of the country's $11.8 trillion gross domestic product, the highest percentage since 1993.

Policy `Out of Whack'

Social Security, the main government-funded retirement program, will spend more money than it takes in starting in 2018, according to a report by the program's trustees. Unless taxes are increased or benefits cut, trust-fund assets for retirees, now at $1.4 trillion, will fall to zero by 2042. A report by trustees of Medicare, a federal health-insurance program, shows their hospital insurance fund spending will exceed income by 2012.

``There are a number of things that are just extraordinary, beginning with the fiscal imbalance,'' said Representative Jim Leach, an Iowa Republican and former head of the House Financial Services Committee, which oversees the Fed. ``The Fed has less credible discretion the more out of whack fiscal policy gets.''

Possible Successors

Bush, 58, who won re-election on Nov. 2, hasn't mentioned a likely successor to Greenspan, whose nonrenewable term as governor ends Jan. 31, 2006, after a tenure spanning four presidents.

Alan Blinder, a Fed vice chairman from June 1994 to January 1996, said possible successors include Harvard University economist Martin Feldstein, 64, a Bush adviser on Social Security, and John Taylor, 57, Treasury undersecretary for international affairs.

Blinder, a 59-year-old Princeton University economist who was an adviser to Democratic nominee John Kerry, also named Fed Governor Ben Bernanke, 50, and former Fed Governor Lawrence Lindsey, 50, as potential candidates, at a Sept. 28 meeting of the Council on Foreign Relations in Washington.

Greenspan's successor must steer the economy through the effects of deficits, high oil prices and global terrorism, Leach, 62, said.

``These are extraordinary times,'' he said. ``Virtually all the risks in the world economy are on the downside.''

Crude oil for December delivery reached a record $55.67 a barrel in New York on Oct. 25. While prices have since slipped to $47.37 a barrel yesterday, oil is still 53.4 percent higher than a year ago.

$88.5 Billion Tax

San Francisco Fed Bank President Janet Yellen, 58, said the surge will result in a temporary boost in broad inflation and, as long as prices stay high, a tax on U.S. consumers. Greenspan said that tax amounted to about $88.5 billion this year, equal to 0.75 percentage points of GDP.

Former Dallas Fed President Robert McTeer flagged the record $166.2 billion deficit in the U.S.'s current account, the broadest measure of trade, as a threat to stability.

The current-account shortfall was equal to 5.7 percent of the economy in the second quarter, up from 5.1 percent in the first three months. The U.S. needs to attract about $1.8 billion a day from overseas to plug the gap. If other nations sour on U.S. securities, the value of the dollar may plunge.

``The current account deficit is going to cause problems,'' said McTeer, 62, who resigned Nov. 4 from the Fed to run Texas A&M University in College Station, Texas. ``Flows will turn against us, and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive,'' he said on Oct. 7 at a New York event sponsored by Market News International.

Dollar Drop

Bush's pledge to make his tax cuts permanent also has traders predicting the dollar will continue to fall. The currency may fall to its lowest level ever against the euro for a second consecutive week after Bush signaled he would expand policies that fueled the deficits and the dollar's decline of about 20 percent against a basket of currencies since he took office in 2001, according to a Bloomberg News survey. Bush will also seek more funding for the war in Iraq.

Sixty percent of the traders, strategists and investors questioned on Nov. 5 from Tokyo to New York advised selling the dollar against the euro.

``A second term for Bush doesn't bode well for the dollar,'' said Samarjit Shankar, director of global foreign-exchange strategy at Mellon Financial Corp. in Boston, which manages $625 billion. ``There's no way of convincing the market additional spending on the war can be paid for if you have a lower tax base. It's a fundamental mismatch between spending and revenue.''

Can't Go On

Greenspan urged Congress on Sept. 8 to rein in spending and return to the ``pay-as-you-go'' system that was in place during President Bill Clinton's administration, whereby all new expenditures or tax cuts needed to be offset by reductions in other programs or higher fee income from government services.

``We cannot continue to just go on without saying, `We can have this, but not this,' and pay-go embodies that mechanism,'' the chairman said.

The costs of Social Security and Medicare are likely to balloon as the 84 million members of the baby-boom generation -- those born between 1946 and 1964 -- begin to retire in 2010, pushing federal government obligations higher, even as the taxpaying workforce shrinks.

``If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels,'' Greenspan said in an Aug. 27 speech in Jackson Hole, Wyoming. ``If we delay, the adjustments could be abrupt and painful.'' Greenspan was chairman of the Commission on Social Security Reform from 1981 to 1983.

`Cookie Jar'

Since then, Poole, 67, of the St. Louis Fed, has made two speeches advocating an increase in the retirement age as a way to reduce the cost of Social Security.

Fed Governor Bies blamed lawmakers for sometimes spending taxpayers' money for political gain during the past four years.

``The part of it that has gotten me so upset is that in this whole election debate, nobody's been talking about the spending side,'' Bies, 57, said after a speech to investors in Rosslyn, Virginia, on Oct. 23, 10 days before the presidential election.

``If you take out Homeland Security and Defense, it has been a cookie jar over the last four years,'' she said. ``Everything has gotten loaded in. Money has gone into these appropriation bills that are funding everything under the sun.''

Another challenge facing Greenspan in his final year is the behavior of the labor market. The economy has created just 814,000 net payroll jobs since the end of the last recession in 2001, even with average annualized GDP growth of 3.3 percent. That's the slowest pace of any expansion of the last 60 years.

Presidential Pressure

Presidents and Congress have sought to influence Fed chairmen throughout the central bank's 90-year history to try to promote their own economic policies. Low interest rates can help finance budget deficits, stimulate economic growth and help offset the negative impact of tax increases.

Harry Truman, the 33rd president, invited Federal Reserve policy makers to the White House in January 1951 to try to persuade them to continue to keep yields on Treasury securities low to help finance the Korean War.

Former President Richard Nixon said he respected Arthur Burns's independence when he appointed Burns to the Fed chairmanship. Then Nixon said: ``I hope that independently he will conclude that my views are the ones he should follow,'' Fed historian Allan Meltzer, a political economy professor at Carnegie Mellon University in Pittsburgh, wrote in a recent paper.

Too Accommodating

Lyle Gramley, who worked as Burns's speechwriter before becoming a Fed governor, said: ``He'd talk to the president, and the president was concerned about where the economy was going. There was evidence of a good bit of pressure directly on him. He clearly in retrospect ran a too-expansive monetary policy.'' Gramley is now an adviser to Schwab SoundView Capital Markets in Washington.

Greenspan also faced political pressure early in his term. Former Treasury Secretary Nicholas Brady criticized the Fed for not lowering interest rates fast enough in 1992, when George H.W. Bush ran for a second term and lost to Bill Clinton.

Economic Hurdles

Greenspan's successor is likely to feel that kind of political pressure as long as there are economic hurdles to overcome, said Senator Richard Shelby, an Alabama Republican.

``Whoever is in there is going to face a lot of challenges,'' said Shelby, chairman of the Banking Committee, which has oversight authority on the Federal Reserve. ``There will always be political pressure, whoever the Fed chairman is, unless the economy is just robust.''

``It is going to be a period when the president will need someone who is going to work closely with the executive branch,'' said James Galbraith, an economist at the University of Texas at Austin who worked with the framers of the Full Employment and Balanced Growth Act of 1978, which reiterated the Fed's goals.

``Is there going to be a problem in getting an adequate growth rate and turning the next administration into a political success?'' Galbraith said. ``Yes.''

US News.com: 10 Big business blunders

10 Big business blunders
Ego and greed: a common recipe for executive error
By Alex Markels

Glance through the following list of business blunders, and you may conclude that the common denominator in financial failure is outsize hubris. Yet arrogance alone doesn't guarantee disaster. After all, if you're seriously lucky as well, the combination can catapult you into the kind of power spot that billionaire Mark Cuban plays on TV's The Benefactor.

For a tried-and-true approach to calamity, there's always the sort of book-cooking that prevailed in the 1990s. But that's an increasingly risky proposition given Eliot Spitzer's ever expanding universe of white-collar probes. And there are plenty of legit roads to ruin. Key ingredients typically include behavior that often accompanies hubris, most notably a cocksure rush to judgment, without doing enough homework. Before making big decisions, great corporate leaders "dive into the brutal facts like pigs in slop," says management guru Jim Collins, who studied the differences between winning and losing management styles in Good to Great: Why Some Companies Make the Leap ...and Others Don't. "Lesser companies tend to . . . just act."

He notes that while some of business's top performers take ample time to study new markets (see Walgreen's, whose stock has outperformed the market 15-fold since 1972), the Internet-era mantra of being "first to market" is almost always a shortcut to a bad decision (see Drugstore.com). So is the chase for the mergermaniac's holy grail: synergy, the frequently fatal belief that 1 plus 1 equals 3. Then, of course, there's the sort of thickheadedness that comes from believing that technology itself is the true holy grail.

In fact, the best corporate decisions are often the most obvious: hiring good people, training them well, and shepherding them up the corporate ladder. Yet those stories aren't nearly as much fun to read. So in the spirit of learning from (and laughing at) the mistakes of others, we present our list of best (or should it be worst?) business blunders.

AOL-TIME Warner: When 1 + 1 = 1/5th

They called it "convergence": a melding of new technology and old media that would revolutionize the business world. "By joining forces with Time Warner, we will fundamentally change the way people get information, communicate with others, buy products, and are entertained," America Online founder Steve Case said of the merger of his Internet pioneer with old media publisher Time Warner in January 2000.

But like so many other promises of synergy between merging companies, "it was a joke," says Harvard's Rosabeth Moss Kanter, author of Confidence: How Winning Streaks and Losing Streaks Begin and End. "When the people at Time Inc. refused to use AOL as their E-mail provider, it was clear how badly things were going."

Although the combined company predicted it would break $40 billion in revenue and $10 billion in profits within a year, its failure to realize the synergies--along with the collapse of the online ad market--assured that the merger would soon take its place among the worst in U.S. business history. Today, after a $54 billion write-down in the value of the deal, Time Warner is valued at a mere $76 billion, one fifth of the companies' combined market worth on the day the merger was announced.
For AOL, the deal was probably a lifesaver. Case was able to use AOL's lofty stock price to buy a highly profitable company with more than 70 years of publishing experience. On the other hand, Time Warner's bigwigs "got silly and drank the convergence Kool-Aid," says business book author Roger Lowenstein. And they're still recovering from the hangover.

The Hunt Brothers: Hi-Ho Silver

The little old ladies lined up outside of London's Hatton Garden jewelry stores in the fall of 1979 should have worried Bunker and Herbert Hunt. If enough of them were willing to sell their silver heirlooms for scrap, then the Hunt brothers' attempt to corner the world's silver supply was surely doomed.

But Bunker Hunt, second-oldest son of Texas oil tycoon H. L. Hunt, was convinced he could turn silver into gold. A big-betting oilman, Bunker became one of the richest men in the world at age 35. Beginning in the early 1970s, he and younger brother Herbert made a tidy little sum on 200,000 ounces of silver they purchased, as silver prices doubled from $1.50 to $3 an ounce.

Figuring bigger is better, over the rest of the decade they purchased an additional 59 million ounces, roughly a third of the world's supply, pushing the price to $50 an ounce and earning the Hunts a paper profit of about $4 billion. But the high prices sparked increased supplies of scrap silver and mining investment. Prices dropped.

Tapped out of cash and unable to liquidate their silver hoard without driving the price down even faster, the Hunts watched as the price fell 80 percent in a matter of days. The following year, the two were named Boneheads of the Year by the Bonehead Club of Dallas. Its motto: "To learn more and more about less and less, until eventually we shall know everything about nothing."

New Coke: It's the Real Thing ... Not!

Coca-Cola executives figured they had finally found the solution for their ailing brand. Concerned that the Pepsi Challenge campaign was dangerously eroding Coke's market share (which had fallen by nearly half since the 1950s), they formulated New Coke in 1985, then gathered focus groups to compare the two in blind taste tests. When the new formula beat Pepsi hands down, they figured they had a winner. Yet within hours of its rollout, it was clear that something had gone sour. "Damn!" exclaimed the wife of a Coca-Cola bottler upon her first sip. "This will never sell!"

Thousands of complaints flooded the company in the weeks after New Coke hit the streets. At first, the company's marketing chief called such complaints "relatively insignificant." But three months and 400,000 angry calls and letters later, New Coke faded from store shelves in favor of "Coke Classic."

Conspiracy theorists believed the whole episode was merely a deft marketing ploy to reinvigorate the brand. After all, Coke's decision to reverse itself was soon rewarded by growing sales and a stock price that reached an all-time high. The truth, however, was that while the focus group leaders had asked whether tasters liked New Coke better than Pepsi, "they never bothered to ask people how they would feel if old Coke was taken away," says Constance Hays, author of The Real Thing: Truth and Power at the Coca-Cola Company.
Long-Term Capital Management: Too smart by half

They were the epitome of the rational man: Two Nobel Prize-winning economists, a former Federal Reserve vice chairman, and 25 egghead Ph.D.'s--all armed with banks of number-crunching computers. Recruited to join Long-Term Capital Management in 1993, they were led by John Meriwether, the legendary former Salomon Brothers bond trader and star of the book Liar's Poker. Meriwether had made billions for his former employer through trades based on computer-generated charts that plotted historical relationships between related securities, like those of merging companies. In 1993, the team pulled in hundreds of millions from wide-eyed investors too impressed to ask probing questions, then leveraged the money by borrowing billions more.

The strategy was a wild success at first, netting investors an annual return of more than 40 percent in 1995 and 1996--even after the partners had grabbed a hefty 2 percent management fee and a 25 percent share of the profits.

But when a host of unexpected events (Russia's debt default, a collapse in the market for mortgage-backed securities, and a currency crisis in Asia) sent the global bond market into a tailspin in 1998, traders stopped acting like the rational buyers and sellers the eggheads had assumed. "They had programmed the market for a cold predictability that it never had," author Lowenstein writes in When Genius Failed: The Rise and Fall of Long-Term Capital Management. "They had forgotten the human factor."

XEROX: Undiscovered treasure

It must have been a sight for sore fingers: an electronic typewriter that could display written correspondence on a screen, store it with a click of a button, then send it around the office and print out hard copies?

Demonstrated at "Futures Day" during a meeting of Xerox's top managers in 1977, the fruits of nearly a decade of study at the company's Palo Alto Research Center caught the eyes of the executives' spouses, many of whom were former secretaries. But most of their manager husbands "just didn't get it," says Douglas K. Smith, coauthor of Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer. "So Xerox turned it down."

Meanwhile, Apple Computer's founders copied much of the technology in their Macintosh PC. And Xerox researchers like Bob Metcalfe, who had invented the Ethernet local area network, left and started their own companies, leaving Xerox largely out of what would become a trillion-dollar industry.

Under pressure to produce profits, the fast-growing Xerox "didn't see PARC's innovations as adding much more than incremental growth."

Not that Xerox was the first to make this mistake. Some 35 years earlier, IBM, Kodak, and General Electric all took passes on a new technology that could reproduce paper copies within minutes. "What's wrong with mimeographs?" IBM executives are said to have asked when they turned down the chance to buy the technology that would go on to empower Xerox.

Donald Trump: Rolling snake eyes

'You're fired!" That's exactly what any sensible board of directors would yell at a chief executive who'd run his company into the ground from Day 1. But when the CEO is Donald Trump, it's apparently easier said than done.

Convinced that Atlantic City would soon eclipse Las Vegas as the nation's gambling center, Trump invested billions beginning in the mid-1980s on behemoths like his over-the-top Trump Taj Mahal. "I can't get into trouble in Atlantic City!" he boasted at its opening in 1990.

But the Taj cannibalized revenue from its neighboring properties, the Plaza and the Castle. And when the recession of 1990-91 sent customers fleeing from the blackjack tables at all three, Trump couldn't pay the more than $1 billion in debt he'd rung up. Narrowly averting bankruptcy, he managed to keep control of the properties by relinquishing much of his original stake and taking the company public in 1995.

Yet Trump Hotels hasn't posted an annual profit since. From a high of $34 a share in 1996, the company's stock sank below 20 cents after it was delisted by the New York Stock Exchange in September. Burdened with a crushing $1.8 billion debt, the company declared bankruptcy for a second time last month. Amazingly, however, Trump saved his CEO status, thanks, in part, to his ponying up $72 million ($55 million of it in cash) to help revive the company.

It's a performance that would make his present-day apprentices blush.

IRIDIUM: The sky really is falling

Blame it all on Karen Bertiger. Just married to a Motorola engineer in 1985, she refused to go on her honeymoon because there was no cellphone service on Green Turtle Cay in the Bahamas. "If you are such a smart guy," she told her husband, Bary (who had patented the communications system for the Voyager spacecraft), why is it that "I still can't make a cellular phone call from anywhere on Earth?"

Thus began one of the largest fiascos in business history. Seizing on the idea, the can-do crowd at Motorola ran Bertiger's idea up the corporate flagpole. The leviathan effort would cost billions, but CEO Robert Galvin figured that by spinning it off and teaming with a host of worldwide partners, it just might work. More than a decade and $5 billion later, Iridium's network of 66 low-flying satellites was finally launched in 1998. "The potential uses of Iridium products are boundless," Iridium's then CEO Edward Staiano decreed.

Yet Iridium's brick-size phone was a far cry from the tiny cellphones flooding the market. Even worse, users had to be outdoors to make the line-of-sight connection needed to communicate with its satellites.

With fewer than 50,000 subscribers by 2000, the company declared bankruptcy. And the low-flying satellites were expected to fall from the sky. But before they did, Dan Colussy, who'd made a fortune refurbishing aircraft, purchased Iridium for $25 million, paying half of one cent for every dollar originally invested--perhaps the greatest deal since the Louisiana Purchase. With lower airtime fees and handsets that cost half what they did in 1998, the company recently announced that its subscriber base had grown to 100,000 and that it had even turned a before-tax profit.

IBM: Error message

Hindsight can be a painful thing. Just ask Gary Kildall, the inventor of the CP/M operating system, one of the first designed for a personal computer. In 1980, destiny knocked on his door in the form of a team of blue-suited IBM executives. They'd been referred by none other than Bill Gates, who'd struck a deal with Big Blue to create software for IBM's first personal computer.

Caught off-guard by the remarkable popularity of the Apple II computer, the IBM ers had decided to rush their own version of the PC to market. But instead of building it from scratch, they decided to slap it together with off-the-shelf parts. Gates was happy to oblige with his programming software, but he lacked an operating system, so he referred them to Kildall. His wife, however, sent them packing after refusing to sign IBM's dense nondisclosure form.

That's when Gates & Co. stepped back in. A friend across town also had an operating system called QDOS (for "quick and dirty operating system"). "We just told IBM, 'Look, we'll go and get this operating system from this small local company, we'll take care of it, we'll fix it up, and you can still do a PC,'" Microsoft CEO Steve Balmer explained in the documentary Triumph of the Nerds .

Microsoft purchased unlimited rights to QDOS for $50,000, tweaked it, and sold it to IBM for $80,000. But with one proviso. While IBM would have the right to install it royalty free in as many computers as it wanted, Microsoft would retain the right to sell the renamed MS-DOS to others. "No problem," replied the IBMers, who couldn't imagine who else might want it.

AT&T: Dialing the wrong number

The right choice seemed obvious to Charles Brown. Forced by a trust-busting federal judge in 1982 to jettison either AT&T's regulated local telephone monopoly or its equipment business, the AT&T CEO chose to keep hardware. With the personal computer business taking off and the melding of computers and telecommunications right around the corner, AT&T could leverage its vast resources to dominate the PC market and transform its stodgy image and middling stock price. AT&T Information Systems was soon born, and the company's first IBM-compatible PC, built with Italy's Olivetti, debuted in the summer of 1984.

But the computers weren't fully compatible. Moreover, AT&T's technologists weren't keen on working with outsiders. Over the next five years, the company lost as much as $3 billion. Yet AT&T's fatal attraction for PC s continued as new CEO Robert Allen set his sites on NCR, which AT&T purchased in a 1991 hostile takeover for $7.5 billion, twice what NCR shares sold for before AT&T came calling. But over the next five years, NCR lost nearly $4 billion before being spun off for less than half of what AT&T paid for it in 1991.

In the end, Brown was right about the coming PC wave. But AT&T chiefs made the classic "industry of the future" mistake, says Harvard's Kanter, "They arrogantly leapt into something totally new, thinking their past success in telephones would add up to the same in computers."

Boston Chicken: Laying an egg

Hell hath no fury like a coupon clipper scorned. Or, at least, that's how executives at Boston Market (originally Boston Chicken) first explained why they were having trouble keeping up the momentum at their restaurant chain in 1997. When management attempted to wean penny-pinching customers off a popular coupon promotion, they ran to the nearest KFC. For a company that touted itself as the next McDonald's for its "home-meal-replacement" strategy of putting a rotisserie chicken in every pot, the flattening sales led to its stock's falling more than 82 percent from its $41.50 high at the end of 1996. Shareholder lawsuits accused the company of hiding more than $750 million in losses incurred by its franchisees, which had borrowed up to 80 percent of their start-up costs from the company. Though most franchisees were losing money as the chain grew to more than 1,100 stores, the company showed a profit, partly by booking the loan repayments as income. In a move similar to those later detected at Enron and elsewhere, "they adopted a financing strategy to keep start-up costs off their balance sheet," says Dartmouth's Sydney Finkelstein, who interviewed company executives for his book Why Smart Executives Fail and What You Can Learn From Their Mistakes. Instead of Boston Market's becoming the next McDonald's, McDonald's became the next Boston Market, purchasing the by-then-bankrupt company for a pittance in 2000. How's that for eating crow?

IPS News: French Role in Côte d'Ivoire Questioned

French Role in Côte d'Ivoire Questioned
Thalif Deen

UNITED NATIONS, Nov 9 (IPS) - France is coming under fire for its heavy-handed action in destroying virtually the entire air force of its former colony Côte d'Ivoire in retaliation for the killings of nine French soldiers and a U.S. aid worker last week.

''We deeply regret the unfortunate incident,'' Ambassador Philippe Djangone-Bi of Côte d'Ivoire told reporters Tuesday. ''But France was wrong in its unilateral reprisal,'' he added.

He said his government wants the Security Council to make a pronouncement about ''our right as a sovereign nation.''

''We love France, it is a friendly country,'' said Djangone-Bi, but its troops had no right to ''fire at our presidential palace, destroy our forces, humiliate us, and shoot at our civilians from helicopters.''

Asked to respond, French Ambassador Jean-Marc de La Sabliere told reporters Tuesday the Ivorian Armed Forces carried out ''a deliberate attack'' on French troops.

''France had the right to retaliate. No one (in the Security Council) questioned us. This is not an issue,'' he added.

French President Jacques Chirac's decision to destroy the Ivorian Air Force was ''widely supported by the Security Council,'' de La Sabliere added.

As part of a combined French-U.N. peacekeeping force, Paris has more than 4,500 troops in Côte d'Ivoire, where a civil war has partitioned the territory into a government-held south and a rebel-held north.

The U.N. Operation in Côte d'Ivoire (UNOCI), created by the U.N. Security Council in April 2004, has a military strength of over 6,000 peacekeepers. But in an unusual arrangement, French troops have the right to act alone and do not come under the military authority of UNOCI.

The two forces are mandated to monitor a May 2003 cease-fire and peace agreement that was signed by the rebel forces and the government of President Laurent Gbagbo. ''The French should not be in Côte d'Ivoire'', says Bill Fletcher Jr, executive director of Washington-based TransAfrica Forum.

''There should be either a United Nations force or an African Union (AU) force. The French clearly have an interest in retaining their role as the hegemonic power over their former colonies,'' Fletcher told IPS.

Côte d'Ivoire gained independence from France in 1960.

Fletcher also argued that ethnic tensions in the West African nation have been additionally "manipulated by opportunist forces who are more interested in power than in national unity."

South African President Thabo Mbeki has been mandated by the AU and the Economic Community of West African States to visit the Ivorian capital of Abidjan and mediate the two-year-old civil war.

He is expected to bring Gbagbo and opposition leader Alassane Ouatarra to the negotiating table, along with Gabonese President Omar Bongo and the president of Burkina Faso, Blaise Compaore, both heads of state of neighbouring countries. Gbagbo has accused France of favouring the rebel forces and undermining his position ahead of elections in 2005.

''It is unfortunate and a grave miscalculation that Gbagbo's regime launched its surprise air raids in an attempt to retake the rebel-held north, which killed nine French soldiers and one American, violating the year-old ceasefire accord,'' says Kwame Akonor, executive director of the New York-based African Development Institute. He said it is not surprising that France's counterattack -- ''which included the destruction of Côte d'Ivoire's newly built-up air force and securing strategic control of the country's largest cities'' -- is raising concerns about the European power's real motives, ''given its chequered history and entrenched interests in its former colony''.

On Saturday, the 15-member Security Council condemned Côte d'Ivoire's fatal attack against French forces.

''The Security Council expresses its full support for the action undertaken by French forces and UNOCI,'' said a statement by U.S. Ambassador John Danforth, the council's current president.

France, a veto-wielding permanent member of the Security Council, is pushing for stronger action, including military sanctions and a travel ban on Côte d'Ivoire government officials.

A resolution calling for such measures is expected to be adopted before the end of this week. But it will give the two parties till Dec. 1 to implement the ceasefire and the peace agreement before coming into force.

Akonor said French concern over developments in its former colony is not simply politically motivated: Côte d'Ivoire has long been the key investment platform for French companies in West Africa.

France, he said, is Côte d'Ivoire's biggest single trading partner, defence supplier and bilateral aid donor. Paris also has military bases in the African country.

''Given its political, economic and military interests in the country, some genuinely wonder if France can function as a neutral peacekeeper,'' added Akonor.

This perception is not helped by the fact that French troops constitute 40 percent of the current U.N. peacekeeping force, and operate independently of it, he added.

''Anti-French sentiment was further stoked in Côte d'Ivoire when a dozen French peacekeepers were arrested and charged in September with stealing money from a local bank,'' said Akonor.

He suggested that if the U.N. deployment is to be credible and effective, ''then the composition of its force must reflect its principles of neutrality and impartiality''.

The Ivorian ambassador told reporters his government had requested an independent commission of inquiry to establish the facts of last weekend's attacks.

Asked if France was supporting rebel forces in Côte d'Ivoire, Djangone-Bi said that by its recent actions, Paris was obviously seen to be favouring the rebels.

He also accused France of ''rushing'' for urgent Security Council action and of dictating terms with its "powerful diplomacy."

''The house is not burning,'' said the ambassador. ''Give Africa a chance to resolve the problem." (END/2004)
http://www.ipsnews.net/new_nota.asp?idnews=26220

New York Times: Informal Lenders in China Pose Risks to Banking System

Informal Lenders in China Pose Risks to Banking System
By KEITH BRADSHER

WENZHOU, China, Nov. 3 - The Wenzhou "stir-fry" is not a dish you eat. But it is giving indigestion to Chinese regulators and could prove troublesome to many investors worldwide - from New York money managers, Pennsylvania steel workers and Midwestern farmers to miners in Australia.

Here in this freewheeling city at the forefront of capitalism in China, the dish is prepared when a group of wealthy friends pool millions of dollars worth of Chinese yuan and put it into a hot investment like Shanghai real estate, where it is stirred and flipped for a hefty profit.

The friends often lend each other large amounts on the strength of a handshake and a handwritten i.o.u. Both sides then go to an automated teller machine or bank branch to transfer the money, which is then withdrawn from the bank. Or sometimes they do it the old-fashioned way: exchanging burlap sacks stuffed with cash.

The worry for Chinese regulators is that everyone in China will start cooking the Wenzhou stir-fry and do it outside the banking system. In the last few months, borrowing and lending across the rest of China is looking more and more like Wenzhou's. The growth of this shadow banking system poses a stiff challenge to China's state-owned banks, already burdened with bad debt, and makes it harder for the nation's leaders to steer a fast-growing economy.

The problem starts with China's low interest rates. More and more families with savings have been snubbing 2 percent interest on bank deposits for the double-digit returns from lending large amounts on their own. They lend to real estate speculators or to small businesses without the political connections to obtain loans from the banks. Not only is the informal lending rate higher, but the income from that lending, because it is semilegal at best, is not taxed. For fear of shame, ostracism and the occasional threat from thugs, borrowers are more likely to pay back these loans than those from the big banks.

Tao Dong, chief China economist at Credit Suisse First Boston, calculates that Chinese citizens withdrew $12 billion to $17 billion from their bank deposits in August and September. The outflow turned into a flood last month, reaching an estimated $120 billion, or more than 3 percent of all deposits at the country's financial institutions.

If the bank withdrawals are not stemmed in the months ahead, Mr. Tao warned, "this potentially could be a huge risk for financial stability and even social stability."

With China now accounting for more than a quarter of the world's steel production and nearly a fifth of soybean production, as well as some of the largest initial public offerings of stock, any shaking of financial confidence here could ripple quickly through markets in the United States and elsewhere. For instance, if the steel girders now being lifted into place by hundreds of tall cranes in big cities across China are no longer needed, that would produce a worldwide glut of steel and push down prices.

On Oct. 28, when China's central bank raised interest rates for one-year loans and deposits by a little more than a quarter of a percentage point, it cited a need to keep money in the banking system. Higher official rates should "reduce external cycling of credit funds," the bank said in a statement.

The main Chinese banks have fairly substantial reserves, but they need those reserves to cover huge write-offs of bad debts someday. The International Monetary Fund's China division chief, Eswar Prasad, expressed concern about bank withdrawals in a speech in Hong Kong three days before the central bank acted.

The hub of informal lending in China is here in Wenzhou, 230 miles south of Shanghai. Some of China's first experiments with the free market began here in the late 1970's, and a result has been a flourishing economy together with sometimes questionable business dealings.

Depending on how raw they like their capitalism, people elsewhere in China describe Wenzhou as either a center of financial innovation or a den of loan sharks. But increasingly, Wenzhou is also a microcosm of the kind of large-scale yet informal financial dealings now going on across the country.

The withdrawals by depositors and the informal money lending have spread so swiftly here that it is only in Wenzhou that the Chinese central bank releases monthly statistics on average rates for direct loans between individuals or companies. The rate hovered at 1 percent a month for years until April, when the authorities began limiting the volume of bank loans.

Borrowers default on nearly half the loans issued by the state-owned banks, but seldom do so here on money that is usually borrowed from relatives, neighbors or people in the same industry. Residents insist that the risk of ostracism for failing to repay a loan is penalty enough to ensure repayment of most loans.

Although judges have ruled that handwritten i.o.u.'s are legally binding, creditors seldom go to court to collect. "If it is a really good friend, I would lose face if I sued them in court," said Tu Shangyun, the owner of a local copper smelter and part-time "silver bearer" - a broker who puts lenders and borrowers in touch with each other, "and if it weren't a good friend, I wouldn't lend the money in the first place."

Violence is extremely rare, but the threat of it does exist as the ultimate guarantor that people make every effort to repay debts. "Someone can hire a killer who will chase you down, beat you up and maybe even kill you," said Ma Jinlong, who oversaw market-driven financial changes in the 1990's in Wenzhou as director of the municipal economic reform committee and is now an economics professor at Wenzhou University.

An austerity policy was invoked, its goal to slow rapid economic growth in the hope of stopping an upward spiral in the inflation rate. With consumer prices rising at 5.2 percent a year despite price controls on many goods and services, and with less-regulated prices for goods traded between companies climbing nearly twice as fast, people lose buying power while their money is on deposit at a bank.

The interest rate for informal loans jumped last spring to 1.2 percent a month, or 15.4 percent compounded over a year, and has stayed there since. According to the nation's central bank, total bank deposits in Wenzhou have been dropping by $250 million a month since April as companies and individuals withdraw money either because they can no longer obtain bank loans for their investments or because they want to lend the money at higher rates to each other.

For lenders, these interest rates are much more attractive than earning a meager 2.25 percent a year, even after the recent rate increase, on a deposit at a government-owned bank. And while Beijing assesses a 20 percent tax on all interest from bank deposits, nobody pays tax on the income they receive from lending money on their own, Mr. Ma said.

Most informal loans have traditionally gone to relatives or neighbors to finance the starting of small local businesses. Wenzhou is now one of the world's largest producers of nonbrand sunglasses; Dong Ganming, the owner of a 350-employee sunglass factory here, said that his plant was just one of almost 1,000 here involved in making glasses.

Fierce competition has prompted local residents to borrow money to exploit every possible niche in the industry, with some factories making nothing but bridges for sunglasses so that they will not slide down customers' noses, other factories making only the lenses and so forth. Any government crackdown on informal loans would carry the risk of stifling highly efficient small and medium-size businesses that have little hope of obtaining loans from the state-owned banks, which still allocate credit based partly on political connections.

Mr. Dong said that loans from friends and family allowed him to start his sunglass company with 10 employees a decade ago; he quickly paid off the loans and has been reinvesting most of the profit ever since, putting very little into bank deposits. "The interest in the bank is very low," he said. "If you invest the money, you can get much more money."

But more recently, local residents say, a lot of money has been flowing into real estate here and in other big cities, especially Shanghai, helping to fuel double-digit increases in interest rates. Deals increasingly involve people who have no family or neighborhood connection, raising the risk of disputes.

Kellee Tsai, a specialist in Chinese informal banking at Johns Hopkins University, said that many overseas emigrants from Wenzhou had also been sending their savings back to be lent at much higher rates here than are available in the countries they have moved to.

Some local investors have been able to pay for their investments with profits from businesses here, like Chen Shen, the owner of four shops that sell shoe-manufacturing equipment to the hundreds of shoe factories that have popped up in this area. She said she paid cash for an apartment near Shanghai's Bund, its riverfront district, that had appreciated as much as 60 percent in less than two years.

Still, Chinese regulators do not like the practice, and officials have been trying to stamp out such operations with limited success. They have outlawed the practice of pooling savings into various kinds of informal banks that make loans for real estate and other investments: organizers are subject to the death penalty but are rarely caught unless the informal banks collapse.

Oriental Outlook, a Chinese current affairs magazine, reported late last month on the trial of a man accused of operating an illegal bank northeast of here that collapsed a year ago, leading to the filing of more than 200 civil suits. Another man who lost money in the scheme, and went bankrupt as a result, assaulted the defendant outside the courtroom, the magazine said.

The extent of such pooling is unclear. But it poses the greatest risks of damage to financial confidence if bank runs occur at these informal institutions, economists agree. Bank runs, with depositors lined up clamoring for their money back, have been an occasional problem around China for years, but always quickly contained as the authorities rushed to distribute as much cash as necessary.

"The policy with bank runs, even with illegal banks in some cases, has been to flood the bank with liquidity and pay everyone off," said Michael Pettis, a finance professor at Beijing University, who criticized as ill advised the Chinese policy of bailing out even illegal banks. "One of the most salutary ways to let people know not to put money in these is to let two or three go bankrupt."

TimesOnline: Plane passengers shocked by their x-ray scans

Plane passengers shocked by their x-ray scans
Dipesh Gadher,Transport Correspondent

AN X-RAY machine that sees through air passengers’ clothes has been deployed by security staff at London’s Heathrow airport for the first time.

The device at Terminal 4 produces a “naked” image of passengers by bouncing X-rays off their skin, enabling staff instantly to spot any hidden weapons or explosives.

But the graphic nature of the black and white images it generates — including revealing outlines of men and women — has raised concerns about privacy both among travellers and aviation authorities.

In America, transport officials are refusing to deploy the device until it can be further refined to “mask” passengers’ modesty.

The Terminal 4 trial — being conducted jointly by the British Airports Authority and the Department for Transport — became fully operational last month and is intended to run until the end of the year. Its deployment has not been reported until now since new security measures at airports are not normally publicised.

If the new body scanner is able to cope with large volumes of passengers, improves detection rates and, crucially, receives public acceptance, it is likely to be rolled out across all Britain’s airports.

At Heathrow, passengers are picked to go through the body scanner on a random and voluntary basis. Those who refuse are subjected to an automatic hand search.

The scanner, which resembles a tall, grey filing cabinet, operates in a curtained area and passengers are asked to stand in front of it, adopting several poses, for their “naked” image to be registered. Once checked, the images are immediately erased.

Security officials claim it is a far more effective way of countering potential terrorists because it detects the outline of any solid object — such as plastic explosives or ceramic knives — which conventional metal detectors would miss.

Managers at Heathrow also say the new technology does away with the need to subject passengers to potentially intrusive hand searches. However, travellers who have been screened — and have asked to see the images — have been surprised by their clarity.

“I was quite shocked by what I saw,” said Gary Cook, 40, a graphic designer from Shaftesbury, Dorset. “I felt a bit embarrassed looking at the image.

A female passenger, who did not want to be named, said: “It was really horrible. It doesn’t leave much to the imagination because you’re virtually naked, but I guess it’s less intrusive than being hand searched.”

In a similar trial at Orlando international airport in Florida in 2002, passengers were shown a dummy image before going through, and at least a quarter of them refused to volunteer.

In America last year, Susan Hallowell, director of the US Transportation Security Administration’s (TSA) security laboratory, showed off her own x-ray image to demonstrate the technology to reporters.

“It basically makes you look fat and naked, but you see all this stuff,” said Hallowell, who had deliberately hidden a gun and a bomb under her clothes.

The TSA has decided not to deploy the device at American airports until manufacturers can develop an electronic means of masking sensitive body parts.