Brussels, Belgium (CNN) – The arrest in New York of Dominique Strauss-Kahn, head of the International Monetary Fund, raises a number of questions across the Atlantic where the organization has been a leading player in the European bailout packages.
One man may not make an organization, but the timing of his arrest on alleged sexual assault charges could not have been worse. European Finance ministers begin two days of meetings late Monday to sign off on a bailout package for Portugal, consider offering Ireland a lower interest rate for its rescue plan and evaluate whether Greece warrants emergency funding.
Strauss-Kahn is expected to make his first court appearance to be arraigned on the charges Monday. The IMF chief's attorney, Benjamin Brafman, vowed to vigorously defend him in court, insisting his client is innocent.
Police have said Strauss-Kahn sexually assaulted the 32-year-old woman Saturday at the Sofitel hotel in Manhattan, then quickly headed off to a New York airport to board a Paris-bound flight.
As ministers sit down in Brussels, auditors from the IMF and the co-lead organization, the European Central Bank, continue their work in Athens on Greek progress in reducing their budget deficit and collecting taxes. IMF officials noted last week that early indications are not promising in Greece – all the more reason the arrest of the organization’s leader can serve as a major distraction.
Astana, Kazakhstan: Being at the crossroads of Europe and Asia provided a vantage point to analyze the response to the death of Osama Bin Laden by Nobel Laureates, global investors and leaders from the largest country in Central Asia, Kazakhstan.
Astana, the relatively new capital of this vast land, is home to a sizable annual economic forum which brings together a handful of Nobel Prize winners and a full range of top economists, central bankers and investors who have a yearning for frontier markets.
Kazakhstan is part of what many like to call a circle of influence in a region which includes some tough neighbours: Pakistan and Afghanistan. Like everywhere else, the meeting rooms and coffee bars of the giant Independence Hall in Astana were filled with side-bar conversations about the death of Osama Bin Laden and the chain reaction it may set off.
Nobel Prize winner and the man known as the “Father of the Euro” Robert Mundell says a long-term risk has been removed for the West, but that near-term risk is not reduced following immediate calls for retaliation. After discussions with two dozen global players at the forum, it was abundantly clear that the 24 hour rally in the dollar and the subsequent fall in commodity prices would be short lived.
Miranda Xafa, global strategist with IJ Partners in Geneva, said the elimination of OBL will only embolden Al Qaeda even if it takes months if not longer for a major restructuring of its operations. More important to her and others I spoke with is the near-term outcome of the Arab uprisings, which is keeping a 10-15% premium on the price of crude.
Many expressed their deep concerns about Iran’s next moves after party unity in the Palestinian Territories between Fatah and Hamas – a deal brokered by Egypt no less. The simple translation for investors: More pressure will be applied against Israel, which will only ratchet up tensions in the Persian Gulf.
This scenario does not bode well for lower energy prices and the timing is precarious at best for the U.S. economy, which is sputtering as the Federal Reserve prepares to withdraw the record stimulus. I asked Sir James Mirless, another Nobel winner, if we are in the midst of structural change in America, with youth unemployment that rivals that of the Arab region. A recent U.S. study points to nearly a quarter of all 16-25 year olds as not working. Sir James, with his decades of hindsight, did not think so. Good old fashioned budget management and tax policy were the choices de jour for those in Astana.
Beyond the obvious security concerns sweeping the MENASA region at this juncture, the greatest worry was reserved for the ever-increasing mountains of debt in the U.S. and Europe. A $14 trillion U. S. federal debt pile is a steep hill to climb in a low growth, high unemployment climate. They chided lawmakers for thinking only in election cycles and not addressing the largest budget obligations, long-term pension and health care entitlements which continue to spiral out of control.
One potential net plus out of the “Business after Bin Laden” world is the possibility for a more unified approach in Washington D.C. After the elimination of one threat to security, could it be possible to chip away at a record debt which threatens the role of the U.S. dollar as the premiere reserve currency? The answer from the crossroads of East and West was a resounding no.
It does not take much to get the market in Athens agitated these days. Not a trading session goes by without rumors of a pending restructuring of Greek debt.
But what seemed on the surface to be a straightforward exchange of internal thoughts at Citigroup created a storm matching the famously dry Meltemi winds that are a trademark of Mediterranean summers.
An email from London-based bond trader for Citigroup Paul Moss, the contents of which were shared from a government source, raised concerns Wednesday about “increased noise over Gr [Greek] debt restructuring as early as this Easter weekend.”
A close examination of the email shows Moss was not suggesting that the restructuring was happening, but that market interest rates and general discussion in the trading pits were suggesting this may transpire.
French President Nicolas Sarkozy had a grand plan in mind to make the Union of the Mediterranean a hallmark of his rotating EU Presidency in July 2008.
The math was simple, the scale grand, up to 44 nations of Europe, Middle East & North Africa that, among other things, would foster trade with the Mediterranean Sea as its center of gravity.
The French President wanted to expand the original plan launched in the mid-nineties under what is known in Brussels as the Barcelona Process. The policy structure under the title of the Euro-Med was in place, but the actual building of this economic blueprint never got off the ground.
The Icelandic people are known for their independent nature, isolated at the northern tip of Europe, but their second “no” vote on bailing out investors from Britain and The Netherlands will keep them entangled in European courts for a long while.
There are only 320,000 citizens of Iceland, but they continue to punch well above their weight in their desire to reject a bailout of nearly $6 billion “foreigners” who invested in the on-line division Icesave of Landsbanki.
Peer across the Atlantic and one would one get the sense that the intensified campaign to stabilize Libya will be done and dusted by early spring.
At the start of the week, investors pushed the Dow Industrials back above the 12,000 mark with a surge of 1.5%. At last count, the index is up better than 5% for the year, the broader S&P 500 nearly 4%. Part of the late March market madness was based on expectations of an early resolution in the Middle East. Once the missile attacks got underway, the general feeling was that decisive action was taken by the West and that would begin to put the worst behind us.
It is not with some irony then, that the Cairo stock exchange opened for the first time since January 27 and plunged nearly 9% on the day, making it the worst performing equity market in 2011. They say equity markets are good lead indicators for the state of play in their respective economies. Which is more accurate today: the New York Stock Exchange or the Cairo Stock Exchange?
Investors must feel very confident that the U.S. economy can continue to expand by around 4%, without the help of government stimulus. There is also an assumption that energy prices have peaked after the unrest that started in Tunisia but at this juncture knows no limits with Syria, Yemen and Bahrain - all part of today’s "great unknown."
The International Monetary Fund was predicting growth of 4% for the Middle East and North Africa before the year got underway. It is difficult to see how the region can obtain half of that output, with tourism receipts already under pressure and a climate that will only scare off foreign investors.
In the past ten years, the MENA region pulled in over a half trillion dollars of investment –- the bulk of that $450 billion came in the last five years alone according to UNCTAD. Prior to the new millennium, the region garnered less than 1% of global FDI; that figure peaked in 2009 at 7.7%.
The creator of the BRIC acronym Jim O’Neill of Goldman Sachs recently stated that the Arab world could ride the revolution into the club of fast growing emerging markets. Rapid birth rates and high productivity are essential tools for growth. The region’s geographic advantage between Europe and East Asia could also benefit more than just the fast growing airlines, which call Dubai, Abu Dhabi and Doha their home.
O’Neill had been so bullish on the region, that he included both Egypt and Iran into his group of the "Next 11" - the list of nations that hold the greatest promise of joining the bigger global players. But he rightly adds, this climb up to the next level will depend on how the leaders of today respond to the challenges from its youth.
This is not only a Western-held view. Saudi Arabia’s former Director General of Intelligence, Prince Turki bin Faisal Al Saud notes, “We have to formulate new policies that could be up to the expectations of the people of the Gulf, very effective and coping up with the recent developments.”
Prince Turki drew parallels of today’s regional uprisings to the fall of communism in Eastern Europe. It was not widely predicted; it provided historic change and eventually paid a huge dividend in terms of unleashing economic power.
That could be the medium term result of today’s fight for more accountability by the region’s youth, but near term it certainly will not deliver the quick resolution investors on Wall Street have been betting on.
Two so called “Days of Rage” have been etched in the month of March in Saudi Arabian calendars. One just passed without major upheaval, but with a high level of intervention by interior security forces and imams advising followers not to take to the streets in protest.
These scheduled protests are bookends to a 10 day period that could determine the future direction of the region. The most intense calls for change are coming from the Eastern Province, which has the largest Shiite population. How these protests are managed take on greater weight since the province borders Bahrain, where the decibel levels of protest remain very high. One should not forget that a fifth of the global oil reserves rest under the sands of Saudi Arabia as well.
The battle for the future of Libya has naturally taken the collective eyes of the media off the struggle for change in Tunisia, Egypt and Bahrain. This is where, as many regional analysts and business leaders rightly state, the hard work begins. We will soon find out if reforms - political and economic - will be watered down or if the government cabinets will be more responsive to their populations.
The knee-jerk reaction so far has been to throw money at the problem in an attempt to buy peace. That is exactly what we are seeing in the six states of the Gulf. Foreign ministers of the region inked an agreement to supply $10 billion each for Bahrain and Oman in the hope of sending the signal to protestors that governments can take action.
The largest economy in the region, the most populous in the Gulf and the producer of nine million barrels a day of oil wants to lead that effort. A month ago, King Abdullah returned from convalescing in Morocco and quickly announced a package of $36 billion to address the neediest in the country. Poverty remains surprisingly high with such oil wealth underground. Official unemployment is just above 10 percent, amongst the country’s youth it is more than double that.
This short-term package of spending follows a five-year, $400 billion plan to beef up education, housing, as well as building four new economic cities from scratch - each with a population of one million or more each. Introducing new cities will also introduce a wave of change - something the King was eager to do to speed up economic reforms. It is not clear at this juncture if there is the continued will to do so by those who will need to see this through. The King and the Crown Prince are well into their 80s and Prince Nayef who has been Minister of Interior for 40 years is 77.
With this backdrop, regional chief executives are trying to navigate their bottom lines for the near term and want to see that there will be continued growth based on this young, but rightfully restive population.
Saudi Arabia represents half of infrastructure group Drake and Scull’s $2.1 billion order book. Chief Executive Khaldoun Tabari does not see a letdown on spending by Riyadh over the next four to five years. He described government outlays as “humongous” by any measure.
The spending might solve a medium-term problem, but in this climate it is managing near-term expectations which will prove difficult.
Asset advisor Saud Masud candidly notes that, “We don’t know what Saudi can deliver even if it wanted to,” since constitutional monarchies and other monumental shifts don’t happen overnight. And there is always a danger of backsliding. These governments have been pursuing economic reforms for the better part of seven years.
Economist Turker Hamzaoglu of Bank of America Merrill Lynch is expressing publicly what many are muttering privately, “I have some doubts that liberal policies will rule the day going forward.”
Three short years ago in the first quarter of 2008, members of OPEC, especially those in the six Persian Gulf states, were riding a wave of surplus capital flowing into their coffers as oil crossed over the three digit level of $100 a barrel.
As we all know, prices continued the march to $147 that summer and started a sharp spiral downwards when the banking crisis set in, the recession took hold in the West and spread like a virus to the fast growing economies of Asia.
Is this a case of deja vu and we will witness a nasty correction as oil prices undermine fragile recoveries in the U.S. and Europe? Quite possibly yes. Contrary to some of the popular thought being shared online, the major producers in the Gulf States are not eager to see a repeat of the autumn of 2008 when prices tumbled more than $100 in six months.
What OPEC, especially Saudi Arabia which sits on a quarter of the world’s proven reserves, has been striving for is a "Goldilocks price" for crude. You remember the fairytale, the porridge that was not too hot, not too cold, but just right.
King Abdullah of Saudi Arabia actually stated what he thought Goldilocks oil was during the run up to a record price of $147 - something in the range of $85-90. OPEC countries are sitting on spare capacity of about four million barrels a day - three-quarters of that in the Kingdom. Most of that spare capacity is there because global demand still remains well below the pre-recession peak levels.
China, India and Southeast Asia have revved up growth again, but America and Europe have needed historically loose economic policies and easy money to sustain a tepid recovery. If this Middle East crisis would have hit right in the midst of the peak of global growth, one would probably be looking at a new record for crude.
While many are quick to jump on the bandwagon and ask Saudi Arabia and others to open their taps (which they are doing already) we should also keep in mind that the market is starting to price in worse case scenarios. Not only are consuming states pondering the future of Libya and its 43 billion barrel reserve, but Algeria, Egypt and Oman as well.
All four combined have production output each day of more than four million barrels. With that simple math, it is quite easy to see why OPEC’s spare capacity gets stock market investors a bit nervous. But it is difficult at this stage to ponder all four of those countries not sustaining production over the medium term.
Whoever comes into power wants the cold hard cash that their black gold generates. There are also other key forces at play in today’s “three digit market,” most notably the hedge and pension fund managers who see the commodity market as an easy bet for making money. Some of the best energy strategists that I have spoken to say that at least 10% of today’s price is driven by these funds. They say another 10% if not more represents a security risk as in the concern that supplies out of the Middle East may be hampered if the region continues to have no endgame in site for political stability in Libya, Egypt, Bahrain, Tunisia and Algeria.
In the classic version of story, Goldilocks wakes up out of a deep sleep, sees the three bears and scampers out of the cottage where she is an unwelcome visitor. The return of the “Goldilocks scenario” to the energy market would certainly be welcomed by producing and consuming nations. They are fearful of the impact today’s $100 oil will have in the near term - but this looks as elusive as the character in the fairytale.
As an active observer and a consistent visitor of the Middle East, one asks a simple question: Why does it have to be this way?
I am not talking about Shiite/Sunni divides, the Palestinian/Israeli conflict or Iran’s growing influence in the region, but persistent and unacceptable levels of poverty in a region blessed with nearly half of the world’s oil and gas reserves.
First it was Tunisia, then Egypt, Yemen, Algeria, Libya and stretching into the Gulf with Bahrain.
There are major historical and cultural differences, of course, and even vast differences in per-capita income – Bahrain for example is high at $38,400, Yemen low at $2,500. But a few common threads can be found: the region’s youth lack opportunities, power is concentrated at the top and the inner circle around them, and most waited too long to embrace the winds of change brought on by globalization.
Protests have now spread far beyond Cairo and Alexandria, labor unrest is boiling over in factories and major port areas and former business titans and parliamentarians are being told not to travel – add it all up and it’s not the ideal backdrop for re-booting the region’s most populous country.
While the business world is looking for key signs of the wheels of commerce starting to move again with the re-opening of banks, core fundamental issues are more worrying by the day.
Initial forecasts from some of the region's leading economists are starting to look at revising their growth figures. From Banque Saudi Fransi-Credit Agricole: economic growth of 5.3% now revised down to 3.7%. To be candid, that seems quite conservative, if this attempt at a controlled transition begins to unravel. The country is currently losing more than $300 million a day in revenues.
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