Peru Is In, Now Where's Colombia?

Santa came early this year, arriving on an alpaca-drawn sleigh with Senate passage of Peru free trade. But it's not the only gift America needs. Congress must pass the even more critical Colombia pact

The Senate's decisive 77-18 vote Tuesday signaled that free trade and bipartisan spirit are very much alive in Congress. Following the House's 285-132 passage on Nov. 8, it was a spectacular victory.

The pact not only scraps tariffs forever on U.S. goods into Peru; it gives Peru a long-term future in which poverty will be alleviated and another Latin American country will align with the U.S.

"Approval of this agreement," President Bush said Tuesday, "signals our firm support for those who share our values of freedom and democracy and expanding opportunity for all."

Hernando de Soto, Peru's great economist of poverty alleviation, said as much at the Heritage Foundation last year. The treaty is "not only about free trade," he said. "We are trying to set up a different model for Latin America. That model is essentially a political one, because we are pro-market."

De Soto was Peru's special envoy for the pact and apparently a persuasive one. He delivered a big blow not only to free-trade critics such as Big Labor and CNN's Lou Dobbs, but also to free trade's biggest enemy, Venezuelan dictator Hugo Chavez.

Chavez must be hurling antiques at his Caracas palace. As Peruvians gain choices about their future, they won't have to turn to Chavez for answers. Eighty percent of Peruvians wanted this pact.

Right off, 85% of U.S. goods will enter Peru duty-free; the rest of the tariffs go in 10 years. Peruvians will now snap up U.S. products at more affordable prices, raising their standard of living.

They have been waiting for this a long time. Peru has put in so many "internal free-trade" reforms to prepare for this pact that its economy is already one of the world's fastest-growing. Real growth clocked in at 8% in 2006, pushing its GDP to $77 billion. Purchasing power was up 10%, meaning Peru's buyers are ready to spend.

The pact also provides a new legal framework for settling business disputes, allows companies to hire the talent they want, and ensures that U.S. and Peruvian companies get treated on the same legal basis. Companies that benefit most are small ones that create jobs, not those that can hire fancy lawyers to guard their rights.

Hailing the treaty, the U.S. Small Business Administration says 38% of U.S. trade with Peru is already done by 5,000 such businesses (vs. 29% for the world as a whole).

For Peru, foreign investment will pour in. If the pact is as successful as the one signed with Mexico in 1994, trade between the two nations will quadruple from $9 billion within a decade.

In short, it's Christmas all around, with the free trade zone of the Americas stretching ever farther across the hemisphere's Pacific coast. It is a trade alliance that will bring confidence and prosperity as surely as it will provide an alternative to populist tyranny.

That is why the pending trade pact with Colombia is just as critical. A U.S. ally with the second-biggest population in South America and the third-biggest economy, it straddles two oceans and has implemented the same economic reforms in preparation for free trade as Peru. Its GDP is forecast to surge 7.8% in 2007.

Also like Peru, it has endured a barbaric Marxist terror war and is on the road to ending it. To pass a pact for Peru while leaving out Colombia, President Bush noted Tuesday, would insult an ally.

As he also said, quoting Canada's prime minister, Stephen Harper, the biggest fear in South America is not the populist appeal of Chavez, but the outlook for stability if Congress spurns Colombia.

Big Labor, however, opposes the Colombia pact with the same rabid fervor it did with the Central American Free Trade Agreement in 2005, a fight it lost. It claims Colombia's government has not done enough to defend labor unionists from the violence that has hit the entire country.

Depriving Colombia's 44 million people of free trade won't improve unionists' safety. Neither will moving the goal posts or jacking the ally around with shifting demands.

With Peru showing that free trade is alive and passable, there is plenty of cause for celebration. Now is the time to move forward on a deal with Colombia. The momentum must not be lost. There is too much to gain.

Argentine Dairy Farmers to `Sacrifice' Cows Over Price Caps

Dec. 12 -- Argentine farmers plan to ``sacrifice'' some dairy cows tomorrow to protest government price controls on milk, posing a challenge to newly elected President Cristina Fernandez de Kirchner.

An unspecified number of Holstein milk cows will be shipped to Argentina's biggest livestock market, Guillermo Draletti, president of the General Union of Dairy Farmers said today. Farmers sent more than 1,000 cows to slaughterhouses last week, he said. Economy Minister Martin Lousteau announced a price cap on untreated milk of 78 centavos (25 cents) a liter on Dec. 4.

``We will sacrifice our oldest cows tomorrow as a form of protest,'' Draletti said in an interview. ``Small and medium- sized farmers can't survive this new measure.''

Fernandez de Kirchner, who replaced her husband Nestor Kirchner as president on Dec. 10, seeks to maintain a policy of capping food prices to protect Argentine consumers from rising global commodity prices. Cattle ranchers and wheat farmers say the measures force them to plow up land or sell their herds to grow soybeans, which are freer of government controls.

Argentine farmers also are protesting outside of plants owned by dairy co-operative SanCor SA, Draletti said. Agriculture Secretary Javier de Urquiza yesterday urged farmers to open talks with the government.

Production Costs

Dairy farmers say the price cap may lead to milk shortages because production costs are 75 to 80 centavos a liter, newspaper Clarin reported Nov. 30. Argentina is the world's third-largest milk-powder exporter, behind New Zealand and the European Union, according to the U.S. Department of Agriculture.

Argentine sales of untreated milk to dairy companies fell 12 percent to 4.2 million liters in the first 10 months of 2007 from a year earlier, according to statistics provided by the agriculture secretariat.

Global cheese and milk-powder prices have doubled in the past year as demand rose and a surge in biofuel crops cut the amount of arable land available for food production.

Milk demand may increase by 2.5 percent a year through 2010 and prices are likely to remain elevated for some time, Rabobank Groep, the world's largest agricultural lender, said in a report in October.

Brazil's Bovespa Rises on Fed's Liquidity Plan: Latin Stocks

Dec. 12 -- Brazil's main stock index rose as global growth concerns eased, after the U.S. Federal Reserve and four other central banks said they would add cash to the banking system to prevent a slowdown.

The Bovespa index of most-traded shares on the Sao Paulo exchange gained 1,179.30, or 1.8 percent, to 65,691.56 at 10:33 a.m. in New York. Petroleo Brasileiro SA paced the gain as oil rose in New York. Latin Stocks fell yesterday on concern the Fed's quarter percentage point cuts in its key interest rates were too small to stop the U.S. economy from falling into recession.

``That idea was thrown out with the action the Fed did today,'' Fernanda Mello, who helps manage the equivalent of $1.3 billion at Maua Investimentos in Sao Paulo. ``Now people can look at the Brazil's fundamentals, which are very good.''

Brazil's economy expanded in the third quarter at the fastest pace in more than three years, the government said today. The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank to ``elevate'' short-term funding pressures, the Fed said in a statement in Washington.

Petrobras, as Brazil's state-controlled oil company is known, gained 3.9 percent to 84.08 reais. Crude oil for January delivery jumped 2.5 percent after a U.S. government report showed inventories declined last week. Cosan SA Industria & Comercio, the world's largest sugar-cane processor, advanced 3.2 percent to 22 reais.

Chile's Ipsa index rose 0.8 percent to 3,191.82, led by Cencosud SA, on speculation that declines in the previous two days had left some stocks cheap as global credit fears subsided.

Welcome Injection

Investors welcomed the central banks' global cash injection to spur lending and economic growth, said Valentin Carril, who oversees $3 billion as chief executive officer of Principal Asset Management SA in Santiago.

``The main impact, especially in the very short term of one day, is a reduction of risk aversion globally,'' Carril said in a telephone interview today. ``Longer term, any resolution of this credit crunch means all companies in Chile are worth a lot more because Chile is a highly dependent on trade.''

Cencosud, Chile's biggest retailer that was given a ``buy'' rating at UBS AG yesterday, rose 1 percent to 1,965 pesos.

In other Latin American markets, the main indexes in Argentina and Colombia rose, while Venezuela's IBVC index and Peru's IGBVL fell. The MSCI index of Latin American shares rose 1.5 percent to 4,551.46. Markets in Mexico were closed for a public holiday.

Brazilian GDP Expands at Fastest Pace Since June 2004 (Update4)

Dec. 12 -- Brazil's economy expanded in the third quarter at the fastest pace in more than three years, stoking speculation that the central bank may keep borrowing costs unchanged for most of 2008 to cap inflation.

Gross domestic product rose 5.7 percent in the third quarter, compared with a revised 5.6 percent increase in the second quarter, the government said. The expansion was above the median 4.9 percent forecast in a Bloomberg survey of 37 analysts.

Growth in Latin America's biggest economy is surging as record low interest rates power consumer and business spending. A jump in corporate investment last quarter may do little to add output capacity fast enough to prevent a rise in prices, prompting the central bank to keep rates on hold, said Nuno Camara, a senior economist for Dresdner Kleinwort Group.

``Investment was very strong, which will make the investor more confident about the sustainability of growth,'' Camara said in an interview from Sao Paulo. ``But more investment means bigger aggregate demand, which is another sign the central bank should keep a cautious scenario.''

Latin America's biggest economy expanded 1.7 percent from the previous quarter, faster than the revised 1.3 percent pace in the second quarter, according to the Rio de Janeiro-based statistics agency.

In the four quarters ended Sept. 30, the economy grew 5.2 percent from 4.9 percent in the same period ended in June, the biggest accumulated annual growth rate since the end of 2004.

Rates, Target

Brazil's central bank over the two years through September lowered the benchmark lending rate 18 straight times from 19.75 percent to 11.25 percent, the longest easing cycle since the so- called Selic was adopted in 1999.

The rate cuts, while fueling investment and output in the $1.1 billion economy, have also stoked annual inflation, which quickened to 4.19 percent last month from an eight-year low of 2.96 percent in March.

Accelerating inflation, growth and industrial output prompted the bank to call a pause to rate reductions on Oct. 17 and again on Dec. 5. The bank board next meets Jan. 22-23.

Inflation measured by the IGP-M index, Brazil's broadest, accelerated 1.1 percent for the 10 days ended Dec. 1, research institute Fundacao Getulio Vargas said today.

Prices in the city of Sao Paulo posted their biggest monthly increase since January this week, the University of Sao Paulo said today.

Output, Lending

A Dec. 5 report on industrial production, a proxy for growth, showed output in October climbed the most in three years, the national statistics agency said.

The 10.3 percent gain exceeded the 5.4 percent increase in September and the 8.9 percent median forecast in a Bloomberg survey of 34 economists. Factories in Brazil are operating at a record 84 percent of installed capacity, the National Industry Confederation, Brazil's largest industry lobby group, said.

Brazilian bank lending rose 2.7 percent in October from a month earlier to 880.8 billion reais ($473.6 billion) from a revised 857.3 billion reais in September, the central bank said Nov. 27. Lending climbed 26.3 percent from October 2006.

`Prudent'

Still, the bank may have leeway to resume cutting the benchmark rate, Latin America's highest, after the second half of 2008, said Alexandre Lintz, senior Latin America economist with BNP Paribas SA in Sao Paulo. He expects the bank to trim the Selic by another point to 10.25 percent by the end of 2008.

``Solid growth won't prevent rates from falling further in 2008,'' said Lintz. ``But at this point, markets are urging policy makers to remain prudent and handle growth more cautiously.''

The yield on the interbank deposits future rate contract due Jan. 2009 rose as much as 9 basis points, or 0.09 percentage point, to 11.83 percent, the highest yield since Aug. 24.

Investors use the contract to bet on future moves by the so-called Selic target rate. The yield fell to 11.82 percent at 1:08 p.m. New York time.

Jobs, Production

The result is also a boost for President Luiz Inacio Lula da Silva, who has focused his policies on sparking growth and job creation ahead of mayoral elections in October next year.

Brazil's government-registered jobs rose 58 percent in October from a year-ago month, the Labor Ministry said Nov. 14.

The economy created 205,260 formal jobs in October compared with 129,795 in October 2006. In the first 10 months, the economy created 1.81 million jobs, a 20 percent increase compared to the same period of 2006.

Manufacturing, powered by capital spending, led growth higher in the quarter after posting a 5.8 percent increase from the same period a year earlier, the agency said.

The services industry, a measure of consumer spending that accounts for about 60 percent of the economy, rose 4.8 percent in the third quarter. Agriculture, which accounts for less than 10 percent of GDP, soared 9.2 percent last quarter.

Camara plans to boost his 2007 growth estimate ``above'' 5 percent from 4.8 percent. ABN Amro Bank NV economist Zeina Latif boosted hers to 5.2 percent from 4.5 percent.

The bank predicts growth of 4.7 percent, according to its quarterly report released in September.

Fed, ECB, Central Banks Work to Ease Credit Crunch (Update9)

Dec. 12 -- The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.

The Fed said in a statement it will make up to $24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S.

Central bankers took the action after interest-rate reductions in the U.S., U.K. and Canada failed to allay concerns that banks will reduce lending, sending the U.S. into recession and hobbling growth abroad. Borrowing costs have climbed as mounting losses on securities linked to subprime mortgages caused lenders to conserve cash.

``This is shock and awe,'' said Fred Goodwin, a fixed-income strategist at Lehman Brothers Holdings Inc. in London. ``The fact that it's coordinated means they have joined together in the war to attack the problem, which is that banks don't trust each other.''

A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash. The Fed will balance its various operations, including daily repurchases of Treasury notes and direct loans to banks.

Bank of England

The Bank of England increased the size of reserves it will auction in money market operations and widened the range of collateral it will accept on three-month loans.

Stocks rallied on both sides of the Atlantic, before surrendering much of the advance. The Standard & Poor's 500 Index rose 0.8 percent to 1,488.82 at 2:50 p.m. in New York, retreating from a gain of as much as 2.3 percent. The S&P 500 tumbled 2.5 percent yesterday as investors expressed disappointment at the Fed's quarter-point reduction in its benchmark rate. Treasury notes fell and the dollar strengthened against the yen.

``Ultimately the problems we're facing go beyond illiquidity,'' said Larry Hatheway, chief economist at UBS AG in London and a former researcher at the Fed ``It's another step in the healing process, but we have some way to go.''

The Fed official said on condition of anonymity that today's announcement wasn't a reaction to the slump in stocks yesterday. The agreement was reached with central banks abroad last week and was announced today at a time when markets were open in Europe and the U.S., he said.

`Elevated Pressures'

The measures are ``designed to address elevated pressures in short-term funding markets,'' the Fed said in a statement in Washington. The U.S. central bank said it's considering setting up a permanent arrangement to provide funds to banks through so- called term auction facility operations.

``The interbank market isn't working very well, and when the interbank market doesn't work very well globally, this creates some problems,'' Bank of Canada Governor David Dodge said in an interview today. ``It's part of our normal role as central banks to try to, if you will, unblock that.''

Fed Vice Chairman Donald Kohn and other officials have expressed frustration that banks haven't made more use of direct loans from the U.S. central bank. Policy makers reduced the so- called discount rate to half a percentage point more than the benchmark rate in an effort to stimulate use of the resource.

Banks' Struggle

The world's major central banks have been struggling to restore liquidity since the market for assets backed by U.S. subprime mortgages collapsed because of rising foreclosures. In August, the Fed was forced to cut its discount rate and join the European Central Bank and Bank of Japan in pumping billions of dollars into the banking system.

``They had to do something,'' said Goodwin at Lehman. ``Now that this has happened we can spend less time adding up the numbers and instead think of this as a sentiment-changing moment, when central banks tackled the problem aggressively.''

The Fed has lowered its benchmark rate three times, and was joined last week by the Bank of England and Bank of Canada. The ECB has shelved planned rate increases. On Wall Street, the chief executive officers of Merrill Lynch & Co. and Citigroup Inc. lost their jobs. Confidence among U.S. consumers, whose spending accounts for more than half of gross domestic product, has weakened.

``The central banks have been behind the curve on the coordination front,'' said Marco Annunziata, chief economist at Unicredit MIB in London. ``It's striking that only now we get a coordinated response to what has been a common problem.''

Auction Schedule

The first U.S. auction, of 28-day funds, will be $20 billion on Dec. 17. The second, on Dec. 20, will provide up to $20 billion. The central bank plans two more auctions, Jan. 14 and Jan. 28, with possible additional operations thereafter, the Fed said. Officials will consider the results and effects of the auctions as they determine whether to proceed with more and how long to set the maturities.

The Fed official said the central bank won't reveal the names of those bidding for the funds. The auctions aren't aimed at helping particular banks, he added. Officials don't expect there will be any ``stigma'' attached to lenders bidding for the funds, the official said.

``By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity,'' the Fed statement said.

Difference From Repos

The Fed's New York branch conducts repos most days to steer the federal funds rate, the overnight lending rate between banks, to the target set by policy makers. Only primary dealers, authorized to trade directly with the New York Fed, participate.

By contrast, all ``generally sound'' deposit-taking institutions can participate in the term auction facility, the Fed said. The Fed's 12 district banks will accept the same ``wide variety'' of collateral that is used for discount-rate loans, the statement said. The regional banks determine the haircuts on the assets submitted.

The Federal Open Market Committee also authorized ``temporary reciprocal currency arrangements,'' or swap lines, for up to six months, with the ECB of as much as $20 billion and $4 billion to the SNB ``for use in their jurisdictions.''

Six years ago, the Fed sold $50 billion to the ECB after the destruction of the World Trade Center restricted foreign banks' access to dollars.

Yesterday, U.S. stocks had their biggest drop in a month and two-year Treasury yields plummeted after the Federal Open Market Committee lowered the benchmark rate by a quarter-point to 4.25 percent and said cumulative cuts of 1 percentage point this year should promote ``moderate growth.''

Some investors expected a larger reduction of a half-point to stave off a recession. The Fed's board also reduced the discount rate, covering direct loans to banks, by a quarter point to 4.75 percent, half of what many economists predicted.

Central Bank Measures to Address Elevated Pressures in Short-term Funding Markets

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.

Bank of England Actions

The Bank of England has already scheduled long-term repo open market operations (OMOs) on 18 December and 15 January. In those operations reserves will, as usual, be offered at 3, 6, 9 and 12-month maturities against the Bank’s published list of eligible collateral. But the total amount of reserves offered at the 3-month maturity will be expanded and the range of collateral accepted for funds advanced at this maturity will be widened.

The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.

The Bank will accept a wider range of high quality securities as collateral against funds advanced at the 3-month maturity. The additional categories of eligible collateral are:

• Bonds issued by sovereigns rated Aa3/AA- or above (in addition to those currently eligible), subject to settlement constraints.
• Bonds issued by G10 government agencies guaranteed by national governments, rated AAA.
• Conventional debt security issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Federal Home Loan Banking system, rated AAA.
• AAA-rated tranches of UK, US and EEA asset-backed securities (ABS) backed by credit cards; and AAA-rated tranches of UK and EEA prime residential mortgage-backed securities (RMBS).
• Covered bonds rated AAA.

Securities must be denominated in sterling, euro, US dollars, Australian dollars, Canadian dollars, Swedish krona, Swiss francs, and, in the case of Japanese Government Bonds only, yen; and must be capable of being delivered via a settlement channel specified by the Bank.

There will be no further changes to the scheduled operations on 18 December and 15 January. As usual, those eligible to bid in the operations will be the Bank’s OMO counterparties and the operations will be conducted as variable rate tenders with funds offered to successful bidders at the rate(s) that they tender.

Consistent with the Bank’s objective of keeping overnight market interest rates in line with Bank Rate, the Bank intends to offset the additional reserves taken up in the long-term repo operations in December and January in its other operations.

The Bank will review whether to make any changes to operations scheduled after January in the light of market conditions at the time.

The Bank will announce further operational details, including details of collateral and settlement arrangements, in a Market Notice on Friday 14 December.

Central banks step in to attack credit crisis

The world’s central banks on Wednesday unleashed a co-ordinated assault on the liquidity squeeze in global capital markets.

The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and the Swiss National Bank all announced measures to attack the liquidity crisis.

The Fed said it was creating a temporary credit auction facility, as revealed in Wednesday’s Financial Times, and entering into foreign exchange swap agreements with the ECB and the Swiss to tackle the shortage of dollar funds in Europe.

The move comes after several weeks of mounting tension in the global money markets, due to a combination of normal, year-end funding pressures and deepening gloom among banks about the impact of the losses on subprime-linked securities.

Until recently, some bankers had hoped that these money market pressures would be short-lived. However, in recent days some of the money market indicators have started to move in ways that suggest banks are now worried that funding problems will last into the New Year, or even the summer. This appears to have prompted the central banks to launch their joint action – a step that is unprecedented in terms of the degree of co-ordination that it implies between the leading central banks.

Forum

Have the central banks done enough to restore confidence in the global financial system? Have your say

The issue of co-ordination between central banks has become particularly important in recent months, since the most severe funding problems have often occurred in the dollar markets – but many of the victims of these pressures have been European institutions, which have not always had access to the dollar market on the same terms as US banks.

This pattern prompted suggestions in the summer that the ECB should conduct a currency swap with the Fed, but this was rejected by the ECB at this time as an unnecessary move.

“The actions demonstrate that central banks are working together to try to forestall any prospective sharp tightening of credit conditions,” a Bank of England spokesman said.

Wall Street welcomed the news. The Dow Jones Industrial Average opened up 204 points at 13,637. The yen fell sharply against a range of currencies as traders bet that the banks’ move would help raise risk appetite and lead to a rejuvenation of the carry trade.

US Treasuries fell and yields rose as investors fled havens and were poised to move back into equities.

In Europe, the FTSE 100 in London, which at one stage in the morning had been down more than 100 points, turned to the black with a gain of 35 points. Banking stocks in particular saw fresh demand, reversing earlier losses.

As part of the measures, the Fed will auction term funds to depository institutions against a wide variety of collateral that can be used to secure loans at the discount window.

The first auction under the programme will be $20bn in 28-day term funds on Monday, settling December 20, with a second auction of $20bn in 35-day funds scheduled for December 20, settling on December 27. Subsequent auctions are scheduled on January 14 and January 28.

Ian Shepherdson, chief US economist at High Frequency Economics, said: “We think these measures are a step in the right direction, but there is simply no way to know for sure how effective they will be. The big question, though, is why the Fed did not make this announcement yesterday, instead of allowing the markets to be hugely disappointed by their actions. Much of the pain yesterday could have been avoided if the Fed had simply said that it would make an announcement about market conditions today.“

However, a senior Fed official said: “This was a global effort among a number of central banks. We wanted to announce that together. We could not have announced yesterday as Europe was closed.”

“Market reaction yesterday had nothing to do with today’s announcement,” the official added. “This has been in the works for a while. The market response was not a factor.”

The official said: “This is not about particular financial institutions with particular problems. This is about market functioning.”

The official added that “this facility will accept a wide range of collateral – the same range as is available at the discount window,” saying “there is no reason to believe there would be stigma associated with the use of this facility.”

Derivatives Trade Soars To Record $681 Trillion

Saudi Arabia - AN/AAQ-33 SNIPER Targeting Pods

The proposed sale will improve the operational capability of the Royal Saudi Air Force (RSAF) by upgrading the long-range target detection and identification systems of the Saudi F-15s.

The Defense Security Cooperation Agency notified Congress of a possible Foreign Military Sale to Saudi Arabia of AN/AAQ-33 SNIPER Targeting Pods as well as associated equipment and services. The total value, if all options are exercised, could be as high as $220 million.

The Government of Saudi Arabia has requested a possible sale of 40 AN/AAQ-33 SNIPER Advanced Targeting Pods, aircraft installation and checkout, digital data recorders/cartridges, pylons, spare and repair parts, support equipment, publications and technical documentation, contractor engineering and technical support, and other related elements of program support. The estimated cost is $220 million.

This proposed sale will contribute to the foreign policy and national security of the United States by helping to improve the security of a friendly country that has been and continues to be an important force for political stability and economic progress in the Middle East.

The proposed sale will improve the operational capability of the Royal Saudi Air Force (RSAF) by upgrading the long-range target detection and identification systems of the Saudi F-15s. The proposed sale will provide an upgraded capability of the RSAF's existing 1980's LANTIRN pod technology. This sale also will increase the RSAF AWACS sustainability and interoperability with the U.S. Air Force, the Gulf Cooperation Council countries, and other coalition air forces.

The proposed sale of a modern F-15 SNIPER targeting system will greatly improve the RSAF's capabilities against offensive air force capabilities. Saudi Arabia will have no difficulty absorbing this improved system capability into its armed forces.

earlier related report
Saudi Arabia - Mission Equipment for AWACS Aircraft
The Defense Security Cooperation Agency notified Congress of a possible Foreign Military Sale to Saudi Arabia of mission equipment for AWACS aircraft as well as associated equipment and services. The total value, if all options are exercised, could be as high as $400 million.

The Government of Saudi Arabia has requested a possible sale of five sets of Airborne Early Warning (AEW) and Command, Control and Communications (C3) mission equipment/Radar System Improvement Program (RSIP) Group B kits for subsequent installation and checkout in five E-3 Airborne Warning and Control Systems (AWACS). In addition, this proposed sale will include spare and repair parts, support equipment, publications and technical documentation, contractor engineering and technical support, and other related elements of program support. The estimated cost is $400 million.

This proposed sale will contribute to the foreign policy and national security of the United States by helping to improve the security of a friendly country that has been and continues to be an important force for political stability and economic progress in the Middle East.

The proposed sale will enhance training opportunities; increase the Royal Saudi Air Force's (RSAF) AWACS operational capability, sustainability, and interoperability with the USAF, Gulf Cooperation Council, and other coalition air forces. Saudi Arabia needs this additional mission equipment to continue its development of an extended Airborne Early Warning (AEW) capability, as well as enhanced command, control and communications (C3). Saudi Arabia will have no difficulty absorbing the upgraded AWACS radar capability into its armed forces.

Iran restarted nuclear weapons program in 2004: dissident

start me up...

Iran resumed its nuclear weapons program in 2004, according to a US-based dissident who said Tuesday that US intelligence had failed to include his findings in a surprise about-face downgrading the Iranian threat.

"The weaponization program is alive, is active, and has been resumed since 2004," Iranian opposition figure Alireza Jafarzadeh told AFP, contradicting the US National Intelligence Estimate released a week ago.

"The NIE was only partly right," said Jafarzadeh, formerly the US spokesman for the National Council of Resistance of Iran (NCRI) and author of a book released in January called "The Iran Threat."

"They (Iranians) were forced to pause in 2003 because of the tremendous pressure they were under," he said. "They suspended it to consider their next steps, and started again in 2004."

In August 2002, Jafarzadeh first reported the existence of secret Iranian nuclear sites at Natanz and Arak, prompting denunciations of Tehran by Washington and hurried inspections by the International Atomic Energy Agency.

The Iranian regime maintains the NCRI is a "terrorist" front run by disaffected exiles. The group is the political wing of the Mujahedin-e Khalq Organization, which is banned in the United States and the European Union.

Jafarzadeh was speaking as the United States continued to press for a third round of UN sanctions against Iran despite the new intelligence estimate, arguing that diplomatic pressure caused Tehran to halt its program in 2003.

The NIE was a diplomatic bombshell that contradicted forceful US assertions that Iran's nuclear program was a gathering threat that raised the prospect of "World War III."

While the NIE expressed with "moderate confidence" that Iran was not now trying to build nuclear weapons, Jafarzadeh said the program had only been suspended in 2003 to evade IAEA inspections.

Under the control of the Iranian Revolutionary Guards, the top-secret weapons program was in fact moved from one site at Lavizan-Shian and scattered across various underground installations in 2004, he said.

Jafarzadeh said he had shared his analysis with contacts in the US intelligence community before the NIE's publication, but suggested a "certain agenda" by some in the community anxious to downplay Iran's threat.

"We've gone back and checked every site that we knew of... since 2002 to see if any of those activities were halted in those sites," he told a press conference, presenting slides purporting to show ongoing nuclear activity.

"With the exception of Lavizan-Shian... no other site was ever shut down," the Washington-based Jafarzadeh said, arguing that the US intelligence assessment "needs to be fixed."

"I don't think the international community, I don't think the United States government can afford to make such mistakes and provide the opportunity for the mullahs to get the bomb before we all know."

Derivatives Trade Soars To Record $681 Trillion

The Bank for International Settlements (BIS) is reporting Derivatives traded on exchanges surged 27 percent to a record $681 trillion in the third quarter.

The amounts are based on the notional amount underlying the contracts.

• Interest-rate futures, contracts designed to speculate on or hedge against moves in borrowing rates, led the increase with a 31 percent increase to $594 trillion.
• Trading in stock index futures and options rose 19 percent to a record $81 trillion in the third quarter, as investors speculated on whether the credit-market losses would spread to the equity markets.
• Trading in currency futures and options increased 18 percent to $6.4 trillion, the BIS said.

Investors may have shifted some trading to exchanges from the over-the-counter market to reduce the risk of counterparties defaulting on deals, the BIS said.

Does Anybody Trust Anybody?

Read the last paragraph in the above article carefully.

Already banks no longer trust each other and/or are so capital impaired they cannot or will not lend to each other overnight. Washington Mutual is the latest casualty in that regard. See WaMu Cuts Dividend and Jobs, and Prices Preferred Stock in response.

Now we find out that there appears to be a growing suspicion about the possibility of counterparties defaulting on derivative deals. Given that derivatives are ten times the global economy that suspicion sure seems justified.

Credit Market Fueled Record Derivatives Activity

BIS says credit market problems fueled record activity in derivatives.

The Bank for International Settlements said the summer's credit market troubles led to record activity on derivatives exchanges but weighed heavily on bond issuance.

Growth in transactions between banks and other financial institutions was particularly strong, consistent with the increasing importance of hedge funds, portfolio diversification by institutional investors, such as pension funds, and an expansion in technical trading. BIS analysts also noted a marked increase in turnover involving emerging market currencies.

Hmmm. An expansion in technical trading and hedge funds are also a factor. Nothing quite like 10,000 hedge funds levered up 10-1 or higher betting on chart patterns adding up to enormous multiples of the world's economy.

Derivatives Legal Issues

While on the subject of derivatives we may as well throw in a bonus item: Wall Street in legal trouble over derivatives prospectus.

The New York state Attorney-General has sent subpoenas to banking giants after announcing an investigation into the sub-prime market crash. According to the New Zealand Herald, Atty Gen Andrew Cuomo has sent subpoenas to several banks, including Bear Stearns, Merrill Lynch and Deutsche Bank.

The banks are being asked to show how they assessed the quality of the home loans underlying derivatives such as mortgage-backed securities and collateralised debt obligations (CDOs), the newspaper says. Mr Cuomo suggests that the banks creating the derivatives could be in trouble for failing in their legal obligation to ensure that prospectus information on the derivatives being sold was true.

Failsafe Prediction

I have a failsafe prediction: Several hedge funds are going to get carted out on a stretcher all at once and cause a cascade of defaults. Many hedges are in place that are based on other counterparty hedges paying off in the event of "an event". When "the" event comes, those hedges will prove to be worthless.

Long Term Capital Management (LTCM) will look like a picnic in the park compared to the derivatives mess we are currently building up. For more on LTCM and the inherent systemic risks of leveraged derivatives please see Genius Fails Again.

EU-AU Summit: Of Money, Mugabe, China

The EU-AU summit currently underway in Lisbon, Portugal has already attracted a huge amount of attention for understandable reasons. It has toxic leaders like Zimbabwe's Robert Mugabe and Sudan's Omar al-Bashir in attendance. (As a result of Mugabe's presence, the UK PM Gordon Brown has boycotted the summit as promised, as have a number of other EU leaders.) There is also a lot of trade at stake as the EU aims to maintain its status as Africa's largest trading partner despite growing Chinese presence in the region. While it may seem that China now drives much economic activity in the region in order to secure the raw materials needed by the Chinese industrial machine, Europe has had a long head start owing to the continent's colonial past.

Let us begin with the Economist analyzing why this summit is taking place despite all the controversy. It says that the summit is driven primarily by economic reasons--the EU doesn't want China to muscle in on its "turf." However, it also says that the enticements offered by the EU are not very attractive and do not justify the damage inflicted to the EU's image by inviting odious characters like Mugabe and Bashir:

The Portuguese, who hold the EU presidency, see this first EU-Africa summit since 2000 as the capstone of their six-month tenure. They accept that the summit carries a “political price”: the one-man-against-the-rest EU split caused by the refusal of Britain's prime minister, Gordon Brown, to attend, in protest against the presence of Zimbabwe's president, Robert Mugabe. But, the Portuguese say, China and others have forced their hand.

For the Europeans are worried that they are losing both trade and clout on a continent that they used to regard as their own backyard. Over the past five years resource-hungry China has swept across a grateful continent, buying oil and minerals. African-Chinese trade has increased five-fold over that time to more than $50 billion last year. Europe's long-standing links mean that it is still Africa's biggest trading partner, but the Chinese are catching up. For example in October the Industrial and Commercial Bank of China paid $5.6 billion for a 20% stake in Standard Bank of South Africa.

India, too, has been buying oil and mineral concessions in countries such as Sudan and Nigeria. America has revived its interest in Africa: it wants to take 25% of its oil imports from there to decrease its dependence on the Middle East...

Europeans complain that China damages Africa by not linking its loans and investments to improvements in government and human rights. [Yes, well, don't invite Mugabe and Bashir to an EU-AU summit, then.] But Africans are dismissive: as one official says, “Europe is jealous. They say we have gotten a new colonial master, but our old one wasn't so good.”

The Lisbon summit will thus be an explicit counterpoint to the China-Africa summit of November 2006, when China cemented its new relationship with a promise of yet more money. Now the Europeans will try to woo the bride back from Beijing, using concessions and inducements.

The main concession is to be less critical of regimes that are a bit light-fingered, or disdainful of human-rights. João Cravinho, the Portuguese minister responsible for the summit, contends that the Europeans have been “excessively simplistic” in insisting on European models of government for Africa. Instead, Europe will “focus on the essence of government [and be] less hung-up on particular forms of decision-making.” Getting into the spirit, Europe overturned its own travel ban on Mr Mugabe, a stranger to decent behaviour, to allow him to attend the summit. Mr Mugabe will be lectured—and is then free to join in the cuddly group photographs. Sudan's president, Omar al-Bashir, will also be at the summit, but there are no plans to nag him about brutality in Darfur.

Of the new inducements, trade deals called Economic Partnership Agreements are the ones Europe thinks will help Africa most. The EU argues that these are good for development, offering African countries full access to the European market while allowing them to keep about 20% of their own markets closed to protect fragile domestic industries. But some African countries, such as South Africa and Nigeria, argue that they are being bullied into making agreements by the end of the year. The Europeans argue that the deals are designed to encourage regional integration in Africa. The Africans retort that by making separate deals with different countries they are doing exactly the opposite.

Europe's new insouciance about human rights will worry many, especially those suffering atrocities in Zimbabwe and Darfur, while the inducements hardly look tempting. Europe needs to do much better than this if it is to win the bride.

Meanwhile, Bloomberg has more on the political maneuvering going on, with a reference to China' role in the region:

``The current situation in Zimbabwe damages the image of the new Africa,'' German Chancellor Angela Merkel told representatives from 80 EU and African states in a keynote speech at the meeting attended by Mugabe. ``Nothing can justify the intimidation of those holding different views and hindering freedom of the press.''

Mugabe's presence came close to wrecking the summit, the first such gathering since 2000. The Zimbabwean leader, who's banned from the 27-nation EU, received a visa from the Portuguese government only after African leaders said they wouldn't come if he were barred. This prompted a boycott by some European leaders, including British Prime Minister Gordon Brown, who says Mugabe is responsible for ``the collapse of Zimbabwe's society and economy.''

In addition to the U.K., Lithuania, the Czech Republic, Poland, Hungary, Slovakia and Cyprus didn't send heads of state or government to the summit, according to a list of participants from the Portuguese foreign ministry...

``Europe wanted this summit to end 50 years of uneasy post- colonial relations. But the meeting is attended by a leader who exploits the colonial past and uses it as an excuse for his human- rights violations and endemic corruption at home,'' Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy, said in an interview. Several of the EU countries at the summit are former African colonial powers including the U.K., France, Belgium, Germany, Spain, Italy and Portugal. ``This summit is a summit of equals,'' said Socrates. ``There are no minor cultures; there are no superior civilizations.''

Aside from human rights, migration and security, EU leaders are using the two-day summit as a bid to counter growing Chinese influence in Africa as competition for the continent's energy and mineral resources grows. ``The EU hasn't missed the boat, but they've certainly lost a lot of ground,'' John Kotsopoulos, an Africa expert at the Brussels-based European Policy Centre research institute, said in a telephone interview.

China is providing $8 billion in loans and investment to Africa and attaches no political demands to aid -- in contrast to Europe, which often links aid to governance and human rights. ``China's approach, also based on their own experiences and values, has forsworn conditions with the exception of the diplomatic recognition of Taiwan,'' said Christopher Alden, an Africa expert at the London School of Economics and author of the book ``China in Africa.'' China regards Taiwan as a renegade province that must be reunited with the mainland, by force if necessary.

Retired South African bishop Desmond Tutu urges action on the part of the EU in dealing with Mugabe, though not much seems to be forthcoming aside from Merkel's largely symbolic swipe. From Africasia:

Meanwhile, South Africa’s retired Anglican bishop Desmond Tutu on Friday said European Union (EU) leaders must confront Mugabe over his human rights abuses at the EU-Africa summit that begins in Lisbon, Portugal today, saying silence could be seen as condoning the abuses in the southern African country. “I would expect that they (EU leaders) would criticise any regime that violates human rights because if you don't, you are condoning those violations. The violators will think you are on their side," Tutu told Renascenca radio station. Tutu, who said he was deeply saddened with what has happened in Zimbabwe, has over the past seven years been among the few African leaders to publicly criticize Mugabe whom he once described as a “caricature of an African leader.” He said he expected EU leaders to “speak without any euphemism on human rights which are being violated so blatantly in Zimbabwe.”

Banana Wars Never End, Part III

There must be something about fighting over bananas that captures the fancy of trade watchers the world over. I have noted developments in the banana wars during recent times [1, 2]. For those of you who are not quite familiar with this row, the Guardian has a brief history. The world's largest banana exporter, Ecuador, and the world's largest banana producer, US-based Chiquita, have long been critical of the EU granting preferential access to the commodity exports of former European colonies which fall under the Africa, Carribean, and Pacific (ACP) grouping. They have already filed and won rulings at the WTO asking for reductions in the tariffs applied to Ecuadorean bananas. However, Ecuador believes that the EU hasn't yet acceded to the WTO rulings, and has asked the WTO to check for compliance. The EU appears to have yet again been found in violation of the binding WTO rulings.

On a related issue, I recently noted that African countries also in the ACP grouping together with various NGOs have been clamoring for an extension of preferential trade agreements with the EU such as that which fomented the banana wars. What this case brings out is that it's not mainly a case of the evil EU lording it over former colonies to end such tariffs as some would make of it. As with Ecuador, these preferential agreements injure other developing countries not in the ACP. From a social justice standpoint, is there much of a case for favoring one developing country over another as a source of banana exports? The EU can atone for its perceived colonial misjudgments through ways less injurious to other LDCs by, for instance, providing aid to ACP countries. Perhaps more developing countries can benefit from a level playing field of lower tariffs on agricultural products all around--what a novel idea. When that moment comes, the banana wars may finally end. From the Associated Press:

The European Union has failed to bring its import tariffs for bananas in line with international trade rules, a WTO compliance panel ruled Monday, possibly opening up the door to millions of dollars (euros) in commercial sanctions from Ecuador. The confidential decision — distributed Monday to the parties and confirmed by Ecuadorean and European officials — is an important development in the decade-old World Trade Organization dispute pitting Latin American countries and the United States against the EU.

The verdict will also be closely followed by Chiquita Brands International Inc., whose shares climbed 9.2 percent last Tuesday on early reports that the EU would lose the case. The tariff costs Chiquita US$1, or €.68 per share annually, according to Barry Sine, an Oppenheimer & Co. analyst.

"It was a total victory," said an Ecuadorean official to the WTO after reviewing the report. "We are very happy with the result." The official asked not to be cited by name because he was not authorized to speak to the media.

Michael Mann, spokesman for EU Farm Commissioner Marian Fisher Boel, confirmed the loss, but criticized the WTO panel for taking a "purely formalistic" approach that ignored data showing an increase in European imports of bananas from Latin America as a whole.

The WTO has consistently ruled against how Brussels sets tariffs for bananas, forcing it to overhaul a system that grants preferential conditions for producers from African and Caribbean countries, mainly former British and French colonies.

The EU claimed that a new banana tariff established last year — €176, or $258 per ton — brought its import rules in line with WTO rulings. But Ecuador, the world's largest banana producer, said the new tariff actually took away some of its market share in Europe, hurting more than 1 million Ecuadoreans dependent on the banana industry.

"In any event, all this is largely academic," Mann said, adding that preferences will be granted under WTO-compliant economic partnership agreements as of next year. "The EU is engaged in good-faith negotiations on the future bound tariff for bananas with all suppliers. It is through negotiations, not litigation, that we will find a solution that is satisfactory for all." The verdict is expected to be publicly released in March, at which point the EU can lodge a final appeal. The U.S. also revived a complaint against Brussels' banana rules at the WTO this year. Colombia initiated a new dispute.

Ecuador claimed in March to have already lost US$131 million because of the discriminatory tariff. It has yet to say how it would retaliate against the EU. Latin American bananas currently have around 60 percent of the EU banana market, while African and Caribbean producers have 20 percent, according to EU officials. Bananas grown in the EU — mostly on Spanish and French islands — account for another 20 percent.

The bananas case was first brought to the Geneva-based trade referee in 1996, but has since spawned a series of disputes as trade lawyers wrangled over procedural intricacies and legislation that had previously never been tested. The U.S., in 1999, and Ecuador a year later both won the right to impose trade sanctions on European goods after the WTO found the EU's rules to be illegal.

Evaluating Nestor Kirchner

Nestor Kirchner's last major policy action - presiding the inauguration of the Bank of the South in Buenos Aires on Sunday with presidents from Bolivia, Brazil, Ecuador, Paraguay and Venezuela. (Photo: Argentine President's Office) Font Size ..... Small Normal Big Very Big

Four experts evaluate Nestor Kirchner's record and chances of coming back to power.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Argentine President Nestor Kirchner [today] turns over power to his wife, Cristina Fernandez de Kirchner, who was elected in October to succeed her husband. Overall, how would you rate Nestor Kirchner's term in office? What has to happen over the next four years for him to stand a good chance for re-election?

Freddy Thomsen, Head of E.F. Thomsen economic consultancy in Buenos Aires: Nestor Kirchner's main achievement during his term in office was to complete it. This was not obvious when he came to power in 2003 with 22 percent of the vote, especially considering his three predecessors were forced to shorten their presidencies. He even managed to anoint his wife as president. His quest for popularity led him to adopt many policies that will be costly to the country. Strong economic growth and political stability were accompanied by double-digit inflation, lack of investment in energy, suspicions of government corruption, manipulation of official statistics, and an unfriendly business environment for many long-term investors. It is not obvious what has to happen over the next four years for Nestor Kirchner to stand a good chance for re-election, should he decide to run. If the economy continues to perform as today (unlikely), won't voters take growth for granted and become more demanding about, say, inflation, corruption, and public safety? Should the economy weaken, will voters blame only Mrs. Kirchner and call for the return of Nestor, or will they direct their anger against both? What can be said is that Nestor Kirchner will need to remain far ahead of his opponents in quickly aligning himself with public opinion, whatever the direction in which it may swing. This quickness of reflexes was one of his strengths as president, and could continue to prevent any opposition candidate from posing a serious challenge in 2011.

Rosendo Fraga, Director of the Union for the New Majority Studies Center in Buenos Aires: At the end of 2006, President Kirchner's project to reform the Constitution to establish indefinite re-election—as he did in Santa Cruz province when he was governor—was definitively tripped up when his pilot experience of imposing it in Misiones province was categorically defeated in a referendum. The Argentine leader reacted with realism, accepted defeat, and shrewdly moved to pass an alternative plan: indefinite re-election-lite through the presidential election of his wife. That is how today in Argentine politics one can imagine that in 2011 Kirchner will return to the presidency for four or eight more years, to be later succeeded by his wife and return to power after her. In four years, many things can change in Argentine politics, and no one can guarantee whether or not Kirchner will be president again. In this regard, Venezuelan President Hugo Chavez's recent defeat confirms that politics tends to be a succession of the unpredictable. However, what Kirchner has achieved is the possibility that he will be president between 2011 and 2019. Politics, looking forward, functions like the market: "if I have the future, I have the present, if I lose the future, I lose the present." To continue having the chance to return to the presidency, Kirchner needs to have two situations in his favor: a global economy that grows and demands food, and economic growth and a fractured political opposition. The latter is important, because Chavez's defeat shows that one can lose an election with a favorable economy if the opposition comes together. Perhaps Chavez's political challenge is now to achieve, as Kirchner did, a version of indefinite re-election-lite, since, if he doesn't, the loss of future power could overtake the present.

Graciela Romer:, Director of Graciela Romer & Associates in Buenos Aires: The first thing that must happen is his truly wanting to be re-elected in 2011, but if that were to happen, he must first get through four years, which at first glance seem easier to get through than the ones he had between 2003-2004 (following the worst economic crisis in Argentine history) and on which he depends for voters to want him to return. It doesn't seem realistic to think that, if Cristina Fernandez de Kirchner (CK) doesn't govern well, people will demand his return and re-elect him. Above all, this is because the vast majority thinks Nestor Kirchner will continue playing an important role in the next government. However, the challenges CK must face are not simple. It's true that her husband leaves a more robust economy, with reserves at $40 billion, with a fiscal surplus that, although smaller than during the last electoral year, will be compensated for in the coming months by an increase in fiscal collections through export withholdings and higher taxes. Better unemployment and poverty rates are also evident. But CK must focus on various fronts—from the border conflicts with Uruguay and improving employment quality (which still remains at 40 percent marginal or informal employment), to the need to improve institutional quality and the business climate to attract investment—which becomes increasingly urgent if she wants to sustain growth rates and, above all, put the brakes on the spiral of inflationary expectations present in the country today.

Lino Gutierrez, President of Gutierrez Global, LLC and a former US Ambassador to Argentina: Nestor Kirchner assumed power after the worst economic crisis in Argentine history; he leaves Argentina well on its way to economic recovery. Argentina has averaged GDP growth above 8 percent for five consecutive years. Kirchner significantly lowered unemployment, cut poverty rates in half, and generated budget surpluses throughout his term. He negotiated a favorable debt rescheduling agreement and created a sustainable debt payment schedule. Obviously, Argentina's strong economic recovery was helped by a favorable international environment, including high commodity prices for exports and a competitive exchange rate for the peso. Kirchner leaves unresolved problems for his successor, including high inflation, subsidized gas prices, and an overly taxed export sector. Internationally, Argentina was a responsible actor during its two years on the United Nations Security Council. Argentina's deployment of troops to Haiti contributed to regional stability. Argentina contributed on proliferation issues, counternarcotics, and the global war on terrorism. Its pursuit of the Iranian perpetrators of the AMIA bombing after years of inaction was much welcomed. It is regrettable that Argentina did not move forward on the FTAA, did not follow through on second-generation economic reforms, including protecting intellectual property rights and fiscal reform, and occasionally gave Chavez a forum to promote his agenda. Although Kirchner leaves office with a high approval rating, his re-election—assuming he decides to run in 2011—will depend on how Cristina's government performs. Most Argentines see the Fernandez administration, with a number of ministers carried over from Kirchner's government, as the second act of the Kirchner administration.