Panic grips credit markets

Panic grips credit markets

By Krishna Guha in Washington, Michael Mackenzie in New York and Gillian Tett in London

Published: September 17 2008 18:23 | Last updated: September 18 2008 00:01

The panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the second world war.

Barometers of financial stress hit record peaks across the world. Yields on short-term US Treasuries hit their lowest level since the London Blitz, while gold had its biggest one-day gain ever in dollar terms. Lending between banks, in effect, stopped.

Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn or might further expand its market liquidity operations.

The $85bn emergency Fed loan for the troubled insurance group AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety.

One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or “broke the buck” – owing to losses on debt in Lehman Brothers, which filed for bankruptcy protection on Monday. This raised the risk that retail investors in other such funds could panic and pull out their money.

All thought of profit was abandoned as traders piled in to the safety of short-term Treasuries, with the yield on three-month bills falling as low as 0.02 per cent – rates that characterised the “lost decade” in Japan. The last time US Treasuries were this low was January 1941.

Morgan Stanley

Shares in the two largest independent US investment banks left standing – Morgan Stanley and Goldman Sachs – fell 24 per cent and 14 per cent, respectively, as the cost of insuring their debt soared, threatening their ability to finance themselves .

Morgan Stanley was holding preliminary merger talks with Wachovia, a troubled regional lender, and could approach other banks and look at other options in the coming days, people familiar with the situation said. Washington Mutual, another regional lender, has hired Goldman Sachs to contact potential buyers.

HBOS, a leading UK mortgage lender pressed into sales talks by the government after its share price halved this week, agreed to a £12bn takeover by Lloyds TSB.

A key measure of fear in the fixed-income markets - the so-called Ted spread, which tracks the difference between three-month Libor and Treasury bill rates - moved above 3 per cent, higher than the record close after the Black Monday stock market crash of 1987.

US authorities fired back with the Treasury announcing it was borrowing $40bn to give to the Fed to use for its emergency lending – in essence removing balance sheet constraints on the size of this assistance.

One-month US Trasury bill yield

The Securities and Exchange Commission announced new curbs on short selling.

Some analysts have criticised US authorities for adopting an arbitrary approach to rescues - saving AIG, but not Lehman - that was impossible for investors to predict and therefore did not boost confidence.

The S&P 500 fell 4.7 per cent, led by a 8.9 per cent slump in financials. Equity volatility was near its highest level since March. The dollar fell against other major currencies.

Gold benefited from safe-haven buying, with prices rising 11.2 per cent to a three-week high of $866.47 a troy ounce.

Andrew Brenner, co-head of structured products and emerging markets at MF Global, said: “It feels like no one wants to take anyone’s credit...it feels like we are on a precipice.”

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Central banks act to calm markets

By Ralph Atkins in Frankfurt and Norma Cohen in London

Published: September 18 2008 09:10 | Last updated: September 18 2008 16:07

The world’s main central banks on Thursday unveiled an emergency $180bn injection of dollar liquidity in the latest attempt to halt the escalating global financial market crisis.

The US Federal Reserve announced it was making available the extra funding to overnight and longer-term money markets in swaps with other leading central banks. In a joint statement, the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada and Swiss National Bank pledged they would “continue to work closely together and will take appropriate steps to address the ongoing pressures.”

Their action followed the dramatic escalation of financial market tensions following the collapse of Lehman Brothers, the rescue of the insurer AIG and the continuing crisis on Wall Street. By Wednesday, lending between banks in Europe and in the US had in effect halted.

The intervention had an immediate impact on overnight interbank lending rates. The overnight Libor dollar rate was fixed at 3.84 per cent on Thursday down from 5.03 per cent the previous day.

However, longer term interbank lending rates continued to rise in a sign that banks remain nervous about the liquidity of their peers.

“The timing, so early in the trading day, shows both the severity of the strains in the interbank market and as well the authorities’ determination to resuscitate orderly functioning of the money markets,” said Julian Callow, European economist at Barclays Capital.

President George W. Bush also moved to reassure investors. ”The American people can be sure we will continue to act to strengthen and stabilise our financial markets and improve investor confidence,” he said.

The liquidity boost, accompanied by a swirl of bid talk in the embattled banking sector, helped Wall Street stocks rebound on Thursday after the previous session’s rout. By mid-morning in New York, the S&P 500 index was up 1.9 per cent at 1178.07, while the Dow Jones Industrial Average was up 1.4 per cent at 10,762.49. The Nasdaq was up 1.7 per cent at 2133.60.

The news also had an immediate impact earlier on Asian equity markets. In Hong Kong, the Hang Seng rose as much as 0.4 per cent higher after earlier falling as much as 7.7 per cent on the back of Wednesday’s Wall Street sell-off.

In Europe, stocks also responded positively, with the FTSE Eurofirst 300 climbing 0.6 per cent and London’s FTSE 100 up 1.4 per cent to 4,982.6.

”These measures address funding difficulties, but do not address the primary risk of further bank writedowns,” said Chris Turner at ING.

Yields on two-year Treasury bills rose to 1.76 per cent as risk appetite returned. On Wednesday, yields on short-term US Treasuries fell to their lowest levels since 1941.

The gap between the two-year yield and US interest rate swaps dropped to around 110 basis points, from a record high of around 133bps before the liquidity action was announced.

The collective intervention by some of the world’s largest central banks pushed the yen lower against the dollar and the euro as risk appetite improved. The dollar, which has also widely been used as a funding currency, also suffered.

But gold added to Wednesday’s record gains, rising more than 1.5 per cent to $876.30, after gaining more than 11 per cent or $33.50 the previous session as investors continued to worry about the outlook for the global economy.

Under the latest action plan drawn up by central bankers, the ECB said it would expand its armoury by offering “for as long as needed” $40bn in overnight funds to eurozone banks.

The ECB is also expanding its reciprocal arrangements with the US Fed to increase to $25bn the amount it provides in the market for 28-day funds and $15bn over 84 days. Under the expanded plans, the amount of outstanding dollar liquidity provided by the ECB could reach as much as $110bn – compared with $50bn previously.

The Bank of England moved to add additional funds into the stressed sterling markets, announcing that it would renew the £25bn it loaned the banking sector earlier this week for another seven days and expanded the ability of banks to borrow from their own funds kept on deposit at the central bank.

The Bank of Japan has agreed make available $60bn of dollar liquidity, and the Bank of Canada $10bn.

After the collapse of Lehman Brothers, commercial banks found themselves short of cash and overnight bank borrowing costs soared around the world.

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Lebanon Jews Tap Diaspora to Rebuild Beirut's Shelled Synagogue

By Massoud A. Derhally
More Photos/Details

Sept. 18 (Bloomberg) -- In 1983, Isaac Arazi and his wife were caught in sectarian fighting during Lebanon's 15-year civil war. A Shiite Muslim militiaman helped the couple escape.

Arazi, a leader of Lebanon's tiny Jewish community, sees the incident as a lesson in the Arab country's tradition of tolerance. Now he is trying to make use of that tradition, along with the global diaspora of Lebanese Jews, in a drive to rebuild Beirut's only synagogue, damaged during the war.

``Those who don't have a past don't have a future,'' Arazi said to explain his push to rebuild the synagogue.

Beirut's Maghen Abraham Synagogue opened in 1926 in Wadi Abou Jmil, the city's Jewish quarter, located on the edge of west Beirut near the Grand Serai palace, where the government meets, and within walking distance of parliament.

Lebanon then was something of a haven for Jews, some of whom were the descendants of those who had fled the Spanish inquisition; it later served a similar role for refugees from Nazi Germany. With ``no history of anti-Jewish tensions,'' it was the only Arab country whose Jewish population rose after Israel's creation in 1948, according to Kirsten Schulze, a lecturer at the London School of Economics and author of ``The Jews of Lebanon.''

By the mid-1960s, there were as many as 22,000 Lebanese Jews, said Arazi, 65. In addition to heading the Jewish Community Council he owns a food-machinery business with 1,000 customers.

All Together

``Christians, Muslims and Jews were all living together when I was growing up,'' said Liza Srour, 57. ``Whenever there was a war with Israel, or tension, the government used to provide protection for us.''

That changed with the nation's 1975-1990 civil war, as Jews fled the violence triggered by rivalries among the nation's Christian, Muslim and Druze factions and emigrated to Europe, North and South America.

Now, Arazi said, only 100 Jews live permanently in the country, while another 1,900 go back and forth or have intermarried into other religions. Srour is the only Jew still residing in Wadi Abou Jmil.

In 1982, according to an Associated Press report at the time, Israeli shells tore through roof of Maghen Abraham as the Jewish state invaded southern Lebanon in an effort to crush Palestinian guerrillas. The synagogue has been closed ever since, its brittle entrance gate chained and padlocked. Plaster and rubble are scattered on the floor.

Political Calm

Arazi figures it will cost about $1 million to restore the synagogue. Making the effort possible is the end of an 18-month crisis between Lebanon's political factions, the blessing of the Lebanese government, financial support from a downtown reconstruction project and acquiescence from the Shiite Hezbollah movement that fought a month-long war against Israel in 2006.

He so far has raised about $40,000 for the project, but has promises of more. Ten percent of the estimated cost will come from Solidere SAL, a company founded in 1994 by then-Prime Minister Rafiq Hariri -- later assassinated in a bombing supporters blame on Syria -- to rebuild the capital's downtown.

The company has given $150,000 to each of 14 religious organizations that are restoring places of worship in Lebanon -- about $2.1 million in all. ``We help all the communities,'' said Solidere chairman Nasser Chammaa.

The Safra family, whose Safra Group includes Brazil's Banco Safra SA and Safra National Bank of New York and which was based in Lebanon in the 1940s as part of the Jewish community, has agreed to help fund the project once work begins, Arazi said.

Financial Help

Joseph R. Safra, nephew of Republic National Bank of New York founder Edmond Safra, said: ``We do not comment on private matters.'' Joseph Safra heads Arview Holdings, Inc., a New York financial-consulting and advisory firm.

Two banks in Switzerland whose founders have Lebanese- Jewish roots also agreed to provide financing, Arazi said. One of the banks has pledged $100,000 toward the synagogue's restoration. Arazi declined to name the banks.

Even the warring factions in Lebanon's government have blessed the project. ``This is a religious place of worship and its restoration is welcome,'' Prime Minister Fouad Siniora, 65, said in an interview. Hussain Rahal, a spokesman for Hezbollah, said his group -- which refuses to recognize Israel's right to exist, and which the West considers a terrorist organization -- also supports the restoration of Maghen Abraham.

``We respect the Jewish religion just like we do Christianity,'' he said. ``The Jews have always lived among us. We have an issue with Israel's occupation of land.''

Arazi said work on the restoration is to begin next month. Meanwhile, his council is already working on plans for its next project: restoring Beirut's Jewish cemetery, where about 4,500 people are buried.

Walking among the weeds overgrowing the cemetery's tombstones, Arazi said: ``I remember my father when I come here.''

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モンスターペアレント、深刻　都内公立校調査

2008年9月18日23時5分

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　理不尽な要求を繰り返す「モンスターペアレント」と呼ばれる保護者らに対応しきれなかった学校が０７年度、東京都内の公立学校の１割にのぼったことが１８日、都教育委員会の調査で分かった。都教委は「現場の教員はかなり苦しんでいる」とみている。

　都教委は６月、区市町村教委を通じて都内すべての公立小中学校、高校にアンケートした。理不尽な要求が繰り返しあり、学校だけでは解決が難しかったケースを調べた。

　小学校では１３１６校のうち１１３校（９％）で１２６件、中学校では６３３校のうち５５校（９％）で６６件あった。「いじめていた児童を指導した担任が、児童の保護者から脅しを受けた」「虐待を児童相談所に通告したことで保護者が学校に暴言を繰り返した」「長時間の電話苦情を受けた後、電話代を払えと言われた」といった報告があった。

　高校は全日制や定時制２６５校のうち４１校（１５％）で７０件だった。「授業料の徴収に際し、脅しまがいの言葉で逃れようとする」と学費に絡むトラブルが目立ったという。

　学校側の不手際で深刻化した例もあった。いじめにあった児童の保護者に応じた教師が「お宅のお子さんにも問題がある」と言ったところ、腹を立てた保護者が何度も学校にメールやファクスを送るようになったという。

　都教委は「トラブルを未然に防げるよう実例をふまえた具体的な対応方法を研修させたい」としている。

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SEC weighs ban on short selling

By Joanna Chung in New York

Published: September 19 2008 02:36 | Last updated: September 19 2008 02:36

US securities regulators were on Thursday night considering a ban on short selling as part of a group of new initiatives to restore calm to the stricken financial markets, people familiar with the situation said.

The US Securities and Exchange Commission was discussing a short-selling ban on some or all stocks and an announcement could come as early as Friday, these people said.

The SEC, which had already announced several actions to curb abusive short-selling on Wednesday, came under growing pressure to take more dramatic steps. Earlier on Thursday, short-selling in the UK was banned by the Financial Services Authority.

Christopher Cox, the chairman of the SEC, attended a meeting with US lawmakers, the head of the US Federal Reserve and the Treasury Secretary on Thursday night to discuss various solutions to the financial crisis.

Short-sellers, who profit from falling prices, particularly hedge funds, have been blamed for plunging shares of financial firms.

Shares in Morgan Stanley and Goldman Sachs – the two last independent banks on Wall Street – have fallen precipitously in the past week.

Many blame short-sellers for pushing down the share price of Lehman Brothers, which filed for bankruptcy, and of AIG, the insurance giant that was rescued by the government this week.

While the move is likely to be welcomed by many firms who claim they are the target of short-sellers, hedge funds have already warned that bans make it impossible to hedge investment risk during a rights issue or placing.

The rule would also push up the cost to banks of raising new capital and share could also become more expensive to trade, as hedge funds provide less liquidity to the market.

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UK ban on short selling of financials

By Peter Thal Larsen

Published: September 19 2008 03:00 | Last updated: September 19 2008 03:00

Short-selling of financial stocks is to be banned in the UK under rules drawn up by the Financial Services Authority.

The ban, which has been approved by the watchdog's board of directors, will prevent investors from creating or adding to short positions in all publicly quoted financial companies. The ban will remain in force until January 16, 2009, when the FSA plans to publish a comprehensive review of short-selling rules.

The ban comes after a week when the shares of leading financial institutions have come under intense pressure as a result of turmoil in the financial markets.

Short-sellers have been blamed for driving down the share price of HBOS, the banking group that yesterday confirmed that it was being rescued through a takeover by Lloyds TSB, its UK rival.

Hector Sants, chief executive of the FSA, said: "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."

In addition, the FSA is also tightening up its disclosure rules, forcing investors to disclose all net short positions in excess of 0.25 per cent of a company's share capital.

Though the ban currently applies only to an unspecified list of financial stocks, the FSA said that it "stands ready to extend this approach to other sectors if it judges it to be necessary."

The change in the rules is the FSA's second attempt to curb short-selling. The regulator has already prevented short-selling of shares in companies that are in the midst of raising cash through a rights issue.

News of the ban comes amid growing political backlash against short-selling, which has been blamed for exacerbating the woes of the country's banks, and for contributing to the crisis of confidence in some of the country's largest financial institutions.

Richard Saunders, director general of the Investment Managers Association, said : "Short selling is not the sole or principal reason for banks' shares to have fallen in recent weeks. But short-selling has not helped, and conditions are such that restraint over short-selling and stock-lending are appropriate."

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Short-term swaps hit by Japan dash

By Lindsay Whipp in Tokyo

Published: September 18 2008 17:22 | Last updated: September 18 2008 17:22

Japanese banks keen to purchase dollars saw the short-term swap market briefly seized up due to liquidity drying up on Thursday after Lehman Brother’s collapse increased the premium demanded to enter short-term borrowing contracts in dollars.

The situation had been worsening all week with the premium on one-month dollar swaps (from yen) reaching Libor + 7 per cent at one point on Thursday.

“[Japanese banks] have huge yen amounts but they cannot swap them into dollars,” said Masayuki Ebira, director of money markets at Barclays Capital in Tokyo. “In March, many people could leverage yen to dollars, the swap market was working. The problem now is that it collapsed.”

The problem was slightly alleviated late afternoon following the announcement that six of the world’s central banks were injecting $180bn of dollar liquidity. That included an agreement between the Federal Reserve and the Bank of Japan to provide up to $60bn of liquidity into Japanese money markets through a swap agreement.

The statement by Japan’s central bank said funds would be supplied “appropriately in view of the prevailing market conditions”, with a termination period of January 2009.

The premium consequently fell to libor + 4 per cent, according to Barclays.

Mr Ebira said: “The market is still afraid the injection won’t solve everything, based on their bitter experiences. The key should be how safe market participants feel.” The Bank of Japan has injected significant amounts of yen into the markets this week to try and help calm money markets following Lehman’s collapse and the subsequent string of events, including the sale of Merrill Lynch and the government bailout of AIG.

“The situation could be worse than Japan’s banking crisis,” Mr Ebira said. “This is happening in huge size and pace. Japan took 10 years to deal with its situation but this is progressing five times faster than Japan, so it’s very difficult to control.”

The failure of Lehman has had an impact on Japanese government bond issuance. Having made successful bids for about Y120bn ($1.15bn) in JGBs, it had not completed payment by the time it filed for bankruptcy, preventing the Ministry of Finance from issuing the bonds. The ministry said it will gauge market demand before deciding whether to cover that amount in another auction.

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Germany may curb cash-settled swaps

By Gerrit Wiesmann in Berlin and Daniel Schäfer in Frankfurt

Published: September 18 2008 23:34 | Last updated: September 18 2008 23:34

Schaeffler’s “creeping take­over” of Continental, the German car parts supplier, may lead to new rules on cash-settled swaps – financial instruments that allow investors to build stakes without disclosing them to regulators.

German government officials are looking at UK proposals to create a disclosure regime for contracts for difference – a financial product similar to cash swaps. “Germany could build on these experiences,” an official has told the Financial Times.

The German move comes as governments and regulators across the world have been discussing the use of derivatives to secure big stakes in companies without anyone noticing.

Unlike shares or options, cash swaps currently do not have to be disclosed, allowing investors to secure access to large stakes in acquisition targets without triggering a mandatory takeover.

The UK has been working for more than a year on a proposal to create a disclosure regime for contracts for difference.

Germany was drawn into the debate this summer when Schaeffler, the privately owned engineering group, secretly secured 36 per cent of Conti’s shares, mainly by using cash swaps.

The finance ministry is wary of introducing disclosure rules on widely traded derivatives as this could create a mountain of useless information. Switzerland, which tightened its rules last year, is about to amend them for the second time to reduce the amount of unnecessary reporting.

The German finance ministry had until recently dismissed the need for regulatory change, but listed companies have been increasing their calls for action against creeping takeovers. Tumbling share prices have left managers feeling vulnerable to hostile takeovers, especially at companies with broad shareholder bases that lack friendly anchor investors.

Some weeks ago a group of chief financial officers from Dax-listed companies sent the finance ministry a demand for tighter rules on disclosure of cash-settled swaps in the wake of Schaeffler’s move on Conti. “It is a loophole that should be closed,” the chief executive of one of Germany’s largest industrial companies told the FT.

However, some experts doubt the effectiveness of such legislation.

“Investment bankers would immediately put their mind in gear and find new ways of building stakes secretly,” Joachim von Falkenhausen at Latham & Watkins, a law firm, said.

Schaeffler’s €12.1bn ($17bn, £9.7bn) hostile take-over bid for Conti, launched shortly after it revealed a large stake in the rival, has ended this week. It resulted in Schaeffler owning almost half of Conti’s shares.

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German groups exposed to Russian bear

By Chris Bryant in Berlin and Daniel Schaeffer in Frankfurt

Published: September 18 2008 22:41 | Last updated: September 18 2008 22:41

The sudden collapse of confidence in Russian financial markets threatens to blow a hole in the business outlook for German exporters, analysts are warning.

The primary risk is that, as the price of oil continues to fall and Russian companies struggle to tap new lines of credit, demand for German goods could start to wane. Russia is a significant export market for Germany.

“The way Russian companies finance themselves, be it on public markets or through loans, has become more difficult, and that will impact on German companies,” Holger Schmieding, chief economist at Bank of America in London, warns.

“Exports to Russia have lately become a noticeable support for German growth, and I think that will now deteriorate significantly,” he said. Many German exporters have offset the slowdown in the US by increasing exports to emerging economies, particularly Russia.

“The big risk from Russia [for Germany] is not just that this slows down as a source of German export demand, but that this also impacts on other countries who are close trading partners of Russia, such as in central and eastern Europe,” Julian Callow, chief European economist at Barclays Capital, said.

Although the knock-on impact of the Russian crisis is not expected to be swift, it could put a dent in Germany’s long-term recovery.

Germany is highly dependent on Russian oil and natural gas and has extensive business interests in other areas.

The popularity of high-tech, German-crafted machinery in Russia helped its exports rise by 23 per cent in the first half of this year to €15.8bn ($22.5bn, £12.6bn), the fastest growth rate in the European Union.

Meanwhile, German direct investment in Russia reached €14bn last year. About 4,600 German companies have branches in the country, including high-profile energy projects involving Eon and Wintershall, a subsidiary of BASF, the world’s largest chemical company.

One sign of nervousness among German businesses is the growing popularity of government export credit guarantees for sales to the Russian market.

Last year the Berlin government wrote protection for German exporters and lending institutions against default by Russian debtors worth €3.2bn, a rise of 61 per cent compared with 2006.

One director of structured finance at a big German bank told the Financial Times at a German-Russian business conference in Dresden this week: “I don’t think it’s a good time to be investing in Russia. Project finance has become a lot more expensive”.

Other participants were more upbeat. “We don’t see a change in the fundamentals,” Burckhard Bergmann, deputy head of the Committee on Eastern European Economic Relations, said.

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Russian stocks surge as confidence returns

By Catherine Belton and Charles Clover in Moscow

Published: September 19 2008 11:26 | Last updated: September 19 2008 11:26

Russian shares soared as much as 25 percent on the Micex stock exchange on Friday, recovering steep losses from earlier in the week as trading resumed with confidence restored by a government anti-crisis plan.

But trading on both the Micex and the RTS was suspended again later on Friday due to the rapid climb. Shares on the dollar denominated RTS Index flew up 20 percent, also recouping the steep losses of Tuesday and Wednesday which forced the government to shut down the exchanges to halt a wave of panic selling and forced sales on margin calls as liquidity dried up.

“This is a relief rally. We are seeing a reversal of the panic selling of this week,” said Chris Weafer, chief strategist at Uralsib investment bank.”But we are not likely to see any more than this reversal until the more substantial issues of the global credit crisis and where the oil price is going to go are resolved.”

Russia’s market turmoil
Russia finance

Timeline: key moments of the recent market slump and how it is different from the 1998 crisis

Dmitry Medvedev, the Russian president, on Thursday pledged $20bn to shore up the nation’s stock markets. Alexei Kudrin, the finance minister, said the government could spend the funds on share buybacks. His ministry on Thursday rolled out an anti-crisis plan aimed at boosting liquidity in the banking system, which would include measures to double the amount of budget funds placed in short term deposits at the three main state-controlled banks to a total of 1.5 trillion roubles ($29.5bn).

The measures also included a $5.5bn export tax cut for oil companies, a reduction in reserve requirements that frees up $11bn across the banking system, and also a 60bn rouble direct credit line to the main market participants in a package aimed at making sure liquidity gets to brokerages and ensuring the settlement system does not fail.

Analysts said the government looked to have succeeded in restoring confidence which had shattered this week after a mid-size brokerage KIT-Finance failed to make payments and banks shut down credit lines. But others said local investors could still face margin calls and some could use the bounce back to sell.

“We know there are a number of local investors – both small and oligarchs who will either use this opportunity to sell or be forced to sell as prices go higher,” Mr Weafer said. “But because of the government anti-crisis plan there will now be buyers.”

Other market players said concern however was growing about the extent of losses incurred by some of Moscow’s investment banks, with a whole class of retail clients wiped out by the market fall.

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Georgia weakened Nato case, says IISS

By James Blitz in London

Published: September 18 2008 18:03 | Last updated: September 18 2008 18:03

Georgia has weakened its case for NATO membership as a result of its “irresponsible” decision to try and recover South Ossetia, a leading UK-based think-tank said on Thursday, warning that US attempts to bring the Georgians into the alliance risked dividing the west.

In its annual analysis of world events, the International Institute for Strategic Studies said Russia’s reaction to the Georgian move was “disproportionately strong” and “unjustified.” But the IISS warned that the west must be careful how it responded to Russia’s defiant mood, and avoid advancing its interests without being aware of the emotional response that this could elicit from the Russian leadership.

The IISS said in its Strategic Survey that it was highly critical of the Georgian leadership. “Georgia has weakened its case for NATO membership,” it said. “It openly defied its main strategic patron, the US, by seeking to recover its lost territories, taking on a declared Russian interest without the ability to do so alone and then calling on the West to sort out the mess it created.”

The IISS went on to say that there was now a risk that the US would press home its attempt to bring Georgia – and Ukraine - into Nato. But it said the European members of the alliance should resist this.

“Europeans have a strong case to argue that it is in NATO’s strategic interest to pause its enlargement policy…Europe will want to invite the US to think strategically, not nostalgically, about the weight it wishes to attach to NATO enlargement in its regional policy.”

The IISS argued that dealing with Russia was becoming increasingly difficult for the west but said the implications of the Georgia crisis should not be exaggerated. “The events of August 2008 do not signify fresh steps towards a new cold war because neither side wants one, and the stakes are too low to warrant one,” it said. However it added that “they do mark the distinct end of the romantic phase of the post-Cold War order.”

The organisation said the west needs to develop a truly specific Russia policy , something that was not immediately necessary after the Cold war period. But reflecting on the crisis it added: “The most powerful remark made about Russia’s actions in Georgia were not those made by the EU or NATO, but those made by the markets in wiping so much value off Russian stocks and effectively marking up Russia risk.”

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Saakashvili scorns aid package ‘nonsense’

By Isabel Gorst in Tbilisi

Published: September 18 2008 19:19 | Last updated: September 18 2008 22:55

President Mikheil Saakashvili of Georgia has dismissed as “nonsense” some of the conditions attached to international aid pledged to the country since its clash with Russia last month.

In an interview, he said he government would abide by World Bank tendering rules when awarding contracts arising from almost $2bn (€1.4bn, £1.1bn) in aid granted by the US and European Union – in spite of the risk of delay from the bank’s rigorous vetting procedures.

“I’d like to see less money spent on experts and more on actual work,” he said.

“We have seen before how if you want to build a road you have to study first how it would affect gender equality in the territory . . . Lots of people can capitalise on all this nonsense.”

Georgia estimates that $1bn-$2bn will be needed to repair infrastructure destroyed during the war.

He said his country would use the international donations wisely to “re-ignite the economy”.

Mr Saakashvili said damage to investor confidence had taken an even greater toll on the economy, reducing foreign investment, the driver of Georgia’s rapid growth in recent years.

International aid would work “like an artificial heart” in the economy until “the real heart” started beating again, he said.

“We need to re-ignite the economy [and] show the war will not come back to the country and that there are lots of new opportunities available.”

A large part of the international aid will be spent on infrastructure projects – including highways, water systems, hydroelectric power stations and gas storage facilities – providing employment and a foundation for future economic growth in Georgia.

Investment in new housing for thousands of Georgians displaced by the conflict, and in healthcare and schools, would provide “real on-the-ground support to public morale”.

Mr Saakashvili said the Georgian opposition and the country’s civil society had been invited to participate in “an anti-crisis council”, overseeing the allocation of foreign aid.

In a conciliatory gesture to his increasingly vocal critics, he promised the opposition “executive positions at every relevant ministry and the right to sign most of the deals”.

The president says that the rapid disbursement of foreign donations could restore economic stability in Georgia within six months, in spite of independent forecasts that growth will drop below 5 per cent this year – less than half the level in 2007.

The US is also committed to easing trade restrictions on Georgia, opening up a huge new market for Georgian food and textiles.

More financial assistance for Georgia came this week when the International Monetary Fund finalised a $750m standby loan to replenish the country’s foreign exchange reserves and bolster investor confidence.

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The Short View: Money market funds

By John Authers, Investment Editor

Published: September 18 2008 19:52 | Last updated: September 18 2008 19:52

There are no one-way bets in markets – but occasionally the government can create some.

Thursday’s huge co-ordinated intervention by central banks only lifted global stocks for a few hours.

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Time to wise up

By John Authers

Published: September 18 2008 14:18 | Last updated: September 18 2008 14:18

This has not been a good year for conventional wisdom.

Of course, “conventional wisdom” is rarely cited as anything other than a whipping boy – something we can expect to be wrong. But markets might be considered to be different, because conventional wisdom can be self-fulfilling. If everyone believes a stock is worth $20, then it will trade for $20.

But some of the smartest investment ideas offered to the wealthy have begun to look very bad indeed of late.

It is now almost a year since a cataclysmic week for quantitative funds heralded the beginning of the credit crisis. The quant funds made their money with a highly sophisticated “market-neutral” strategy, in which they bet on equal numbers of stocks to go up and down, exploiting subtle differences in their valuations. They found that many had made the same bets. As soon as a few fund managers started getting out of the market, suddenly all of them suffered huge losses. This had been hailed as a “low-risk” strategy uncorrelated to the markets, but some of the most prestigious funds in finance saw one-third of their value wiped out in a week.

Another bright new orthodoxy was: “commodities are good for you”. Academic studies demonstrated that investing in commodities via futures as part of a broader portfolio could give you the investor’s holy grail – higher returns for no greater risk. Investment banks put together commodity indices, based on futures, providing products for private bankers to sell to their clients.

The problem is that many now claim that the money this attracted into commodities helped push up prices artificially. There have even been hearings in Congress over the claims. Debate rages over that topic but the experience of the past few weeks, with almost all commodity indices now down more than 20 per cent from their highs, has been unpleasant.

More apparent wisdom, offered to high net worth investors, was that macro hedge funds, which make big international bets on asset allocation, were the way to conserve wealth. There have certainly been trends to exploit in the financial upheaval since last summer. For many months, betting on commodities, while betting against the US dollar and the stock of US banks, was a great way to keep your head above water.

But in the middle of the market panic of mid-July, both sides of the trade suddenly went into reverse. Hedge funds that had funded investments in oil futures by selling short on bank shares were caught in a vicious squeeze, as this strategy lost more than 40 per cent in a matter of weeks.

A spoof “Dear Investor” letter from a macro hedge fund manager to his clients is currently doing the rounds on the internet. It captures nicely enough what went on. “We have no explanation, since our trades are systematically based upon doing what others are doing (only, hopefully, faster ... though, in this instance, not fast enough). Nor do we offer you apologies. You [presumably] knew the risks, and felt the glory (if only for a while).”

Again, a strategy widely offered to wealthy investors to enable them to make money during the carnage had come a cropper.

It is popular to blame complicated investments such as this for the market’s problems. Excessive use of leverage, derivatives or short-selling have all helped amplify market chaos in the past year. It is supposedly good for the rich that they can take advantage of such strategies, but that is beginning to look questionable.

And conventional wisdom seems to be taking a new beating on another front. For years, that wisdom has held that for most people, index funds make sense. Passive investing keeps costs low, and avoids wasting money on trying to do what most active managers seem to find impossible – beating the market consistently.

Yet there is a problem: index funds are dumb. They cannot be contrarian. Once a trend gets going, they have no choice but to follow it, thus making that trend even stronger. Index funds arose, logically, out of the theory of efficient markets. Put very crudely, markets are efficient, so it is impossible to beat them and you should just join them. But the very existence of index funds helps make markets more inefficient and more prone to bubbles.

Experience, and not just logic, backs this argument. Indexation began to become an orthodoxy for retail investors and for big institutions about a decade ago. And in that decade, markets have grown ever more prone to bubbles – from the tech bubble to housing stocks, to China.

The logic of indexing has not gone away. It makes more sense to pay a small fee for an index return than to pay much more to an active manager who will be lucky to do even that well.

But the conventional wisdom is starting to shift against indexing. And while it is still fashionable to blame the esoteric investments of the rich, there is a good argument that index funds, the investment of the masses, have also exacerbated the world’s financial problems.

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和菓子店、あんに毒物？　従業員が嘔吐・しびれ　長野

2008年9月19日21時22分

　１９日午後３時ごろ、長野市南高田１丁目の和菓子店「丸生（まるせい）本店」で、仕入れたあんを口にした従業員の男性（３６）と女性（３５）が嘔吐（おうと）や手足のしびれを訴え、市内の病院に運ばれた。長野中央署によると、２人は意識があり、話ができる状態という。

　同署などによると、２人はおはぎを作るため、あんを混ぜる作業中だった。普段使っている銘柄のあんが足りなくなってきたため、店に保管してあった１袋５キロ入りの中国製の「加糖あん」を開封した。あんから石油のようなにおいがしたため、手ですくって口に入れてみたところ、直後から嘔吐などの症状が出た。

　丸生本店は２日に、この加糖あんを長野市内の業者から２箱（４袋入り）仕入れ、１３日に１箱を使用。２人が２箱目を開封したという。

　県警は、何らかの原因で毒物が混入した疑いがあるとみて、毒物の特定や仕入れルートなどを調べている。今のところメタミドホスなどの有機リン酸系毒物の可能性は低いという。

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発信箱：ちょっと物言い＝福本容子（経済部）

　新聞記者が記事を捏造（ねつぞう）し、それが発覚したら、普通は記者生命を失うと思われる。

　彼の場合は違った。英タイムズ紙の新人時代に専門家の発言をでっち上げてクビになるが、デーリー・テレグラフ紙に拾われ、欧州特派員、政治コラムニストに起用される。その後、保守党から国会議員に当選した彼は、今春、ロンドン市長になった。

　北京五輪閉会式で大会旗を手渡され満足顔だったボリス・ジョンソンさん（４４）だ。オックスフォード大出のインテリだが、失言放言やスキャンダルが絶えない。それでも、機知に富んだ文章、際どいユーモアのある痛快さが人気を集め、ジャーナリスト、コラムニストとして大成した。

　若きジョンソンさんに才能を見いだし、もう一度チャンスをあげよう、とテレグラフ紙に雇った当時の編集長の賭けは吉と出たようだ。

　大麻問題でロシア出身の３力士が解雇され、この話を思い出した。２０歳の元若ノ鵬は「日本のみなさん、すいませんでした。まじめにやります。許してください」と復帰を求めたが、解雇されたら二度と戻れないのが日本相撲協会のルールだという。

　大麻はもちろんよくないし厳しさで対処するのも一つのやり方だろう。けれど、もう一度チャンスをあげて育てた力士が、いつか横綱なんかに昇進して、テレビの解説者が「一時は大麻でどうなるかと心配されましたが、実に見事な横綱です」とか言うのを聞くのもきっといいはずだ。

　角界に限らず、若者の過ちを温かく包み込む力の薄れが、世の中を生きづらくしている気がしてならない。