One more time...

For the seventh times, the Fed has decided to cut its interest rates to avoid a potential recession, even if some experts already consider that the recession has started in the US. The interest rate went from 2.25% to 2% which means the rates have drop from 3.25% since last September. This should be a new step to boost the growth because the economic activities remain weak in spite of the US government's tax rebates, which have just started reaching consumers to boost their spending. This is expected to be the last step from the government to "buffer the economy from a credit crunch and housing downturn".

The US economy is going through " a tough time" said the President Bush. Indeed, all the economic factors are not good in the American economy: the US GDP meets some difficulties to progress (0.6% since the beginning of 2008), the consumer spending is at its lowest level since 2001, there is no more business investment and home building continues to fall, recording the biggest drop in 26 years. If the Fed is trying to struggle them with its "economic stimulus plan" to create growth, the Fed should remember that meanwhile, the rise of the prices of energy and commodities represent serious downside risks for growth as they represent inflations signs.

Food crisis - Time to change!

"Since 2005, the prices of staples have jumped 80 percent" World Bank President Zoellick said. The skyrocketing commodity price's impact on the developing countries is huge: 37 countries (21 are in Africa) are facing a serious food crisis as the foodstuffs have gone up 41 percent in price since October 2007.

The UNs World Food Program requires 500USD million to meet emergency calls from 70 million people in 80 countries; Zoellick reckons that the United States, the European Union and the Japan should act now to fill the global food gap otherwise lot of people will suffer and starve.
The World Bank will set up a "Green Revolution" to help poor countries to boost their productivity by lending more: for example in Africa, the organisation will double its lending (from 450 USD to 800 USD). The goal is to give more opportunities and confidence to developing countries to expand their production. But increasing current spending is only a short-term solution. Higher food prices appear to be here to stay...

So where are the problems?

First, the spike in oil prices (103 USD per barrel in recent days which means +72% in 2007) is one problem as it is followed by an increase of the cost of production and the cost of transport of the cereals which have a knock-on effect on the selling price.

Then there is climate change. Jacques Diouf, President of the FAO, claimed that the climat change is a main issue for the worlwide food security. Over the last years some majors cereals suppliers countries such as the United-States, Australia or Europe, had to face some serious natural disasters (dryness or flooding) and so they have not be able to produce sufficient cereals quantities. As a consequence, the worldwide stocks of cereals have been consumed.

However, the fact that the worldwide population is more and more important (more than 6billion of people today and 9billion expected in 2050) should be taken into account. Indeed, India or China which account for the most populated countris in the world, are going through some food habits changes: they tend to leave their traditional way of eating for a more occidental one, which means less vegetable proteins and more animal proteins. The problem is that these proteins need 10 times more space to grow up and meanwhile, the cultivable space becomes smaller due to the urbanization.

These three major reasons of the food crises are truly related; the oil has allowed the food globalisation, the increase of richness and wealth but has led to the environmental pollution! Unfortunately, no end is forecasted for this crises, which could have serious repercussions on the worldwide economic factors.

At the end, this skyrocketing of food prices is the direct result of the human willingness to always looking for a strong growth with two digits even if it is to the detriment of our planet.

World Growth Forecast hacked!

As the result of the subprime crisis, the IMF slashed the Wolrd Growth forecast: the world economy will slow to 3.7% in 2008 and 2009 which is 1.25% lower than the growth in 2007. The US should be the first one to go in recession with an economic growth forecast of 0.5% in 2008 and 0.6% in 2009, which means a slow recovery. But it is known that there is one in four chance of a global recession when the world growth falls below 3%. The subprime crisis represent the largest financial shock since the Great Depression.

The problems in the US housing market will lead to a world downturn as the house price inflation will follow in some European countries such as Spain, Ireland and the UK, making a slowdown more than possible. "House prices have already fallen by around 10% in the US by some measures, and the IMF says that they may be over-valued by more than 20% in the UK, Ireland and Spain".

President Bush reckoned that the US economy is going through a though period (see the article: "One More Time...") as all the economic factors are slow. Even if the Fed is trying to cope with them to reboost the growth, it could become a main issue for Europe, which is the biggest trading partner with the US. In the Eurozone, the growth forecasts are 1.4% in 2008 and 1.2% in 2009, which is higher than in the US where the slowdown has already started. The ECB has kept interest rates unchanged because on the opposit of the Fed (which is looking for the growth), the main objective of the EBC is to cope with the inflation. In future, the EBC could fix the interest rates regarding the rising house prices to avoid it to go "out of normal valuation ranges".

This slowdown should not affect directly the fast growing markets such as China or India economies but they will be affected by a slowdown of the trade with these occidentals economies: the imports into rich countries will slow quickly due to the beginning of the recession and that will lead to a cut in the rate of growth of exports by developing countries.

Once again, the US is worried about their home economic wealth (seven rate cut since September) but seems to forget that its actions have serious repercussions on the rest of the world!

Final discussions for Alitalia

If the current Italian government is agreeable with the offer of the French group, Air France Klm, the trade unions of Alitalia reject it massively. Indeed the French group bid goes with draconian conditions; 2100 job cuts were expected during the first negotiations. Now the French group is ready to make some concessions: it assures that the renewal of Alitalia staff will be quick to reduce the job cuts. But the Europe's biggest airlines wont make anymore modifications to its bid.
The Italian elections plan on April 13th and 14th increase the controversy, as Silvio Berlusconi announced he may have another offer in about three weeks time. But the economic situation of the Italian airline company requires a quick intervention to avoid a collapse. For many, it seems that S. Berlusconi just plays the pre-electoral game and Air France KL is the only serious offer and opportunity for Alitalia to survive.
For the Italian industry, this is a serious issue as the economic patriotism plays a significant role. Since the governments are no longer involved in their national airlines, it has become clear that a huge process of concentration has started and then at the end, it will remain only 5 or 6 European airlines.
The UK highlights with just cause that for a service company such as the airlines company, being bought up should not be a major issue because it does not lead to a delocalisation of the activity.
However, in spite of the European Union, it still remains a strong economic patrotism in some countries; which it may be the scar of the difficult way to the European integration.

Islamic Private Bank in Switzerland

The National Bank of Kuwait, one of the largest bank in the Middle East, plan to set up an Islamic Private Bank in Switzerland in partnership with a Saudi Arabian institution. This Islamic Private Bank will be based on the tenets of the Sharia Law.

The Islamic Banking, which means the prohibition of interest, is the fastest growing area in the Arab World despite the worldwide credit crunch. Indeed, there is a significant boom in bank products compliant with Islam.

The Islamic Private Bank will target high-net worth individuals from the Persian Gulf Region (Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the UAE). These economies are awashed of liquidity from the booming oil prices: since 2002, the Persian Gulf Economies have more than doubled in size, following the increasing price of oil prices (from $30 a barrel to more than $100 today).

This Islamic Institution could be open before the end of the year.

Tata buys up Jaguar and Land Rover

The North America economy is in trouble. Is this economy in a recession? If all the economists do not agree on the answer, the householders have already started to suffer from the subprime crise.
As a result, the US luxury car sales decreased dramatically last month. Ford Group Vice President Jim Farley said "I'd like to be able to tell you the worst is behind us but I can't really say that. The second quarter may be the worst sales period of the year''.
Ford agreed to sell its two luxury car brands to the Indian Giant group Tata motors for $2.3 billion. Tata claims that he will keep the "the image, touch and feel" of the two marques.
This Indian acquisition of two UK luxury car brands, represents a significant development of the country and a whole symbol: This ex-UK colony generates now firms, which are able to buy up UK brands. But it does not shake Great-Britain, which is the European country that attaches less importance to the economic patriotism.
However, in a globalized economy where the capital does not have any borders, most of Europeans worry about the future of the European firm if the governments and the managers are no longer able to take care of the European interests.
Now the India's biggest industrial conglomerate should prove to the sceptics, its ability to handle with the production of trucks and the management of two luxury car brands.
If Ford's rating remains unaffected by sale of Jaguar and Land Rover (B/STABLE/B-3), Standard & Poor's Ratings Services lowered the credit rating of Tata Motors from BB+ to BB, as the result of Tata's increased debt ($3 billion loan to fund the deal with Ford).

Northern Rock - Temporary Public Ownership

BUSINESS AS USUAL
Temporary Public Ownership: What It Means For You
The Government has announced its intention to take Northern Rock into temporary public ownership.
The Government believes that this is in the best interests of customers and taxpayers.
Customers are not affected by this change.
Your savings with Northern Rock continue to be safe and secure, protected by the Government guarantee arrangements.
The terms and conditions of your mortgage, savings and other products remain unchanged.
All branches, call centres and other operations remain open for business as usual.

Here is what customers can read on the homepage of Northern Rock website.

The story started on September 2007 when Northern Rock received a bail out from the Bank of England, following the problems in the credit markets caused by the US Subprime mortgage financial crisis.

On 22 February 2008 the British government announced the nationalisation of Northern Rock after it had acquired all the bank's shares. Mr Darling said the government had rejected two private takeover bids for the bank from Richard Branson's Virgin Group and Northern Rock's own management team because they both do not offer "sufficient value for money to the taxpayer". According to him, this temporary public ownership is the best solution to safeguard taxpayer's money and for the Bank of England to get back the ₤26 billions lent to Northern Rock. This is a temporary measure and the aim is that the bank return to private sector once the market conditions improve and the value of the bank grows.

But this decision marks the first official nationalisation since the 1970's and forces the British government to deal with several critics: The shareholders criticize this measure because they will receive only a little compensation for their shares which were suspended on Monday. George Osborne, the shadow chancellor, underlined that the nationalisation will allow Northern Rock to borrow and lend more cheaply than its rivals because of the government backing. And finally, the rivals bankers believe that the government should limit his action to ensure taxpayers do not lose their money.

Now the Northern Rock's new management team headed by Ron Sandler will draw up a business plan for the bank to reinvent Nothern Rock as "a profitable, vibrant and sustainable business" with a view to selling it to private sector.

Has the capitalism system become crazy?

Is the worldwide financial situation about to worsen? The economic climat is definitely not good: the growth is slower everywhere in the western countries and the US is about to start a recession.

The Attali Commission has choosen this unstable period to propose 316 mesures to help the French economy to survive through the worldwide crise. Jacques Attali suggets more freedom and more security to reach an equilibrium favourable to growth. It is time for the French government to make decisions! This difficult period with no forecasted elections is the perfect ooportunity to choose the adaptation rather than the decline. Indeed, the French challenge is huge: In 40 years time, the French growth wnet from 5% to 2% per year. In 2008, the French Balance of Foreign Trade deficit is around E40 billion and the increase in gaz and oil prices are not the responsible! French people consume more than they produce because the globalization allows people to go abroad to buy cheaper... It is the reason why Jacques Attali emphasis on the topic: Education and Research through which France will become more competitive. The strengh of the Euro allows to buy cheaper abroad and then prevent France to suffer seriously from the financial crise consequences.

The subprime crise started in the US in 2006 and now it repends itself as a virus which contamines the whole international financial system.

In the US, the subprimes are financial mortgage with high interest rates, given to people with a weak solvency. Real success! but in 2006, the interest rate increased because lot of people are not able to pay back their credits. The main problem is that the US banks have minised their risks by using money they had not. Indeed, they shared the risk with others American and foreign banks such as the Societe Generale in France or Nothern Rock in Great Britain. It is the whole financial system which is weaken as a consequence of the financial globalization.

The Fed cut its interest rate twice to reach 3% in order to boost its economy with no garantee of sucess because the American economy survival rest on a weak dollar.

At the same time, the Societe Generale, a big French bank, looses E5 billion... The financial market is no longer under control and could be easily compared to a casino economy. The only internal control is not enough! Now the only goal of banks is to make still more money through risky financial placements that the deregulation makes possible. The case of the Societe General is not unique! The governments need to make more ethical the capitalism system and ask for more transparency on the financial markets.