A Commentary

Fragmented Bondholders

Via Portfolio.com, 21/1/9

During the Great Moderation, institutional fixed-income investors had boring, if lucrative, lives. They’d buy paper, clip coupons, and make money. Now, however, faced with a stream of high-profile defaults, they’re going to have to start justifying their former paychecks by getting down in the trenches with the distressed companies they lent money to, and negotiating hard to maximize their eventual payout.

Or not. The biggest bond investor of all, Pimco, has resigned from the investor committee negotiating with General Motors, despite being one of GM’s largest bondholders. And I don’t like the way that Pimco’s Bill Gross is trying to paint this as some kind of win for the little people:

“We’re just not good committee members,” Bill Gross, Pimco’s co-chief investment officer, said in an interview yesterday from his Newport Beach, California-based office. “We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.”

Of course bondholders will represent their clients’ interests in negotiations. No one’s expecting anything else. But that doesn’t mean they shouldn’t talk at all. Creditor committees exist for a reason: they allow companies and their creditors to gauge which solutions are likely to be mutually acceptable, and move on past a debt restructuring to a period of profitability and growth. After all, neither company nor creditor likes it when bonds are in default, and they both have an interest in ending that state of affairs as soon as possible.

Interestingly, the news of Pimco’s resignation from the GM committee arrives just as Ecuador announces that it has managed to find a bank to advise it on its own debt restructuring: Lazard. The last time that Ecuador defaulted, back in 2000, the country evinced very little interest in meeting or negotiating with its creditors, and Ecuador bondholders were furious. They set up the Emerging Market Creditors Association, or EMCA: a forum where the biggest holders of emerging-market bonds could get together and try to force countries to come in good faith to the negotiating table.

And who was the co-founder of, and single largest bondholder within, EMCA? None other than Pimco’s very own Mohamed El-Erian. Back then, El-Erian fought hard for the right of bondholders to sit down and negotiate with distressed debtors; now, he seems happy for Pimco to unilaterally resign from such negotiations, citing vague reasons about just not being good on committees.

EMCA no longer exists, which is a shame, since it’s needed now more than ever, in the wake of Ecuador’s default and as emerging-market bond spreads price in a massive wave of further defaults in the future. But maybe that’s symptomatic of a broader problem: bondholders compete against each other, to see who can get the highest returns, and are never very comfortable when they try to cooperate. Which means that they fragment — as the GM bondholders just did with Pimco’s departure from the negotiating table — and leave debtors in a more powerful position.

Clearly, Lazard wasn’t scared enough of its buy-side clients to refuse the Ecuador mandate. What that says to me is that bondholders don’t have teeth these days. You’d think that Pimco would be worried about that state of affairs, but evidently not.

Update: Notwithstanding the fact that the only above-the-jump link in this blog entry was to the Bloomberg article I quoted, and notwithstanding the fact that I put the quotation in <blockquote> tags to make it quite clear that I was quoting another news source, I received the following nastygram this morning from Bloomberg:

I am in-house intellectual property counsel for Bloomberg L.P. and its affiliates, which together form one of the largest providers worldwide of financial news and information and related goods and services.
It has come to my attention that the recent, January 21, 2009 “Market Movers” blog article entitled “Fragmented Bondholders” includes a direct quote from Bill Gross which was obtained by Caroline Salas for Bloomberg News. As there is no attribution to Bloomberg News, there is an implication that the quote included in the Market Movers blog article originated with the author of the article. We ask that the article be updated with the proper attributions.
Now that you are aware of the issue, Bloomberg News expects a higher level of respect for the copyright law and greater editorial integrity going forward.
Regards,
Joanne St. Gerard

Does a direct link to the article in question really not constitute an attribution? How on earth can something which is explicitly tagged as a quotation from an outside source be read as an implication that I got the quote? Does Joanne St. Gerard ever read blogs? And why does she think that impugning my “editorial integrity” is a sensible way of initiating contact with me? I have no idea. But for the record, yes, the quotation in this article came from the Bloomberg article I linked to. I trust she’s happy now.

The politics of rating the USA

Via Felix Salmon, 22/5/9

When I said yesterday that any S&P downgrade of the USA “would be entirely political”, I was referring not to US politics but rather to the internal politics of S&P and even of McGraw-Hill, its parent: my guess is that no such decision would be made without the explicit consent not only of McGraw-Hill’s CEO but even of its board.

If you want proof that US sovereign ratings say everything about the rating agency and much less about the US, here it is coming straight from the horse’s mouth:

SR Rating, a Brazilian firm, will soon issue a judgment on American government bonds. Its verdict is not pretty: the company says it will issue a AA rating.

Paulo Rabello de Castro, who chairs the ratings committee at SR, describes the decision to rate Uncle Sam as “an outright provocation”.

Not that de Castro doesn’t make sense:

Mr de Castro argues that perfect scores should henceforth be saved for places like Norway that sit on lots of oil, put revenues from its sale into a piggy bank and are unlikely to be invaded by their neighbours. As for the structured products that were mistakenly given AAA ratings over the past few years, he argues that no asset that has been around for less than ten years should be considered worthy of the accolade.

This is uncontroversial stuff: even Moody’s has come out and said that Norway is more creditworthy than the USA. But the fact is that the US sovereign rating is so imbued with symbolism, especially since the Treasury-bond rate being considered the risk-free rate of return, that it can never be taken at face value.

Citigroup’s doomed IT strateg

Via Felix Salmon, 22/5/9

Why do I get the feeling I’ve seen this movie before?

Citi had originally estimated it could save $3bn over three years by rationalising its operations and technology functions, which employs 140,000 people including 25,000 software developers - more than many IT companies.

But recent progress in reducing overlaps between systems, and linking IT infrastructure across businesses that had previously run individual systems has prompted Citi executives to sharply increase its cost-saving target.

I’m going to go out on a limb here and say this ain’t gonna happen. The first thing any new management team or management consultancy does, on looking at the nightmare that is Citi’s web of incompatible IT systems, is decide that they should be unified and rationalized. And the second thing they do is blame Sandy Weill for the current mess. (Yes, that’s in the article too.)

The problem, of course, is that these legacy systems — all of which support vital operations and databases — won’t just die and go away. Citi’s IT honchos have the same problem that Microsoft’s do: everything they do needs to be backwards-compatible with everything that went before, or else they have to build some brand-new system which nobody currently knows how to use and into which all the old data can be seamlessly imported. Both options are so complex and difficult as to be, practically speaking, impossible — especially in a dysfunctional company like Citigroup which is simultaneously putting significant resources towards splitting itself up as opposed to integrating itself.

It’s a rare sign of good news within Citigroup that executives reckon there has been “recent progress” on the IT front. But extrapolating from that progress to billions of dollars in new cost savings is bound to prove overly ambitious.

The end of Sri Lanka’s war: Tainted triumph

A bloody victory won, Sri Lanka’s government urgently needs to make peace with the Tamil minority

Via The Economist, 21/5/9

FOR Sri Lanka’s government and many of its citizens, reactions in the West to the final phase of its 26-year war with the Tamil Tigers have reeked of sanctimonious hypocrisy. The world knows the Tigers to be vicious terrorists. To stave off defeat, they held tens of thousands of civilians as human shields in their shrinking corner of northern Sri Lanka. This was typical of their callous disregard even for those whose rights they claimed to champion. Their crushing and the death of their vile chieftain, Velupillai Prabhakaran (see article), are cause for celebration. And in welcoming the end, surely it is unfair to wring hands at the inevitably bloody means. After all, the West is cheering on Pakistan’s army as it takes on the Taliban, uprooting people in their hundreds of thousands.

The alleged double standards of those criticising the Sri Lankan government, however, do not begin to answer their three chief complaints. These are, firstly, that the prosecution of the war, especially in its last weeks, has been unnecessarily brutal and careless of civilian life, perhaps even breaking international humanitarian law. Second, the government has still to show that it is ready to do all it can to ease the suffering of those who have survived the Tigers’ last stand. Third, it has given Sri Lankan Tamils no more than vague assurances that it will tackle the grievances that have stoked the conflict.

If military victory is to bring lasting peace, the government needs to move fast on all three points. The signs, sadly, are not good. On the first, the conduct of the war, the government has consistently described its offensive as a “humanitarian operation”, to free the Tigers’ hostages; it maintains that civilian casualties have all been caused by Tiger shooting and suicide-bombing. If those boasts are true, then it should welcome a thorough inquiry into war crimes. But its policy has been to avoid all scrutiny. The United Nations estimates that some 8,000 civilians have died this year. In private, some of its officials guess the true number may be at least twice that. The truth may never be known (see article). The government has kept journalists away from the battlefield. It has questioned the patriotism of any critics. It has even locked up three of the doctors who revealed some of the casualty figures.

Magnanimity would bring rewards

More urgent than confronting the horrors just past is the need to avert a secondary disaster. Long shelled, shot at and deprived of shelter, food and medicine, the half-starved wretches who have survived the recent battles are exceptionally vulnerable. The government’s concern that Tiger fighters had hidden themselves among the refugees should be less acute after its comprehensive victory. More than a quarter of a million displaced people need immediate help. The restrictions on foreign access to the camps housing them must be lifted at once. The government’s promise, to have four-fifths of them back home by the end of the year, requires a massive programme of mine-clearing and reconstruction. But it might offer the chance to win Tamil loyalties.

Of 3m Tamils in Sri Lanka and a further 1m in the diaspora, very few have faith in the government. A history of abuses by the security forces, and the government’s long refusal to offer genuine political concessions to Tamil demands for autonomy, drove many into the clutches of the Tigers. They, in turn, were ruthless in killing and marginalising more moderate Tamils.

Sri Lanka’s president, Mahinda Rajapaksa, made his victory speech both in Sinhala, the tongue of the majority, and some Tamil. He noted military success brought no “final solution” and boasted that the Tigers’ defeat was “an even greater victory for the Tamil people”. That is not how it looks to those in the camps, nor to Tamils elsewhere in Sri Lanka as their countrymen celebrate the triumph. Nor is it how it appears to angry exiles whose money—some freely given as well as much extorted—has sustained the Tigers’ campaign. “We are all Tigers now,” claimed one British-born, well-educated Tamil protester outside the Houses of Parliament in London this week. That is why the third thing Mr Rajapaksa’s government needs to do is to attack the basis of the Tigers’ residual support by offering Tamils a genuine devolution of political power.

The government seems to have calculated that, if it won the war quickly enough, using whatever means it took, it could deflect calls from America and Europe for sanctions. Hiding behind the diplomatic support of Russia and, especially, China, it has been able to do that. It seems unaware of quite how badly it has in the process besmirched Sri Lanka’s reputation as a freedom-loving democracy. If it fails to act quickly to save lives and build a lasting peace, the world will have to start treating it as the elected dictatorship it is beginning to resemble.

Climate change and Congress: Weak Medicine

Compromise has enfeebled America’s cap-and-trade bill. A carbon tax would be better

Via The Economist, 21/5/9

FOR those who believe that climate change is a serious problem, the decisions that America makes now are of momentous importance. In Copenhagen in December, the world will decide whether to reinvigorate or abandon its effort to avert serious climate change, and what America does between now and then will in large part determine the outcome. So the fact that Barack Obama clearly intends to turn America from being a laggard into a leader in this task is therefore encouraging.

Good intentions, however, are not enough. Moves in Washington over the past week have indicated the shape of America’s policy. And although impressively far-sighted by the standards of the Bush era, it looks disappointing when measured alongside what is probably needed to insure against the real-though-hard-to-quantify threat of serious climate change.

A price that pinches

“Oil lost and coal won,” was an insider’s verdict on the two big developments in Washington this week (see article). The oil industry got hit by the administration’s decision to tighten vehicle fuel-efficiency standards. Though hardly punishing by international measures—China has already adopted similar targets—the new rules will at least bring America within hailing distance of Europe’s fuel-efficiency standards.

If America insists on using fuel-efficiency standards to cut vehicle emissions, then tough ones are better than weak ones. Yet such standards are a poor way of reducing emissions. They discourage companies from innovating and encourage them to game the system. The existence of different standards for cars and light trucks—an anomaly that continues—encouraged the rush into pickups and SUVs, overproduction of which ultimately helped sink America’s car industry.

Far better to have a carbon price high enough to pinch, and then let companies and consumers decide where to cut emissions. But that, unfortunately, is unlikely to emerge from the cap-and-trade bill now in the House of Representatives, the details of which have been revealed by its promoters, Henry Waxman and Edward Markey. They have, it seems, granted some rather generous concessions to Midwestern Democrats from states dependent on coal or heavy industry.

As a result the bill is now too weak in three crucial ways. First, it envisages America cutting carbon-dioxide emissions by 17% below 2005 levels by 2020 (down from 20% in the original draft). Europe, by contrast, is aiming to cut its emissions by 20% below 1990 levels by 2020 (and by 30%, if the rest of the world makes similarly serious efforts). Second, the purpose of a cap-and-trade system is to introduce a carbon price. But the bill sets a ceiling of $28 a tonne on the price of carbon—too low to change behaviour enough.

Third, under a cap-and-trade system, the government issues permits to pollute. The administration had wanted 100% of permits to be auctioned, but the bill would hand most of them out free (a third to electricity companies, which is nice for coal; only 2% to oil companies). When that happened in Europe, power-generation companies passed the cost of buying permits on to consumers and pocketed the value of the ones they had been given free. In order to avoid such an outcome, the bill specifies that the value of free permits must be passed on to consumers. But if consumers are protected from price increases, they will have no incentive to cut back on carbon consumption—which is one of the goals of the scheme.

The weakening of this bill illustrates one of the central problems with cap-and-trade systems. They are complex, obscure and therefore susceptible to horse-trading. A chunk of allowances can be handed out to one lobby, a sliver to another, and soon the system’s effectiveness has been sliced away. The corresponding attraction of a carbon tax, which this newspaper has always supported, is its simplicity. The government sets the rate. Everybody can see what it is. Voters get transparency. Businesses get certainty. And the government gets a large chunk of revenue—not to be sniffed at in these difficult times.

This is an important moment. Thanks to much effort on the part of many well-intentioned people, America is prepared to legislate to control carbon. The country needs to seize this opportunity and introduce a simple carbon tax. Sceptics will howl about the initial cost, but it will be transparent and far, far cheaper than the impact of serious climate change.

Decoupling 2.0

The biggest emerging economies will recover faster than America

REMEMBER the debate about decoupling? A year ago, many commentators—including this newspaper—argued that emerging economies had become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies. Naysayers claimed America’s weakness would fell the emerging world. Over the past six months the global slump seemed to prove the sceptics right. Emerging economies reeled and decoupling was ridiculed.

Yet perhaps the idea was dismissed too soon. Even if America’s output remains weak, there are signs that some of the larger emerging economies could see a decent rebound. China is exhibit A of this new decoupling: its economy began to accelerate again in the first four months of this year. Fixed investment is growing at its fastest pace since 2006 and consumption is holding up well. Despite debate over the accuracy of China’s GDP figures (see article), most economists agree that output will grow faster than seemed plausible only a few months ago. Growth this year could be close to 8%. Such optimism has fuelled commodity prices which have, in turn, brightened the outlook for Brazil and other commodity exporters.

That said, even the best performing countries will grow more slowly than they did between 2004 and 2007. Nor will the resilience be universal: eastern Europe’s indebted economies will suffer as global banks cut back, and emerging economies intertwined with America, such as Mexico, will continue to be hit hard. So will smaller, more trade-dependent countries. Decoupling 2.0 is a narrower phenomenon, confined to a few of the biggest, and least indebted, emerging economies.

It is based on two under-appreciated facts: the biggest emerging economies are less dependent on American spending than commonly believed; and they have proven more able and willing to respond to economic weakness than many feared. Economies such as China or Brazil were walloped late last year not only, or even mainly, because American demand plunged. (Over half of China’s exports go to other emerging economies, and China recently overtook the United States as Brazil’s biggest export market.) They were hit hard by the near-collapse of global credit markets and the dramatic destocking by shell-shocked firms. In addition, many emerging countries had been aggressively tightening monetary policy to fight inflation just before these shocks hit. The result was that domestic demand slumped even as exports fell.

Not such a bad idea after all

But the global shocks are now abating. Firms cannot slash stocks for ever. And as investors’ panic recedes, so credit markets are beginning to function. This will not be enough to spur a vibrant recovery in America, where households must painfully rebuild their balance-sheets. But it removes a drag on big emerging economies—all the more so because their governments have dramatically loosened the fiscal and monetary reins. China’s stimulus is the most spectacular, but Brazil has also been able to cut interest rates and boost spending.

Government activism helps explain why the creditworthy big emerging economies can recover more quickly. But it cannot create long-term resilience. China’s rebound will only be sustained if the economy shifts further from state-sponsored investment to private consumption. That will require tough structural changes, from forcing state-owned firms to pay fatter dividends to a stronger social safety net. Other countries, notably India, must calibrate their government finances even more carefully (see article). The idea of decoupling lives on, but that does not mean sustained prosperity in the big emerging economies is a foregone conclusion.

After India’s Election: Good news: don’t waste it

The voters of the world’s biggest democracy have given their government a precious second chance

INDIA is a land of bright promise. It is also extremely poor. About 27m Indians will be born this year. Unless things improve, almost 2m of them will die before the next general election. Of the children who survive, more than 40% will be physically stunted by malnutrition. Most will enroll in a school, but they cannot count on their teachers showing up. After five years of classes, less than 60% will be able to read a short story and more than 60% will still be stumped by simple arithmetic.

Some 300 parties and numerous independent candidates contested the election that has just ended (see article). They chose a bewildering variety of symbols: a lotus flower, a bow-and-arrow, a ceiling fan, a cricketer pulling the ball to the boundary. Of the 417m people who voted (a turnout of 58%), about 119m pushed the button next to an open hand, the symbol of the Congress party. That was enough to give it 206 of the 545 parliamentary seats. In a country more than twice the size of the European Union, speaking more languages, that is about as clear a mandate as any party can hope to win and—if Congress uses that mandate wisely—a wonderful chance to boost the welfare of the next generation of Indians.

Free at last…

The good news is that Congress has found it easy to form a coalition with what looks like a stable parliamentary majority. It will thus spare the country a repeat of the past five years, in which the party squandered its energies appeasing its allies in an unwieldy coalition. The election was also heartening because it revealed the limits of divisive politics. India’s second party, the Bharatiya Janata Party (BJP), remains rooted in the Hindutva (Hindu-ness) movement, which seems to believe that India’s 160m Muslims live there on sufferance. The BJP lost ground this time, showing yet again that Hindu nationalism is enough to underpin a party, but not a government.

Still, Congress must not now fall prey to complacency. The party is a big, shapeless tent, tethered to the Nehru-Gandhi dynasty, which has provided three of the country’s prime ministers. The courtiers have now turned their attention to the next in line, Rahul Gandhi, the son of Sonia Gandhi, the party’s leader. But, following the example of his mother, he is in no hurry to become prime minister. That is commendable. Manmohan Singh, the Oxford-educated economist who has been prime minister since 2004, has business to finish.

Liberals hope that Mr Singh’s reformist instincts will enjoy freer rein now that Congress is no longer beholden to the communist parties which abandoned the government last summer and suffered horribly at the polls this spring. But liberalising measures, such as lifting the cap on foreign direct investment in insurance, win few votes in India. Only 0.7% of households own any of the shares that jumped by 17% on the first day of trading after Mr Singh’s victory was declared.

Mr Singh says his aim is “inclusive” growth. He and Mrs Gandhi have shown a taste for redistributing the proceeds of growth to favoured constituencies, some of whom happen to be desperately needy. The government raised the pay of public employees, forgave the loans of small farmers and expanded its public-works scheme for the rural poor.

Congress will find it harder to repeat this trick in its second term. Although the electoral maths is now in its favour, the fiscal arithmetic is less forgiving. The government’s budget deficit (including the states’) could exceed 11% of GDP this year. If the economy recovers—India, alongside China, seems to be decoupled from the sluggish West (see article)—the government’s borrowing will put pressure on interest rates.

To narrow the deficit, it will be tempted to short-change infrastructure spending, an investment that pays off slowly. But this would be a false economy. If India is to grow at 9% a year, it needs to add at least 25,000MW of power a year. It is also bad politics: in the states of Bihar and Orissa, voters in this election proved they will reward state administrations that show an interest in improving their lot. A government with a secure five-year term has a chance to earn votes, not just buy them.

A better way to save money would be to curb government subsidies on fuel and fertiliser. These outlays are wasteful and mostly benefit better-off people who own vehicles, or farm large plots of land. Fuel subsidies, in particular, hold the public finances hostage to the world oil price, which threatened fiscal mayhem when it passed $140 a barrel last summer. Another crisis beckons if the world economy recovers.

Reforming subsidies would be administratively easy, but politically tricky. The same, alas, applies to India’s onerous labour laws. It would take only a penstroke to repeal these rules, which make a tiny fraction of the workforce practically unsackable, at the expense of everybody else. But with exports plummeting and industry shrinking, it would be a brave new government that made Indians easier to fire.

Sadly, Congress has neither the courage nor the mandate to grasp this nettle. Yet some urgent reforms would be politically popular. To reform education or combat malnutrition, for example, the government needs to recruit, motivate and monitor millions of teachers and crèche-workers. Unfortunately, that asks a lot of India’s creaking bureaucratic machinery, which is notoriously prone to “leakage”, a euphemism for corruption. Mr Singh’s failure to repair that machinery explains a lot of his government’s failure to achieve much else. It has, for example, dawdled over a bill that would supposedly enforce the right to education, because it fears the practicalities. In India, it can take up to four years to fill a teacher vacancy.

…but no more excuses

In the past five years Congress could blame such shortcomings on the vagaries of coalition politics. But it lost that alibi this week. Unencumbered by its useless former allies, it now has a clear mandate to provide the country with educated minds, well-fed bellies, irrigated fields and uninterrupted electricity, without busting the budget. Promises to do just that featured prominently in Congress’s manifesto, just as they did in the election of 2004. If the hand comes up empty again, India’s voters will push someone else’s button next time.

Nepal’s political crisis - Two armies into one won’t go

Via The Economist, 7/5/9

With peace in its grasp, Nepal is let down by its politicians and its army

TO MUCH of the outside world, Nepal has seemed blissfully quiet in recent months. The peace process that ended a bloody ten-year civil war in 2006 seemed on track, and outsiders could go back to seeing the place as a small Himalayan holiday-spot of little concern.

But Nepal is neither insignificant nor irrelevant. It has nearly 30m people and occupies a strategic position between Asia’s emerging giants, India and China. And the notion that its divisions were healed was an illusion that has been shattered by a bust-up between the prime minister and the army (see article). The country now faces a crisis for which the Maoists, the other parties and the army all share responsibility. So do Nepal’s foreign partners, especially the most important one, India.

It was a jolt to most foreign observers and the Nepali elite when Maoist insurgents won the most seats in an election a year ago. The shock eased as the rebels swapped combat fatigues for lounge suits, put on weight and started to resemble normal grasping politicians. Just as in peace processes from Northern Ireland to Sri Lanka, however, Nepal’s politicians left the hardest parts to last.

The deferred, intractable issue is the future of Nepal’s security forces. What was once the “Royal” Nepal Army, which propped up the now deposed king, Gyanendra, in a short-lived dictatorship, has been refusing to follow the writ of the government of the new republic, led by the Maoist leader, Pushpa Kamal Dahal, better known by his nom de guerre, Prachanda. Under the peace agreement, the Maoists’ ragtag bunch of guerrillas was supposed to be integrated with the proper army.

The army will have nothing of it, so former Maoist fighters are still holed up in United Nations-supervised cantonments. Mr Dahal sacked the army chief. The president reinstated him, so the prime minister has now resigned.

The Maoists have, in part, themselves to blame for making the army—and everyone else—nervous about their commitment to pluralism. Although they have confounded fears that they would be a Nepali, elected Khmer Rouge, they still talk (amongst themselves, at least) about a totalitarian-sounding “people’s republic”. Their youth wing is guilty of thuggery. Yet, whatever their private ambitions, Mr Dahal has offered to join a government of national unity if the president rescinds his reinstatement of the army chief. That seems the least bad outcome. But it relies on the acquiescence of the other political parties and the army, who have seemed even more hostile than do the Maoists to the peace deal they all struck.

In last year’s election the Maoists won 38% of the seats in a Constituent Assembly. The other, losing, parties came out in support of the sacked army commander and seemed ready, with army backing, to form a government without the Maoists. The former rebels thus captured the democratic high ground. And to do its job—drafting a constitution—the assembly needs the Maoists, who have a blocking vote.

Delhi dallying

Nepal’s foreign donors should have pushed harder for the establishment of proper civilian control over the army. India, which did much to engineer the peace, has quietly backed the army commander’s unconstitutional disobedience. The Delhi government sees the army as its truest friend in Nepal, where it has long had an overweening influence. Facing a large, scattered Maoist rebellion of its own, India has also been alarmed by the Nepali Maoists’ rapprochement with China (which had no time for them when they were mere leftist guerrillas).

In standing down, Mr Dahal has been able to present himself as both a champion of the poor, and defender of Nepali pride against a meddling neighbour. The Maoists’ prestige may be further bolstered in coming months by their having quit government at a time of mounting economic hardship and disillusionment with the peace process. All this may strengthen them. Eventually, India and other powers will have to accept that the Maoists are in Nepali politics for the long haul.

On the offensive - Pricked by America, Pakistan’s army takes the fight to Mullah Fazalullah

Via The Economist, 12/5/9

WHETHER Pakistan’s army now intends to crush the Taliban, as America hopes, is unclear. But its latest offensive against a Taliban chieftain in North-West Frontier Province (NWFP), launched last week in response to unprecedented public goading by America, looks painfully serious.

Over 360,000 people have fled NWFP’s Swat valley, where the army is pounding well-entrenched Taliban militants from the air. According to the army, this takes the number of war-displaced in north-western Pakistan to some 1.3m. Some of these fresh fugitives arriving to hastily pitched, UN-provisioned camps, say that many civilians have been killed in the bombing in Swat. Others say that the Taliban, who control large parts of NWFP’s Malakand region, which includes Swat, have mined routes out of the valley and are forcing civilians to remain, for future use as human shields.

On Monday May 11th Pakistan’s interior minister, Rehman Malik, said that 700 militants had been killed in the five-day operation, which tore up a controversial ceasefire deal between the government and Taliban in Malakand, agreed in February. The army, which denies killing many civilians in Swat, says it is now preparing a heavy ground-attack to follow the bombing. An army spokesman promises that this would, if necessary, involve house-to-house combat in Mingora, Swat’s biggest city and the Taliban’s local stronghold.

That would be a first in Pakistan’s often half-hearted war with the militants who rule much of its north-west. In the region’s semi-autonomous tribal areas, which form a scarcely-policed border with Afghanistan, the army has oscillated between bombing the militants and making peace deals with them. This has given the Pakistani Taliban, a loose conglomeration of Islamist warlords, named after their Afghan confreres, the run of most of the area.

In Swat, a more thickly populated and economically developed part of NWFP, the army had attempted the same strategy. It ended a brutal four-month assault there in February, in which several hundred civilians were allegedly killed, after drafting a ceasefire agreement with associates of the local Taliban chieftain, Mullah Fazalullah. This agreement, which was approved by President Asif Zardari last month, would have led to the introduction of Islamic law in Malakand. But instead of laying down their arms, as the agreement stipulated they must, Mr Fazalullah’s men used the ceasefire as an opportunity to expand their control.

A Taliban takeover of Buner, a district of Malakand adjoining Swat, last month provoked President Barack Obama’s administration to give warning of a creeping Taliban takeover of Pakistan. The current operation in Swat was announced last week, the day after Mr Zardari met Mr Obama in Washington. Pakistan’s army, which had been reluctant to resume fighting in Swat, is now promising to rout Mr Fazalullah’s men and restore the government’s sway there. There are also reports that it is planning a similar offensive in South Waziristan, the most radicalised of the tribal areas, against the Pakistani Taliban’s chief, Baitullah Mehsud.

To explain its many battlefield setbacks in the north-west, Pakistan’s army has often been accused of playing a double game, to protect militant leaders whom it has previously sponsored to fight in Afghanistan and Indian-held Kashmir. If there is little evidence for this claim, the army is clearly reluctant to lose many men or inflict great casualties in a war that few Pakistanis support. According to a survey conducted in March and released by the International Republican Institute on Monday, 80% of Pakistanis supported the ceasefire agreement in Swat. Yet the army now claims, with enthusiastic support from the country’s English-language media and from America, that Pakistani opinion has recently shifted against the Taliban.

As evidence for this it cites widespread revulsion inspired by a video, broadcast on television, showing a teenage girl being flogged by the Taliban. The militants’ takeover of Buner, a district only 100km (62 miles) from Islamabad, was also considered an affront by many Pakistanis. So was a speech by the government’s main Islamist interlocutor in Malakand, an ageing fundamentalist named Sufi Muhammad, in which he denounced democracy and Pakistan’s constitution as unIslamic.

There does seem to have been a mood-change in Pakistan. The country’s dominant Urdu-language media, which is mostly anti-American and sometimes sympathetic to the Taliban, has offered little condemnation of the army’s campaign in Swat. Alas, it seems unlikely that this may continue, as the civilian death-toll rises. That would make life difficult for Pakistan’s generals. But under such American pressure, it seems they will have to stay on the offensive in Swat, at least for a bit.

A turning tide? The oil price rises amid hints of economic recovery

Via The Economist, 13/5/9

THE price of oil reached over $60 a barrel during intraday trading on Wednesday May 13th, its highest point since November. Glimmers of economic recovery, such as an increase in imports from China, together with a weak dollar and tight supply forecasts have pushed up the prices of many commodities. Coffee, sugar and wheat have all hit modest peaks this week. Exporters of commodities would welcome an upturn in prices for food and other raw materials and those worried by deflation might also cheer rising prices. But consumers already battered by the economic slump, especially in poor countries, will not be pleased by rising costs.