16 May, 2008 | No comments

Reformer Sarkozy waves goodbye to Chirac

A NEW era opened in French politics yesterday as Nicolas Sarkozy took over as president from Jacques Chirac and pledged a period of major reforms to lift France out of its economic and social malaise.

In a symbolic handover of power, Mr Chirac, 74, passed on the launch codes to France’s nuclear arsenal and briefed his 52-year-old successor on current agenda items before being driven away from the Elyse Palace for the last time after 12 years in residence.

A 21-gun salute rang out from the esplanade of the Invalides across the River Seine to mark Mr Sarkozy’s assumption of the presidency as the results of his election victory were read out to invited guests in the Elyse’s ornate main reception hall.

Mr Chirac yesterday confirmed plans to set up a foundation later this year devoted to “dialogue between cultures and sustainable development”.

However, his presidential immunity expires on 16 June and judicial officials have said it is “most probable” he will be interviewed as a witness in an investigation into a kickback scheme for paying workers of his RPR party during his 18-year stint as mayor of Paris.

In a ten-minute televised inaugural address, Mr Sarkozy said France needed “to take risks and follow initiatives” and called for change and national unity.

He added that the country also needed to “rehabilitate the values of work, effort, merit and respect” and defeat intolerance.

Mr Sarkozy inherits a country divided over its future and beset by sluggish economic growth, with unemployment of more than 8 per cent and social tensions, especially in the deprived, multi-ethnic Paris suburbs.

He said his first decision was to make all schools read a letter home written by a young Second World War resistance fighter.

He said he could never read Guy Moquet’s letter - written before his execution in 1941 at the age of 17 - without being “profoundly moved”, and said it was essential children knew the horror and barbarism of war.

Mr Sarkozy said: “The people have given me a mandate; I will carry it out scrupulously, with the desire to be worthy of the trust the French have placed in me. There is a demand for change. Never have the risks of inertia been so great for France as they are now in this world, where everyone is trying to change quicker than others, where any delay can be fatal.”

The new president finished a whirlwind first day by jetting to Berlin to meet Angela Merkel, the German Chancellor, to discuss his proposals for relaunching the European constitution rejected by French voters in a referendum two years ago.

Mr Sarkozy is expected to waste no time starting reforms in his first 100 days in office, including tax cuts, trade union rules, new controls on immigration and tougher sentencing rules for repeat offenders.

Mr Chirac, once a rival of Mr Sarkozy, urged people to remain “united” under his successor.

ENTENTE CORDIALE ONCE AGAIN

TWO historically rocky relationships for the new French president showed signs of thawing as Nicolas Sarkozy took office yesterday.

Jacques Chirac, Mr Sarkozy’s former mentor turned arch rival gave him a cordial, almost friendly wave as he left the Elyse Palace and he received a public kiss on the lips from his once-estranged wife Cecilia.

Mr Sarkozy headed for his wife moments after making his first speech as head of state and affectionately stroked her face. The 49-year-old former model, conspicuously absent from his side during the presidential campaign, appeared surprised at the gesture, but later she kissed him on the lips after a brief hesitation when he went to peck her on the cheek.

Mrs Sarkozy left her husband for an advertising executive in 2005 but the couple were reunited in January 2006. The question now is whether the fiercely independent former PR executive will move into the Elyse Palace with her husband. She once said: “I don’t see myself as a first lady. It bores me.”

16 May, 2008 | No comments

Outlook uncertain for interest vote

Heres hoping they can kiss and make up. The nine men and women on the Bank of Englands Monetary Policy Committee (MPC) will meet this morning to begin their interest rate deliberations still bearing the bruises from their meeting last month.

Januarys vote broke all the rules. Paul Tucker, the MPCs arch hawk, voted against raising rates, concerned that the market might get ahead of itself. More external members voted for tighter policy than Bank officials did. For the first time, Mervyn King, the Governor, used a deciding vote to push through higher rates.

Today, it all kicks off again, as the MPC meets to review data from the past four weeks in preparation for next Thursdays decision. Here, we analyse whats on their agenda.

Growth: strengthening
GDP in the fourth quarter was reported as growing 0.8 per cent by the Office for National Statistics last month. The 3 per cent year-on-year rate was the strongest in two years.

Part of the strength came from retailing, which turned out to have had a healthy Christmas. Sales volumes rose by 1.1 per cent in December. The CBI said that sales were even stronger in January, much to the surprise of retailers.

Manufacturing picked up in November by 0.3 per cent, almost reversing Octobers dip.

Prices: will the shock fade?
This months big shock was inflation hitting 3 per cent on the consumer price index, and reaching a 15-year-high of 4.4 per cent on the retail price index. Any higher, and the Governor would have had to write an explanatory letter to the Chancellor. Although the Bank expects inflation to fall back this year as lower oil prices feed into the annual figures, the psychological effect of a spike in inflation risks boosting expectations of higher prices, a major headache.

The Banks other chief concern is wage settlements. The official data, a few months out of date, show that average earnings including bonuses rose by a benign 4.1 per cent in November, unchanged from October. However, unofficial data point to higher settlements in the crucial January pay-bargaining period.

However, January brought the first signs that the housing market may be softening in response to higher interest rates. Nationwide said that prices rose by a modest 0.3 per cent in January, the lowest rise since May. Mortgage approvals sank sharply in December to 113,000, from 129,000 in November.

The international economy
Trade-weighted sterling has risen by more than 1.5 per cent since the increase in interest rates in January, and at one point sterling rose above the $1.99 mark. Later in the month, US growth came in at an annualised 3.5 per cent in the fourth quarter, higher than expected and the best rate since the start of 2006.

Rate verdict: uncertain
Last months rate rise, the third in six months, was passed by the slimmest of margins on the MPC, and so most economists now expect the committee to sit on its hands this time. However, rates will rise again if data stay hawkish, and five out of 62 economists polled by Reuters forecast higher rates next week.

Bank thinking

In the past month, Mervyn King has struck a balanced tone. Despite voting to raise rates in January, he said the MPCs central view was still that inflation is likely to fall back in the second half of the year, possibly quite sharply. However, he also gave warning against inflationary pay rises. Andrew Sentance, an external MPC member, has spoken of the need to keep demand constrained and inflation expectations well-anchored. Tim Besley, who has voted three times in five months to raise rates, has said he is concerned that inflation will not fall as fast as the Bank is hoping. David Blanchflower denied being a dove, saying: I am as hawkish as anyone about keeping inflation on target.

16 May, 2008 | No comments

Proxy war could soon turn to direct conflict, analysts warn

The growing US focus on confronting Iran in a proxy war inside Iraq risks triggering a direct conflict in the next few months, regional analysts are warning.

US-Iranian tensions have mounted significantly in the past few days, with heightened rhetoric on both sides and the US decision to establish a military base in Iraq less than five miles from the Iranian border to block the smuggling of Iranian arms to Shia militias.

The involvement of a few hundred British troops in the anti-smuggling operation also raises the risk of their involvement in a cross-border clash.

US officers have alleged that an advanced Iranian-made missile had been fired at an American base from a Shia area, which if confirmed would be a significant escalation in the “proxy war” referred to this week by General David Petraeus, the US commander in Iraq.

“The proxy war that has been going on in Iraq may now cross the border. This is a very dangerous period,” Patrick Cronin, the director of studies at the International Institute for Strategic Studies, said.

Iran’s leaders have so far shown every sign of relishing the confrontation. The supreme leader, Ayatollah Ali Khamenei, declared yesterday that American policies had failed in the Middle East and warned: “I am certain that one day Bush and senior American officials will be tried in an international court for the tragedies they have created in Iraq.”

In such circumstances, last week’s Israeli air strike against a mystery site in northern Syria has triggered speculation over its motives. Israel has been silent about the attack. Syria complained to the UN security council but gave few details. Some say the target was Iranian weapons on their way to Hizbullah in Lebanon, or that the sortie was a dry run for a US-Israeli attack on Syria and Iran. There is even speculation that the Israelis took out a nuclear facility funded by Iran and supplied by North Korea

The situation is particularly volatile because the struggle for influence threatens to exacerbate a confrontation over Tehran’s nuclear ambitions.

The US has called a meeting of major powers in Washington next Friday to discuss Iran’s defiance of UN resolutions calling for its suspension of uranium enrichment. It comes amid signs that the Bush administration is running out of patience with diplomatic efforts to curb the nuclear programme. Hawks led by the vice-president, Dick Cheney, are intensifying their push for military action, with support from Israel and privately from some Sunni Gulf states.

“Washington is seriously reviewing plans to bomb not just nuclear sites, but oil sites, military sites and even leadership targets. The talk is of multiple targets,” said Mr Cronin. “In Washington there is very serious discussion that this is a window that has to be looked at seriously because there is only six months to ‘do something about Iran’ before it will be looked at as a purely political issue.”

US presidential elections are due in November 2008, and military action at the height of the campaign is usually seen by voters as politically motivated.

Vincent Cannistraro, a former CIA counter-terrorism chief who is now a security analyst, said: “The decision to attack was made some time ago. It will be in two stages. If a smoking gun is found in terms of Iranian interference in Iraq, the US will retaliate on a tactical level, and they will strike against military targets. The second part of this is: Bush has made the decision to launch a strategic attack against Iranian nuclear facilities, although not before next year. He has been lining up some Sunni countries for tacit support for his actions.”

US and British officials have complained to Iran about the use by Shia militias in Iraq of what they say are Iranian-made weapons. The main concern is the proliferation of roadside bombs that fire a bolt of molten metal through any thickness of armour, which the officials say must have been made in Iran.

A US military spokesman in Baghdad, Major General Kevin Bergner, raised the stakes when he said the 240mm rocket that hit the US military headquarters outside Baghdad this week, killing an American soldier and wounding 11, had been supplied to Shia militants by Iran.

Gen Bergner used to work in the White House, where he was aligned with administration hawks, and his dispatch to Baghdad was seen by some as a move to increase pressure on Iran.

“There are an awful lot of lower level officers who are very angry about the deaths from explosively formed projectiles said to come from Iran. There is a certain amount of military pressure to do something about this,” said Patrick Clawson, the deputy director for research at the Washington Institute for Near East Policy. “That said, it is very difficult for us to do anything without much better evidence. In that respect, border control is a sensible solution.”

Any US decision to attack Iran would force Gordon Brown to choose between creating a serious rift in the transatlantic alliance and participating in or endorsing American actions. British officials insist that Washington has given no sign it is ready to abandon diplomacy and argue that UN sanctions are showing signs of working. They point to the resurgence in Iran of Hashemi Rafsanjani, seen as a pragmatic counterweight to President Mahmoud Ahmadinejad.

Hopes that a new war could still be avoided have also been boosted by Gen Petraeus’s claim that Iran’s covert Quds force alleged to be supporting Shia attacks on coalition forces had been pulled out of Iraq. If true, it could be that in the stand-off between the US and Iran, Iran has blinked first.

16 May, 2008 | No comments

Israel's 'invisible hand' still controls Gaza, says report

Israel continues to control Gaza, 16 months after it pulled out its settlements and military installations, with an “invisible hand” that has provoked a severe humanitarian and economic crisis, according to an Israeli human rights body.

Ending its 38-year military occupation of the Gaza Strip did not end Israeli control but simply changed the rules of engagement, charges Gisha, the Legal Centre for Freedom of Movement, in a report due to be published next week.

The organisation says that Israels control over Gazas borders, airspace, territorial waters, population registry, tax system and supply of goods means that it cannot absolve itself of responsibility for its citizens under international law.

“Its a new position made very clear in Hebrew before the courts but not something that Israel has made clear internationally,” said Sari Bashi, Gishas executive director.

“Sometimes Israeli soldiers still operate in the streets of Gaza but Israeli control of every aspect of the lives of Gaza citizens is constant, they know that their ability to do ordinary things like turn on a light or buy milk depends on decisions made by the Israeli military.”

The report details how Israel has removed some of its elements of control while significantly tightening others.

“Far from improving the economy and welfare of Gaza residents, Israeli actions since September 2005 - including severe restrictions on the movement of people and goods in and out of Gaza and an economic stronghold on the funding of civil services - have contributed to an economic and humanitarian crisis in Gaza not seen in the 38 years of Israeli control that preceded the withdrawal of permanent ground troops.”

Gisha says that Gaza has been cut off from the outside world for 42 per cent of the time since the Strip was evacuated of Jewish settlers and troops. The Rafah Crossing between Gaza and Egypt is operated by the Palestinian Authority under the supervision of European Union monitors and Israeli security officials who monitor operations with live video footage and passenger lists.

Travel through the crossing is restricted to Palestinians registered in the Israeli-controlled Palestinian population registry.

This means that foreigners may only enter Gaza via the Israeli-controlled crossing points in the north.

“Reports and internal military documents suggest that Israel has used the closure of the (Rafah) crossing to exercise pressure on Gaza residents. In the first year following the completion of its disengagement programme, Israel kept Rafah Crossing closed for 148 days.” Since June last year, when militants kidnapped an Israeli soldier, the Rafah crossing has been closed for 80 per cent of the time and, on days that it has opened, has functioned only for a few
hours.

At the same time Israel has also kept Gazas other crossings mostly closed and has withheld monies needed to pay the salaries of civil servants and to run civilian institutions.

“The results of these controls have been devastating and have helped plunge Gaza into an economic and humanitarian crisis unprecedented in nearly four decades of occupation,” says the report, seen by The Times.

Israel completely controls the import of goods into Gaza and exercises substantial control over exports from Gaza to third countries and to the West Bank.

16 May, 2008 | No comments

Hedge Funds Eye Shareholder Moves

Some hedge funds with heavy exposure to complicated, often illiquid securities likely are in for a rough ride in the next few months if investors take out their money.

Many funds’ returns have suffered. Heavy redemptions can deepen losses. The size of any exodus won’t be clear until Sept. 30, the deadline for paying August redemptions.

Some shareholders probably will bail if their funds are hurt by hard-to-price securities. That can make those securities less liquid. Many are linked to the subprime mortgage market.

The average hedge fund was up 0.37% in July, according to Hedgefund.net, which tracks almost 3,500 funds. That left them up 7.74% for the year. That beat the S&P 500 index, which returned 3.64%.

But funds whose strategies focused on the finance sector 37 funds fell an average of 3.88%. That was the worst of all sectors HFN tracks. It left that sector down 5.21% for the year.

Meanwhile, hedge funds that invested in the mortgage sector soared 13.07% on average in July.

Much of that gain was due to the few funds among a total of 15 in that sector that shorted mortgage securities, says Joel Schwab, managing director at HFN.

In May and June, mortgage hedge funds’ average returns were 0.25% and 3.64% respectively, and the range among funds was narrower.

August results won’t be reported until the month’s end at the earliest.

Hedge funds generally don’t let investors exit immediately, as mutual funds do. In the first six months of 2007, hedge fund assets rose 20.4%, to $2.59 trillion. Of that increase, $268 billion is new allocations.

Hedge fund assets have grown from $845 billion in 2003 to $2.6 trillion as of mid-2007. Mutual funds run $10 trillion.

Mortgage Meltdown

The subprime market meltdown didn’t make itself felt until the latter half of July. Several hedge funds had problems pricing instruments where the market all but dried up.

Three BNP Paribas’ funds that invested in subprime-related securities were frozen shareholders could not redeem assets because their net asset value couldn’t be calculated; there were no buyers or sellers.

Hedge funds often require shareholders to wait up to 90 days to take their money out.

Big redemptions can force hedge funds to sell ailing securities. That can push prices down more. It gets worse if a hedge fund has invested in illiquid securities.

Bear Stearns had those problems with two hedge funds. It froze redemptions. Goldman Sachs had to inject $2 billion into one of its funds.

Because of notice periods, some shareholders industrywide won’t be able to remove assets until Sept. 30 at the earliest. In the meantime, some hedge funds have to scramble to raise cash if the market doesn’t rally.

David Friedland, president of Magnum U.S. Investments which manages $500 million in hedge fund money says when hedge funds stop redemptions or can’t cover them, it often is because they can’t price a security and don’t want to risk underselling something.

“With stocks, it’s easy. There’s an exchange and you can get a price,” he said. “With debt securities, it’s different, you have to look around.”

People may prefer to invest in a hedge fund that is diversified and whose manager has been active since 1998 or earlier, Friedland says.

Those who remember Long Term Capital Management, which collapsed that year, are less likely to repeat that firm’s mistake: betting on single market sectors, expecting them to behave exactly as they had in the past.

Now, funds whose underlying instruments were linked to mortgage-backed securities will lose the most, Friedland says. They depended on the housing market staying strong.

An exodus of talent also will hurt, Friedland says.

As returns fall short of certain thresholds, many hedge funds collect zero or smaller fees. Managers and others won’t get bonuses. Many will leave. Some shareholders will follow favorite managers out.

Wider Wariness

“People got upset. Look at Bear Stearns,” said Charles Gradante, managing principal at the Hennessee Group.

Bear’s funds went under despite the firm selling some $4 billion of securities to cover redemptions.

Events like that make investors wonder whether they can always get their money out, Gradante said.

Hedge funds originally were designed to be relative return vehicles, smoothing out market volatility.

But that was before the proliferation of cheap money, complex derivatives and computer tools, which tempted more hedge investors to take risks. Many of those risks have now lost money, Gradante says.

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