The problem with all this issuance materializing is that it completely cannibalized demand

TO BE NOTED: From Bloomberg:

"World Bank Bonds Show What Happens in State Rescues (Update1)

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By Gabrielle Coppola

May 1 (Bloomberg) -- Federal guarantees by 13 countries on more than $400 billion of financial company bonds are punishing the AAA-rated World Bank Group with record borrowing costs -- an indication of what can go wrong when government gets in the way.

The Washington-based World Bank, founded in 1944 to rebuild economies after World War II, sold $6 billion of three-year notes March 26 priced to yield 30 basis points more than the benchmark for such borrowings. The so-called spread was the widest for a dollar-denominated bond offering by the supranational lender, said George Richardson, the institution’s head of capital markets, in an interview.

Just seven months ago, the World Bank paid a record low 35 basis points less than the midswap rate, a market measure for exchanging fixed- and floating-rate cash flows. The sudden rise in World Bank relative bond yields is an unintended consequence of sales of taxpayer-backed debt by more than 50 companies, including Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. While these special offerings were designed to bring stability to the credit markets after $1.4 trillion in losses and writedowns in the past 28 months, no one realized the World Bank would be depreciated by such government policies.

“Governments started announcing guarantees for their banks, and then the whole world changed,” said Richardson, a former Goldman Sachs banker.

Rising Sales

Rising risk premiums are also affecting the Washington- based Inter-American Development Bank, which lends to Latin American and Caribbean countries, and Germany’s state-owned Kreditanstalt fuer Wiederaufbau, whose credit supports housing, education and small business.

Banks and financial companies worldwide sold 320 billion euros ($424 billion) of state-guaranteed debt since October, denominated in euros, dollars and U.K. pounds, according to Leef Dierks, a fixed-income analyst at Barclays Capital in Frankfurt.

They may issue a total of 900 billion euros in bonds for all of 2009, Dierks said.

The total includes $235 billion of dollar-denominated debt in the U.S. with backing from the Federal Deposit Insurance Corp. as of yesterday, according to data compiled by Bloomberg.

Lenders backed by multiple governments, known as supranationals, have the flexibility to borrow billions in multiple currencies and at any part of the yield curve, making their bonds among the most liquid securities.

Financial Acumen

The financial acumen of the World Bank, which pioneered the first use of derivatives to obtain Swiss francs and German marks by exchanging cash flows with International Business Machines Corp. in 1981, hasn’t protected the institution from widening borrowing spreads.

Average yields relative to midswap rates on dollar- denominated supranational debt rose to 164.4 basis points, as of yesterday, from 46.8 basis points at the start of October, according to the Credit Suisse Liquid U.S. Corporate Sovereign Spread Over Swap index.

The midswap index, which contains bonds sold by the World Bank and the IADB, reached a record-high of 217.4 basis points on Jan. 2, Credit Suisse data show. A basis point is 0.01 percentage point.

A benchmark for borrowers, the midswap index lies between the bid and asking yields on contracts exchanging fixed for floating interest-rate cash flows.

Double Borrowings

The World Bank, whose projects now include financing AIDS prevention in Botswana and education reforms in Brazil, will more than double borrowings to as much as $35 billion this year to help provide food, health and education services through the International Bank for Reconstruction and Development, Richardson said.

Robert Zoellick, the bank’s president, recently announced plans for $100 billion of new loans over the next three years to relieve the recession. The lender issued $1.5 billion of five- year notes on Oct. 1 at 35 basis points below the midswap rate, a record low for that maturity, according to Richardson.

The International Monetary Fund, a Washington-based agency of the United Nations that monitors the global economy, may sell its first bonds to China and Brazil to raise money to combat the downturn. IADB borrowings will total $15 billion to $20 billion this year, up from $6 billion to $7 billion in 2007 and $11 billion in 2008, said Soren Elbech, the bank’s treasurer.

“There is a major crisis going on, and institutions like ourselves have been asked to step up to the plate and use our financial strength and pass it on to the regions that we cover,” Elbech said. “The IADB is heeding that call.”

Colombia’s Borrowing Costs

The benefit provided by development bank lending compared with borrowing private capital has increased as credit markets seized up, sending yields relative to Treasuries on emerging market debt to a six-year high.

Colombia, which received a four-year, $4 billion credit line from the World Bank last month, sold $1 billion of 10-year notes at 458.5 basis points above Treasuries April 14. That compares with 10-year notes Colombia sold in July 2006 at 229 basis points over Treasuries, Bloomberg data show.

Developing countries “are all in a position where they’re not going to welcome an increase in borrowing costs,” said John Williamson, a senior fellow at the Peterson Institute for International Economics in Washington. “But it’s not as bad as not getting the credit you need.”

While development lenders’ spreads more than tripled since October, the yield premiums on World Bank and other supranationals’ bonds have narrowed since their sale as corporate credit markets begin to heal.

Passed On

The three-year notes sold by the World Bank on March 26 rose to 100.4 cents on the dollar as of yesterday to yield 50.8 basis points more than Treasuries, according to Bloomberg data. That’s down from 82.2 basis points when they were issued.

Spreads on the IADB’s five-year notes sold April 13 fell to 109.8 basis points over Treasuries as of yesterday, from 140.25 basis points at their sale.

Increased financing costs are being passed to borrowers, according to Horst Seissinger, head of debt capital markets at Frankfurt-based KfW, which has a direct guarantee from the German government.

“What we are doing is what all the banks have to do,” he said. “The interest rates for the loans we grant to our customers have to reflect the re-pricing we have seen in capital markets over the last few months.”

Nathalie Druecke, a spokeswoman for the bank, said she couldn’t specify which projects are paying more because of the cost increase.

Energy-Efficiency Projects

KfW’s increased borrowing costs aren’t reflected “on a one to one basis,” in its lending, she said.

Development lenders face higher costs than the AAA-rated World Bank. IADB, which last month said it’s supporting $2 billion in Latin American and Caribbean energy-efficiency projects with the Export-Import Bank of Korea, paid 83 basis points more than the midswap rate on notes sold April 13 and due in 2014, according to Bloomberg data. That compares with 24 basis points below the benchmark on similar debt sold in February 2008.

KfW, a sovereign agency, sold $4 billion of notes due 2014 on March 3 priced to yield 162.8 basis points more than similar- maturity Treasuries, or 95 basis points over midswaps. The bank paid 83.5 basis points more than Treasuries, or 20 basis points less than the midswap rate on five-year debt sold in July, Bloomberg data show.

Supranational borrowers’ costs “went from the best of times to the worst of times within a matter of weeks,” said Daniel Shane, head of Morgan Stanley’s supranational and sovereign debt syndicate in London. “The problem with all this issuance materializing is that it completely cannibalized demand.”

Unlock Credit Markets

Banks began issuing government-backed debt on Oct. 22, when Barclays Plc of London sold 3 billion euros of three-year notes. The guarantees were intended to help unlock credit markets, which had been effectively shut since the bankruptcy of Lehman Brothers Holdings Inc. a month earlier.

New York-based Goldman Sachs opened the market for FDIC- backed debt on Nov. 25, issuing $5 billion of three-year notes. With top AAA rankings, they were priced to yield 200 basis points more than similar-maturity Treasuries, according to Bloomberg data.

Bank of America, based in Charlotte, North Carolina, is the biggest user of the FDIC program, raising $41.7 billion of dollar-denominated debt since Dec. 1, Bloomberg data show.

Michael DuVally, a spokesman for Goldman Sachs, and Scott Silvestri, a Bank of America spokesman, each declined to comment.

Temporary Program

“Credit market conditions have improved in response to government stabilization efforts such as the TLGP,” Andrew Gray, an FDIC spokesman, wrote in an e-mailed statement.

“The FDIC has taken steps to reduce reliance on this program, including establishing the deadline of Oct. 31, 2009 for any new issuances,” Gray wrote. “Clearly this is not a program that will exist in perpetuity.”

Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010, prompting private banks to further curtail lending, the International Monetary Fund said in an April report.

The IADB, which may approve a record $12 billion of loans to finance projects and enhance social programs in 2009, has raised lending rates, Elbech said. He wouldn’t elaborate.

Borrowers from the World Bank are still paying about the London interbank offered rate, the same as a year ago, according to Richardson. The institution’s cost of new debt hasn’t yet affected the overall average yield on existing bonds, Richardson said.

Libor is the rate banks say they charge each other for loans. It was set at 1.02 percent yesterday for three-month credit.

“If we’re going to be issuing at these wider, above-Libor spreads for a while, then you’ll see that lending rate move slowly higher,” he said.

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net"

not only to recover from instability and natural disasters but to prosper, because of new, favourable US trade legislation

TO BE NOTED: From ReliefWeb:

"UN envoy for Haiti urges speedy disbursal of donor pledges

Source: United Nations News Service

Date: 17 Apr 2009

Hailing pledges worth nearly $325 million for Haiti's reconstruction and development made at a donor conference in Washington last week, the top United Nations envoy to the impoverished country today expressed hope the funds will be quickly disbursed.

"I hope that commitments made at the meeting will materialize very rapidly to begin implementation of plans presented by the Haitian Government," Hédi Annabi, Secretary-General Ban Ki-moon's Special Representative, said.

He added that the goal was "not only to respond to the needs for immediate reconstruction after the storms of 2008, but also to attract indispensable investments that would help put the country on a trajectory of sustainable development."

The Special Representative, who also heads the UN Stabilization Mission in Haiti (MINUSTAH), stressed that improving the economic and social situation was essential to consolidating stability in the country.

He said that he was impressed not only by the results of the conference, but also by the strong attendance there, including high officials of 28 bilateral and multilateral partners, as well as the Secretary-General.

"The engagement of donors is a good beginning, particularly in the current international economic context," Mr. Annabi said.

"This involvements illustrates the political will of the international community in Haiti to work together to encourage investment and the creation of employment in the country," he said.

Secretary-General Ban, who visited the country with former United States President Bill Clinton last month, said at the conference that the country stands a better chance than almost any emerging economy, not only to recover from instability and natural disasters but to prosper, because of new, favourable US trade legislation.

To lock in the gains, however, he said that the Government requires additional short-term technical and financial assistance.

"I firmly believe that Haiti is poised to make more progress over the next two years than it has made in the past two decades," Mr. Ban told a major donor conference hosted by the Inter-American Development Bank in Washington.

Reasserting that the country is now at a turning point, a message he has been stressing since his visit there last month, he added that "for all of us, this is the moment, a break-out moment, to help one of the poorest nations lift itself toward a future of real economic prospects and genuine hope."

Following many years of unrest and high crime, last summer's storms have left $1 billion – equivalent to 15 per cent of Haiti's gross domestic product (GDP) – of damage in their wake.

The global recession has further eroded the country's socio-economic situation, with remittances, which bring three times the amount of funds to Haiti as international aid, plummeting 14 per cent."

Reference map of Haiti

Nobody has worked out what infrastructure would be appropriate for the HOPE opportunity to succeed

TO BE NOTED: from the Guardian:

"Beyond the begging bowl

Haiti need not be a failing state. Its problems are fixable if only the world community co-ordinates

Comments (27)

• 
• • Paul Collier in Port-au-Prince
  • The Guardian, Friday 3 April 2009
  • Article history

Haiti is on all the lists of "failing states". Yet the persistence of its troubles demonstrates not so much their intractability as the past incompetence of the international community in helping to tackle them. Haiti should not be a failing state: its fundamentals such as neighbourhood are remarkably favourable. Its problems are fixable if the international community moves beyond gestures to a co-ordinated use of a range of policies: security, trade, governance and aid.

Like most failing states, Haiti is structurally insecure and periodically torn apart by political violence. It has one of the fastest rates of population growth in the world and a chronic shortage of jobs. Unsurprisingly, with few jobs and agricultural incomes in decline, the aspiration of young Haitians has been emigration. The last year has compounded these problems: the world food crisis toppled the government; the country was hit by four hurricanes and because of the US recession, 30,000 illegal immigrants are about to be repatriated.

International policies have been unco-ordinated, yet fortuitously, the most difficult have already been put in place. Thanks to $5bn and 9,000 Brazilian troops who - under the auspices of the UN - have been keeping the peace, there is now effective security. Brazilians turned out to be just the right military for this task. Previous peacekeepers had baulked at entering Cité Soleil. When the Brazilians saw it, their reaction was: "That's a favela: it's only seven blocks!"

Haitian emigration has enabled a trade policy to develop. Firms in the bottom billion need privileged access to our markets and this is usually difficult to negotiate. The large Haitian diaspora in America has become an effective political lobby: in 2006 Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act (HOPE), which has given Haiti the best trade deal on earth, with duty-free, quota-free access and generous rules of origin guaranteed for a decade.

The security provided by peacekeeping and the market access provided by HOPE are a window of opportunity: potentially Haiti could now break into the US garments market. In Bangladesh the sector provides more than 2m jobs; in Haiti, a 100,000 jobs would be transformative.

The remaining policy planks are governance and aid. The governance agenda for exporting garments is not daunting - if the Bangladeshi government can do it, so can the Haitian. The governance of ports and customs needs improving, and the export zones need exemptions from legislation that prevents the private generation of electricity and multi-shift working. These changes would have political costs, but if they create jobs, the government is willing to make them.

But security, market access and governance are not enough: manufacturing needs infrastructure. Haiti's two existing garments clusters demonstrate that infrastructure will be decisive. The cluster in Haiti's capital, Port-au-Prince, is struggling whereas that in Ounaminthe, in the remote north-east, is thriving. The explanation is that although Ounaminthe is remote from the rest of Haiti, it is right on the border with the Dominican Republic. The garment manufacturers get their electricity by plugging into the Dominican Republic power grid, and export their products through its roads and ports. Infrastructure is needed for export zones in the major population centres.

Infrastructure is expensive and so it needs aid, especially now that international private finance has dried up. But to date, even when they chose infrastructure, donors neglected the obvious. Trapped into a mentality of projects, they ignored the issue of maintenance, so the same infrastructure has been built again and again. One road has been rebuilt three times in 25 years, the last time with a $170m loan, and now needs rebuilding again. More seriously, provision has not been linked to a larger strategy. For example, in Port-au-Prince there is a donor plan for electricity, yet because of the insistence on using new equipment, the cost of the power it would produce is triple that paid by the Chinese firms with which Haiti must compete. Nobody has worked out what infrastructure would be appropriate for the HOPE opportunity to succeed.

Security, market access, governance and aid: each is dependent upon a different actor yet all are needed for success. Unless the donors can credibly commit to a more strategic programme, it would be quixotic of the government to incur the political costs of policy reform. Thanks to the recent roadshow, led by Ban Ki-moon, Bill Clinton, Susan Rice and the rapper Wyclef Jean, Haiti now has the attention of the international community. In April there is a rare opportunity to address such interdependence: all the key actors will be convened by the Inter-American Development Bank. What is needed is not to pass round the begging bowl, but to set out a list of commitments which, in combination, will turn HOPE from a tacky acronym into an inspiring reality.

• Paul Collier is professor of economics at the Oxford University"