Should America be a great power? If so, can the United States remain a great power? Christian Brose, senior editor at Foreign Policy, and Rachel Kleinfeld, president of the Truman National Security Project, debate the future of the world’s hegemon and rising heavyweights on bloggingheads.tv.

Christian Brose argues that “the greatest advantage that the United States has going forward is that as other countries become more powerful there is always going to be the feeling among their neighbors and among others in the world that they are going to view that apprehensively and I think they are going to look to the United States…to provide you with a security partner.”

“The United States could destroy ourselves if we’re not careful,” warns Rachel Kleinfeld. And she argues that the previous administration in Washington “lost more of America’s power over the last eight years than we’ve ever seen before.”

Video from blogginghead.tv.

Angering China, Taiwanese President Ma Ying-jeou announced yesterday that the Dalai Lama will visit southern Taiwan next week. Beijing is always irritated when the Dalai Lama, the Tibetan spiritual leader, travels abroad and the government often issues strong rebukes to foreign hosts. Last November Mr. Ma stopped the Dalai Lama from coming, but Mr. Ma is under pressure at home with rising anger across Taiwan over the government’s response to the recent typhoon.

The visit follows a marked improvement in cross-strait relations – the hallmark of Mr. Ma’s first 15 months in office. With direct tourist flights, shipping links and strong bilateral trade, the ties are arguably better than they have been in 60 years.

The Dalai Lama’s stop will complicate dealings between Beijing and Taipei and could threaten Mr. Ma’s progress in warming relations. But Beijing has lately demonstrated greater understanding of Taiwan’s domestic politics, and so far the opposition party in Taiwan (members of the opposition reportedly invited the Dalai Lama) seems to be receiving the brunt of China’s ire. Rapprochement is not out of the question, but it won’t be easy.

Photo from AFP.

On Tuesday, South Korea launched its first rocket but failed to put the satellite in its planned orbit. Russia helped build the rocket after the United States refused due to worries that a regional arms race could take off. “With all its neighbors – China, Japan and North Korea – pursuing space programs, South Korea has been eager to have its own.”

South Korea and its northern neighbor are not the only ones with ambitions to reach space and contend with the well-established programs. Contenders in the new global space race also include Iran and Brazil. Russia has successfully put the most payloads into orbit in the last decade with the US close behind. China now launches more rockets than Europe and Japan and India send up less than five a year on average.

Images from The Economist and Jason Lee for Foreign Policy.

Back in 2007, Niall Ferguson and Moritz Schularick wrote about “Chimerica” or the “symbiotic economic relationship” developing between China and the United States in International Finance. “Not only has plentiful Chinese and Asian labor increased global returns to capital; Chinese excess savings have also depressed US and global interest rates.” China did the saving and lending and America did the spending and borrowing – a seemingly perfect marriage.

In the most recent issue of Newsweek International, Niall Ferguson, a professor at Harvard University and author of the The Ascent of Money, says that in the past Chimerica looked like “a marriage made in heaven: both economies grew so fast that they accounted for about 40 percent of global growth between 1998 and 2007.” But the question now is “whether or not this marriage is on the rocks.”

“It’s a bit like one of those marriages between a compulsive saver and a chronic spender,” he writes. “Such partnerships can work for a certain period of time, but eventually the penny-pincher gets disillusioned with the spendthrift.” Beijing feels as though the country has enough US government bonds and is worried about America’s loose fiscal policy.

China may begin to “go it alone” and increase domestic consumption. “So a post-Chimerican China needs to be not only an empire, but also a consumer society…The global implications of this divorce are huge.” Will cooperation give way to competition? Will a strategic rivalry develop?

“We are a very long way from outright warfare, of course. The tectonic plates of geopolitics don’t move that fast. But the danger signs are there. In a succession of official and semi-official statements, Chinese spokesmen have signaled their interest in a substitute for the dollar in the form of International Monetary Fund Special Drawing Rights, or even gold. At the very least, a gradual increase in the share of euros and yen in Chinese reserves must surely be in the cards. But they could go further than that. It’s not impossible that, at some point within the next five to 10 years, the Chinese will feel ready to remove their capital controls and allow their own currency, the renminbi, to develop as a freely convertible international currency. At that point, the Chimerican marriage will be over. Not too surprising, really. As the name implied, such an unbalanced relationship was always something of chimera.”

The video above is Mr. Ferguson speaking at the Carnegie Council for Ethics in International Affairs last year about the global financial crisis and its implications. For his entire speech and a discussion on Chimerica, see the Carnegie Council’s coverage.

America’s decline is a false prophecy. Writing in the latest issue of Foreign Affairs and yesterday’s International Herald Tribune, Josef Joffe, co-editor of Die Zeit and a fellow at the Hoover Institution, argues that even though it is fashionable again to speak of America’s fall and the rise of others, the United States will remain the world’s default power for years to come.

The story of America’s decline is everywhere, but according to him the tale is wrong. “The history of declinism shows that doom arrives in cycles, and what comes and goes, logically, does not a trend make,” he writes. “Today, as after past prophecies of imminent debility, the United States remains first on any scale of power that matters – economic, military, diplomatic or cultural – despite being embroiled in two wars and beset by the worst economic crisis since the Great Depression.”

“Never before in modern history have the gaps between great powers been so wide.” The US economy is worth three times as much as the world’s second largest economy, Japan, and it’s almost as large as the combined total of the four closest competitors, Japan, China, Germany and France. And Washington’s defense spending is nearly half the globe’s total military expenses – no one else comes close.

The United States will also retain its position and international role because of its “warrior culture” and “unmatched research and higher-education establishment.” America’s world-renowned universities and research and development outlays will enable the country to project power in the future.

“The United States is the default power because there is nobody else with the requisite power and purpose. The default power does what others cannot or will not do.” It’s hard to imagine any other country defending common goods.

But what about the rising powers?

While it is the most touted emerging economy, “China, it seems, still has a way to go before it can dethrone the United States.” Beijing will face myriad challenges, including economic reforms, social cohesion and demographic deterioration. “Estimates that China’s economy will grow by six percent in 2009 are another cautionary tale. China’s growth has dropped by half from a historical high of almost 12 percent in 2007, which serves as a warning that its miraculous growth is foreign made – China is a place where the rest of the world essentially rents workers and workspace at deflated prices and distorted exchange rates.”

Don’t believe all the hype and hysteria, America isn’t going anywhere. “Gainsayers will still dramatize China’s growth rates as a harbinger of a grand power shift. But as the 21st century unfolds, the United States will be younger and more dynamic than its competitors.”

If this is all true, maybe we should rename this blog. Perhaps we can call it America’s Lasting Power.

Image from The New York Times Magazine.

The question is:  Was it the right for the United States to announce its withdrawal from Iraq in order to focus on the war in Afghanistan? 

See this link for a video on the bomb attacks in Iraq.  Attacks in Iraq. Source: NYTimes

Arguments on both sides of the issue are convincing.  Obama got elected by single-mindedly attacking Bush’s policy on Iraq including, until recently, the “surge,” which dramatically reduced internecine violence in that country.  Now, just as he must do on health care reform, the President has to follow through on his election pledges or Moveon.org and others on his left flank will never forgive him.  Yet McCain this time last  year said the job in Iraq wasn’t finished, and the Democrats took his “one hundred years” quote out of context to convince the American people that McCain planned on staying in Iraq for, well, a hundred years.  Now, Iraq may be spinning out of control again, and it may be because of a too-precipitous pullout of American forces.  Barack Obama made the point last year on the campaign trail that, unlike Hillary Clinton, he has good judgment, never supporting an invasion of Iraq, even making a speech to that effect in the Illinois state legislature, where grandstanding on the issue had no policy effect at all.  Putting aside whether we should have invaded Iraq to rid the world of this dictator with bad intentions if not bad weapons, it is a legitimate debate whether we should wind down Iraq, a country central to stability in the Middle East — given its location, ethnicity, and oil wealth, and wind up Afghanistan, arguably a mountainous backwater that has bled imperialists from Russia to Britain to the United States for centuries.  True, instability in Afghanistan triggers instability in nuclear-armed Pakistan.  I said there were good points on both sides of the issue.  I merely wish to get under the teflon a little and question the wisdom of President Obama’s foreign policy choices.

Cheng Li, senior fellow at the Brookings Institution, details the growing importance of think tanks in China in the China Leadership Monitor. Think tanks and so-called “super think tanks” are organizing conversations and international exchanges to better understand the global challenges that China will face in the coming years.

But he also notes that “in contrast to many of their counterparts in the West, where independence from the government is usually seen as a mark of credibility, Chinese think tanks often strive for strong ties to the government, and especially value a close connection with the upper stratum of the Chinese leadership.”

In the Think Tank Index published in Foreign Policy earlier this year, the Chinese Academy of Social Sciences is listed as the number one think tank in Asia.

Photo from Greg Baker/Associated Press.

Fitch Ratings, one of the three global rating agencies, published reports this week on the state of play in Russia.  The government of Russia’s BBB rating was affirmed, but the Outlook for the rating (i.e., where the rating is likely to go in the next two years) remains negative.  Russia has been more negatively affected by the global downturn than other Emerging Markets (with GDP down over 10% annualized in the first half of this year).  Fitch quotes these reasons why:

“First, it [Russia] was highly exposed to the shocks to global commodity prices and cross-border capital flows, which were of the order of 25% of GDP. Second, monetary policy was overly loose, external borrowing and domestic credit growth was excessive, and the economy was overheating prior to the crisis. Third, vulnerabilities were exacerbated by structural weaknesses including an undiversified economy, a weak banking sector, high inflation, FX mismatches on private sector balance sheets, weak institutions and a difficult business climate - which the authorities failed to address sufficiently during the boom years.”

In addition, Fitch banking analysts expect non-performing loans at Russia’s banks to top off at 25% of total loans, up from 14% in June.  Under its “pessimistic” scenario, Russia’s NPLs rise to 40% and losses amount to 24% of total loans.  Press releases on the Sovereign and the banks are below.

” Fitch Affirms Russia at ‘BBB’; Outlook Negative   04 Aug 2009 7:12 AM (EDT)

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Fitch Ratings-London-04 August 2009: Fitch Ratings has today affirmed the Russian Federation’s Long-term foreign and local currency Issuer Default ratings (IDR) at ‘BBB’ with Negative Outlooks. At the same time, the agency has affirmed the Short-term foreign currency IDR at ‘F3′ and the Country Ceiling at ‘BBB+’.

“The Russian economy and sovereign balance sheet have been severely affected by the global financial crisis and, despite signs of economic and financial stabilisation since March, risks to creditworthiness remain on the downside,” says Edward Parker, Head of Emerging Europe in Fitch’s Sovereigns team.

Russian GDP contracted 10.1% y-o-y in H109, a far worse performance than in other larger emerging markets, and foreign exchange reserves (FXR) have fallen by around USD200bn over the past 12 months. The severe impact of the global crisis on Russia reflects three sets of factors. First, it was highly exposed to the shocks to global commodity prices and cross-border capital flows, which were of the order of 25% of GDP. Second, monetary policy was overly loose, external borrowing and domestic credit growth was excessive, and the economy was overheating prior to the crisis. Third, vulnerabilities were exacerbated by structural weaknesses including an undiversified economy, a weak banking sector, high inflation, FX mismatches on private sector balance sheets, weak institutions and a difficult business climate - which the authorities failed to address sufficiently during the boom years.

Fitch forecasts Russia’s real GDP to decline 7% in 2009, before increasing 3.5% in 2010, helped by the inventory cycle, base effects, higher oil prices and a large fiscal stimulus. However, the length and depth of the recession is a downside risk and will have implications for bank asset quality, public finances and, potentially, political pressures on the Russian authorities. Fitch views the banking sector as a key credit weakness. In its base case, the agency projects impaired loans to increase to 25% of total loans by end-2009, requiring recapitalisation of at least USD22bn in addition to the USD24bn injected since Q308. The central bank faces a challenge in providing sufficient liquidity to the banking sector, while reducing inflation to single-digits and avoiding excessive rouble volatility.

The Russian private sector faces maturing external debt payments of USD137bn this year, which may be difficult to refinance in current market conditions. Fitch estimates the roll-over rate was 64% in Q109. Capital outflows and the dollarisation of household bank deposits have eased since the completion of the rouble devaluation process in February, but could re-emerge in the event of renewed financial stress. Nevertheless, overall the country has a strong external liquidity position, with FXR of over USD400bn, and it is a net external creditor to the tune of 17% of GDP at end-2008, compared with a net debtor position for the ‘BBB’ range ten-year median of 13%.

Public finances are a key sovereign rating strength. General government debt was only 8% of GDP at end-2008, well below the ‘BBB’ range 10-year median of 35%. Moreover, Russia has an aggregate USD184bn in its Reserve Fund (RF) and National Wealth Fund (at end-June, equivalent to around 15% of projected 2009 GDP) providing a strong liquidity position to finance budget deficits and to run counter-cyclical fiscal policy. However, Fitch forecasts the recession, fall in oil prices and anti-crisis measures to cause the federal budget to swing from a surplus of 4.1% of GDP in 2008 to a deficit of 8.5% in 2009 and 6% in 2010. Even with a return to the eurobond market next year, this will cause the RF to be depleted in 2010 and require significant fiscal consolidation over the medium-term.

A renewed deterioration in global economic prospects, oil prices and risk appetite leading to a material weakening in the sovereign balance sheet or macroeconomic instability could result in another downgrade (Fitch downgraded Russia’s ratings by one notch on 4 February 2009). Negative shocks from the banking sector or elevated financial pressures from low roll-over rates on external debt or large-scale capital flight would also be negative for the ratings. Furthermore, a failure to narrow the budget deficit, and a consequent rapid increase in government debt and depletion of the sovereign wealth funds could lead to downward pressure on the ratings in the medium-term. In contrast, a material easing of a combination of these risks could see the Outlooks revised to Stable.

Contacts: Edward Parker, London, Tel: +44 (0)20 7417 6340; David Heslam, +44 (0)20 7417 4384.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:  peter.fitzpatrick at fitchratings.com.”

 

“Fitch Ranks 57 Russian Banks by Loss Absorption Capacity  
14 Aug 2009 5:07 AM (EDT)

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Fitch Ratings-London/Moscow-14 August 2009: Fitch Ratings released a report today ranking 57 rated Russian banks based on their loan loss absorption capacity. Fitch considers this capacity to be currently weak at 10 of the banks reviewed, although most of the 10 could likely rely on capital support from shareholders, and moderate at a further 14.

The extent of Russian banks’ asset quality deterioration, their loss absorption capacity and contingency recapitalisation plans are likely to be the main drivers of rating actions over the next 12 to 18 months. Fitch-rated banks reported an average 14% impaired loans (5% non-performing and 9% restructured) at 1 June 2009, up from 10% (3% and 7%) at 1 March.

“However, management figures prepared at a still relatively early stage of the credit downturn are unlikely to fully capture the eventual full extent of asset quality problems,” says Alexander Danilov, Senior Director, Fitch’s Financial Institutions group in Moscow. “The gradual deterioration of banks’ asset quality metrics is likely to continue during the second half of 2009 and into 2010.”

Fitch had previously stated that it expects impaired loans at Russian banks to reach 25% in a base case scenario, resulting in ultimate loan losses of 12.5%. Under a more pessimistic scenario, impaired loans could reach 40% resulting in loan losses of 24%.

Fitch ranked the loan loss absorption capacity of the 57 rated Russian banks to demonstrate their relative vulnerability to loan losses. The agency assessed the banks’ loss absorption based on the maximum reserves to loans ratio they could have sustained at 1 June 2009 without breaching minimum regulatory capital requirements. However, Fitch notes that a lower or higher loss absorption capacity, as defined by this measure, does not automatically mean that a bank is more or less vulnerable to potential loan impairment, as credit losses at individual banks may significantly diverge from Fitch’s average sector assumptions.

For 10 of the 57 banks - VTB24, Rossiya, Bank of Moscow, Swedbank (Russia), VTB, Moscow Bank for Reconstruction and Development, AK Bars, Rosbank, Orgresbank and Unicredit (Russia) - the maximum reserves/loans ratio is below 10%, and Fitch thus regards these banks’ loss absorption capacity as currently weak. However, Fitch notes that the capacity of two of these banks - Bank of Moscow and VTB - should strengthen significantly as a result of upcoming equity injections, and that most of the other eight banks also have relatively strong shareholders, which the agency would expect to contribute new capital in case of need. Fourteen of the banks reviewed had moderate loan loss absorption capacity (a maximum reserves/loans ratio of 10%-15%), while capacity was significant at 14 banks (15%-20%), solid at 11 (20%-32%) and strong at eight (more than 32%).

Banks’ loss absorption capacity has increased significantly in recent quarters as they have received new capital, albeit mainly in the form of subordinated debt, and cut back on loan growth. However, this capacity still remains moderate on a sector basis relative to potential credit losses.

“The recently approved government programme to support banks’ tier 1 capital, if successfully implemented, could help to make recapitalisation a manageable process,” says James Watson, Managing Director, Fitch’s Financial Institutions group, “Defaults would still be possible, in particular at banks with major asset quality or corporate governance failures, although recent government actions suggest a determination to avoid destabilising, unmanaged failures at larger institutions.”

The report, entitled ‘Russian Banks: Measuring Their Loss Absorption Capacity’, focuses mainly on asset quality deterioration trends and banks’ loss absorption capacity. It follows and expands on the July 2009 presentation, entitled ‘Asset Quality Problems Weigh on Russian Bank Ratings’, which provided a summary of Fitch’s sector wide credit loss expectations and recapitalisation requirements. The report and presentation are available at www.fitchratings.com.

Contacts: Alexander Danilov, James Watson, Moscow, Tel: +7 495 956 9901.

Media Relations: Marina Moshkina, Moscow, Tel: +7 495 956 9901, Email:  marina.moshkina at fitchratings.com; Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email:  hannah.warrington at fitchratings.com.”

Dilma Rousseff, the less-than-glamorous heir-apparent to Brazil’s leftist President Lula, is being accused of exerting pressure on a government official to whitewash an investigation into a political ally.  See FT article on the subject.  These corruption investigations snarl Brazil’s Congress all the time, and some blow over, while others balloon.  What will happen to this one could affect Dilma’s chances in the presidential election of 2010, which is getting under way.  Dilma, former guerrilla tortured under Brazil’s military regime in the 1970s, Lula’s chief of staff, energy minister and chairwoman of Petrobras, Brazil’s part-state-owned energy company, may not coast as easily into the Brazilian presidency as Barack Obama did into the White House.  Stay tuned…

The FT reports today that China is extending a much-needed $1 billion loan to the government of Ecuador, one of the worst-run countries on the planet, as a downpayment on oil deliveries to the Asian juggernaut.  Ecuador has oil, as well as other assets, including in tourism (for example, the Galapagos Islands, the Andes, and charming Quito), but it has been mismanaged by elites for decades, leaving its indigenous population impoverished and its debt in default.  China needs oil.  These countries need each other.  Read an earlier post on China and Latin America.