Sunday, July 4, 2010

Bashing BP — When We Should Be Bashing the Corporatist State

Mises Daily: by

There has been tremendous criticism in the media of late regarding BP's response to the explosion and sinking of the Deepwater Horizon drilling rig and the subsequent spilling of millions of barrels of oil into the Gulf of Mexico.

An ABC news / Washington Post poll shows that 81 percent of those polled stated they thought unfavorably of the response by BP to the spill.Download PDF The same poll shows that nearly two-thirds of those responding favor criminal charges against BP and other companies involved in the spill.

Although I am not one to condone negligence or malice, I have no intention of adding my voice to the chorus bashing BP. After all, they are one of many companies providing fuel for our cars, generating electricity to power our homes, and enabling so many aspects of our lives today. I could not readily type this short article, and expect to send it to an editor who will read it within a few hours and let me know whether he is interested, without companies like BP.

Instead, I want to illustrate that while BP is being bashed for the company-wide effort to contain its recent spill in the Gulf of Mexico (amidst cries for government to "DO SOMETHING!"), the spill is so difficult to deal with precisely because of government intervention in the marketplace.

Government Intervention: A Major Contributor to the Mess

After first hearing about the problem BP as a company currently faces, I became curious about the positions of oil platforms in the Gulf of Mexico. I am no expert, but drilling in over five thousand feet of water sounds hard. So, I searched for something to show me where the platforms are located and found the following map, which I find useful for discussion.

Figure 1

I've seen the total number of platforms estimated at around 4,000, with up to 100 drilling rigs operating at a time. One of the interesting things to me about this map is that it shows no rigs in the eastern part of the Gulf of Mexico. It turns out this is due to a moratorium on drilling first put in place by President Bush in 1990. In 1998, President Clinton extended the moratorium until 2012. So, one government intervention has resulted in a situation in which drilling operations are constrained west of the border between Alabama and Mississippi, with a concentration of drilling off the coast of Louisiana.

Another interesting thing I noticed is that there are many platforms that are a great distance from the shoreline — particularly off the Louisiana coast. Wondering why this is the case, I did some research and found one particularly compelling explanation.

Incentivizing Risk

In 1995, President Bill Clinton signed into law the Deepwater Royalty Relief Act (DWRRA), which was "intended to encourage natural-gas and oil development in the Gulf of Mexico in waters at least 200 meters (656 feet) deep by offering royalty relief on qualifying natural gas and oil lease sales." This act has since expired, but there remain continued incentives for drilling in deep water.

For example, a report from the DOE written in 2005 states that after the conditions of the DWRRA expired in 2000

the MMS adopted a program which determines royalty relief on a lease-specific basis. Under the revised method, leases located in the same water depth may have different volumes exempt from royalty charges if the economic conditions vary. For example, if one natural gas field is more expensive to access, then it may potentially receive more royalty relief than a field in the same water depth with lower costs to access.Download PDF

In other words, the government specifically passed laws that gave the oil companies incentives to drill far offshore — that is, in deeper water where risk is presumably higher. In addition to the higher risk of accidents, the cost of solving any problems are necessarily greater in five thousand feet of water than in, say, 250 feet of water.

How much of an incentive was there to drill in deeper water? The same DOE report contains the following table.

Figure 2

It seems that it would have been downright foolish for a company to spend much effort drilling in shallow, more easily accessible regions nearer to the coastline, when by law there was a five-fold incentive for them to go out into deeper waters. Who could blame a company for trying to achieve a minimum relief volume, which would guarantee billions of dollars in royalty-free sales of petroleum and natural gas?

To see how this affected the amount of oil taken from deep waters, let's examine a second table from the same DOE report.

Figure 3

As is seen from this table, the production of crude oil in deep waters increased dramatically after the passage of the DWRRA in 1995. As of 2003, there was more than a 250 percent increase in the percentage of total oil produced in the deep-water regions of the gulf, with about 70 percent of all drilling taking place there.

It seems the DWRRA law was passed with precisely the intention of encouraging deep-water drilling, and it accomplished this goal. Unfortunately, accomplishing this goal led necessarily to higher risk and unintended consequences.

Unintended Consequences

The problems caused by the current spilling of oil into the Gulf of Mexico will certainly have tremendous impact on the residents of the coastal states, on the fishermen, on the beaches and wildlife, and not least of all on BP as a company. There are some who think BP may end up in bankruptcy. In the meantime, it seems the company is doing quite a bit to make good on promises to clean up the problem and to take care of damages.

"Congress and big oil companies colluded to reward risky behavior and lost their bet."

Stepping back from all this and taking a look from a free-market perspective, it is clear that the incentives put in place by the state — undoubtedly at the behest of lobbyists for oil companies — led to drilling in deep water, leading to increased risk. The incentives encouraged drilling in water that had been previously deemed economically unattractive by those same companies.

Additionally, a liability cap of $75 million for the oil companies was put in place by law. This is an incredible use of the control of the political means to make favorable dealings for oneself in the economy.[1] In fact, it is the very definition of corporatism: First, individuals within a company work to get laws passed to reward companies for taking risks previously deemed unworthy of the time, energy, and capital expenditures. Then, those same individuals within the company work to get other laws passed to limit liability when things go wrong.

This oil spill is something that we in engineering and science refer to as a three-sigma event, in that it is a very low-percentage occurrence. In other words, Congress and big oil companies colluded to reward risky behavior and lost their bet. Comically, we now see Congress — who encouraged the risks — cry "foul!" They are demanding that the previously set damage cap be raised, retroactively, to another arbitrary figure deemed more appropriate for BP's sins: at present, $20 billion, although this may change in the near future.


Predictably, in response to the mess, there have been calls for more and tighter regulation on the industry. President Obama recently said he is interested in finding out who deserves punishment for the crime of the oil spill. (Maybe he can blame Congress?) Also predictably, there is scarcely a mention of the role of government intervention in the mess in any of the traditional state media. Instead, there is the standard demonizing of "unfettered capitalism" and the cries about the failure of the free market. Barely a mention is made that safety on drilling platforms has been under the purview of government regulators within the US Minerals Management Service and that the Deepwater Horizon was deemed a model for industry safety just last year.

In a free market, where BP would bear full responsibility for damages caused by its operations, there might not be such a mess to deal with in the gulf. Additionally, private insurers for BP would not have allowed for such a shoddy inspection record on the safety of a very complicated and difficult operation. Drilling far out in the ocean waters would likely have been pursued in some form, but with the companies bearing all the risk — and certainly not being rewarded for taking economically unsound actions — there would have been far less activity in deep waters.

Many people agitate for BP to hold true to its corporate line of moving "Beyond Petroleum" to alternative energy sources. The environmental disaster in the gulf will undoubtedly place further pressure on the company. Yet how can we ever know if that direction is feasible without freedom in the markets? True freedom would put the costs at the level that are truly indicative of risks and rewards involved with each activity.

For now, the vast majority of what we do in our lives is in one way or another dependent upon petroleum. With that in mind, we can only hope that the damage can be cleaned up quickly and that the coastal towns can move on to brighter days.

Ending The Endless War

Ending The Endless War

Will Colombia’s democracy survive the violence?

According to popular Colombian lore, a bridge was inaugurated in Eastern Colombia to much fanfare in the mid-twentieth century. Colombia’s Eastern Plains are a vast flatland with roaring rivers, and so the bridge was engulfed by the river a few rainy months later. By the time the dry months returned, the river had settled on a different course, leaving the bridge alone, rising awkwardly above a dry patch of land.

I have heard the story several times from different sources, but I don’t know if it’s true. It deserves to be, since it captures something about the paradoxes of Colombia.

This is a country that in 1991 drafted one of the most modern and enlightened constitutions, consecrating a vast array of citizens’ rights, and during the following decade saw around 3 million of its citizens, more than one in fifteen, internally displaced. Colombia boasts one of the longest democratic traditions in the Western Hemisphere, 120 years of contested elections and peaceful transfers of power; but, in a slow year, more than a thousand Colombians, including union leaders, journalists, and human rights activists, fall victim to political violence. Sometimes the number is two or three times that. An exemplar of prudence and professionalism in its economic management, Colombia hosts one of the largest illegal economies in the world, as the international leader in cocaine production. Life in Colombia’s cities goes on as it would in any other country—and probably with more partying—while right-wing death squads roam the countryside. By some estimates, they have killed more than 40,000 people since the late 1980s, including women, children, and the elderly.

There is no agreement on when Colombia’s plight began or even what to call it. Most say it started 40-50 years ago; however, in 2008 Venezuela’s Hugo Chávez spoke of its “sixty-year war,” while an influential World Bank paper from 2000 places its origins between 1980 and 1984. Colombia’s orgy of killings during the 1940s and ’50s went down in history as the period of La Violencia (The Violence), a generic name suggesting just how difficult it was to comprehend. Similarly, Colombians often refer to their current situation as the “armed conflict,” thus avoiding a more conventional label such as “civil war.” The sitting administration of Álvaro Uribe refused to use the word “conflict” for a while, offering instead “attack against democracy.”

The Colombian and American governments claim that the violence in Colombia—whether twenty or 60 years old, whether armed conflict or civil war—seems to be turning a corner. Such bouts of optimism are an invitation to careful analysis. With a land mass comparable to that of Alaska (and South Africa) and a population of 45 million (comparable to that of the West Coast of the United States), Colombia is a significant presence, and events there reverberate from the Caribbean to the Amazon basin to its sizable diaspora. Future textbooks in Colombia will likely refer to the end of the current conflict as the foundation of a new republic. But after decades of bloodshed, what kind of republic will it be? Will it enshrine the violence or will it bequeath to new generations the peace, tolerance, and solidarity that evaded previous ones? Both outcomes are possible and only time will tell.

The war begins

If we date the onset of the war in Colombia by the founding of the main insurgent organization, it is 44 years old. When the Revolutionary Armed Forces of Colombia (known by their Spanish acronym FARC) was founded in 1964, it represented something fundamentally new. To be sure, it emerged from La Violencia, but unlike earlier militias, it was not attached to either of Colombia’s two historic political parties (Liberal or Conservative) and instead had ideological affinities (some say dual-membership) with the Communist Party.

Originally the FARC was a band of displaced peasants seeking a modicum of self-governance in the land they occupied at the end of La Violencia. But it soon styled itself as the avant garde of a communist revolution and grew to become the main insurgent organization in the country. The FARC was too small to have much impact in its early years, which is why some date the war to the early 1980s, when its activities began in earnest. Still, the group’s main leader, Manuel Marulanda Vélez, who recently died of natural causes in his old age, was already fighting an armed conflict around the same time that Fidel Castro launched his revolution.

Longevity is not the only reason the FARC stands out among Third World guerrilla organizations. In contrast with others that sprouted throughout Latin America in the ’60s—many of them products of the radicalized, urban, and educated youth—the FARC was and remains to this day fundamentally a peasant group in a country that is more than 70 percent urban. Though it has made some inroads in the cities, its core support is rural.

In the 1980s, amid peace talks that would eventually fail, the FARC created a political party, the Patriotic Union (UP). What ensued was one of Colombia’s greatest political disasters. A few years after its auspicious beginning, the UP was eliminated with diabolical efficiency. Up to 3,000 supporters—roughly 1 percent of the party’s total votership, or the equivalent of 600,000 U.S. Democrats—died. One by one they were killed, up the rungs of the organization from militants to small-town activists, local elected officials, congressmen, and, ultimately, the two chairmen and presidential candidates. The thoroughness, precision, and impunity of the slaughter was made possible by an unholy alliance of drug lords, rural economic elites, and rogue elements of the armed forces.

Thus began one of the bloodiest, longest, and dirtiest counterinsurgency campaigns in Latin America—which is saying a lot. Over the next fifteen years, the gangs that formed would grow to become Colombia’s current paramilitary groups, responsible for the political assassinations, massacres, and displacements of civilians that have earned Colombia its infamy among human rights groups.

To readers familiar with Latin America, talk of a counterinsurgency campaign usually evokes the image of a tightly centralized operation, coordinated from the highest echelons of power. That is not how it works in Colombia. If anything, it was precisely the incapacity of the Colombian state to curb the guerrillas’ activities in several cattle-growing regions that led local landlords to create their own militias. Of course, such “bottom-up” initiatives depend for their success on good friends, sometimes very good friends, in high places, sometimes very high places. Such friendships were, in fact, plentiful. But the evidence available so far does not allow us to conclude that this “dirty war” was orchestrated by the central government. There is no Colombian Ríos Montt or Pinochet.

Although the duration of Colombia’s war defies explanation, one cynical factor cannot be ignored: until it hit the wealthy and the middle class, it didn’t matter.

With the annihilation of the UP, a crop of articulate activists more attuned than the historical FARC membership to the practice of politics, the FARC was cut down to its rural roots. The survivors never came in from the cold, never abandoned their militaristic outlook and, ultimately, learned again the lesson of the guerrillas pardoned and then killed after La Violencia: never trust the government’s peace overtures.

Even under normal circumstances, such a hardened group of armed peasants would have been a significant thorn in the side of a government chronically unable to assert its authority. But circumstances were far from normal. In a perverse confluence of premodern and postmodern challenges to the nation-state, these peasants linked up with that most globalized of supply chains: the drug trade. The coca crops migrated northward from Bolivia and Peru into Colombia’s outermost rural periphery in the Southeast, the region with the weakest state presence. Operating in this area, the FARC was able to create an embryonic state. It meted out justice on matters ranging from land disputes to marital law and acquired a sizable tax base, the envy of other guerrilla groups and of many governments. By the mid-1990s, the FARC possessed a formidable fighting force, able to inflict heavy casualties on elite units of government soldiers.

It is impossible to overestimate the impact of the drug trade on Colombia’s warfare. A country fights the civil wars it can afford. The inflow of drug money, apart from allowing the FARC to sustain a deadly arms race with the right-wing death squads funded by the same sources, profoundly transformed the conflict. With its political structures in ruin and its military fronts gaining strength, the FARC began to act in several areas of the country as an occupation army. Before it took on the government, it was shelling civilian targets, recruiting minors, planting land mines, and kidnapping citizens for ransom in a pattern of abuses that was as morally repugnant as it was politically tone-deaf.

But while the corrupting effect of drug money runs deep inside the FARC, the widespread view of the group as an overgrown criminal racket (recently the government coined the “FARC cartel”) is very likely exaggerated. The FARC spends abundant resources in keeping a fighting force larger than would be necessary to run a drug operation. Reportedly, it also maintains, at significant cost and risk, several underground political activities.

Game of mirrors

Colombia’s paramilitary started as little more than a particularly deadly kind of security detail for landowners. Over time, however, they, like the FARC, have grown in size, complexity, and wealth, and become increasingly involved in the production and processing of cocaine. As the FARC’s political arm has atrophied, the paramilitary groups have developed new societal and political ties, probably the most lasting consequence of this game of mirrors.

Caught in the crossfire, Colombian peasants have displayed the same everyday ingenuity and political volatility as their counterparts in many other rural conflicts in the world, shifting allegiances depending on which army can provide security. Thus, even such bastions of working-class radicalism as the oil refineries in Barrancabermeja or the banana export concerns in Urabá—presumably home to ideological allies of the FARC—became paramilitary strongholds through a time-honored tactic: first, ruthlessly kill as many political contacts of the enemy as possible, then terrorize the population and impose law and order. In due course, loyalty follows, especially if the other faction is nowhere to be seen. It works.

Although both armies recruit heavily from the Colombian peasantry, the paramilitary have been more successful in tapping into the slum youth that had already found in urban organized crime a ticket to respect among peers, a modicum of wealth for their families (often their single mothers), and early death. They have been more successful in accessing political and economic power, too.

Born out of the landowning elites in contentious regions, the paramilitary groups have continued to nourish these connections. In what has become known as the “parapolitics” scandal, since 2006 more than 60 congressmen have been investigated for links to these illegal armies, and about half of those investigated have been indicted.

Far from simply cultivating contacts, the militias have also become more assertive in pursuing their own political aspirations. In recent elections, several local machine politicians have been defeated by dark horses sympathetic to the aims of militias and their elite patrons, a phenomenon that suggests the paramilitary’s considerable power.

The political successes of the militias mark something of a reversal. During La Violencia the patrician classes found it difficult to oversee their estates and, while absent, lost much of their political hold in the countryside. The result was the emergence of a new class of politicos, more plebeian in their origins and more tied to the parties and the state bureaucracy. The present war will likely bring back a political class with closer ties to private economic concerns, similar to the one displaced decades ago.

The global economy intrudes

Although the duration of Colombia’s war defies explanation, one cynical factor cannot be discounted: for years it did not matter. Until the ’90s the insurgency festered in the countryside, largely sparing the Andean region, where most Colombians live and where most of the GDP is produced.

But Colombia’s economic geography is changing. Over the past two decades, coffee has been displaced as the leading export, first by oil, then by coal. Today, remittances from migrant workers are the largest source of foreign capital. A new set of natural resources has enormous potential: palm oil for biofuels, timber, and, presumably in a post-conflict future, the natural beauty of the landscape itself, attractive to eco-tourists. Whereas coffee historically has been grown in the dramatic slopes of the Western Mountain Range, cultivated in middle-sized plots, and hand-picked in a labor-intensive operation, the new exports are produced in the vast Eastern Plains and the Atlantic and Pacific coastal areas and involve large industrialized, capital-intensive land holdings.

The new frontier of agro-exports coincides strikingly with the flashpoints of the war. Through eviction and intimidation, the paramilitary groups have accumulated huge swaths of land in the newly exploited regions, and in the process created one of the world’s worst crises of internally displaced people.

No Colombian president has been as uncompromising with the FARC—or engaging with the right-wing paramilitary—as Álvaro Uribe.

Now the war matters for the most consequential political constituencies and economic agents (of course, it always mattered to those ravaged by it). For the urban middle classes, that powerhouse of electoral mobilization, the war has come to their doorstep not only in the form of displaced beggars but, more shockingly, kidnappings for ransom at the hands of the FARC. The psychological effect of the kidnappings—frequently on key roads—cannot be exaggerated. For Colombia’s urban middle classes, the weekend outing means a cherished respite from congested cities in distant but familiar small villages—often, in a country of recent urbanization, places of childhood memories and elderly relatives.

Other forces propelled the war to the forefront of Colombia’s politics. While its export base moved internally, Colombia, no stranger to the neoliberal reforms that swept South America in the ’90s, eagerly plugged into the world’s capital flows. It has since run up considerable trade deficits, to the obvious pleasure of Colombians, who have embraced the luxury cars, glitzy boutiques, daring restaurants, and exotic vacations that followed the wave of foreign investment.

Just as the global drug trade placed the coca frontier men of Putumayo in the same transactional chain as the overworked young executives of New York, the global economy has thrust Colombia’s peasant guerrillas onto center stage. If it is to keep receiving foreign investment, Colombia needs to overcome its “country risk.” It needs to end the war. Thus, over the past ten years, citizens have voted repeatedly to do just that, in 1998 through negotiations, in 2002 and 2006 by force.


On February 20, 2002 the FARC hijacked a regional plane and kidnapped Senator Jorge Eduardo Géchen Turbay. Even more than the FARC’s brutality and military prowess, what shocked Colombians was the timing. On the heels of other provocations, the hijacking brought an end to the longest and most thorough peace process ever offered the FARC by any government.

From the point of view of the Colombian public, there was nothing the FARC could have disliked about the peace process, which had been initiated by President Andrés Pastrana in 1998. As a temporary gesture to facilitate talks, though not as a “final status” concession, the government had granted the FARC a demilitarized zone the size of Switzerland, a fact never neglected by the process’s critics.

The kidnapping occurred in the thick of the electoral season, and in a matter of weeks, voters flocked to the one candidate who had denounced the peace process: Álvaro Uribe. Before the kidnapping, Uribe had languished in the polls, but on election day he crushed his nearest rival and won an absolute majority of votes, precluding the need for a secondary election. Just as spectacular as Uribe’s rise in the national vote was his performance in the major cities: in Bogotá and Medellín he obtained twice as many votes as any previous successful presidential candidate.

The speed, vehemence, and bitterness with which the electorate, especially city-dwellers, turned toward the most hawkish candidate suggest that large segments of the citizenry had accepted the peace process only through gritted teeth. They had come to view the FARC as an alien army to be defanged, by force if possible, negotiations if necessary, rather than a wayward group of countrymen with whom reconciliation was desirable.

President Uribe enjoys approval ratings unprecedented in a country notorious for its political cynicism. It would be a mistake to discount the friendly role of the media—the country’s main national daily, El Tiempo, was owned by the family of Vice President Francisco Santos Calderón until 2007 and remains a staunch ally of the administration—but more important is Uribe’s novel security policy. He has pursued an all-out military effort against the FARC, with only perfunctory gestures at dialogue; and, in a radical departure from previous practices, a sui generis peace process with the paramilitary groups. No predecessor has been as uncompromising with the FARC or as willing to engage with the paramilitary.

Indeed, it is in the offensive against the FARC that the government has had its biggest success. Certainly the anti-drug effort has made little progress. Uribe’s first Minister of the Interior, Fernando Londoño, predicted that the coca crops would be eradicated in eighteen months. The hardy plants are still there, and their crop is still widely available at relatively low prices in U.S. cities. But the Uribe government’s aggressive tactics against the FARC themselves have forced some fighters to surrender and led to the rescue of numerous hostages. One of the most serious blows was the death of Raúl Reyes, the FARC’s second-in-command, who met his end in a Colombian army operation across the Ecuadorian border, which triggered a significant international crisis.

The FARC has proven resilient, but recently has suffered the worst blows in its history. By conservative estimates, its membership is half the size of five years ago.

Before Uribe, the government had always officially rejected negotiations with the militias. (Unofficially, several members of the armed forces have been complicit in their substantial growth.) The Uribe administration changed course by offering them a settlement in the context of the “Law of Justice and Peace.”

Under the terms of the agreement, the paramilitary groups can obtain some judicial benefits if they confess their crimes and offer compensation to their victims. As a result several paramilitary leaders are serving prison sentences and some foot soldiers have laid down their weapons. In a surprising move, Uribe also extradited the most prominent leaders of the paramilitary to the United States, where they face charges of drug smuggling.

The paramilitary’s most visible leadership has thus been dismantled, but Uribe may have mortgaged the possibilities of the accord on their punishment: under these new circumstances, will remaining paramilitary leaders cooperate? Moreover, extricating the army from the paramilitary has proven a Sisyphean task, and the victims’-compensation process moves at glacier speed. There is little chance that evicted peasants will be returned to their lands.

Some critics of the administration suggest that Uribe is in cahoots with the paramilitary, and whatever the government’s intentions, clearly the paramilitary obtained a deal better than anything currently on offer to the FARC. The paramilitary entered talks in a position of strength. They suffered no pre-negotiation offensive intended to soften them up. With the FARC, the government always continued fighting until the day before talks and made clear that, should the talks fail, new attacks would come.

The paramilitary’s vast political and economic connections offer them high-level protection. Thanks to decades of carefully preserved connections, the militias have the capacity to blackmail “respectable” figures in Colombia’s public life. To revert their land-grabs, in both the critical new export sectors and in the more traditional cattle-growing areas, would require legal and institutional commitments that the government appears unwilling to make.

Moderate progress has been made outside of government, however. Working under the tight deadlines of the Law of Justice and Peace, some jurists and human rights activists have brought charges against the paramilitary leaders. This legal pressure has resulted in several confessions, and, especially of late, media portrayals have exposed Colombians to the brutality of the paramilitary campaigns.

As for the FARC, it has proven remarkably resilient, but recently has suffered the worst blows in its long history. Conservative estimates put membership at 8,000, possibly half the size of five years ago. In many countries insurgent groups much smaller than this have been able to mount major challenges to their establishments. Yet for several years, the FARC has all but acknowledged that military victory is not feasible. Whenever it leaders articulate their goals, an exercise that does not come easy to guerrillas unaccustomed to politics, they talk of a “transitional government of national unity.” In other words, they’ve given up on the pie, and are prepared to settle for a slice. In its most optimistic flights of imagination, the FARC would consider it a huge victory (as no doubt it would be) if, in exchange for laying down their weapons, its members were allowed a permanent foothold in Colombian politics. They would rejoice at a deal similar to the one the Maoist guerrillas in Nepal only grudgingly accepted.

Even a FARC defeat would not necessarily bring closure to the Colombian conflict. Its forces may, in the way of guerrillas of the ’50s, degenerate into social banditry and linger for years. The Colombian conflict may never know the type of closure that came to Spaniards from Franco’s entry into Madrid or to South Africans from the historic handshakes in Kempton Park.

Orangutan in coattails

Among the many victims of the war may be Colombian democracy, that oddity once described by Darío Echandía, a prominent leader of the Liberal Republic of the ’30s and ’40s, as “an orangutan in coattail.” Coattails are no longer de rigeur for public ceremonies, but Colombians have shown time and again that they like their heads of state in civilian clothes.

When not busy with elections, campaigns, and congressional debates, the orangutan has been growling. In an off year, the number of political assassinations and disappearances in Colombia would humble any military dictator from the Southern Cone. Much of this bloodshed is perpetrated by the FARC, a peculiar type of spokesman for the downtrodden that has killed several peasant and indigenous leaders. But political dissidents, murdered at the hands of the paramilitary or even the state’s agents, make up the bulk of victims.

In the not-too-distant future, Colombians probably will enjoy a much-needed decline in violence. Incidences of kidnapping and assassination are already falling. Lower levels will likely create a new normal. But how shall we describe the resulting democracy? How likely is it, as some liberal thinkers would have it, that Colombian democracy can provide a neutral realm where free and equal citizens can decide together where to take their society?

No society can start from scratch. In Colombia the war has already reshaped land ownership and displaced thousands of families. The next generation of rural labor markets will feed off the dislocation of peasant, indigenous, and black communities. Labor unions, decimated by years of attacks on union activists, will have a lot of rebuilding to do. The emerging political order will be profoundly unequal.

Today, Colombia is mobilized with ever-increasing vigilance and cost against an enemy that by all objective measures has been contained.

But structural injustice will not be the war’s only anti-democratic legacy. As his own term approaches its end on August 7 (an attempt to run for a third term was shot down by the Constitutional Court), and the presidential campaign heats up, Uribe keeps warning of FARC plots to seize power via the electoral process and implicating members of some opposition parties. He has also proposed that university students in Medellín be paid to spy on each other. If what Uribe says of the FARC is true, then the FARC is more powerful today than ever before. That’s not very unlikely. But it would be a serious indictment of the Uribe government’s policy if, after eight years of military efforts, it has not achieved the one task it was elected to accomplish.

Such disingenuous statements—despite the comfortable lead of the pro-government candidate, former Defense Minister Juan Manuel Santos—and attempts to militarize society suggest something else at work: the entrenching of a permanent counter-revolution, a political climate in which the country is mobilized with ever-increasing vigilance, and at ever-increasing cost, against an enemy that by all objective measures has already been contained. Threat inflation is standard operating procedure, which allows the government to treat the legal opposition as a fifth column for a terrorist plot.

Santos’s likely opponent, former Bogotá mayor Antanas Mockus, is distancing himself from the most unsavory practices of the current government (such as illegal wiretappings of political opponents), but offers no wholesale rejection of the policies in place. Little suggests that he will look for a comprehensive peace accord or significant improvements in economic equality. With either Santos or Mockus, the anti-democratic elements in Colombian politics will remain influential.

To be sure, Colombia may be able to stand down and pursue a more equal and democratic future. Peace is possible and may not even be particularly difficult. Colombia’s combatants share the same ethnic, religious, and linguistic background. There is no call for secession, and there will be no forced collectivization of private property. Several decades from now, Colombia’s conflict may appear to have been the growing pains of a society whose modernization process of inclusion and prosperity hadn’t kept pace on an agrarian frontier where only the drug trade and the occasional ill-fated resort to armed struggle offered hope. In that case, Colombia would not be the first country to overcome this condition.

The poorest 20 percent of Colombians live on 3 percent of the country’s GDP, as the defense budget inches toward 6 percent of GDP. Political choices, rather than harsh economic realities, stand in the way of better days.

A new U.S. policy

One of President George W. Bush’s last acts in office was awarding Uribe the Presidential Medal of Freedom, a testament to the ties that bound them through their tenures. Even by the standards of Colombia—probably the most U.S.-friendly country in the region for decades—the closeness between the presidents was unusual.

The political elites of Bogota and Washington have converged in an approach to drugs that fuses interdiction with counterinsurgency, with an occasional tug-of-war between both. But this is not the only possible strategy. After all, the paramilitary are as active in the drug trade as the insurgency, and arguably the flow of people into the coca frontier could be reverted if the land grabs in cattle-growing areas could be rolled back. Yet this alternative is beyond the bounds of political discourse.

Even with Uribe soon to be out of office, it is hard to imagine any U.S. administration taking another approach. Doing so would require an unprecedented willingness and ability to diversify contacts with Colombian society. One could say President Obama needs to get out more, but that would not change anything if his chauffeur and his translators are the same and if they drive him through the same neighborhoods.

Nor will the current electoral cycle in Colombia deliver a whole new cast of characters. The next president promises to be no great “change agent,” and recent legislative elections have returned a Congress remarkably similar to the previous one.

Last summer the Obama administration finalized an agreement to allow the U.S. military access to seven bases in Colombia, with a mandate that covers everything from drug interdiction to counterterrorism in whatever vaporous definition suits the circumstances. This was to be expected. From the U.S. point of view, Colombia is not a crisis flashpoint; with a crowded foreign-policy agenda, why try something new with a firm ally? Colombia is undergoing profound structural changes that make its economic model more volatile, its social inequalities more salient, its political system less democratic, all as a result of brutal counterinsurgency—but this does not make it an urgent national interest for U.S. policymakers.

Colombia’s displaced population will not be beached at the U.S. coast, not any time soon. Drugs will continue to find their way into the United States, as they have for decades. The human rights situation in Colombia will experience its ups and downs dictated by the typical fluctuations of the war, prompting the U.S. government to go from congratulations to admonitions and back, but without any serious challenge to the government.

If Obama were a community organizer, he would encourage the government to restore peasants to their land, instead of fumigating the countryside in service of a futile coca-eradication policy. He would call for a massive grassroots effort to restore peasants’ economic, social, and political rights and a plan for community-centered crop eradication and substitution.

If he were a professor of constitutional law, he would be concerned by the way Colombia’s warlords became entrenched in the political system after destroying dissent in many regions and hollowing out the country’s democratic promise. He would issue stern warnings about the need for an independent judiciary to get to the bottom of the matter, and to breathe new life into the country’s institutions.

If he were a state senator leery of military adventures, he would be alarmed that Colombia’s government has closed off paths to political settlement with the insurgency and exaggerated its danger. He would note that the U.S. response—an ever-growing footprint in Colombia—risks embroiling his country in conflicts with Colombia’s neighbors, such as Venezuela.

If he were a bridge-building candidate, he would be appalled at how the lack of political will perpetuates a war that grows more pointless as time goes by. He would use his position to call all parties to a stance that opens the door for a nonviolent settlement.

But he is President of the United States, and this severely limits his options.

Before the altar of Europe


Before the altar of Europe

Some parting reflections from this columnist on the faith and folly of the Brussels elite

NIGEL FARAGE, a British politician with a knack for synthetic outrage, was appalled to learn recently that over 1,000 European Union officials earn more than Britain’s prime minister. The EU is a “racket”, thundered Mr Farage, who sits in the European Parliament for the United Kingdom Independence Party (UKIP). No wonder Brussels bureaucrats demand “more Europe”, he declared. What they really want is “more money” for themselves.

The truth is even worse, at least for UKIP voters. Brussels officials call for “more Europe” because they really want more Europe. Yes, some are overpaid, notably old-timers hired before a staff reform in 2004. Highly educated and often a bit bored, Eurocrats can also sound spoiled: moaning about their conditions while enjoying some of the safest jobs in the world. Yet the average Eurocrat is not primarily in it for the money.

The European quarter of Brussels is an odd place. It is less Sodom and Gomorrah than the Vatican. Europe is a faith-based project for its bureaucrats, or at least it was when they took the EU entrance exams. Even as Eurocrats become more cynical with age, learning that promotion has less to do with merit than with politics, most retain a spark of faith. Put simply, they believe that nationalism is the greatest of evils. As articles of faith go, this is not a terrible one. Nationalism has indeed been a European curse. Today, the existence of the EU is a bulwark against fresh horrors. Take the recent tensions between Slovaks and Hungarians, whipped up by cynical populists in both countries. Such ugliness can only go so far: local politicians cannot close the border to traders from the wrong nationality, for example, or sack workers with the wrong background: it would be against EU law.

Brussels officials are often thoughtful, clever and good company. They speak lots of languages. Many are married to partners from another country (and divorced from a spouse from still another country, come to that). They have multilingual, multicultural children who think of Europe as their nationality. Strikingly often, they come from regions with strongly independent identities, such as Catalonia or Wales. Unwilling to seek a career in a hated national capital like Madrid or London, they instead latched onto the dream of a united Europe.

Like priest-confessors, Eurocrats are well-placed to see the grubby deals done in the name of national interests. At the annual fish council, they watch ministers seeking over-large quotas for “their” fishermen, driving prized species into extinction. They see supposedly pro-European governments lobbying so that new laws will favour “their” farmers or car workers. All of this buttresses their faith in Europe as a higher ideal.

Yet their credo of anti-nationalism carries risks too. At best, EU bureaucrats can be naive about how much integration ordinary voters will bear. At worst, they sound hostile to democracy. Like any priestly caste, Eurocrats display a streak of authoritarianism and obscurantism. When the French and Dutch voted against the EU constitution in 2005, Brussels officials muttered that it was nonsense to put the complex legalese of an EU treaty to ordinary people. The bolder among them argued that the EU had always been an elitist project, with good reason. Why, they said, if German voters had been asked, they would never have given up the Deutschmark for the euro. Nor would French voters have approved EU enlargement.

Hardline Eurosceptics accuse European officials of plotting a dictatorship. That is cheap demagoguery. The EU is a club of democracies, albeit one with unelected referees. The Brussels bubble—a cosy world of officials, EU-funded think-tankers and a good chunk of the press corps—is not full of people who hate democracy. The problem is that it is full of people who equate national democracy with selfishness and populism.

An irresponsible parliament

One solution to this problem is proposed endlessly: pan-European democracy, built around cross-border parties and the huge new powers handed by the Lisbon Treaty to the European Parliament. Such enthusiasm requires another act of faith. The European Parliament is the great disappointment of the European project. It is the revenge of the B-team: an assembly led by posturing second-raters dedicated, in their every waking moment, to grabbing new powers at the expense of national governments.

The parliament is elected but not truly accountable. Members can vote down any law without risking the fall of a government and snap elections: that is power without consequences. Ordinary voters have no idea who represents them in the parliament, or even whether the left or right dominates there. In fact, Europe’s diversity means that the left-right labels used by the parliament’s big blocks mean very little: on free trade, for example, Swedish left-wingers are more enlightened than French conservatives. Business is advanced by stitch-ups between party barons, not the open clash of ideas. As a result, the parliament has utterly failed to capture the public’s imagination.

Brussels insiders are convinced that critics of the EU are nationalists. They are wrong. As he ends his Brussels posting, this critic accepts that many of Europe’s worst follies can be blamed on the selfishness and cynicism of governments, not Brussels bureaucrats. The EU holds nationalism in check, and that is a high calling. Charlemagne believes in the EU. On balance it has swept away barriers to internal trade and the free movement of people. It has modernised poor regions. It has anchored southern and eastern Europe in the free world: an historic achievement.

But Charlemagne’s is a low-church sort of Euro-faith. And it does not run to believing in miracles like pan-European democracy. In the real world when democracy gets much beyond the nation-state, it stumbles.

Angela Merkel rebuked

German politics

Angela Merkel rebuked

The arduous vote for a new president exposes the acrimony within her coalition

THE German custom, when electing a new president, has been to sprinkle the assembly of politicians that makes the choice with actors, sports stars and writers. This time the guest electors were fewer. Such non-political folk are unpredictable and the stakes were too high: defeat of the government’s nominee would have been a body blow to Angela Merkel, the chancellor, already beset by squabbling coalition partners and slumping ratings.

On June 30th, after three rounds of voting, she avoided that disaster: her candidate, Christian Wulff, the premier of the state of Lower Saxony, was elected president a month after the sudden resignation of his predecessor, Horst Köhler. In the event, Mr Wulff eventually won the absolute majority that had eluded him in the first two rounds of balloting. But the result was a severe setback nonetheless.

The election of a president—a job with little political weight but, in the right hands, perhaps the power to instruct and hearten the citizenry—is an unusual reason for a crisis. The three coalition parties—Mrs Merkel’s Christian Democratic Union (CDU), its Bavarian sibling, the Christian Social Union (CSU) and the liberal Free Democratic Party (FDP)—commanded a majority of the 1,244-member assembly, which is made up of the entire Bundestag and an equal number of representatives of the 16 states. Mrs Merkel had hoped that a successful ballot would mark a new beginning for her government; instead the grudging vote exposed the stubborn old problems she has yet to resolve.

In choosing Mr Wulff, a mild-mannered career politician, Mrs Merkel made her job needlessly difficult. The choice was meant to soothe her party’s bigwigs, with whom she has a sometimes testy relationship. But she paid too little heed to the rank and file, and failed to campaign for him energetically enough once the decision had been made. Beyond governing circles, Mr Wulff stirred little enthusiasm.

Against him the opposition Social Democratic and Green parties cleverly put up Joachim Gauck, a charismatic leader of East Germany’s “peaceful revolution” in 1989 who became head of the Stasi archives and exposed the crimes of the communist secret police. He was the popular favourite, in part because he seemed to rise above politics. A champion of “freedom” over “security”, he is philosophically closer to Mrs Merkel’s “Christian-liberal coalition” than to the left-leaning parties that nominated him. Even hardened government partisans were beguiled by his candidacy. In backing Mr Wulff, Mrs Merkel was opposing a symbol of democratic renewal.

It is the latest misadventure for a government that has been stumbling since its inception. Billed as a “dream coalition” before last September’s federal election, the governing trio has bickered incessantly over such issues as whether tax cuts should come before deficit reduction, how health care should be reformed and how much longer nuclear power plants should be allowed to operate. At the height of the global financial crisis, during Mrs Merkel’s first term as chancellor (at the head of a “grand coalition” with the Social Democrats), she portrayed herself as a bulwark against economic chaos. With this year’s euro crisis, and the colossal bail-outs required to contain it, she has struggled to keep chaos at bay. Her technocratic leadership style, once reassuring, looks out of touch now.

She and her allies have paid a high political price. A CDU-FDP coalition was voted out of office in North Rhine-Westphalia, the most populous state, in May. That erased the federal government’s majority in the Bundesrat, the legislature’s upper house. Support for coalition parties has fallen (see chart). If opinion polls are right, the FDP might not re-enter the Bundestag, having fallen below the 5% minimum threshold. The next federal election is due in 2013 but the coalition’s popularity, and thus its cohesiveness, will be tested in several regional ballots next year.

Mrs Merkel and her government allies still have a chance to regroup. The economy is bouncing back and unemployment has fallen to nearly pre-recession levels. Even before the presidential vote, coalition leaders were vowing that they would be more civil to each other and readier to compromise. Demands by the FDP and CSU for big tax cuts, despite rising deficits, were the biggest source of strife. Guido Westerwelle, who is both the FDP’s chairman and the foreign minister, now says that deficit reduction takes precedence. He and his fellow party leaders will have to show similar flexibility over such contentious issues as health reform, nuclear power and the details of a planned €80 billion ($97 billion) deficit reduction package if tensions are not to erupt again. The Bundestag’s summer break, which starts later this month, will offer a welcome respite from turmoil.

The wobble over the presidency has done more damage to Mrs Merkel’s position as leader of the CDU than as head of government, reckons Richard Stöss, a political scientist at Berlin’s Free University. Even so, Mr Wulff’s election neatly sidelines the chancellor’s last serious rival within the party. Mrs Merkel’s allies are not satisfied but, for now at least, are probably stuck with her. German voters may well feel the same.

Global economic policy

Global economic policy

Austerity alarm

Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous

ECONOMIC policymaking, like hemlines, has fads. Last year the leaders of the G20 group of big economies led a global Keynesian boost, pledging fiscal stimulus worth a combined 2% of world GDP to prop up demand. At their most recent gathering, in Toronto on June 26th-27th, the club’s rich-world members pledged “at least” to halve their deficits by 2013. Though they left themselves wiggle room, the change of tone was clear. Thanks to Greece’s sovereign-debt crisis, which has terrified politicians, stimulus is out and deficit reduction is in.

The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. Japan’s new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress’s fears about the deficit have thwarted the Obama administration’s efforts to pass a new mini-stimulus (see article).

Until recently the deficit-cutting rhetoric exaggerated its likely short-term impact. Germany has long been one of the loudest proponents of the need for austerity. But its near-term plans (tightening worth 0.4% of GDP in 2011) are modest. Spain was the only big European economy forced by financial markets into immediate, tough austerity. Yet now Britain has chosen that route, with a budget that promises tightening worth 2% of GDP in 2011. The expiration of America’s stimulus implies a fiscal tightening of some 1.3% of GDP in 2011, a figure which could rise considerably if Congress prevented the extension of George Bush’s tax cuts. Much could change, but for now the rich world looks set for a collective fiscal adjustment worth around 1% of its combined GDP next year, the biggest synchronised budget contraction in at least four decades.

Goodbye Keynes, hello Hoover

To Keynesian critics the switch to austerity is a colossal blunder. Paul Krugman, an economist who writes in the New York Times, frets that officials who “seem to be getting their talking points from the collected speeches of Herbert Hoover” will push the world economy into a depression. With unemployment high, output far below its potential, private spending still weak and interest rates close to zero, Mr Krugman and his allies argue that fiscal stimulus remains an essential prop to the economy and that deficit-cutting now will spell stagnation and deflation.

From the other side, supporters of the shift to austerity believe it is both essential and appropriate: deficit spending cannot go on for ever, and by boosting firms’ and households’ confidence and lowering the risk premium on government debt, well-designed fiscal consolidation can actually boost growth. Jean-Claude Trichet, president of the European Central Bank, argues that fiscal thrift will increase private spending by reducing uncertainty about government tax policy and debt.

Both sides of this debate oversimplify their cases. Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy. For example, firms across the rich world are hoarding cash. Their reluctance to invest may have more to do with regulatory, financial and fiscal uncertainty than weak consumer demand (see article). If governments address those worries, businesspeople may start spending.

The advocates of austerity exaggerate more dangerously still. They base their argument on cases in the 1990s, when countries such as Canada to Sweden cut their deficits and boomed. But in most of these instances interest rates fell sharply or the country’s currency weakened. Those remedies are not available now: interest rates are already low and rich-country currencies cannot all depreciate at once. Without those cushions, fiscal austerity is not likely to boost growth.

The austerity fad is also distorting politicians’ priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country’s huge medium-term deficit by, for instance, reforming social security. The result probably won’t be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been.

Unemployment in America


Free exchange

Unemployment in America

Labour without force


THE best that can be said about the June jobs report is that it doesn't signal a return to recession. Total employment fell 125,000, but this was because of an end to some temporary jobs conducting the federal census. Private payrolls rose by 83,000. That's soft, and less than expected, though better than May's revised increase of 33,000.

Unfortunately, the guts of the report aren't much more uplifting. The private work week, after rising to 34.2 hours in May, fell back to 34.1 in June. In terms of the amount of labour being used throughout the economy, that's the same as a drop of 300,000 in payrolls. Average hourly earnings actually fell, by 0.1%. That may fan fears of deflation given the already low readings on inflation. I think that's premature. Hourly earnings have been generally rising, albeit sluggishly, and the June drop could be a one-time move.

Finally, while the unemployment rate did drop, to 9.5%, an 11-month low from 9.7%, it dropped for the wrong reason: a lot of people stopped looking for work. This might be because a Senate impasse led to the expiration of extended unemployment insurance benefits early in June. The number of recipients has been falling by about 200,000 per week since. Some of these people may have stopped looking for work (a requirement to qualify for benefits), and thus are no longer counted as unemployed. Census layoffs may have also played a part.

For what it's worth, the household survey (used to calculate the unemployment rate) showed a much bigger drop in employment, of 301,000, than the payroll survey. The rule of thumb is that when the two differ, go with the payroll survey.

A lot of the softness in June seems related to a slowdown in the manufacturing sector. Though factory payrolls rose a hair, that was far offset by a big drop in hours: the factory work week fell to 40 hours from 40.5, although in April it was only 40.1. This reinforces the message from the recent purchasing managers' indexes, that the inventory restocking that was fueling a V-shaped recovery in the industrial sector is petering out. Without a follow through from household and business spending, the industrial sector won't be providing much oomph to the economy.

All that said, this tells a story of moderate growth, not of a dip back into recession. As UBS notes, total hours worked rose at a 3.3% annual rate in the second quarter, an acceleration from the 2.4% reading in the first. This is consistent with GDP continuing to grow at around a 3% rate, just a bit above the economy's potential growth rate. The economy already faces some headwinds from expiring fiscal stimulus (the unemployment benefits and the home-buyer tax credit are the most obvious examples), and those headwinds will build over the coming six to nine months. The test for the recovery is whether private demand will be strong enough to overcome those headwinds.

The coming days

The coming days

The week ahead

Israel's prime minister, Binyamin Netanyahu, visits Barack Obama in Washington


• ISRAEL'S prime minister, Binyamin Netanyahu, is set to travel to Washington for a meeting with Barack Obama on Tuesday July 6th. Mr Netanyahu’s previous date with America’s president at the beginning of June was postponed after Israeli forces killed nine people in a raid on a boat attempting to deliver humanitarian aid to Gaza in defiance of an Israeli blockade. Mr Obama will be keen to find a way to encourage Israeli and Palestinian leaders to begin direct talks again. Face-to-face negotiations were suspended in December 2008 after Israel’s deadly offensive against Gaza intended to stop rocket attacks from the territory. In a sign of a thawing of relations between Israel and the Palestinian Authority, Ehud Barak, the country’s defence minister, said that he would shortly meet Salam Fayyad, the PA’s prime minister.

• THE lower house of France’s parliament begins debate on Tuesday July 6th over the controversial issue of banning women from wearing full Muslim veils in public before a vote likely to be held the following week. A burqa ban, which has the backing of President Nicolas Sarkozy, is also winning support in other parts of Europe. Belgium’s lower house has approved a similar measure and Spain Senate recently narrowly voted to impose a ban too. But the Council of Europe, an EU institution that oversees the human rights of Europeans, has voted unanimously to oppose any national bans on the burqa in EU countries. It also called on Switzerland to reverse its ban on the construction of minarets.

• AS BP’s battle to contain the spill of oil into the Gulf of Mexico continues, other energy companies hoping to extract the black stuff from deep under the sea around America will have their hopes pinned on an appeals court hearing on Thursday July 8th. Barack Obama’s administration saw its six-month moratorium on deep water drilling overturned by a federal judge on June 22nd but will hope that the higher court reimposes the ban, pending investigation of the causes of the catastrophic leak after an explosion on BP’s Deepwater Horizon rig.

• THE ruling Democratic Party of Japan faces elections for the upper house of the country’s parliament on Sunday July 11th. Recent polls cast doubt on the ability of the DPJ and an ally may not win enough seats to guarantee a majority which it needs to ease the passage of planned legislation to cut huge public debts. The popularity of Naoto Kan, the country’s prime minister, plunged after he called for debate on increasing sales taxes as part of measures to restore Japan’s battered public finances. If Mr Kan’s party fares particularly badly he may also face a challenge to his leadership from within the DPJ.

BP Bankruptcy in U.K.

BP Bankruptcy in U.K. Is Obama’s Worst Nightmare: Caroline Baum

Commentary by Caroline Baum

-- It would be a “horror,” a “disaster,” according to lawyer Kenneth Feinberg, who was appointed by President Barack Obama to administer BP Plc’s $20 billion compensation fund for victims of the Gulf oil spill. “That is not an option.”

Feinberg was talking about a bankruptcy filing by BP in a Fox News interview.

“Bankruptcy absolutely is an option, and the U.S. needs to recognize that,” said Peter Kaufman, president and head of restructuring and distressed M&A at the Gordian Group, an investment bank in New York.

Which is it?

No company has the ability to pay unlimited claims, even one that earned $16.6 billion last year and more than $20 billion annually in the prior four years. At the same time, no one has any idea how big BP’s damages will be. That hasn’t stopped Wall Street analysts from churning out estimates that move up in lockstep with the number of barrels thought to be leaking from the collapsed well each day.

How many companies are willing to face unlimited civil claims, the prospect of criminal prosecution and daily excoriation by the U.S. government before going on the offensive?

That’s Kaufman’s argument for why BP should consider filing for Chapter 11 bankruptcy. (And the U.S. should consider the implications of such an outcome.) In the U.S., unlike in most countries, “you can file for bankruptcy even if you are perfectly solvent,” said Jay Westbrook, professor of law and a bankruptcy specialist at the University of Texas, Austin.

Bigger Boot

Don’t try pulling a fast one to avoid paying the bills. The courts have developed a “doctrine of good faith,” Westbrook said. “If you are abusing the bankruptcy code, they will throw it out.”

If BP’s damages, or even “reasonably probable damages,” exceed the value of the company, or if it faces a liquidity crisis, bankruptcy would be a way to organize the claims into a “sensible, orderly, fair process,” he said.

U.S. Interior Secretary Ken Salazar may think keeping the “boot on the neck” of BP is a good strategy, but he should understand that BP has a stiff boot of its own. What if the company were to utilize its considerable financial and legal resources and the insolvency laws of the U.S. or Great Britain “to make it extremely difficult and time consuming for legitimate claimants to get succor?” Kaufman said. (It wouldn’t be a first for an oil company.)

‘Egregious Willful’

BP is already the most reviled company in America. Two of its refineries accounted for 97 percent of the violations (a total of 862, of which 760 were “egregious willful”) in the refining industry over the last three years, according to the Center for Public Integrity. It holds the record for the largest fine ($87 million) ever levied by the Occupational Safety and Health Administration. Its public relations couldn’t be worse if it disbanded its PR department.

In the court of public opinion, BP is already about as low as it can go. So why shouldn’t it try, as a matter of business, to limit its liability?

The government isn’t the only one with leverage. If BP were to file for bankruptcy, who would compensate Gulf residents whose livelihood and sole means of support were destroyed by the spill?

The U.S. taxpayer. To avoid being seen as someone who bailed out Wall Street and abandoned Main Street, Obama would probably ask Congress for money to compensate victims and line up to be paid with other creditors.

No Exit

What if BP chose to file for bankruptcy in the U.K., something that’s well within its rights? No doubt London courts would deliver an outcome more favorable to BP. And they’re apt to be less generous when it comes to paying damages to folks three times removed from directly affected claimants.

No wonder Congress wants to shut down that option. House Judiciary Chairman John Conyers, Democrat of Michigan, introduced a bill that would, among other things, prevent BP from seeking bankruptcy protection in the U.K.

If the goal is to get relief as quickly as possible to the legitimate victims of the oil spill, then using BP as a pinata isn’t a great idea, Kaufman said. (Nor was sending Attorney General Eric Holder to New Orleans to threaten BP with criminal prosecution a way to foster an environment of cooperation on the clean-up.)

No one knows whether BP agreed in writing to the $20 billion escrow fund or to Feinberg’s power of attorney. Jon Pack, a London-based BP spokesman, couldn’t comment.

Tilting at Windmills

BP has huge assets and tremendous earning capability, at least until we figure out how to power our cars with wind. While Kaufman is right in theory that BP should consider the bankruptcy option, in practice it would make life hard for the company.

Why? Energy is already a highly regulated industry -- at least that’s what everyone says. And it’s bound to become more highly regulated following the BP spill.

The next time BP applied for a drilling permit, it might find that regulators had found religion. While a company can’t be denied a permit solely on account of bankruptcy, according to Westbrook, I bet regulators could find enough “egregious willful” violations to prevent BP from expanding its U.S. business.

Subbarao Has ‘Eye on the Ball’

Subbarao Has ‘Eye on the Ball’ as India’s Inflation Accelerates

By Kartik Goyal and Unni Krishnan

July 5 (Bloomberg) -- India’s central bank signaled it’s set to raise interest rates again after an unscheduled increase last week, on concern that increased consumer spending and higher fuel prices will stoke inflation.

The Reserve Bank of India, led by Governor Duvvuri Subbarao, on July 2 boosted the reverse repurchase and repurchase rates by a quarter point each, to 4 percent and 5.5 percent, and added it will “take further action as warranted.”

Subbarao may follow with another quarter point at the bank’s next meeting on July 27, Royal Bank of Scotland Group Plc and Barclays Plc said. India is acting ahead of counterparts in Asia from South Korea and Indonesia to the Philippines and Thailand as dangers from the fastest inflation among the Group of 20 nations outweigh risks from Europe’s debt crisis.

“The decision shows policy makers have their eye on the ball,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “India needs to focus on inflation pressures rather than a potential impact from Euro-area weakness.”

India’s benchmark 10-year government bond yields may advance by as much as 15 basis points today after last week’s move, said Arvind Sampath, head of interest-rate trading at Standard Chartered Bank Plc in Mumbai.

Subbarao announced the increase on July 2 after financial markets closed. Bond yields that day gained 4 basis points to 7.56 percent, while the Bombay Stock Exchange’s Sensitive Index fell 0.3 percent to 17,460.95. The rupee slid 0.5 percent to 46.79 against the dollar.

‘Strong’ Demand

“Demand conditions are pretty strong,” said Gaurav Kapur, a Mumbai-based economist at Royal Bank of Scotland. “The fuel- price increase of last month may have also prompted the RBI to act before the policy meeting,” Kapur said, referring to the central bank.

India’s $1.2 trillion gross domestic product expanded 8.6 percent in the first quarter of this year from a year earlier, the fastest pace after China and Brazil among major economies. Industrial output jumped 17.6 percent in April.

Maruti Suzuki India Ltd., the nation’s biggest carmaker, is spending 17 billion rupees to increase capacity 23 percent, to 1.25 million units a year. Tata Steel Ltd., India’s largest producer, last month won environmental approval to expand capacity at its Jamshedpur unit as it seeks to benefit from increased demand from carmakers.

Advanced Economies

The strengthening demand in India parallels a trend across emerging markets from China to Brazil, where expansions are outpacing those of advanced economies. U.S. growth prospects have been undermined by reports in the past month showing fewer workers hired than forecast, a drop in home sales, deterioration in consumer confidence and slower manufacturing.

Concern that expansions in developed nations are sputtering sent the MSCI World Index of stocks down 4 percent last week.

India’s growth is pushing up inflation, undermining the purchasing power of households in a country where more than three quarters of the 1.2 billion population lives on less than $2 a day.

India’s benchmark wholesale-price inflation unexpectedly accelerated to 10.2 percent in May. Consumer prices paid by industrial and farm workers rose almost 14 percent in May, according to government data.

Inflation Comparison

By contrast, consumer-price gains are running at 2.9 percent in Australia, 2 percent in the U.S., 1.6 percent in the euro zone and 3.1 percent in China.

Also boosting inflation are India’s steps to rein in its budget deficit, which widened to a 16-year high of 6.9 percent of GDP in the year through March. Prime Minister Manmohan Singh last month freed gasoline prices to cut subsidies, allowing refiners raise them by about 3.5 rupees a liter.

The government also permitted diesel costs to rise by 2 rupees in a country where 65 percent of the goods are transported by road. Diesel pricing will eventually be freed, the government said.

The fuel-price decision may boost the inflation rate by about one percentage point, the central bank said.

The Reserve Bank’s action to tame prices came after opposition parties led by the Bharatiya Janata Party called for a nationwide strike to protest against the fuel-price increase and the government’s inability to contain inflation.

Finance Minister Pranab Mukherjee described the monetary tightening as “desirable.”

Timing the Move

The central bank said that while growth and inflation were quickening, it was “inadvisable” to raise rates earlier because of a shortage of cash with lenders.

Cash availability dropped after businesses withdrew money to pay taxes and the government raised 1.06 trillion rupees from the auction of high-speed mobile phone permits and broadband internet airwaves to companies including Bharti Airtel Ltd.

To prevent the cash squeeze from hampering growth, the central bank added money to the banking system since May. The bank extended until July 16 a plan to allow lenders keep less money in government bonds as reserves. The facility was set to expire on July 2.

“Liquidity has begun to ease more recently,” HSBC Holdings Plc economists Frederic Neumann and Prithviraj Srinivas wrote in a note to clients. “There is still a long way to go” in raising rates, with another 1.25 percentage points likely in the coming 12 months, they forecast.

Trichet Urges EU Governments

Trichet Urges EU Governments to Tame Deficits to Boost Growth

By Mark Deen and Helene Fouquet

July 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet pressed governments to trim their budget deficits, saying such action would boost economic growth by improving confidence of consumers and investors.

“We are in a period where we have to manage budgets very tightly,” Trichet told journalists in Aix-en-Provence, France. “I have no problem with austerity, rigor. I call this good budgetary management.”

The comments reinforce plans set out by Group of 20 leaders last month in Toronto, where the countries representing 85 percent of the world economy responded to plans by European governments to tackle the region’s sovereign debt crisis by slashing budget deficits.

Advanced G-20 economies pledged June 27 to halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016. While President Barack Obama is pushing his counterparts to focus on spurring growth, leaders in the U.K. Germany, Spain and Italy are already tightening spending to bolster investor confidence.

Economists at Goldman Sachs Inc. and BNP Paribas SA have trimmed their growth forecasts, partly in response to the spending cuts and tax increases already announced. Trichet said today that deficit reduction won’t choke growth and a failure to stem budget gaps would be equally risky for the recovery.

“Confidence is key for growth, and if you cannot have confidence in the sustainability of the fiscal policies then you have no growth because you have no confidence,” he said. “The two things are complimentary.”

Trichet urged European governments to boost growth through structural changes and to publish results of stress tests on banks as part of their efforts to boost confidence in the financial system.

“Industrialized countries as a whole, on both sides of the Atlantic and Japan have to reinforce their capacity to adapt to an environment which is changing rapidly -- to embark on structural reforms,” he said.

Asia Convertible Slump

Asia Convertible Slump Means Citi Sees 25% Gain: Credit Markets

By Katrina Nicholas

July 5 (Bloomberg) -- The worst quarter for Asian equities in more than a year has pushed yields on convertible bonds higher than some debt that can’t be exchanged for stock, prompting strategists to predict gains of 25 percent or more as the region’s economy posts the fastest growth in the world.

“Upside of 25 percent from here would be a conservative estimate and it could be as much as 50 percent,” Kim Wong, Citigroup Inc.’s head of convertible bond trading for Asia, said in a telephone interview from Hong Kong.

The debt lost 3.92 percent in May and June as measured by Bank of America Merrill Lynch indexes, while the MSCI Asia Pacific Index of stocks fell 10.4 percent. PT Bumi Resources’ $375 million of equity-linked notes due 2014 yield 16 percent, compared with 11.3 percent for its $300 million of bonds due 2016, according to Exane SA and ING Groep NV prices. Shares in Indonesia’s biggest coal producer fell 16.4 percent to 1,880 rupiah (21 cents) in Jakarta this year through June 30.

With the economy in the Asia-Pacific region forecast by Barclays Capital to grow 7.6 percent this year, faster than the 4.7 percent for the world overall, the securities are a bargain, according to Swiss bank Lombard Odier Darier Hentsche & Cie. Some 250 convertible dollar-denominated bonds are outstanding in Asia-Pacific excluding Japan, compared with 3,406 which can’t be exchanged for equity, according to data compiled by Bloomberg.

‘Reward Looks Good’

“If equity markets recover strongly you could make 50 percent, 60 percent” on the debt, Nathalia Barazal, a money manager who invests in equity-linked securities at Lombard Odier, said in a phone interview from Geneva. “If they don’t, you’ve still got a bond with the safety net of a positive yield, so either way the risk versus reward looks good.”

Convertible bonds are notes that can convert to stock at a predetermined ratio. When stocks fall the option to convert loses its value, pushing prices down.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt rose 2 basis points last week to an average of 197 basis points, or 1.97 percentage points, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has fluctuated between 190 and 201 basis points since May 25 after widening from the low this year of 142 on April 21. Yields ended last week at 3.98 percent, compared with 3.99 percent on June 25.

‘Sobering Reassessment’

Corporate bond sales tumbled last week as credit-default swap indexes jumped. General Motors Co. is seeking a $5 billion revolving line of credit as concern that the economy will slow leads investors to shun loans.

“In the beginning of April it felt like we were off to the races again,” said Tom Newberry, the New York-based head of global leveraged-finance at Credit Suisse Group AG, the fourth- biggest underwriter of leveraged loans this year. There’s since been a “sobering reassessment,” he said.

Companies issued about $9.4 billion of bonds worldwide in the five-day period ended July 2, a drop of 63 percent from the previous week, data compiled by Bloomberg show. That’s the least in five weeks and below this year’s average of $25.3 billion.

Credit-default swaps tied to U.S. corporate bonds jumped the most in six weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 8.6 basis points to 122.75 basis points, the biggest weekly rise since the period ended May 21, according to Markit Group Ltd.

Europe Swaps

In London the Markit iTraxx Europe Index of swaps on 125 investment-grade companies rose 0.7 basis point to 127.04. Both indexes typically increase as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of bonds and loans.

GM is talking with banks about setting up a revolving line of credit of $5 billion or more, said two people with knowledge of the plan. The Detroit-based automaker may use the line to pay business costs while using cash to refinance more expensive debt, said one of the people, who asked not to be identified because the talks are private.

GM also wants a credit line to establish relationships with banks, the people said. Noreen Pratscher, a spokeswoman GM, declined to comment.

Loans, Convertibles

The automaker is seeking the loan as prices for the debt weaken. The S&P/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.93 cent last week to 87.88 cents on the dollar. The index lost 3.7 percent last quarter after gaining 4.7 percent in the first three months of the year.

Convertible bonds overall have lost 1.48 percent this year after gaining 36.3 percent in 2009 as stocks rallied amid a recovery in the economy. The securities lost 29.3 percent in 2008, Bank of America Merrill Lynch index data show. The firm’s broad corporate bond gauge has gained 5.07 percent following an increase of 16.3 percent in 2009.

Equity-linked securities have been hurt along with stocks amid concern that Europe’s sovereign debt crisis and attempts by governments to reduce spending will slow economic expansion. The MSCI World Index of stocks has tumbled 11.45 percent in 2010.

The average yield on equity-linked bonds from Europe, the Middle East and Africa has “almost doubled” since January, providing new opportunities for investors, said Barclays Capital equity-linked analyst Angus Allison, citing the London-based bank’s EMEA Convertibles index.

Asia Recovery

Asian convertibles may be more attractive than those of Europe and the U.S. because the region’s relative economic strength should translate into a faster equity market recovery, according to Barazal at Lombard Odier, which has 3 billion euros ($3.7 billion) invested globally in the debt.

“If it’s growth, budget deficits, whatever you’re looking at in Europe, Asia looks better,” Barazal said. “We’re overweight Asia because the fundamentals are good.”

PT Berlian Laju Tanker’s $125 million of 2015 convertible bonds yield 28.2 percent, compared with 19.7 percent for its $400 million of non-convertible bonds due 2014, according to Mizuho Securities Co. and BNP Paribas SA prices.

SM Investment Corp., the Philippines company which owns the country’s largest bank by assets and its biggest shopping mall operator, has $300 million of 2012 convertible bonds yielding 4.4 percent, Nomura prices show. Its $350 million of 2013 bonds which aren’t convertible yield 4.1 percent, BNP prices show.

Concentration Risk

Infratil Ltd., the New Zealand investor in energy and transport companies, has NZ$77.3 million ($53.2 million) of 2012 convertible bonds yielding 10.2 percent, New Zealand Exchange Ltd. prices show. Its NZ$20 million of 2011 notes which aren’t convertible yield 7.9 percent.

The size of Asia’s convertible bond market means volatility is higher than in other parts of the world, according to James Simmons, a money manager at hedge fund Enhanced Investment Products Ltd. The firm doesn’t own any equity-linked notes.

“The vast majority of the market is concentrated in the hands of a small number of people, all of whom act at the same time,” he said in a phone interview from Hong Kong. “I’m not saying equities won’t go up or credit spreads won’t tighten, just that I think you’re not being paid enough to take on that kind of additional risk right now.”

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