The Cyprus Bailout and European Banking Stability

Cypriot protestors demonstrate against the EU’s proposed savings tax.

The Cypriot parliament on Tuesday rejected a proposed bailout package from the European Union that would have imposed a surcharge on bank deposits. The tax was resoundly defeated, with 36 members of parliament opposing the measure and 19 abstaining; no one voted in support. Meanwhile, thousands of protestors had taken to the streets to voice their opposition to the measure.

German Finance Minister Wolfgang Schauble noted that he “regretted” the Cypriot parliament’s decision, asserting that “There is a danger they won’t be able to open the banks again at all.”

The measure would have imposed a 6.75 percent levy on all deposits of less than 100,000 euros, and a 9.9 percent surcharge on deposits of more than 100,000 euros. In a last-ditch effort to save the measure, the government of Cyprus announced ahead of the vote that accounts of less than 20,000 euros would be exempted from the tax.

Cyprus, which like Ireland and Iceland had attempted to position itself as an international banking center, had an exceptionally large number of foreign depositors. It was estimated that approximately 40 percent of all deposits on the small island were held by foreigners, mostly Russians. The European Union’s measure angered the Russian government, which announced that it would need to reconsider the terms of a 2.5 billion euro loan it had made to Cyprus in 2011. Cyprus’ Finance Minister, Michalis Sarris, was in Moscow on Tuesday, hoping to extend repayment terms and lower the interest rate on the original loan.

International observers widely condemned the European Union’s proposed bailout package, the terms of which were released on Saturday. Economist Paul Krugman argued that,

You can sort of see why they’re doing this: Cyprus is a money haven, especially for the assets of Russian beeznessmen; this means that it has a hugely oversized banking sector (think Iceland) and that a haircut-free bailout would be seen as a bailout, not just of Cyprus, but of Russians of, let’s say, uncertain probity and moral character…The big problem, however, is that it’s not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”

The Cypriot case is particularly interesting. According to an IMF report, the country was doing well before the 2008 global economic crisis, experiencing “a long period of high growth, low unemployment, and sound public finances.” But the global financial crisis hit Cyprus particularly hard, as the country was exceptionally dependent on foreign depositors. By 2011, concerns were emerging. Cypriot banks had made loans to Greek barrowers totaling more than 160 percent of the Cypriot GDP, and those ties to the Greek economy were beginning to drag down Cyprus.

What’s interesting is the moral hazard that the imposition of the new levy poses for other banks in the European Union. As Krugman notes, Europeans watching from other troubled economies (think Spain, Portugal, and Italy) the bailout requirements in Cyprus may be an incentive for them to relocate their assets before their country is forced to undertake similar reforms.

What do you think? Are the conditions imposed by the European Union on Cyprus as a prerequisite for receiving a rescue package reasonable? Or do they threaten to undermine economic stability in other troubled European economies? Leave a comment below and let us know what you think.

What’s Going on at the IMF?

International Monetary Fund Headquarters, Washington DC

Once the unabashed advocate for cutting government regulation and liberalizing economies worldwide, there have been recent murmurings from the International Monetary Fund moving in a dramatically different direction. This is not to suggest that critics of the IMF—most notably Joseph Stiglitz—have run out of ammunition. Rather, as Duncan Green has been reporting on his Oxfam blog, the IMF appears to be opening up to new proposals. For most, the concession that the state may have a role to play in development is hardly a dramatic finding. But from the organization that promoted cuts in government spending and liberalization of capitalism markets as the solution to nearly every economic and financial crisis from Asia to the United Kingdom, from Russia to Brazil, it’s quite a concession.

We’re specially looking at three developments, all covered by Duncan. First, in early February, the IMF began to rethink its traditional focus on inflation. In a paper co-authored by the IMF’s chief economist, Olivier Blanchard, the organization conceded that it had become too focused on inflation at expense of other goals, like fiscal policy, interest rate stability, and—wait for it—preventing global financial crises like the one that rocked the world beginning in 2008.

Later the same month, responding to increasing pressure from countries like Brazil, the IMF began to rethink its traditional opposition to capital controls.  For years, the IMF had promoted open financial markets as a central component of development strategies. But such openness carried significant risk of fostering financial instability. We saw this, for example, during the 1997 Asian financial crisis. In 1997, the IMF prescribed cutting capital flows as part of its reform package. But in 2010, it reversed course, conceding that capital controls, under certain circumstances,  may be an effective part of the policy toolkit to manage capital flows.

In April, the IMF announced its most dramatic change to date, announcing its support for establishing a “Robin Hood Tax” intended to force banks to pay for the direct and indirect costs associated with government interventions to bail out the banking sector following the global financial meltdown. While this initiative has stalled amid strong divisions between major players—particularly between the United States and France—the willingness with which the IMF embraced the proposal stood in stark contrast to its earlier positions on financial deregulation and lowering tax rates.

Now, in a new working paper published this month, two IMF economists draw a connection between inequality and the outbreak of financial crises, concluding that higher levels of inequality make an economy more prone to the kinds of crises that have rocked the global economy in recent years. They conclude that preventing future economic crises may depend on reducing the total level of inequality in any given society.

Duncan Green is right. They must be putting something in the water at IMF headquarters. How else do we explain the dramatic shifts taking place there?

The Irish Crisis

Irish PM Brian Cowen concedes Ireland requies assistance.

Once the “Celtic Tiger,” the envy of most other European (and indeed global) economies, the economoy of Ireland now lies in tatters. The economic crisis in Ireland reached boiling point over the weekend, as the government announced it would accept loans from the European Union. The Irish government had been resistant to the idea, believing that the conditions imposed on Ireland as part of the relief package were too strict.

According to a statement released Monday by European finance ministers, Ireland will now undertake dramatic “fiscal adjustment” and “structural reform” in order to receive EU and IMF assistance, amounting to some €80bn-€90bn. The proposed relief package covers just a small portion of the bailout needed to pay off foreign banks and keep the Irish economy afloat. Kan Kees de Jager, the Dutch finance minister described the cuts as “fast and deep.” The cuts will likely have profoundly negative effects on the people of Ireland. Already, dramatic cuts in the country’s minimum wages and reductions to universal child benefits have been proposed. Apparently off the table, at least for now, are tax increases. Ireland currently has a corporate tax rate of 12.5 percent and is among the lowest in the world. In many ways, the conditionalities imposed as a part of receiving the relief package echo the era of structural adjustment in the global south.

The package has already provoked considerable discussion in the blogosphere. The FT’s Brussels Blog offered extensive analysis. Also blogging at the Financial Times, Gideon Rachman explores the possible effects on the Euro, while the bloggers at Baseline Scenario point to the moral hazard of socializing the risk associated with investment decisions onto the backs of Irish taxpayers. 

Politically there are costs as well. According to the New York Times, the government of Prime Minister Brian Cowen will likely collapse as a result of the bailout package, forcing new elections early next year. By that time, however, the rescue package will be done, and the new government will be bound by the conditions it imposes.

The Irish crisis certainly raises questions about the viability of the Euro and the strength of the Eurozone economies. While Germany appears to be humming along, many other Eurozone members, including Greece, Portugal, Spain, and Ireland are in the doldrums. Greece has already accepted a EU/IMF rescue package, and investors widely believe that Spain and Portugal will also be forced into austerity. Can the Euro survive such a widespread crisis?

Reforming the International Monetary Fund

Dominique Strauss-Kahn, Managing Director of the IMF

There’s a showdown brewing at the International Monetary Fund (IMF). The organization, which is responsible for overseeing the global financial system, stabilizing exchange rates and balance of payments, is at a standoff over the appropriate size of its executive board. The board is arguably the most powerful body within the fund, as it is responsible for conducting the day-to-day affairs of the IMF. By tradition, the Managing Director of the IMF is a European, while the First Deputy Managing Director is an American (similarly, the World Bank President has traditionally been an American). Constitutionally, there are 20 members of the board, though a series of ad hoc decisions which must be renewed every couple of years, the number of seats was expanded to 24.

There’s the rub. The European Union, which currently holds 9 of the 24 seats on the board, wants to renew the agreement. The United States, arguing in favor of a more streamlined decision-making process, objects. Due to the voting procedures in the IMF, the United States effectively holds a veto over the body’s decisions. All decisions of the IMF must be made by an 85 percent supermajority, and the United States holds 16.74 percent of the votes. (The voting structure and board composition is detailed on the IMF website).

The likely losers in the reform process are the small European states, like Belgium and the Netherlands, which would see their seats merged with a larger European power, most likely Germany. “Musical deck chairs,” as the Global Dashboard describes it. And given the ongoing controversy over Germany’s push for fiscal austerity, this would not likely be well-received.

The United States, however, gains in other ways. According to a report by the Economist’s Free Exchange, the reforms would also give the United States greater clout with developing countries, which have been pushing to reform the voting structure of the IMF for years.

America also gains subtly by taking the side of emerging economies. They might be less likely, for example, to make a big fuss about America’s effective veto at the fund. This is something some have been highlighting as a rule that needs to change—but perhaps now that America is using its veto to make emerging countries’ case, they might prefer to pipe down about what a terrible thing it is. Which would probably suit America just fine.

The current voting structure of the IMF gives Belgium (2.08% and the Netherlands (2.34%) greater input than Mexico (1.43%), Brazil (1.38%), and South Korea (1.38%). Not to mention the fact that many IMF members have less than 1/10 of a percent of a vote. Zambia, for example, has 0.23 votes, Vietnam 0.16 votes, Uganda 0.09 votes, and so on. Even South Africa—the largest economy on the African continent—has just 0.85 votes. (For a complete list of the IMF weighted votes by country, see the IMF website).

And that is, of course, the tragic irony: the countries most affected by IMF policy have the least input in its decision-making processes. The countries most likely to need IMF assistance, and therefore most likely to be subject to the austerity measures imposed as a condition of receiving that assistance, have virtually no input in crafting the nature of those conditions, let alone influencing broader IMF policy.

Some redistribution of seats is certainly necessary. As David Bosco notes, Europe is over-represented and the developing world, particularly East Asia, is under-represented in the current IMF voting system. But does reducing the size of the board address this inequality? Not really. Even with the changes, the developing world continues to lack real input into the decisions of the IMF. The United States continues to have its de facto veto. The position of the other major powers in the IMF (Japan, Germany, France, the United Kingdom) remains unchanged. European control of the Managing Director position remains intact. And the developing world continues to be affected by the decisions of the IMF without having any real input into making those decisions. Under these conditions, the “failure” of developing countries to take “ownership” of the economic reform process—a criticism widely cited as the reason for the failure of structural adjustment in IMF reports—is hardly surprising. Why take ownership of a process and policy you had little input in crafting?

The Global Financial Crisis, Revisited

Blogging at Triple Crisis, Kevin Gallagher noted an interesting development in the “blame game” between the International Monetary Fund, the World Bank, the United Nations, and the World Trade Organization regarding the causes of the global financial crisis last year. As Gallagher notes, the World Trade Organization held its much anticipated session on the WTO and the financial crisis last week, claiming that the WTO played no negative role in the crisis.

The debate centers on the role of financial controls and capital account liberalization in the broader liberalization process. While the International Monetary Fund increasingly recognizes the importance of capital controls in preventing financial crises, the World Trade Organization continues to maintain that the imposition of capital controls may be “actionable” under the General Agreement on Trade in Services. In other words, even as the IMF acknowledges that imposing limits on the ability of speculative investors to move in and out of particular economies may provide an avenue for governments to limit the negative impact of such speculative investment on their national economies, the World Trade Organization’s rules make such restrictions a punishable offense.

The recognition of the importance of capital controls is not new. Joseph Stiglitz made a similar argument following the 1997 Asian financial crisis, arguing that the IMF ignored the importance of sequencing liberalization to avoid economic crises in developing economies. But there are two important take-away points here. First, the fact that the IMF—the former bastion of unrestricted liberalization—now recognizes that liberalization must be paced represents an important development in the international economy. Indeed, as a February 2010 IMF Staff Paper noted, controls on capital inflows “can usefully form part of the policy toolkit to address the economic or financial concerns surrounding sudden surges in capital.” Second, as Gallagher argues in his paper on the topic, capital account liberalization is not associated with economic growth in developing countries. In other words, at least among developing economies, there is little benefit but much risk in liberalizing financial flows. This is something that the government of Brazil recognized early in the global financial crisis, when it imposed a two percent tax on capital inflows attempting to limit portfolio investment tin the county.

The IMF’s Policy Shift

IMF Managing Board

Last Friday, the International Monetary Fund released a staff position note  (basically, a working paper) entitled “Rethinking Macroeconomic Policy.” The impetus for the paper, writing in a surprisingly clear and jargon-free tone, seemed clear enough. In the introduction, the authors argue that macroeconomists and policymakers had been lulled into a false sense of complacency about how to conduct macroeconomic policy. The onset of the global economic crisis—or perhaps more accurately, the inability of our macroeconomic policy toolkit to address the crisis—challenged that complacency, creating the need to rethink our policies.

But the surprising part doesn’t come from the paper’s assertion that we need to think about what our post-crisis macroeconomic policy might look like. Rather, the surprising part—and the part that has generated considerable discussion in the blogosphere—are the recommendations themselves. The report recommends that central banks and the International Monetary Fund make several key changes in their policy outlook:

1. Increasing the inflation target from 2 to 4 percent.
2. Automatic lump sum payments should be introduced for poorer families if unemployment crosses a pre-determined threshold.
3. Exchange rate intervention should be permitted for developing countries heavily dependent on international trade.
4. Central banks should be granted greater regulatory authority and capacity.

These proposals represent a dramatic departure from the Washington Consensus [glossary] that dominated international economic policy since the early 1980s. Indeed, the Financial Times noted that, “The suggestion that inflation targets should be raised to 4 per cent will cause many central bankers to choke on their breakfasts, since they have spent their whole careers gaining and preserving the creditability of keeping inflation at levels close to 2 percent.”

Needless to say, the proposal has sparked considerable coverage. While Ben Bernanke still seems to be committed to keeping inflation under the 2 per cent target, Paul Krugman and James Vreeland have both already chimed in the on discussion, offering some important contributions. (Krugman importantly notes that the current financial crisis facing Greece and the other PIIGS countries has its roots in this low-inflation policy). And Joseph Stiglitz has written several books critiquing the Consensus. But the new position note comes from within the IMF, suggesting a more dramatic policy shift may be on the horizon.

So why the move? The argument presented in the position note concludes that because the inflation targets were set so low, there was no room for central banks to maneuver once the global economic downturn hit. Central banks quickly lowered interest rates, attempting to stimulate the economy. But when this did not work, monetary policy provided few good options for addressing eh economic crisis.

Five Stories You Might Have Missed

There have been several interesting developments in European politics over the past few days. Final results were released Saturday from the Irish referendum on the Lisbon Treaty. The Irish approved the treaty by a wide margin (with 67.1% of voters in favor) after defeating the treaty in June 2008 by a 53.4 percent majority. Ireland’s approval of the treaty represents an important step forward in approving a restructuring of the European Union; a restructuring that would expand the influence of the European Parliament, establish a full-time presidency for the EU (a position for which former British Prime Minister Tony Blair may be tapped), and limit the ability of national governments to veto EU legislation in certain areas. But despite the approval by Irish voters, Czech President Vaclav Klaus tempered expectations, stating that he may delay signing the treaty until a Czech appeals court can review the treaty and assess its implications for Czech sovereignty.

Two important elections also took place recently. In Germany, Angela Merkel won reelection as Germany’s Chancellor. The victory of her center-right coalition promises to continue her emphasis on greater openness for the German economy. Preliminary results from Greek elections on Sunday suggest that the Socialists will soundly defeat the ruling New Democracy party, possibly securing a legislative majority in the national parliament. The contradictory results suggest an interesting restructuring of European politics.

In news from outside of the European Union last week:

1. Government ministers at the annual meeting of the International Monetary Fund in Turkey this week rejected warnings by the banking sector that new financial regulations could undermine economic growth. Representatives from the United States, Italy, and the United Kingdom all rejected claims by the global bankers association that regulatory overkill could undermine global economic growth and result in the creation of fewer jobs. But despite apparent agreement on the need for new financial regulations, considerable debate over the exact nature and structure of those regulations remains, and an agreement on the details appears to be a ways off.

2. The International Olympic Committee granted Rio de Janeiro the right to host the 2016 Olympic Games on Friday, making Rio the first South American city to host the Olympics. A last minute visit by President Barack Obama to Copenhagen was unable to convince the IOC to grant the games to Chicago, which was also bidding to host. Several observers have raised concerns that Obama’s unsuccessful campaign to win the games may undermine his ability to deliver on health care reform and foreign policy objectives.

3. A massive earthquake in Indonesia resulted in the deaths of an estimated 1,100 people last week. The tragedy follows a tsunami in the South Pacific that killed more than 100 people. Concerns that another, larger quake could strike soon were also raised on Saturday. International aid campaigns have begun delivering supplies to the region, but the widespread devastation of government facilities in the region could hamper aid efforts.

4. The President of Burkina Faso has been dispatched to meet with the military rulers of Guinea to address the emerging crisis in the country. More than 100 people have been killed in Guinea in the past week, as the county’s military government has moved to quash opposition protests. On Thursday, Cellou Dalein Diallo, former prime minister and current opposition leader, was forced to flee the country, as Captain Moussa Dadis Camara, who came to power as the country’s leader in a December coup, has attempted to solidify his hold on power.

5. On Sunday, the government of Iran agreed to permit International Atomic Energy Agency inspectors to visit a secret uranium enrichment facility made public by the United States last week. The discovery of the site led the Russian government to concede the possibility of United Nations sanctions on the Iranian government—a proposal which both Russia and China have long opposed. The Iranian decision comes ahead of scheduled six-party talks, involving the United States, Russia, France, China, Britain, Germany, and Iran, at the end of the month.

Five Stories You Might Have Missed

The G20 meeting in Pittsburg this week resulted in agreement on several important principles, with the group agreeing in principle to establish guidelines for bankers’ pay, developing a timetable for reforming financial regulations, and establishing a new framework for economic growth. The G20 also agreed to transfer five percent of the shares in the International Monetary Fund and three percent of the shares in the World Bank to emerging countries. The organizations have long been criticized for voting structures which over-represent the developed world at the expense of the developing world.

In other news from the previous week:

1. There were several important developments in Iran this week. On Sunday, Iran test fired a short-range missile as part of ongoing war games in the country. The missile, a Shahab-3, has range sufficient to reach Israel and U.S. bases in the Persian Gulf. The launch comes just days after the United States announced it had discovered Iran possessed a second, secret uranium enrichment facility. France and the United Kingdom joined the United States in condemning Iran for misleading the international community. The discovery and announcement put pressure on Tehran, which maintains that the facility is used for peaceful purposes. The most recent announcement produced new signals from Russia, which had historically opposed sanctions against Iran. But after being briefed on the new facilities by the Obama administration, Russian President Dmitry Medvedev indicated that the Russian government may be willing to consider sanctions as a way of addressing the Iranian nuclear situation.

2. Germany is headed to the polls today, with most analysts calling the election too close to call and many speculating about what kind of coalition will take control of the world’s fourth largest economy. Although Angela Merkel’s ruling Christian Democrats have been leading throughout the campaign, her support has been slipping over the past week. With low turnout forecast, observers believe that the election could still be close. Further, a quirk in the German voting system could result in Merkel’s CDU winning a plurality of seats in the Bundestag despite winning a smaller percentage of the popular vote than her rivals. Her rival, the Social Democrats, have lagged in the polls throughout the campaign but managed a late-campaign surge. No matter what the margins, negotiations around a forming a new coalition in Germany will likely be the central focus of German politics in coming days.

3. Two car bombings believed to the work of the Taliban in Pakistan killed 27 people on Saturday. The attacks targeted Pakistan’s military and police forces, coming just days after the country’s President, Asif Ali Zardari, appealed to the G20 for assistance in fighting terrorism in Pakistan. The attacks demonstrate the resilience of the Taliban in Pakistan, which has been engaged in a protracted war with the national military. Last month, the Pakistani military killed Baitullah Mehsud, the Taliban’s main leader in Pakistan, and earlier this year, the military killed more than 3,000 Taliban militants in operations in the Swat valley region. Despite these losses, however, the Taliban remains a central threat to the stability of the Pakistani regime. 

4. The government of Guinea is moving forward with its efforts to overturn some of the contracts signed with foreign companies under the military dictatorship of Lansana Conté, whose 24 year-rule ended with his death in December. The new government has already forced Rio Tinto to return a portion of its iron ore concessions and convinced the South African gold company, AngloGold Ashanti, to establish a $10 million fund to pay for environmental damages caused by their operations in the country. On Tuesday, the government ordered the Russian aluminum company Rusal to quit the country, claiming that it owed more than$750 million in taxes, royalties, and other duties owed since 2002. With a GDP per capita of $442, Guinea remains one of the poorest and least developed countries in the world.

5. Deposed President Manuel Zelaya returned to Honduras last week, sneaking into the country and hiding in the Brazilian embassy in Tegucigalpa. Honduran security forces used water cannons and tear gas to dispurse crowds which had gathered outside the embassy in support of Zelaya. The Brazilian government has called on the international community to do more to support Zelaya’s return. Most of the international community has refused to recognize the new government and international assistance from the World Bank and the International Monetary Fund has been suspended. Speaking before the United Nations General Assembly on Wednesday, Brazlian President Luiz Inácio Lula da Silva said, “The international community demands that Mr Zelaya return immediately to the presidency of his country and must be alert to ensure the inviolability of Brazil’s diplomatic mission in the capital of Honduras.”

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The political situation in Iran continued to evolve over the past week. Last week, a standoff between President Mahmoud Ahmadi-Nejad and Iran’s Supreme Leader, Ayatollah Ali Khamenei, culminated in the dismissal of two conservatives from the cabinet and the firing of Vice President (and close ally of Ahmadi-Nejad), Esfandiar Rahim Mashaei. The deteriorating relationship between Ahmadi-Nejad and Khamenei further undermines the political stability of Iran, already weakened by June’s disputed presidential elections and the subsequent protests which have rocked the country. Protests have been a regular feature of the Iranian political scene for the past month, including clashes between police and opposition supporters like those that occurred on Thursday.  Although the Iranian government last week released hundreds of people arrested for participating in the post-election protests, the trial of 100 of the most prominent detainees is moving forward. Critics of the regime have condemned the trial as a spectacle.

Meanwhile, three Americans were arrested on Saturday by Iranian security forces for allegedly entering the country illegally.  The three were camping in Kurdistan (near the Iraqi-Iranian border) when they crossed over into Iran. They have been transferred to the capital, Tehran, where they are currently being held.

In news from outside Iran in the last week:

1. Two statements by the Indian government last week dashed hopes of progress in multilateral negotiations. On Wednesday, India’s commerce secretary, Rahul Khullar, dismissed hopes of rekindling World Trade Organization talks as unrealistic in the current global political and economic climate. The current round of talks, referred to as the Doha agenda, has been under negotiation for nine years. The talks have been suspended numerous times, largely as a result of the inability of WTO member states to agree on binding cuts to agricultural subsidies. According to Khullar, progress is unlikely because, in the context of the global economic crisis, political leaders are focused on job losses and the lack of domestic economic growth, a focus which makes it difficult to move forward on a new global trade deal.

In another development, India’s environment minister, Jairam Ramesh, said on Friday that India would not agree to binding emission cuts for at least ten years, potentially throwing climate talks scheduled to take place in Copenhagen in December into disarray. India and China are both dismissive of western pressure to agree to greenhouse gas reductions, believing that such reductions would undermine future economic growth and development in their countries. But without the participation of China and India in climate change negotiations, progress will be far more difficult, particularly given the historical U.S. negotiating position that it will not be bound by any climate change agreement that does not also include reductions for China and India.

2. Over the weekend, Russia concluded negotiations to expand the Russian troop presence in Kyrgyzstan. The expanded Russian presence is part of Russia’s broader effort to reassert itself in its traditional sphere of influence, an effort which included the development of the Collective Security Treaty Organization, a counterpart to NATO which includes Russia and six other former Soviet Republics, Kyrgyzstan, Kazakhstan, Tajikistan, Uzbekistan, Armenia and Belarus. The United States and Russia have been competing for influence in Kyrgyzstan, which occupies an important geo-strategic position, and Kyrgyzstan’s president, Kurmanbek Bakiyev, has skillfully negotiated between competing Russian and American interests. In February, after receiving $2 billion in aid from the Russian government, Bakiyev ordered the United States to leave Kyrgyzstani bases by June. The bases are part of the U.S. air transit route to supply forces in Afghanistan. After the United States agreed to triple rent payments for use of the base and to offer additional financial assistance to the Kyrgyzstani government, Bakiyev rescinded his request that the U.S. withdraw.

3. Venezuelan President Hugo Chávez has once again sparked widespread criticism, this time among human rights groups. At issue is the latest development in the president’s campaign against “media terrorism”—a new law which would punish journalists and their sources with up to four years in jail for “causing panic,” “disturbing social peace” or compromising national security.

In an unrelated development, the government of Venezuela has “frozen” diplomatic and economic relations with its neighbor, Colombia. Relations between the two countries have been poor since March 2008, when Colombia launched a raid into Ecuador, a close ally of Venezuela. The decision to suspend relations came after Colombia accused Venezuela of supplying rocket launchers to Marxist rebels in Colombia.

4. Clashes between security forces and an Islamist sect in three states in Nigeria continued last week despite the death of Islamist leader Mohammed Yusuf in police custody. More than 150 people have died in five days of fighting in Nigeria, where a sharp economic and political divide between the largely Muslim north and the predominately Christian south has been exacerbated by the country’s declining economic situation. The fighting in the northern part of the country complicates efforts to address the longstanding crisis in the southern, oil producing region of the country, where conflicts between militant separatist groups and the government have continued off-and-on for the better part of a decade. Taken together, these conflicts represent the most significant challenge to the Nigerian government since independence.

5. The International Monetary Fund on Friday issued a statement intended to play down the standoff between the Fund and the government of Iceland. At issue are the conditionalities imposed on the government of Iceland as a requirement for the dispersal of $2.1 billion in IMF loans. The government of Iceland has been under immense political pressure regarding the status of foreign savings deposits in Icelandic banks, which collapsed last year as part of the global economic crisis. The IMF is requiring that the government guarantee all foreign savings deposits, but the government of Iceland has so far refused, bowing to domestic political pressure not to compensate account holders.

Five Stories You Might Have Missed

It’s been an interesting week in the news. While the domestic political scene has been dominated by President Barack Obama’s comments regarding the arrest of Harvard Professor Henry Louis Gates, the real issues of health care reform and reforming the U.S. financial regulatory system appear to have fallen by the wayside, at least temporarily.

In news from outside the United States in the last week:

1. George Mitchell, President Barak Obama’s special Middle East envoy, met with Syrian officials on Sunday. Although no specifics of the meeting were reported, it is believed that Mitchell’s visit is part of Obama’s strategy of improving relations with Syria as part of the broader goal of achieving a comprehensive settlement of the Arab-Israeli dispute. The visit was Mitchell’s second trip to Syria in two months.

2. The political situation in Iran appears ready to destabilize, as the government faces both opposition from opposition political parties as well as a standoff between fundamentalist elements within President Mahmoud Ahmadi-Nejad’s cabinet. On Monday, Iran’s supreme leader, Ayatollah Ali Khamenei warned opposition leaders that they faced “collapse” if they continued protests over last month’s disputed presidential elections. Last week, Akbar Hashemi-Rafsanjani, Iran’s former president, lent support to the opposition, speaking at a protest against Ahmadi-Nejad’s re-election. Rafsanjani’s position was closely watched, particularly given his position as head of two powerful conservative bodies in Iran, the expediency council and the experts assembly.

In other developments, over the weekend, President Ahmadi-Nejad fired two cabinet ministers, Hossein Saffar-Harandi, culture minister, and Gholam-Hossein Mohseni-Ejei, intelligence minister. The firings, which are rare in Iranian politics, represent the latest developments in a political standoff between Ahmadi-Nejad and conservative forces in his government. It was reported on Wednesday that four ministers, including the two fired over the weekend, debated the president’s decision to name Esfandir Rahim Mashaei as first vice president. Mashaei is a close ally of the president, but managed to draw the criticism of conservatives when he argued last week that the position of the Iranian government should maintain a friendly disposition towards the Israeli people. After the appointment was made public, Ayatollah Ali Khamenei, who as the country’s supreme leader has the final word in governmental affairs, wrote to Ahmadi-Nejad, urging him to fire Mashaei. Ahmadi-Nejad initially refused, but Mashaei nevertheless stepped down over the weekend.  

3. The International Monetary Fund approved a new $2.6 billion loan for Sri Lanka on Friday. The loan is intended to help Sri Lanka rebuild after its 25 year civil war, which ended several months ago after the government launched a series of attacks which incapacitated the Liberation Tigers of Tamil Eelam rebel group. Despite the end of the fighting, however, the government continues to hold thousands of ethnic Tamils displaced by the fighting in detention camps. The detention of so many people led some human rights groups to condemn the IMF’s decision, arguing, as Human Rights Watch did, that the loan “is a reward for bad behavior, not an incentive to improve.” The United States and the United Kingdom both abstained from the decision, an unusual move for the two countries which collectively control almost 22 percent of the voting shares in the organization.

4. Government services in townships across South Africa have been disrupted by a strike by municipal workers demanding higher pay. The strike follows weeks of protest by residents of poor black urban areas in South Africa, who are demanding improvement of water and electricity delivery, better government housing, and reductions in corruption. The protests represent the most significant political challenge to President Jacob Zuma’s government, which came to power on the platform of reducing poverty and addressing corruption. Zuma promised last week to crack down on protestors, but such a strategy appears likely to exacerbate the political crisis facing the government.

5. The standoff in Honduras continued to develop last week, as ousted President Manuel Zelaya visited the Honduran border on Friday. Zelaya vowed to return to power and symbolically crossed the border, briefly stepping in to Honduras before quickly stepping back into Nicaragua to avoid arrest. Talks between Zelaya and the interim government of Honduras appeared to break down this week, as both sides have refused to cede any ground on the most fundamental question: who should be president. Meanwhile, western governments have stepped up pressure on the interim government of Honduras. On Monday, the European Union announced it was suspending all aid to Honduras while the United States has suspending military aid to the country and has threatened to suspend economic aid if progress is not made. Honduras is one of the poorest countries in Latin America, heavily reliant on coffee for export earnings.