Issue 10 | Nov. 4, 2011: A special brief for members of the Global Initiatives Council

The Euro Rescue Plan-Good but not great
Europe’s leaders introduced a stronger rescue plan that includes larger write downs of Greek debt, banks raising their capital to protect themselves against losses from any potential defaults, expanding the European Bailout Fund to 1 trillion euro and new capital injections into weak European Banks.  Until the details are worked out, it is unclear whether or not the plan will stop the unraveling of Eurozone members Spain, Italy, and France.  Even after the deal, Italy’s cost of borrowing continues to increase to unprecedented highs of more than 6 percent.  An interest rate of 6 percent or higher is usually considered unsustainable. 

U.S. Economy Grows 2.5%
The U.S. economy grew 2.5 percent in the third quarter, easing fears of a possible double-dip recession. Increased spending on equipment and software by businesses was paralleled by increased consumer spending. Exports also increased by 4 percent. The increase in consumer spending was not accompanied by income growth, however, as spending by businesses was focused primarily on fixed investment rather than labor. The pace of growth would have to climb to above percent to make a dent on the unemployment rate.

Japan Intervenes in Currency Markets to Weaken the Yen
The Japanese government intervened in the foreign exchange markets earlier this week, buying dollars to devalue a yen that it said has been driven up by currency speculators. The strong yen has hurt post-tsunami reconstruction efforts by harming the competitiveness of Japanese exports overseas. Flooding in Thailand has also disrupted supply chains of Japanese companies. The yen was trading at a record rate of 75 yen to the dollar on Monday, down from 86 the previous year, before government purchases pushed the rate down to 78 yen to the dollar. Japan has held back from taking a more active role intervening in light of U.S. pressure on China to loosen its currency controls.

Europe Seeks Bailout Funds from China
The head of the Eurozone’s bailout fund is taking steps to persuade China to help bail out members facing a sovereign debt crisis.  It is thought that China could add 70 billion euros to the fund, raising its overall level to 1 trillion euros, but China has said it will not add to the fund unless there are strong guarantees of the safety of their contribution.   Among experts, it is not clear whether or not China will contribute to the fund.  Other developing countries  including Brazil and India seem unwilling to contribute.

$975 Million Loan for Indian Rail Project
The World Bank agreed to a $975 million loan to the Indian government to build a freight railway line to connect North and Eastern India.  India is investing heavily in its crumbling infrastructure in order to sustain its current growth rates.  The country desperately needed to add railways to meet the growing freight traffic expected to increase more than 7 percent annually.

California High-Speed Rail Cost Estimates to Rise
The California High-Speed Rail Authority recently announced its revised business plan for the rail project. The new estimates for the project are now $98.5 billion, up from the $42.6 billion estimate two years ago and nearly triple the $33.6 billion price advertised to voters, with the projected completion date pushed back from 2020 to 2033. The state budget for the current fiscal year is $86 billion. Supporters are putting pressure to begin the project before a federal grant of $2.2 billion expires next year, with opponents raising concerns about where funding will come from. The state would have to raise money by issuing bonds to fund a $6.3 billion section of the track stretching from Fresno to Bakersfield before the federal deadline next year. That section would not be long enough to support high-speed rail service, but could be used as a springboard to build more sections as funding materialized. Scrapping the project would go against voter approval in the 2008 elections, and sink the $650 million already invested in planning costs.