sg.biz.yahoo.com Wednesday February 19, 1:45 AM By John Parry Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--High crude oil prices, not far off 29-month highs near $37 per barrel Tuesday, present a lurking threat to longer-dated bond prices; a danger that sovereign debt's robust safe-haven bid amid fears of war is serving to obscure.

"If we didn't have the global risk premium (associated with war and security threats) that is giving Treasurys a bid and if we were to look in isolation at higher oil prices, Treasurys would probably sell off because of the potential inflationary impact," said Paresh Upadhyaya, currency analyst, with Putnam Investments in Boston.

Longer maturities are particularly vulnerable to rising price pressures, although such pressures would have to be sustained in order to markedly erode the price of such bonds, fixed income strategists point out. Bond yields and prices move inversely.

In order to have a marked effect on prices in the economy as a whole, crude oil would have to remain in its current high ranges for the next six- to 12 months, says Ihab Salib, a global bond portfolio manager with Federated Investors in New York.

That would tend to rub off more negatively on European government bonds than on U.S. Treasury bonds, because European economies are more susceptible to hikes in global crude prices than the U.S.

Yet any disruptions to oil supply that may occur if an U.S.-led war against Iraq takes place should be short lived, allowing oil prices to descend to around $25 per barrel within the next few months, leaving longer bonds relatively unscathed, Salib expects.

Federal Reserve Chairman Alan Greenspan is among those who expect the surge in crude oil and gasoline prices to be transient. Last week, Greenspan said that colder-than-normal weather in the U.S. has pushed oil prices higher, along with geopolitical uncertainties in Iraq and an oil strike in Venezuela, but added that eventually, "the fundamentals are for much lower prices."

Ignoring The Inflation Threat

Nonetheless, some economists fret that capital market participants are too heavily betting one way - on a swift U.S.-led military action in Iraq that would soon deflate any price pressures in the oil market - and are not paying enough attention to the off chance of any war becoming drawn out and hugely expensive.

"Markets are not pricing in a wide variety of scenarios, and are ignoring inflation" as a threat, said Lara Rhame, senior economist with Brown Brothers Harriman in New York.

"Everyone is taking for granted that there will be a short-lived, decisive military action and after that...oil will come back down, the dollar will be up again, stocks will be up again and businesses will be reinvesting." But this is only one of several potential outcomes, Rhame emphasizes.

The dollar has been punished over the past few months in anticipation of a war, while U.S. stocks hit multi-month lows and crude oil surged last week.

For now, global bond market participants "are looking at higher energy prices as a negative tax, which will slow (economic) growth, and be positive for sovereigns in general," said Jack McIntyre, global fixed income analyst with Brandywine Asset Management in Wilmington, Del.

And even should crude oil prices remain high for a sustained period, if the pricing pressures they stoked acted principally to cap global economic growth, that lackluster economic scenario likely would depress bond yields, some bond strategists argue.

However, there is another scenario that could prove treacherous for longer dated government bonds; that of so-called "stagflation": lackluster economic growth, but with rising price pressures. The emergence of that troubling phenomenon could present a real threat to longer dated sovereigns, strategists warn.

"If there are higher oil prices for some time, that could undermine any global recovery," perhaps sending some major industrialized economies into recession "which would also be bad for global equity markets," said Upadhyaya of Putnam Investments.

If stocks weakened, that would tend to send more shifts into shorter-dated government bonds - a classic refuge for investors when equities slump. But longer-dated government bonds could fail to tap these flows, at the same time suffering from rising U.S. federal government budget deficits and spiraling price pressures.

"Longer dated Treasurys are looking like less of a safe haven than they did a year ago when we didn't have these massive budget deficits and higher oil prices hanging over our heads," said Rhame of Brown Brothers Harriman. Rhame expects longer dated Treasurys yields are set to rise and more acutely than those of shorter maturities, resulting in a so-called `steepening of the yield curve'.

Rising government deficits may also put some upward pressure on euro-zone government bond yields, as major economies including France, Germany and Italy struggle to keep their respective deficits within the 3.0% of gross domestic product limit stipulated by the Stability and Growth Pact. Inflation does not present an immediate additional threat to longer-dated European sovereigns, but longer-than-expected oil price hikes could change the picture.

-By John Parry; Dow Jones Newswires

john.parry@dowjones.com; 201-938-2096

www.globeandmail.com By ALLAN ROBINSON Monday, February 17, 2003 - Page B9

Indicator anticipated

Don't look for a busy day on the Canadian stock exchanges today with the closing of the U.S. markets for the Presidents' Day holiday.

The major economic news in Canada won't come until tomorrow when Finance Minister John Manley unveils his first federal budget, which is expected to provide for a major increase in spending on health care and other areas.

Today, however, Canadian investors will get a look at some economic data with the release by Statistics Canada of the "leading indicator" -- a broad measure of economic performance.

Economists forecast the indicator will show a slowdown in January with an increase of 0.2 per cent, compared with December's 0.4-per-cent rise.

The leading indicator is an index of 10 major cyclical categories of the Canadian economy, including money supply, the stock market, housing starts, durable goods orders, and employment levels. It also encompasses the U.S. leading indicator because of the importance of exports to the Canadian economy. The index was increasing at a rate of 1.2 per cent in early 2002, before declining late in the year. Recently, it has been erratic, although showing signs of renewed strength.

Earnings season slows

Profit reports slow to a trickle today in the United States and Canada.

Houston-based Southwestern Energy Co. is expected to release its fourth-quarter results today and analysts are forecasting a profit of 16 cents (U.S.) a share, which would bring the profit for the year to 54 cents, according to Thomson Financial/First Call.

Although oil is trading at about $36 a barrel, "most energy stocks are currently priced for $20 a barrel," Merrill Lynch Royal Securities Inc. said in a report. "The oil balance will remain exceedingly tight no matter what happens in Iraq -- it will take a long time for Venezuela to come back on stream," it said.

Over all, about 85 per cent of the companies on the Standard & Poor's 500-stock index have reported their fourth-quarter results, and profits have fallen about 34 per cent in the quarter to about $3.60 a share from a year ago, the report said. The $45-billion writeoff by AOL Time Warner Inc. alone depressed the S&P earnings by nearly $5, otherwise reported profits would be up 14 per cent from 2001, Merrill Lynch said. Operating earnings are up 17 per cent over 2001, it said. Regulators convening

Canadian securities lawyers are expected to keep a close eye on the two-day 13th annual Securities Superconference in Toronto today. Regulators from securities commissions, stock exchanges and accounting bodies will look at changes in corporate governance affecting North American business in response to major stock market frauds. An optional workshop on the third day will spotlight insider trading and the need for corporate compliance.

www.iht.com Chi-Chu Tschang Bloomberg News Monday, February 17, 2003   BEIJING China has posted an unexpected trade deficit for the first time in over six years as it stockpiles crude oil ahead of a possible war on Iraq and consumers take advantage of tariff reductions to buy more imported cars. The deficit in January was $1.25 billion, the first time China has posted a shortfall since December 1996, the Ministry of Foreign Trade and Economic Cooperation said Friday, citing customs statistics. Imports rose 63 percent to $31 billion, driven by a 78 percent increase in the volume of oil imported. Exports rose 37 percent to $29.8 billion. General Motors Corp. and other carmakers are taking advantage of China's entry into the World Trade Organization to import more cars into China and raising production at plants assembling parts shipped from overseas. "It is surprising," said Robert Subbaraman, an economist at Lehman Brothers in Tokyo. "My suspicion is there were temporary factors involved. Oil prices have been going up so China might be trying to front load their imports." As China imported greater quantities of oil, prices rose. The price of crude in New York has risen 73 percent in the past year on concern that an Iraq war may disrupt supplies from the Middle East. A workers' strike in Venezuela also reduced output from the world's fifth largest oil exporter. "Half of the deficit is due to oil," said Gordon Kwan, an industry analyst with HSBC Securities in Hong Kong. Kwan said the import bill might keep rising as war jitters cause crude prices to increase further. China will build a 20-million-ton strategic oil reserve to protect itself from a war in Iraq and other conflicts that may disrupt supply from the Middle East, the government said last month. The country plans to stockpile about 149 million barrels, enough to meet oil demand for one month, said Song Chaoyi, a deputy director at the State Development Planning Commission. There is a growing appetite for raw materials and machinery in China, whose economy is expanding by about 8 percent a year, the fastest pace of any other major nation in Asia. As the economy grows, incomes are rising and foreign cars, wines and other goods becoming more affordable. Car imports rose more than three-quarters to 127,394 units last year after China raised its vehicle quotas as part of its WTO commitments. Car and auto part imports totaled $860 million last month, two and a half times what they were a year earlier, the report said. China will increase its vehicle import quota 15 percent this year to $9.12 billion. General Motors said it imported 789 cars in January, compared with 145 a year earlier. The company's total vehicle sales in China last month topped 30,000, compared with 14,500 a year ago. While China is allowing foreign companies greater access to the growing Chinese market, trading partners such as the United States are pressing for trade barriers to come down faster. The U.S. trade deficit with China widened by a fifth to $93.6 billion in the first 11 months of last year, the U.S. Commerce Department. Chinese negotiators may be tempted to use China's January trade deficit as a reason for easing import restrictions more slowly when they meet next week in Beijing with the U.S. trade representative, Robert Zoellick. Economists said China would need sustained deficits to reasonably argue such a case. Last year, China had a trade surplus of $30.4 billion, up 35 percent from 2001, according the Chinese government.

www.insightmag.com Posted Feb. 17, 2003 By Martin Edwin Andersen Media Credit: Pierre Roussel/iPhoto IDB President Enrique Iglesias and other officials of multilateral development banks are under increased scrutiny. Yellow police tape sealed off a sixth-floor office in the exquisite headquarters of the Inter-American Development Bank (IDB) just two blocks from the White House. The tape barred entry to the room, but it could not contain the horror within, where a former official of an IDB Central American office, reportedly distraught over misconduct at the multilateral development bank (MDB), had slashed throat and wrists. While doing so, say IDB insiders, the former official wrote in blood on an office wall: "The bank is corrupt!"

The tragedy is reported to have occurred after the official blew the whistle to superiors concerning alleged abuse of power affecting IDB projects in the field. In response, the official had been transferred back to Washington. According to a former IDB officer familiar with the case, the official's "grade [job rank] was lowered" and the whistle-blower "was assigned to a small windowless office -- something very important to bank staff -- and given no responsibility." Then the "silent treatment" began.

Four other sources, including a highly placed bank official, have confirmed part or all of the story. Contacted at home by Insight, the recovering bank officer had been on leave since the July 18, 2002, incident and continued to be under a physician's care. The officer would not comment on what had happened, nor would the IDB.

The incident offers emblematic and tragic evidence of what some officials at the MDBs tell Insight are the risks they face in speaking out against wrongdoing at these institutions supported by U.S. taxpayers. Not only can doing the right thing lead to losing one's job, but foreign hires dependent on bank-sponsored work visas face additional risks. "Everybody is afraid," a well-placed IDB source tells this magazine. "Of course, they fear losing their jobs, but another way [the bank] keeps them in line is by threatening to take away their visas. If they lose their visas, they have to go home."

Similar concerns, say advocates for bank reform, are heard from inside the World Bank, the Asian Development Bank and the African Development Bank. "Experts I work with at the World Bank say that if they make comments critical of the bank's position, they do so at what they have described as 'great risk,' and they end up not being listened to anyway," says Korinna Horta, a senior economist at Environmental Defense, a citizen watchdog group. "I have firsthand knowledge that this happened in the case of the Chad-Cameroon oil-pipeline project."

According to a recent study by Northwestern University political scientist Jeffrey Winters, in the last five decades corrupt officials from Third World countries have skimmed an estimated $100 billion from World Bank loans. Not until 1996 did the World Bank institutionalize a strategy and mechanism for combating the corruption inside the institution, which next to the federal government is the largest employer in Washington. The years passed. In 2000, the bank shifted the chairs on the deck of what seemed to some like the Titanic, merging its corruption-and-fraud-investigations unit and its office of business ethics into a department of institutional integrity. That same year the General Accounting Office (GAO), the U.S. congressional watchdog, issued a report calling on the World Bank to make greater efforts to control corruption.

But the U.S. Treasury Department is the executive-branch overseer of the development banks. And in November 2000 it successfully killed recommendations to Congress proposed by the U.S. Agency for International Development (USAID) that greater public disclosure of the banks' operations be mandated and a better process of external and internal review be established to prevent potentially illegal loans from being approved.

More recently the International Financial Institution Advisory Commission, a congressionally mandated 11-member panel on the role and effectiveness of several international institutions, was created. Known as the Meltzer Commission, it was created amid growing bipartisan discomfort about the slowness of these banks to reform. Those demanding action ranged from the late senator Paul Wellstone (D-Minn.) to former House majority leader Richard Armey (R-Texas). Few were surprised when the commission called for major reform to ensure a more efficient use of U.S. funds -- such as the more than $1 billion provided in the fiscal 2003 foreign-operations bill.

Within the last year, allegations of endemic corruption at the IDB have been accompanied by complaints heard at sister institutions alleging gross mismanagement and violations of U.S. law. In addition, U.S. watchdog groups have charged that all the banks still are reluctant to heed calls for greater transparency and public disclosure concerning the use of public funds for development objectives such as poverty reduction.

In response, there have been increasing calls for greater congressional oversight of the banks. Proposals range from requiring the State Department and the Justice Department more actively to review MDB-funded activities and report to Congress every year, to holding the MDBs' feet to the fire by authorizing their budget only on a yearly basis, at least for the next year or two, rather than on the current three-year schedule. As one congressional source observes, "The banks come up for their money every three years, make a lot of promises, then basically thumb their noses at us until the next appropriations cycle is near."

Rep. Steve Israel (D-N.Y.), a member of the House Financial Services Committee, tells Insight: "The multilateral development banks are critical instruments for reducing poverty around the world and making life better for billions of people. The U.S. makes significant contributions to these banks and it is essential that the Congress find out if we are getting what we pay for. These banks shouldn't be making people rich. They shouldn't be used as personal fiefdoms. They are a public trust, and the people who run them must remember that. If they don't, the Congress should remind them, in the strongest possible terms." And, according to Israel, "We must put their very existence at risk if we are going to get any results."

Senate Finance Committee Chairman Charles Grassley (R-Iowa) emphasizes: "We need to make certain that these development banks are being operated for the common good and are not above the law. Just as the banks require loan recipients to be forthcoming about information, so Congress expects the banks to be responsive and candid to requests for information."

Oversight of operations at the World Bank, says John Ruthrauff, senior policy adviser for Oxfam, is still a hit-and-miss proposition, despite improvements instituted during the 1990s by current bank president James Wolfensohn. Ruthrauff notes that the bank's directors do not see their oversight responsibilities extending to operational issues and, even if they did, they are hamstrung by small staffs and a system of rotation in which most directors last only a few years because 26 executive directors and a similar number of alternates represent 180 countries. "They just don't have the time to look into issues themselves -- there are just too many projects," Ruthrauff adds. "So oversight, where it exists, is left to the staff."

The situation is even worse at the regional development banks, insiders say. "While at the World Bank you might have a Pakistani in charge of programs in Venezuela, in the regional banks it pretty much boils down to an elite group that works with its friends," says one insider. "It is tougher to have an arms-length relationship between borrowers and bank staff, or among the latter, because the regions are smaller and there is a lot of opportunity to develop networks and special friendships."

Most observers agree that, of the international financial institutions, the World Bank appears to have the best internal-review policies, an image carefully bolstered by a first-rate press office. "The World Bank takes its fiduciary and audit responsibilities very seriously," bank spokeswoman Caroline Anstey, says. "To this end, we encourage anyone with a complaint of fraud or corruption involving a World Bank financed project to come forward and report these allegations to our fraud and corruption investigations unit. ... Our experience over the years has shown that a transparent management of public funds represents a key element of good governance, and this, in turn, is indispensable for sustained growth, poverty reduction and a country's overall development."

Treasury's role in the oversight process continues to be controversial. Sources on the IDB board tell Insight that U.S. Executive Director José Fourquet has not provided leadership needed to curb alleged corruption at that bank. Fourquet has not responded to several requests for comment.

On Feb. 3, Rep. Barney Frank (D-Mass.), a longtime proponent of greater oversight of the banks and a supporter of their development mission, wrote to Rep. Jim Kolbe (R-Ariz.), chairman of the House Appropriations subcommittee on Foreign Operations, complaining about Treasury's resistance to outside oversight. "I was very disturbed to learn recently that the Treasury Department reproached some officials at the World Bank for engaging in some detailed, high-level discussions with my office about [funding issues] without Treasury's approval," Frank said. "I think these actions speak to the need for continued, assertive congressional oversight."

Critics contend that without conditions placed on the banks, passage of the omnibus appropriations bill by Congress will result in continued abdication of responsibilities in monitoring institutions that lend tens of billions of dollars each year. Not only are U.S. taxpayer dollars in danger of being squandered, they warn, but less-developed nations continue to be saddled with unwanted debt that all too often ends up in the hands of greedy local politicians or is spent on projects that exacerbate economic and environmental problems.

Martin Edwin Andersen is a reporter for Insight. He worked as an international consultant for the IDB from 1997-2001.

www.iht.com Chi-Chu Tschang Bloomberg News Monday, February 17, 2003   BEIJING China has posted an unexpected trade deficit for the first time in over six years as it stockpiles crude oil ahead of a possible war on Iraq and consumers take advantage of tariff reductions to buy more imported cars. The deficit in January was $1.25 billion, the first time China has posted a shortfall since December 1996, the Ministry of Foreign Trade and Economic Cooperation said Friday, citing customs statistics. Imports rose 63 percent to $31 billion, driven by a 78 percent increase in the volume of oil imported. Exports rose 37 percent to $29.8 billion. General Motors Corp. and other carmakers are taking advantage of China's entry into the World Trade Organization to import more cars into China and raising production at plants assembling parts shipped from overseas. "It is surprising," said Robert Subbaraman, an economist at Lehman Brothers in Tokyo. "My suspicion is there were temporary factors involved. Oil prices have been going up so China might be trying to front load their imports." As China imported greater quantities of oil, prices rose. The price of crude in New York has risen 73 percent in the past year on concern that an Iraq war may disrupt supplies from the Middle East. A workers' strike in Venezuela also reduced output from the world's fifth largest oil exporter. "Half of the deficit is due to oil," said Gordon Kwan, an industry analyst with HSBC Securities in Hong Kong. Kwan said the import bill might keep rising as war jitters cause crude prices to increase further. China will build a 20-million-ton strategic oil reserve to protect itself from a war in Iraq and other conflicts that may disrupt supply from the Middle East, the government said last month. The country plans to stockpile about 149 million barrels, enough to meet oil demand for one month, said Song Chaoyi, a deputy director at the State Development Planning Commission. There is a growing appetite for raw materials and machinery in China, whose economy is expanding by about 8 percent a year, the fastest pace of any other major nation in Asia. As the economy grows, incomes are rising and foreign cars, wines and other goods becoming more affordable. Car imports rose more than three-quarters to 127,394 units last year after China raised its vehicle quotas as part of its WTO commitments. Car and auto part imports totaled $860 million last month, two and a half times what they were a year earlier, the report said. China will increase its vehicle import quota 15 percent this year to $9.12 billion. General Motors said it imported 789 cars in January, compared with 145 a year earlier. The company's total vehicle sales in China last month topped 30,000, compared with 14,500 a year ago. While China is allowing foreign companies greater access to the growing Chinese market, trading partners such as the United States are pressing for trade barriers to come down faster. The U.S. trade deficit with China widened by a fifth to $93.6 billion in the first 11 months of last year, the U.S. Commerce Department. Chinese negotiators may be tempted to use China's January trade deficit as a reason for easing import restrictions more slowly when they meet next week in Beijing with the U.S. trade representative, Robert Zoellick. Economists said China would need sustained deficits to reasonably argue such a case. Last year, China had a trade surplus of $30.4 billion, up 35 percent from 2001, according the Chinese government.