Honduras Defends Coup as Defense of Democracy
Latin American Leaders Criticize President's Ouster
PAUL KIERNAN DAVID LUHNOW
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Associated Press Riot police Monday dispersed supporters of ousted Honduras President Manuel Zelaya near the presidential residency in Tegucigalpa.
TEGUCIGALPA, Honduras -- A day after Honduras's military ousted President Manuel Zelaya, the country's new government found itself isolated amid international condemnation of the coup, but said it was acting to defend the country's democracy instead of subverting it.
Meanwhile Monday, several hundred protesters clashed with Honduran troops and riot police outside Honduras's presidential palace. Protesters hurled Molotov cocktails, stones, and sticks at police. Several shots rang out, though it was unclear if anyone was hurt.
Earlier, U.S. President Barack Obama said Mr. Zelaya's ouster was "not legal" and that Mr. Zelaya remains the country's president, the Associated Press reported.
Speaking to reporters in the Oval Office after meetings with Colombian President Alvaro Uribe, Mr. Obama pledged the U.S. would "stand on the side of democracy" and work with other nations and international entities to resolve the matter peacefully.
Leaders from several Latin nations, including Venezuela and Ecuador, met in Nicaragua to discuss how to manage the first coup in Central America since the end of the Cold War. Within hours, they announced they were recalling their ambassadors from Honduras.
Mr. Zelaya, a populist and close ally of Venezuela's Hugo Chavez, turned up in Managua's airport early on Monday after being sent into forced exile in Costa Rica on Sunday. He was greeted like a hero by Mr. Chavez, Nicaragua's Daniel Ortega, and Ecuador's Rafael Correa.
Mr. Chavez defended Mr. Zelaya by casting the dispute as a rebellion by the region's poor against elites, according to AP.
"If the oligarchies break the rules of the game as they have done, the people have the right to resistance and combat, and we are with them," Mr. Chavez said. He threatened to "overthrow" the new Honduran leader sworn in by lawmakers, Congressional President Roberto Micheletti. Mr. Micheletti replied in an interview with Honduras' HRN radio on Monday: "Nobody scares us."
The coup stemmed from a bid by Mr. Zelaya, a frequent critic of the U.S., to stay in office past the end of his term in January. Mr. Zelaya wanted to hold a referendum on Sunday asking voters if they wanted to vote at a future date to scrap the constitution. Mr. Zelaya's opponents say his aim was to end the constitution's limit to a single presidential term.
The crisis grew into a full blown confrontation between Mr. Zelaya and the country's other institutions. The Supreme Court had ruled the vote was illegal because it flouted the constitution. The army, Congress, Catholic church and business leaders lined up against the president. The Supreme Court gave the order for the army to arrest the president, who was hauled out of his residence early on Sunday and bundled onto a plane to Costa Rica.
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Anti-riot police and soldiers stood guard at the main entrance of the presidential palace in Tegucigalpa Monday.
Mr. Micheletti, a member of Mr. Zelaya's own Liberal party, tried to ease worries about democracy by saying he would only serve out the end of Mr. Zelaya's term, which ends in January following presidential elections set for November.
"We respect everybody and we only ask that they respect us and leave us in peace because the country is headed toward free and transparent general elections in November," he said.
His designated foreign minister, Enrique Ortez Colindres told HRN on Monday that no coup had occurred. He said the military had merely upheld the constitution "that the earlier government wanted to reform without any basis and in an illegal way."
In Tegucigalpa, troops with riot shields surrounded the presidential palace. A 9 p.m. curfew was imposed Sunday, but in the evening the protesters, many carrying sticks and rocks, began adding chain-link fences to the burning tires as barricades to try to block the military from moving to break up the demonstrations. "I love Zelaya, he's a good president," said Esther Ortiz, a 46 year old doctor, as she helped block off a street by the palace.
Supporters Rally Around Ousted Honduran President
2:01Leftist Latin American leaders rally around ousted Honduran President Manuel Zelaya. Zelaya, who was overthrown in a military coup, fell out with the army, the Congress and the judiciary over his plans for constitutional change. Video courtesy of Reuters.
Honduras, one of Latin America's poorest countries, was a staging area for the U.S.-backed Nicaraguan Contra rebels during the 1980s. The country of about eight million people subsists on exports of bananas, shrimp, coffee, apparel and remittances from Hondurans in the U.S.
The Obama administration and members of the Organization of American States had worked for weeks to try to avert any moves to overthrow President Zelaya, said senior U.S. officials. Washington's ambassador to Honduras, Hugo Llorens, sought to facilitate a dialogue between the president's office, the Honduran parliament and the military.
The efforts accelerated over the weekend, as Washington grew increasingly alarmed. "The players decided, in the end, not to listen to our message," said one U.S. official involved in the diplomacy. On Sunday, the U.S. embassy here tried repeatedly to contact the Honduran military directly, but was rebuffed. Washington called the removal of President Zelaya a coup and said it wouldn't recognize any other leader.
The U.S. stand was unpopular with Honduran deputies. One congressman, Toribio Aguilera, got prolonged applause from his colleagues when he urged the U.S. ambassador to reconsider. Mr. Aguilera said the U.S. didn't understand the danger that Mr. Zelaya and his friendships with Mr. Chavez and Cuba's Fidel Castro posed.
Retired Honduran Gen. Daniel López Carballo justified the move against the president, telling CNN that if the military hadn't acted, Mr. Chávez would eventually be running Honduras by proxy. It was a common view Sunday. "An official who was subverting legality and had violated the Constitution was removed," wrote Mariela Colindres, a 21-year-old Honduran who is studying at Indiana University, in an email. "Everything was done legally and this does not imply a rupture in the constitutional order."
The U.S. has a controversial history of backing coups in Latin America. It began promoting democracy strongly after the end of the Cold War, but in 2002 it hesitated in condemning a brief coup against Mr. Chávez and was sharply criticized by other Latin nations. Mr. Chávez came back to power and radicalized his posture against the U.S. Since then, he periodically claims the U.S. wants to oust him in a coup.
Moves to try to stay in power through the ballot box have become increasingly common in Latin America. Leftist Latin American leaders such as Venezuela's Mr. Chavez, Ecuador's Rafael Correa and Bolivia's Evo Morales have used referendums for a similar purpose, and Colombia's right-wing President Alváro Uribe is trying to change the constitution to allow him a third term.
Latin America analysts said the Honduran coup will complicate Mr. Obama's efforts to re-engage a region where anti-Americanism has flourished in recent years. They said Mr. Chavez is likely to seize on the crisis to depict Central America as under attack.
At a Sunday news conference in Costa Rica, Honduran President Manuel Zelaya, ousted at gunpoint by the army hours earlier, denounced his exile as a kidnapping.
As a result, analysts said Mr. Obama will need to aggressively call for the reinstatement of President Zelaya, despite U.S. concerns that he is seeking to mirror Mr. Chávez's campaign to secure limitless rule.
"It's very important for the U.S. to come out against the coup and make the point that the U.S. supports democracy unequivocally," said Kevin Casas-Zamora, Costa Rica's former vice president and a senior fellow at Washington's Brookings Institution. "This would prevent Chávez from stealing the show."
Mr. Casas-Zamora and other regional analysts said the coup raised questions about just how much influence Washington actually has in Central America, given the Obama administration's failed effort to avert it. Honduras receives more than $200 million in development aid from Washington annually.
Both sides of the Honduras crisis traded allegations Sunday. The secretary of Honduras' congress, José Alfredo Saavedra, showed reporters what he said was a resignation letter signed by Mr. Zelaya. The letter cited the crisis and "insuperable health problems" in resigning. Mr. Zelaya said it was a fake.
The ousted president called on unions, workers and peasant and indigenous organizations to demonstrate peacefully for his return. "I ask the people of Honduras to be calm, but for them to defend their democracy and rights," he said.
Bets on Recovery Bolster Stocks
Stocks rose on Monday as economically sensitive sectors enjoyed a tentative return of buyers betting on a recovery.
The Dow Jones Industrial Average, which is coming off its first two-week losing streak since early March, gained 90.99 points, or 1.1%, to 8529.38.
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The S&P 500 rose 8.33 points, or 0.9%, to 927.23. All of its sectors gained, led by the consumer-discretionary, utilties and financial sectors, climbing 1.3% each.
Some consumer and materials companies have filed better-than-expected fiscal quarter reports in the past week, helping boost sentiment ahead of the flurry of earnings reports that are expected next month.
"The off-calendar earnings have been better than we expected," said Kelli Hill, a portfolio manager with Ashfield Capital Partners. "There has been an overall reduction in expenses, increased margins and if you get any growth in the second half, that will all go to the bottom line."
Financials were led by SLM, after the Department of Education released details about pricing terms for student-loan servicing contracts. SLM rose 8.5%.
Trading volume was low, with fewer than 900 million shares changing hands on the floor of the New York Stock Exchange.
Money managers are also making last-minute moves as the end of 2009's second quarter on Tuesday draws near. In a phenomenon known as "window dressing," managers often tweak their portfolios before sending out quarter-end statements to clients.
Roger Volz, director of equities, at BGC Partners in New York, said, "We've gone right up to several overbought readings on stocks and oil, but we just can't break through. We just seem to be marking time."
Oil futures rose $2.33 to $71.49 a barrel, the highest close in two and a half weeks, in New York amid continued violence in Nigeria's main oil-producing region. Traders also digested reports that Organization of Petroleum Exporting Countries and the European Union had agreed in talks that the weakened global economy could support crude prices between $70 and $80 a barrel.
Despite a bullish outlook from many oil traders lately, gasoline prices have been under pressure as U.S. refineries have ramped up to full-scale summer production. That has translated into some relief at the pump for everyday consumers, whose purchases of other goods are often crimped at times when they have to pay more to fill up.
According to the driving club AAA, the average U.S. price of regular-grade gasoline fell every day last week and was down a fraction of a penny at $2.639 a gallon on Monday, though it still remains up 6.1% from a month ago.
Eric Marshall, portfolio manager at Hodges Capital Management in Dallas, said that his firm remained out of consumer-discretionary stocks for the most part in 2008, but it has recently been buying a few names in the sector, including Liz Claiborne and Jos. A. Bank Clothiers, as early bets that a rebound is on the way in the U.S.
"We've actually been narrowing down the total number of names that we own in our portfolios," from 100 last year to about 50, said Mr. Marshall. "But if we see a company with a good balance sheet that has some staying power to get to the other side of the valley in the recession, we are willing to put some money to work."
Several important economic announcements are due later in the holiday-shortened week. They include the June employment report, which will be announced earlier than usual on Thursday, as U.S. markets will be closed Friday in recognition of Independence Day.
The Nasdaq Composite Index rose 5.84 points, or 0.3%, to 1844.06. Oracle and Sun Microsystems rose 1.2% and 1.9%, respectively, despite increased scrutiny by the Justice Department of Oracle's proposed $7.4 billion acquisition of Sun.
The dollar was stronger against the yen and weaker against the euro. Treasury prices were higher. The 10-year note gained 12/32 to yield 3.485%.
Venezuela and the Honduran Coup
By StratforMilitary forces arrested Honduran President Manuel Zelaya at his home early Sunday morning, marking a sea change for the country. Prior to the coup, Zelaya had been attempting to call a national referendum on whether to change the constitution. Though Zelaya still had backing from many leftist organizations in the country, he lacked the support of the Congress, the Supreme Court and the military -- all of which maintained that his actions were unconstitutional. His decision to go forward with the referendum in the face of such strong opposition pushed the situation to a climax, ending with his exile to Costa Rica.
The situation has prompted howls of objections, particularly from leftist leaders in Latin America - with Venezuelan President Hugo Chavez at the forefront. Though Chavez's promises of a military response following the arrest of Zelaya -- a fellow leftist -- have made headlines, his ability and will to intervene are both extremely constrained. Chavez himself has mentioned limits to his willingness to intervene in the situation, declaring that hostilities would be inevitable if the Honduran military violated the sanctity of the Venezuelan embassy or murdered the Venezuelan ambassador.
Chavez likes to link Venezuela to any and all leftist leaders in the region and to rattle sabers when any of those leaders are threatened. The Honduran coup, however, is deeply entrenched in domestic politics, and Chavez's ability to take serious action is limited by uncertainties in the political situation he faces in Venezuela. Just as in a 2008 incident between Colombia and Ecuador (when Colombian forces crossed the border in pursuit of members of the Revolutionary Armed Forces of Colombia), Chavez can make statements but is not able to put substantial forces into play.
There have been isolated and unsubstantiated reports that Venezuelan and Nicaraguan personnel might have been supporting Zelaya in Honduras as hostilities were intensifying, but there is nothing to suggest that any kind of meaningful troop presence or interference was a factor in the day's events. Indeed, sources in Venezuela have revealed that even Venezuelan military personnel lack confidence in the country's ability to leverage the troop transport aircraft that would be required to establish a meaningful force in Honduras.
Because even Chavez is unable to intervene effectively, the situation in Honduras remains localized. The military immediately turned control of the country over to the Congress, which appointed its leader as the interim head of state. Therefore, it does not seem likely that this situation will turn into a military grab for power -- a fact that should bring sighs of relief to a region where the destructive military dictatorships of the 1970s and 1980s are remembered well.
This also should not be read as a symbolic or tide-turning failure of the Latin American left, which is far from being a united ideological bloc. With center-leftists leading successful regimes in Brazil and Chile, the myth of a rising, unified wave of extreme leftism in Latin America is just that. Though the coup in Honduras could invigorate opposition movements in leftist-led countries throughout the region -- particularly in countries like Venezuela, which are experiencing serious economic difficulties due both to populist excesses and the troubled global economy -- it should not be taken as a part of a larger trend. If other governments in Latin America fall, it will be a result of their own spiraling, domestic dramas rather than a domino effect from Sunday's events in relatively isolated Honduras.
The fact is that regional cohesion in Latin America is very difficult to achieve. With massive geographic barriers separating Latin American countries and the economic challenges facing each leader, there are enormous obstacles to functional cooperation and pressing concerns to attend to at home. Ultimately, the challenges facing Latin American countries in 2009 might lead to military intervention, as in Honduras. But regime stability very often depends on domestic factors -- and all the leftist alliances in the world cannot save a leader who rejects the authority of every other branch of his government.
The Fed must reassure markets on inflation
By Martin Feldstein
The interest rate on 10-year US Treasury bonds almost doubled in six months, rising from 2.26 per cent last December to 3.98 per cent in mid-June, before decreasing slightly in recent days. This sharp rise happened despite the Federal Reserve’s quantitative easing policy aimed at lowering long-term rates by buying $300bn (€21bn, £18bn) of Treasuries and promising to buy more than $1,000bn of mortgage securities.
The higher Treasury bond interest rates have pulled up mortgage rates, especially since April. That has weakened aggregate demand by depressing home-buying and reducing house prices. The fall in house prices in the past six months cut household wealth by some $1,500bn, leading to lower consumer spending. The lower home prices also caused more defaults and weakened bank balance sheets.
There is no single reason for the sharp rise in rates, and what matters is not just how investors see the economic future but also what they think other investors will come to believe. Someone may sell long-term Treasuries because he believes inflation will rise, or because he thinks others will soon sell bonds because they think inflation will rise.
The simplest explanation for the higher 10-year rate is that many investors now expect inflation to rise. Although economic weakness and excess capacity are keeping current inflation low, the explosive rise of bank reserves created by Fed policy provides fuel for future inflation. The prospective decline of the dollar is also a potential source of inflation.
Comparing the interest rates on 10-year Treasuries with the interest rates for 10-year Treasury inflation protected securities (Tips) supports this inflation explanation for the rise in long-term nominal rates. In mid-December, the 10-year Treasury yield was 2.26 per cent and the yield on 10-year Tips implied a 10-year expected inflation rate of just 0.19 per cent. By mid-June Treasury yields were up to 3.98 per cent and the yield on Tips was slightly down, implying that 10-year expected inflation had jumped to 2.07 per cent. Analysed this way, the entire increase of the interest rate was due to the rise in investors’ expectations of 10-year inflation, or to that plus an increase in their willingness to pay for protection against a rise in the risk of inflation.
But such an explanation is deceptively easy. The changing spread between the yields on Treasury bonds and Tips reflects not only changes in inflation expectations but also the response to investors seeking safety. Those scared by Lehman Brothers’ collapse wanted the safety and liquidity of ordinary Treasury bonds, causing their yields to fall sharply while yields on Tips rose slightly.
Treasury yields rose by this month to their level a year earlier because improving market conditions meant investors were no longer willing to pay for the extreme liquidity of Treasuries. Inflation was thus not the only, and perhaps not even the main, reason for the rise in rates.
Why did the Fed’s massive buying of long-term Treasury bonds not hold down the bond rate? The answer is that bond markets are less impressed by the $300bn of Fed purchases than by the official projection of $10,000bn of government borrowing over the next decade, with a deficit in 10 years’ time above 5 per cent of gross domestic product. The resulting crowding out of private investment will require higher future interest rates, and that is reflected in current long-term rates.
A further reason long rates remain high is a fear that foreign buyers may not be willing to continue buying dollar bonds to finance a large US current account deficit.
In short, higher long-term interest rates reflect investors’ concern about future inflation, future fiscal deficits and the future willingness of foreign investors to purchase US bonds. These long-term concerns can have adverse effects on the prospects for recovery during the coming year. The immediate challenge to the US government is to reassure investors about both the risks of inflation and the projected growth of fiscal deficits.
It would be wrong for the Obama administration and Congress to reduce the fiscal stimulus in 2009 or 2010, since there is no clear evidence of a sustained upturn. But it would be equally wrong to allow the national debt to double to 80 per cent of GDP a decade from now. Increasing taxes even more than proposed would weaken demand in the near term and hurt economic incentives in the long run. The fiscal deficit should therefore be reduced by curtailing the increases in social spending that the president advocated in his election campaign.
The Fed must also be careful not to tighten too soon. But it needs to reassure markets that it will prevent the excess reserves of the banks from financing a surge of inflationary lending when the economy begins to expand. It must make clear now that it will be willing to do so even if that involves big rises in short-term rates.
The writer is professor of economics at Harvard University
'Reforms' Won't Prevent Future Crises
By Robert SamuelsonSince its earliest days, the United States has suffered periodic financial crises. The first dates to 1792. In the 19th century, bank panics occurred regularly. Then, of course, came the great stock market crash of 1929 and the failure of two-fifths of the nation's banks in the Great Depression. Now we're in the midst of another crisis. It would be reassuring to think that the Obama administration's financial "reforms" -- or, indeed, any conceivable alternative -- would prevent these collapses for all time. Dream on.
Every financial crisis originates in a failure of imagination. It's not that, before the crisis, no one foresees problems, "excesses" and losses. There are usually warnings. But what's routinely overlooked are the fatal interconnections that transform problems into panic. People panic because the future goes dark. They don't know what to expect, so they expect the worst. Markets cascade uncontrollably downward.
The current crisis did not occur merely because "subprime" mortgages experienced unexpectedly large losses or even because many of these loans were "securitized" in complex bonds, argues Yale economist Gary Gorton. The crux of the matter, he says, was the failure of the "repo" market. The term comes from "repurchase agreements" -- short-term loans (usually overnight) that require the borrower to pledge collateral (usually bonds) in return for cash; the collateral is then "repurchased" by repayment of the loan.
No one knows the size of the repo market; Gorton thinks perhaps $10 trillion at any moment. Banks relied heavily on repo loans, which were routinely renewed. But when doubts arose about banks' subprime securities, the repo market panicked. Loans vanished or became costlier. Deprived of credit, Bear Stearns and Lehman Brothers failed; other institutions were vulnerable. Hardly anyone expected the panic; once it happened, large -- but bearable -- losses became a crisis.
In a crisis, government is the last bulwark against a complete financial collapse. That's the main justification for regulation. Just because all crises can't be prevented doesn't mean that some can't. Though complex, the Obama plan would essentially broaden regulation in three ways.
First, it would empower the Federal Reserve to designate some financial institutions (presumably, the likes of Citigroup and Goldman Sachs) as so important that their failure would "pose a threat to financial stability." These institutions would face stiffer capital requirements -- capital being mainly shareholders' investment. More capital would provide a larger buffer against losses and a crisis.
Second, it would create a Consumer Financial Protection Agency to police unethical lending practices and to ensure that loan documents for mortgages, auto loans and other types of consumer credit are understandable. (The Securities and Exchange Commission would retain power over stock markets.)
Third, it would change some rules of financial markets. For example, financial firms issuing securitized bonds -- bundles of mortgages, auto loans and other credits -- would be required to hold 5 percent of the bonds themselves. Because they would have to keep some bonds, it's argued, sellers would scrutinize the underlying loans more carefully.
Though these proposals sound sensible, they have potential drawbacks. Writing in the Wall Street Journal, Peter Wallison of the American Enterprise Institute argued that the very largest financial institutions would become the protected and pampered wards of the state. "Larger firms will squeeze out smaller ones," he said. Consumer regulation sounds great. But if the protections are cumbersome and expensive, lenders will compensate by raising interest rates or lending only to the safest borrowers, and consumer credit will, paradoxically, become costlier.
Up to a point, some retrenchment of the financial sector is healthy. It absorbed too much of America's talent while pursuing strategies that, in hindsight, misallocated the nation's investment capital. But there are perils to overregulation. It could dampen the normal risk-taking required for solid economic expansion.
However the debate concludes, regulation isn't a panacea against future crises. The idea of "enlightened regulators" who are vastly more perceptive than the bankers, traders and money managers they regulate is a fiction. Even in early 2007, when the problems of subprime mortgages had emerged, few regulators or economists foresaw a wider financial meltdown. They didn't see the impending chain reaction. The problem wasn't a lack of regulation; it was a lack of imagination.
So the next crisis could come from anywhere -- perhaps the follies of government, not finance. Between now and 2019, the U.S. federal debt could rise to $11 trillion , projects the Congressional Budget Office. U.S. Treasury bonds are the bedrock of the global financial system; they're considered safe and reliable. What if a glut of bonds causes investors to lose faith? What are the implications? Good questions. The seeds of the next crisis almost certainly won't be found in the debris of the last.
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