The Seychelles, the idyllic archipelago in the Indian Ocean off the coast of Africa, is best known as an island paradise playground for celebrities, royalty and the ultra-wealthy. These days, it's better known for something else: bankruptcy.

The tiny country's debt burden may be tiny compared to Iceland, which needed a $2.1 billion bailout from the International Monetary Fund last fall, but the Seychelles' problems illustrate the degree to which the global economic crisis has leveled some economies altogether.

And because of its small size, with just 87,000 people, the Seychelles now has the unenviable stature of being perhaps the most indebted country in the world. Public and private debt totals $800 million - roughly the size of the country's entire economy.

Last year, as tourism and fishing revenue began slowing, the Seychelles defaulted on a $230 million, euro-denominated bond that had been arranged by Lehman Brothers before its own bankruptcy. The IMF came in in November with a two-year, $26 million rescue package, and the country has since taken a series of emergency steps: It laid off 12.5% of government workers (1,800 people), floated its currency (the Seychelles rupee, which has fallen from eight to the U.S. dollar to 16, effectively doubling the prices of imports), lifted foreign exchange controls and agreed to sell state assets.

The IMF has given a thumbs-up to the initial progress, but it warned that the economy would contract 9.5% this year. The government of Australia is sending tax experts to help overhaul the revenue collection system and audit local companies.

Now the Seychelles is negotiating with the governments of Britain, France and other Western countries including the U.S. - the so-called Paris Club - to reschedule $250 million in debt it owes them. It is asking for 50% of it to be forgiven - a rate it hopes its commercial creditors will then apply to its remaining $550 million outstanding.

"We borrowed more than we can repay," complains Ralph Volcere, the editor of Le Nouveau Seychelles Weekly and a vocal government critic. "This was wholly irresponsible."

Heavily reliant on tourism, the Seychelles is desperately searching for ways to raise capital - at a time when tourism is forecast to drop precipitously this year. In early March, Seychelles Vice President Joseph Belmont told a meeting of local tourism industry business owners that the country has already seen a drop of 15% in visitor arrivals from the start of 2009; tourism revenue for the year, he said, could drop by some 25% more as a result of the global recession.

Seychelles officials have another idea though: to promote the country's longstanding virtue of being an off-shore business haven, with no corporate tax, no minimum capital requirements, only one shareholder or director required, and an annual licensing fee of just $100.

It also hopes to grow revenue from fishing licenses in its territorial waters, and on March 26 it will present a proposal to the United Nations to expand its exclusive rights to the surrounding seabed, potentially increasing prospects of revenue from underwater minerals, oil and gas.

And hopes for expanding tourism remain high. In addition to the usual roster of luxury-seeking royals and high-spending celebs, the middle-tier traveler is now being heartily courted, too. The government in early March announced an "Affordable Seychelles" campaign - what would have until recently been an oxymoron - with the motto: "Once-in-a-lifetime vacation at a once-in-a-lifetime price," based on lower prices caused by the halving in value of the currency.

Most hotels and meals in restaurants frequented by foreigners, however, remain priced in euros - like the new Four Seasons Seychelles, which opened its five-star resort, more than two years in the works, in February. Rates start at 1,000 euros ($1,345) per night, although current packages include stay-an-extra-day offers. Free-standing, multi-room houses with private swimming pools, billed as "Presidential" and "Royal" suites, are also available (from 4,500 euros, or $6,055).

The company claims it's seeing interest from travelers: "We have extremely strong demand; a lot of people are calling and asking for information," says General Manager Markus Iseli, surveying the property of 67 private, luxury villas perched on a hillside overlooking a stunning powdery-sand beach. But while normal luxury hotel occupancy averages 70-to-75%, he says he expects perhaps 30-to-35% occupancy this year.
source:http://finance.yahoo.com/news/Seychelles-Paradise-goes-hftn-14745001.html

WASHINGTON – Concerned about the faltering war in Afghanistan, President Barack Obama plans to dispatch thousands more military and civilian trainers on top of the 17,000 fresh combat troops he's already ordered, people familiar with the forthcoming plan said Thursday.

Obama also will call for increasing aid to neighboring Pakistan as long as its leaders confront militants in the border region. The president plans to lay out his revamped strategy for Afghanistan and Pakistan on Friday.

Several sources told The Associated Press the strategy includes 20 recommendations for countering a persistent insurgency that spans the two countries' border, including sending 4,000 military trainers to try to increase the size of the Afghan army.
source:http://news.yahoo.com/s/ap/20090326/ap_on_go_ca_st_pe/us_afghanistan

PARIS — The International Monetary Fund reached a deal with Serbia on Thursday to provide a 27-month, 3 billion euro loan to help the country address its vulnerability to the financial crisis.

The agreement for the loan of about $4 billion was announced at a news conference in Belgrade by Serbian government officials and Albert Jaeger, a fund representative. The deal, which still requires the approval of the monetary fund’s board in Washington, will force painful budget cuts on Serbia, the country’s finance minister, Diana Dragutinovic, told reporters.

The economy minister, Mladjan Dinkic, said on Wednesday in an interview with the daily Vecernje Novosti that the measures would fall mostly on the public sector, which employs 550,000 workers, versus 1.6 million in private sector.

“We will reduce funds for cities and local administrations,” Mr. Dinkic told the newspaper. “There will be no new jobs, and those who retire will not be replaced with new staff. The position of state servants will be equalized to the position of employees in the private sector. Various privileges used by public servants will be abolished. No bonuses will be allowed. We will not allow the purchase of new cars. We decided to cut costs as much as possible.”

The credit crisis dried up foreign investment, straining the government’s finances at a time of economic shock. The Belex15 stock market index has fallen 77 percent in 12 months, while government bonds have tumbled. The currency, the dinar, has fallen 20 percent against the euro since its peak in August.

Serbia’s public finances are in relatively good shape, with the public debt at less than 30 percent of G.D.P. The government will use the loan to replenish the central bank’s foreign currency reserves, a move meant to stabilize the dinar.

The I.M.F. expects the Serbian economy to shrink by about 2 percent this year, Mr. Jaeger said, and to be stagnant next year. Many private sector economists expect the decline to be twice that size.

A day earlier, the fund announced that it was leading a financing package of 20 billion euros for Romania.

Serbia’s Balkan neighbor Croatia is also trying to sharply cut government spending, as it tries to avoid turning to the I.M.F. for help. European countries, including Belarus, Hungary, Iceland, Latvia and Ukraine, have sought the help of multinational lenders since the global economy went into a tailspin last year.
source:http://www.nytimes.com/2009/03/27/business/worldbusiness/27imf.html?ref=worldbusiness

Drug wars appear to be escalating in Mexico, with violence spilling across the border into the United States. As Mark Landler reported today, Secretary of State Hillary Clinton for the first time acknowledged that Americans’ demand for drugs feeds the Mexican drug trade and all its ills.

So what’s her solution? Secretary Clinton reportedly wants to beef up Mexico’s antidrug law enforcement. But that’s not necessarily what traditional economics would prescribe.

Civil liberties and morality debates aside, many economists say drug legalization, rather than heightened prohibition, is the answer.

Plenty of economists, legal scholars, journalists and even drug law enforcement leaders have written about legalizing drugs, often pitching the idea as something like a “least bad” option. They argue that the black market is what makes the drug trade so profitable, enables drug cartels’ current business models and pushes “business” disputes out of the courtroom and into the streets.

As Jeffrey A. Miron, a senior lecturer in economics at Harvard, wrote Tuesday on CNN.com:

Prohibition creates violence because it drives the drug market underground. This means buyers and sellers cannot resolve their disputes with lawsuits, arbitration or advertising, so they resort to violence instead.

Violence was common in the alcohol industry when it was banned during Prohibition, but not before or after.

Violence is the norm in illicit gambling markets but not in legal ones. Violence is routine when prostitution is banned but not when it’s permitted. Violence results from policies that create black markets, not from the characteristics of the good or activity in question.

The only way to reduce violence, therefore, is to legalize drugs. Fortuitously, legalization is the right policy for a slew of other reasons.

Prohibition of drugs corrupts politicians and law enforcement by putting police, prosecutors, judges and politicians in the position to threaten the profits of an illicit trade. This is why bribery, threats and kidnapping are common for prohibited industries but rare otherwise. Mexico’s recent history illustrates this dramatically.

He also trots out another economics-based argument for legalizing drugs, involving state budgets: the ability to regulate — and tax — drug transactions, and reduce spending on antidrug efforts:

Prohibition is a drain on the public purse. Federal, state and local governments spend roughly $44 billion per year to enforce drug prohibition. These same governments forgo roughly $33 billion per year in tax revenue they could collect from legalized drugs, assuming these were taxed at rates similar to those on alcohol and tobacco. Under prohibition, these revenues accrue to traffickers as increased profits.

The right policy, therefore, is to legalize drugs while using regulation and taxation to dampen irresponsible behavior related to drug use, such as driving under the influence. This makes more sense than prohibition because it avoids creation of a black market. This approach also allows those who believe they benefit from drug use to do so, as long as they do not harm others.

But of course, moral and health-related concerns about drug use — and concerns about whether drug use itself causes violent behavior — have sustained strong support among Americans for prohibitions on drugs like marijuana, even if such drug consumption could be taxed.
source:http://economix.blogs.nytimes.com/2009/03/25/stopping-border-violence-by-legalizing-drugs/

Mitsubishi UFJ Financial Group and Morgan Stanley said Thursday that they would merge their securities businesses in Japan, building on Mitsubishi UFJ’s $9 billion investment in the American bank last year.

With the move, Mitsubishi UFJ, the biggest Japanese bank, is stepping into a void left after major retrenchment in Japan and elsewhere by global investment banks, including Merrill Lynch and Citigroup.

The joint venture would form the third-biggest securities firm in Japan in terms of the value of mergers and acquisition advisories, after Nomura Holdings and Goldman Sachs Group, according to Bloomberg News data.

Japan’s mergers and acquisitions market surged last year, with overseas acquisitions by Japanese firms tripling to a record $70 billion, though the pace has slowed this year in the financial crisis.

Mitsubishi UFJ will hold a 60 percent stake in the new brokerage, while Morgan Stanley will hold the other 40 percent. The banks are also discussing further ways to integrate their businesses, they said.

Morgan Stanley turned to Mitsubishi UFJ for funds last year, as the Wall Street brokerage sought refuge amid the turmoil stoked by the collapse of Lehman Brothers. Mitsubishi UFJ is now Morgan Stanley’s largest shareholder, with a 21 percent stake in the ailing bank.

Morgan Stanley, which received $10 billion under the U.S. government’s Troubled Asset Relief Program, posted a $2.37 billion loss in its fourth quarter.

Japanese lenders initially appeared relatively unscathed by the financial crisis, and they made a return to the world stage last year with a series of high-profile investments in struggling U.S. banks. In September, Nomura acquired the Asian units of Lehman Brothers.

But more recently, Japanese banks have taken a hit from a decline in the value of their vast shareholdings amid a stock market sell-off. Mitsubishi UFJ cut its full-year profit forecast by 77 percent last month, and in recent months it has acted to raise capital of ¥1.3 trillion, or $13 billion.

Separately, Mitsubishi UFJ said it would postpone its purchase of Citigroup’s trust banking unit in Japan, NikkoCiti Trust & Banking, for about ¥25 billion. The acquisition was originally scheduled for April 1.

The Mainichi Shimbun reported Tuesday that NikkoCiti had lent several tens of billions of yen to SFCG, a financial services company that is now under bankruptcy protection. Mitsubishi UFJ will delay its takeover to review NikkoCiti’s exposure to the bankruptcy, the newspaper said.

source:http://www.nytimes.com/2009/03/27/business/worldbusiness/27iht-broker.html?ref=business
Mitsubishi UFJ declined to give a reason for the delay.