Category: Others


WSC’s Guide To The LIBOR Scandal


What is LIBOR?

London Inter Bank Offered Rate is the rate at which banks in London lend money to each other for the short term in a particular currency. A global benchmark interest rate used to set a range of financial deals. It is also a measure of trust in the financial system and the faith banks have in each other’s financial health.

 

Every day a group of leading banks submit rates for 10 currencies and 15 lengths of loan ranging from overnight to 12 months. The most important is the three-month dollar Libor. The rates submitted are what the banks estimate they would pay other banks to borrow dollars for three months. This is a simple example of
how it works.

Since the rates submitted are estimates not actual transactions it’s relatively easy to submit false figures.

Traders at several banks conspired to influence the Libor by getting colleagues to submit rates that were either higher or lower than their actual estimate.

 

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“Tsamina mina eh eh

Waka waka eh eh

Tsamina mina zangalewa

Anwa aa

This time for Africa”

The soccer fever had gripped the world way before the world cup had even started. It all started with “Wavin’ Flag” followed by “Waka Waka” and the countless creative commercials. The world was eager and also maybe a little apprehensive about how South Africa will pull off hosting its first ever World Cup, being the first African country to be given that honour. It was the first time ever that an African country has come under spotlight to showcase its talent as Africa was always branded as a dark continent. The world cup has its own pros and cons on its hosts – South Africa.

As outlined in Deloitte’s paper “2010 FIFA World Cup. A turning point for South Africa,” South Africa is reaping the rewards of hosting the Cup, including infrastructure improvements, an economic boost, and an increase of national pride. The need to move tens of thousands of fans, teams, and accompanying support personnel rapidly from one place to another prioritized the strengthening of South Africa’s transportation system. The country completed much of the first section of its new high speed Gautrain passenger railway and added bus lines. Highways were upgraded and the city of Durban was able to finish the country’s first new green field airport in five decades. These infrastructure projects have increased employment opportunities and provided workers long-term skills and training.

This event helped to increase their employment percentage atleast temporarily during the ongoing global financial crisis. And also South Africa being a coal- dependent economy has taken several additional measures to nullify the negative effects on environment with the host cities undertaking large scale tree plantation projects.

Quoting the finance minister of South Africa, Pavin Gordhan -“This infrastructure we have built is not short-term infrastructure that you build today and destroy tomorrow. We have increased the productivity of the people of South Africa, and all of that is part of our development and long-term planning for our country. Today, we have earned the reputation of a country that can actually deliver, and that is good for future growth,” adding that the event had helped to bring an end to the Afro-pessimism that had dominated foreign media for years.

An estimated 130 000 jobs, most of them leading up to the World Cup, were created in the construction, roads and transport and hospitality industry. It has been estimated that 373,000 foreign tourists will visit South Africa during the World Cup, each spending an estimated R30,200 on average per trip. .But the exact number is yet to be calculated since many are expected to turn up for the Grand Finale.The government expects to cover most of its expenses through the income from ticket sales and the tourism sector. The South Africa’s real gross domestic product (GDP) is expected to rise by 0.4 percent. There has also been a significant increase in foreign investors.

But experts argue that all in not well for SA whose fiscal deficit has been pushed to 6.7 percent of its GDP in 2009/10 due the World Cup’s expenses. General government borrowing increased to 184.3 billion rand in 2009/10 from 40.2 billion in 2008/09. The SA government has spent about 40 billion rand ($5.17 billion) since 2006/07 on World Cup-related projects, with 11.7 billion going towards revamping of stadiums and 13.2 billion on transport infrastructure.

The Treasury’s expenditure excluded money spent sprucing up airports. Airport Company South Africa has spent about 17 billion rand since 2006 upgrading airports in Cape Town and Johannesburg and building a new one in Durban. The spending also does not include the 25 billion rand spent on building the country’s Gautrain rapid rail network. Depending on cash subsidies, South Africa has built five world-class stadiums, renovated two existing football stadiums and also three rugby stadiums and other infrastructural changes all at a cost in excess of 30 billion South African rand, double what was predicted in 2006.

The economic benefits to the South African’s are also scarce.  Because of the sky high prices of the tickets very few Africans have been able to afford it. With less than 10 percent of its people having access to internet and the tickets being sold online initially the low turnout of natives was inevitable. FIFA stated that it’s the first time ever that the host country’s representation is so low for the matches. Besides this, the small businesses and local industries have suffered a massive blow. Local traders have been barred from selling food, beverages, and soccer merchandise outside the stadiums. Local factories were not even awarded the contract to produce the official mascot, Zakumi — instead, the work went to a factory in Shanghai.

The much touted, “trickle down benefits” to ordinary South Africans have simply not materialized. Additionally, the enforced “cleaning up” of urban areas has mainly targeted the homeless and poor, something which is in direct contradiction to the promise of more inclusive urban planning, housing provision and living space. The costs of the 2010 World cup stadia and related infrastructure, borne by the South African taxpayer, have increased from an initial amount of R2.3 billion in 2004 to a whopping R17.4 billion presently, representing a 757% increase. Also creating a “tax – free bubble” around FIFA has been a blow to the South Africa’s revenues.

The Gini Coefficient of income inequality also indicates the high levels of poverty in this country. This coefficient, a metric on a zero-to-one scale with higher numbers representing greater disparity, has risen from 0.66 in 1993 to 0.70 in 2008 (the U.S., for comparison, is at 0.45). Racial apartheid has been replaced by class apartheid and unemployment hovers around 40%.The much needed funds for the public projects had been diverted to this event which will generate significant revenues. But the major chunk of profits will be going into FIFA’s pockets and the big corporations while the leftovers are expected to cover South Africa’s huge expenses. The 2010 World Cup is already proving lucrative for FIFA —Jerome Valcke, the organization’s secretary general, recently announced that income has increased by 50% since the last event.  FIFA is already boasting about record earnings of $2 billion in contrast to the losses incurred by the host country. Financially, it’s a great deal for FIFA, as virtually all of its revenue is contracted in advance via the sale of television and marketing rights, while South Africa has to foot the enormous bill for infrastructure improvements.

Though South Africa by hosting a spectacular World Cup has earned the good – will of many countries along with the trust and confidence of its people, its huge expenses have surpassed its earnings. Majority of the losses incurred due to its poor infrastructural facilities compared to the previous host countries coupled with price rise due to the global financial crisis. But the infrastructure developed will be permanent and will help in future growth of the economy. In the long term the positive effects might override the losses.

-Radha Krotthapalli