A Weekly Digest of The World's Financial Press

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Business Week

Can US chief executives justify pay packages that average $10m?

OUTRAGEOUS? WELL, yes and no.Many CEOs appear to be earning their keep. Thanks to options, the link between pay and performance has never been tighter. Enormous value had been created by many of these top execs. And shareholders are not complaining either.

But times are exceptionally good for executives to strut their stuff. It's too easy to confuse genius with a bull market. What to do? To ensure that only the best performers reap their just rewards, we support Alan Greenspan in advocating indexed options. Give CEOs options that have no value unless the stock actually does better than a market or, a peer group index. High pay is OK only if supported by performance.

- Editorial

Financial News

Placing new restraints on derivatives would be unnecessary and unwise

THE WORLD Bank's snipe at the $50 trillion derivatives industry is somewhat uncharacteristic. Derivatives instruments help tease apart the strands of risk entwining the global economy. They offer investors untold opportunities to assess the merits of government policy. In doing so they attract capital to well-managed economies and facilitate flows out of those that are unsound. This is evident not just in emerging markets but in G10 countries such as Italy.

To levy an ill-conceived regulatory framework on emerging market derivatives now would be to punish those countries making painful, but rewarding strides towards recovery, and those which have turned their back on the free- market principle.

- Editorial

The Washington Post

On how Brazil has come back from the brink of recession

IN JANUARY, Brazil conducted a crisis devaluation of the currency. It was a cruel blow to a lower class already absorbing severe punishment, and also to a middle class scarcely more securely perched on the lower rungs of a society notorious for its income disparities. Yet it did not produce the widely-feared Brazilian meltdown. Brazilians still expect negative growth this year.

Nonetheless, developments in Brazil can be regarded as an achievement. They do more than win President Fernando Henrique Cardoso the further respect of the international financial set. They confront the twice-elected former professor with the opportunity to tackle more demanding reform.

- Editorial

Financial Times

On Europe after the euro's first one hundred days

WITH INFLATION subdued, the central question becomes an assessment of the scale of the trouble facing the real economy. It is serious. Euro- zone growth has collapsed. Domestic demand is sickly and business confidence and investment are terribly weak. Monetary easing alone will not cure Europe's economic ills. For too long, politicians have avoided the difficult liberalisation needed to unleash enterprise and help unemployment fall.

Since the launch of the euro, too many politicians have been second-guessing the ECB. After the ECB's first rate cut, it is time for governments to play their part. If monetary union brings economic reform, that really will be a reason to drink a toast. - Editorial

The Economist

Why America is fighting a just trade war over bananas

BUT SURELY, a liberal might plead, the EU should protect poor Caribbean banana growers against heartless American multinationals? Is not bending world trade rules a small price to pay for helping the poor? No, it is a large price to pay, and for not very much help. Trade restrictions are not a good way to help poor countries; trade rules are too important to global prosperity. Moreover, the banana regime is a rich man's racket.

It costs European consumers about $2bn (pounds 1.24bn) a year. Of that, around $1bn (pounds 0.62bn) goes to the distributors. Banana growers in the poor countries get only $150m (pounds 93m) a year. If the EU wants to help, it should throw open its banana market and increase direct aid to the Caribbean.

- Editorial


On what China stands to gain from the World Trade Organisation

WHAT WORRIES China is the short term: the impact on state industries. With a stability-obsessed leadership alarmed by rising unemployment, the list of potential WTO casualties is long. China may call itself a "developing" country, but a more accurate label is "semi-reformed". And the further Peking inches towards market reform, the tougher become the the choices.

From this perspective, China's drawn-out WTO entry bid simply highlights a more fundamental challenge for the Chinese leadership: how to get the country from an opaque, state-dominated economy to a rules-based free- market system without eroding the pillars of one-party power.

- Editorial, Richard Tomlinson


On the impact of overstated earnings on Wall Street

MIND-BLOWING valuations and speculative frenzy by no means exhaust the list of things that trouble us about the level of the market. Purported earnings are a sore subject as well. We've long had a gripe about taking huge anticipatory charges in a bad year, so as to puff up earnings the next. Equally irksome is hyping earnings by using options instead of cash to pay employees.

Andrew Smithers has bravely sought to determine the impact of the use of options on corporate profits. If corporations had accounted fully for the costs of options, published profits would have been reduced by a whopping 56 per cent in 1997 and 50 per cent in 1998. It puts the market in a slightly different light, doesn't it?

- Editorial