Zimbabwe's 'Blood Diamonds' exposed by Wikileaks cable

Washington keeps a close eye on Marange because of suspicions that diamonds are being sold to Lebanese traders acting for Al Qaeda. Terrorists rely on gems to move money because they are compact, and do not set off metal detectors.

The undocumented diamonds are sold to a mix of foreign buyers, "including Belgians, Israelis, Lebanese, Russians and South Africans who smuggle them out of the country for cutting and resale elsewhere".

"The majority of the diamonds are smuggled to Dubai and sold at the Dubai Multi Commodities Centre Authority. The highest quality diamonds are shipped to Belgium, Israel, or South Africa for cutting," said the report.

The cables suggest that the US diplomats give weight to allegations by Zimbabwe sources claiming that central bank chief Gideon Gono ran the operation, paying for gems with freshly printed "Zim dollars", and reselling them for US dollars.

The trade helps explain why Zimbabwe's central bank had a motive for generating the worst hyperinflation since Hungary in 1946 or Germany under Weimar. The currency disintegrated in early 2009, giving way to US "dollarisation" under the power-sharing deal with premier Morgan Tsvangirai.

The cable relayed claims that Mr Gono ran the operation and pocketed "several hundred thousand dollars a month" before being displaced by Zimbabwe's military. Vice-president Joyce Mujuru allegedly skimmed off similar sums.

The report cited allegations that President Mugabe's wife, Grace, and sister, Sabina, were both profiting from the smuggling. A string of top officials in Mr Mugabe's ZANU-PF party were named as active participants in the venture.

The violence has been staggering. After one assault by security forces "over 200 bodies turned up at Mutare mortuaries. Many of those bodies arrived with fatal gunshot or dog bite wounds and were tagged "BID Marange" or "brought in dead from Marange".

Some allegations came from tribal leaders in the Mutare region near Mozambique, where Marange is located. One source is a member of the ZANU-PF central committee, who stated that the late Sabina Mugabe "had been profiting from the purchase and sale of [Marange] diamonds". The name of the source is not redacted by Wikileaks, leaving him vulnerable to reprisals.

The reports buttress claims that African Consolidated, which has long alleged that the Mugabe elite seized the property to enrich itself and finance the ZANU-PF machine.

Andrew Cranswick, ACR's chief executive, is identified by name as a source for one cable, giving specific details about specific individuals in the smuggling ring, including a prominent South African.

"It was highly irresponsible for Wikileaks to publish names," he told The Daily Telegraph. "This is extremely dangerous and puts peoples' lives at risk."

Mr Cranswick has other difficulties. He has been declared bankrupt by an Australian court for overdue taxes. The company, which also has phosphates and metals, has been crippled by the Marange dispute. It operates from a modest house in a Harare suburb.

A survey report for De Beers indicated that the Marange fields have a ratio of more than 1,000 carat per hundred tons, eight times higher than peers. One industry expert said it was "the richest diamond field ever seen by several orders of magnitude".

ACR executives first realised its full potential when it the saw local boys using the glassy green-black stones in slings to kill guinea fowl. "We asked one youngster to show us the stones in his pocket and almost all of them were diamonds. That is when we understood," said Mr Cranswick.

The Marange stones - 70pc industrial, and 30pc gems - came to the Earth's crust 1.3m years ago, far earlier than other diamonds. The radiation has changed their appearance, so it takes an expert to spot that they are diamonds.

Tribal chiefs said the diamonds were causing havoc. "The environmental degradation was severe, violence reigned, and the community was not benefiting from the resource. Three quarters of the schools failed to open because teachers and students alike were digging for diamonds," said the cable.

The US embassy said Marange could be a bonanza for battered Zimbabwe, perhaps generating sales of $1.2bn (£760m) a year. Instead it had become a "curse".

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Political upheaval rocks eurozone debt markets

Finance minister Fernando Texeira dos Santos said failure to agree on budget cuts will 'plunge the country into a very deep financial crisis' Photo: AP

Hopes of a budget deal in Portugal collapsed after marathon talks between the minority government of socialist premier Jose Socrates and conservative leaders ended in acrimony.

Finance minister Fernando Texeira dos Santos said failure to agree on budget cuts will "plunge the country into a very deep financial crisis".

Meanwhile, Ireland has announced fiscal retrenchement of €15bn over the next four years, twice the original plan. It is already cutting public wages by 13pc.

John Fitzgerald from Ireland’s Economic and Social Research Institute said there is a risk that austerity tips the economy into a downward spiral, comparing it to an overdose of "chemotherapy" that does more harm than good.

Finance minister Brian Lenihan said the country had no choice. "The cost of borrowing is high and rising, and if we do not act soon to live within our means, people may stop lending to us. We will not fool the markets for an instant if we seek to defer any longer what evidently needs to be done now. The Irish people will have to accept cuts in public expenditures and higher taxes," he said.

In Greece, yields on 10-year bonds surged 67 points to 10.26pc, the biggest jump since the turmoil in June. The sell-off came after permier George Papandreou warned that the country was still in danger, and threatened to call early elections.

Finance minister George Papaconstaninou refused to rule out a request for an extension of the repayment period for the EU rescue package and confirmed that tax revenues are falling short. "We are deluding ourselves as a country in thinking we have a tax system. We don’t," he said.

He confirmed leaks that the budget deficit for 2009 would be "above 15pc" of GDP, higher than the last estimate of 13.8pc and five time the original claim of 3pc by the previous government.

Gavan Nolan from Markit said fears of "political instability in sovereign credits" had moved onto the radar screen, with investors now paying closer attention to whether or not governments can actually deliver on austerity plans.

It unclear whether Portugal can salvage anything over coming days in what amounts to a game of brinkmanship, with the socialists demanding VAT tax rises and the conservatives demanding spending cuts.

The opposition denied that there was "any possibility" of continuing talks, but hinted that it would abstain on the budget vote. Mr Socrates in turn has said he will resign if there is no accord.

Julian Callow from Barclays Capital said politics is intruding in the eurozone fiscal crisis. "It is one thing to promise cuts but it is very different to agree on details and decide where the axe will fall. There are some encouraging signs but Portugal has an awesome undertaking ahead in squeezing fiscal policy by 4pc of GDP over the next year, and the the task may be too great."

Yields on 10-bonds jumped 25 basis points on Wednesday to 5.77pc, far above the likely rate available from the EU’s bail-out fund and the International Monatery Fund. A string of top economists in Portugual have said the country should call in the IMF to gain breathing time.

As members of the eurozone, Portugal, Ireland, Greece cannot devalue or resort to monetary stimulus offset fiscal tightening. They must each pursue a policy of "internal devaluation", meaning deflation within the currency bloc to regain lost competitiveness.

This is risky for economies with total debt levels above 300pc of GDP, as is the case in Ireland and Portugal. Ireland’s nominal GDP has already contracted by over 20pc of GDP, yet the debt burden has not diminished.

The test will be whether these countries can generate enough exports to trade their way out of crisis over coming years, or remain trapped in slump with rising political tensions.

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EU 'haircut' plans rattle bondholders

Front row left to right, European Commission President Jose Manuel Barroso, French President Nicolas Sarkozy, and Lithuania's President Dalia Grybauskaite. Back row left to right, Portugal's Prime Minister Jose Socrates and German Chancellor Angela Merkel at the EU summit in Brussels Photo: AP

Germany has agreed to give the EU's €440bn (£383bn) bail-out fund permanent status rather than letting it expire in 2013 as planned, but only as part of a "Crisis Resolution Mechanism" that forces bondholders to share losses from any future bail-outs. The fund must be anchored in EU law through changes to the Treaties in order to head off legal challenges at Germany's constitutional court.

A draft proposal from Berlin – now serving as a working text for the European Commission – calls for "orderly insolvency" by eurozone countries in trouble. Details are sketchy but this "Chapter 11" for sovereign states would include an extension of debt maturities, a "holiday" on interest payments for as long as needed to let debtors recover, and a suspension of bondholder rights. The blueprint is akin to debt-restucturing schemes used by the International Monetary Fund.

Under a Finnish proposal, there are likely to be "Collective Action Clauses" in all new bond issues to prevent minority bondholders blocking a default deal.

European President Herman van Rompuy will be tasked to draw up a blueprint for the crisis mechanism. There may also be a Sovereign Debt Restructuring Mechanism (SDRM).

Berlin is determined to avoid a repeat of the €110bn bailout for Greece when banks were shielded from losses, leaving eurozone taxpayers facing the full cost.

Silvio Peruzzo, Europe economist at RBS, said talk of "haircuts" for bondholder at this delicate juncture could backfire. "The debt crisis in the eurozone periphery has not been sorted out. These countries need markets to keep buying the bonds, but investors are going to stay away if you open the door to private sector pain," he said.

It is unclear whether the latest bond jitters in Greece, Ireland, and Portugal is linked to growing awareness of the German plans. Each country has its own troubles. Yields on Ireland's 10-year bonds briefly rose to a post-EMU high above 7pc on Thursday, partly due to a stand-off between Dublin and angry funds facing losses on the junior debt of Anglo Irish Bank.

However, EU officials fear that the proposals could make it harder for high-debt states to tap debt markets, risking a self-fulfilling crisis.

Germany is likely to win backing in principle at Friday's EU summit in Brussels since it has already struck a deal with France, and Britain has dropped its opposition to treaty changes.

Brussels believes it is possible to invoke Article 48.6, which allows changes to the Lisbon Treaty without the political trauma of referenda or full ratification in all 27 states. This "simplified revision" can be used to cover matters in Part III of the Treaty, but the EU risks a political backlash if it tries to push through such a controversial plan by these means. Viviane Reding, the EU justice commissioner, said it was "suicidal" to tinker with the treaties so soon after the Lisbon storm.

German Chancellor Angela Merkel is also demanding EU powers to strip countries of their voting rights if they breach eurozone rules, but this has been dismissed by Brussels as "totally unacceptable" and will be blocked by other states.

The summit was intended to endorse plans by an EU taskforce for a beefed-up Stability Pact, but as so often at EU meetings France and Germany have run away with the agenda.

The German proposals have a logic since they let struggling states claw their way out crisis by reducing debt. Greece's rescue risks failure because it will leave the country with public debt of 150pc of GDP, near the point of no return.

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Angela Merkel consigns Ireland, Portugal and Spain to their fate

“We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers,” said German Chancellor Angela Merkel.

Or in the words of Bundesbank chief Axel Weber: “Next time there is a problem, (bondholders) should be part of the solution rather than part of the problem. So far the only ones who have paid for the solution are the taxpayers.”

These were the terms imposed by Germany at Friday’s EU summit as the Quid Pro Quo for the creation of a permanent rescue fund in 2013. A treaty change will be rammed through under Article 48 of the Lisbon Treaty, a trick that circumvents the need for full ratification. Eurosceptics can feel vindicated in warning that this “escalator” clause would soon be exploited for unchecked treaty-creep.

Mrs Merkel needs a treaty change to prevent the German constitutional court from blocking the bail-out fund as a breach of EU law, and a treaty change is what she will get. “This will strengthen my position with the Karlsruhe court,” she admitted openly.

One might argue that bondholders should have been punished for their errors long ago. The stench of moral hazard has been sickening, on both sides of the Atlantic. An orderly bankruptcy along lines routinely engineered by the International Monetary Fund is exactly what Greece needs. It makes no sense to push Greece further into a debt compound spiral by raising public debt from 115pc of GDP at the outset of the “rescue” to 150pc at the end of the ordeal.

If you strip out the humbug, the Greek package allows banks and funds to shift roughly €150bn of liabilities onto EU governments, or the European Central Bank, or the IMF. Greek citizens are being subjected to the full pain of austerity under false pretences, without being offered the cure of debt relief.

It is in reality a bail-out for investors. There is a touch of cruelty in this. Needless to say, the Greek Left has noticed. A socialist dissident from the “anti-Memorandum” bloc (ie anti EU-IMF) is likely to win the Athens region in coming elections.

Note too that the ruling socialists have fallen to 25pc in the Portuguese polls, while the Communists and hard-left Bloco are together up to 18pc. Ain’t seen nothing, you might say.

Yet opening the door to bondholder haircuts at this delicate juncture – with spreads reaching fresh records in Ireland last week, and Portugal struggling to pass a budget – is to toss a hand-grenade into the eurozone periphery.

We now know that that ECB’s Jean-Claude Trichet warned EU leaders on Thursday night that it was dangerous to stir up this hornets’ nest, and moreover that the politicians did not understand what they were unleashing. He was slammed down acrimoniously by French President Nicolas Sarkozy, who later denied that he lost his temper.

“Mr Trichet expressed a number of reserves. There was a debate, there is always a debate, but the European Council took its decision,” he said.

“It is wrong to say I was irritated. You can reproach heads of state for all kinds of things in a democracy, but I don’t think you can reproach them for not being aware of the seriousness of the situation,” he snorted.

Mr Sarkozy was not going to let his Brussels `triomphe’ slip away after stitching up EU affairs once again in a pre-emptive deal with Germany and imposing his will. The notion that the Franco-German axis still runs Europe is potent politics in France, even if the decisions actually reached are often of little value or – as in this case – ill-advised. Such is the chemistry of EU summits, where mad things happen.

Spain’s premier Jose-Luis Zapatero knew he had been mugged. “We need to listen carefully to what the head of the ECB says about the rescue mechanism. Great care is called for because this message is risky,” he said.

Eurozone sovereign states must issue €915bn in new bonds next year, according the UBS, either to roll over debt or to cover very big deficits – though it is hard to outdo Ireland’s deficit of 32pc of GDP in 2009. Yet investors have just been told in blunt terms to charge a hefty risk premium on any peripheral debt that expires after 2013, with great confusion over what happens even before that date. Can any investor be sure what the terms will be if Ireland or Portugal needs to access the EU’s bail-out fund next week, or next month, or next year? Are haircuts already de rigueur?

A study by Giada Giani at Citigroup entitled Bondholders Moving Back Home said data from the second quarter reveals a sharp drop in foreign ownership of debt from Greece (-14pc), Portugal (-12pc), Spain (-8pc), and Ireland (-5pc).

Local banks have stepped into the breach, borrowing cheaply from the ECB to buy their own state debt at higher yields in a `carry trade’ that concentrates risk. These four countries account for the lion’s share of the €448bn in ECB funding for banks (Spain €98bn, Greece €94bn). Frankfurt is propping up this unstable edifice. Mr Trichet may well fret.

A strong case can be made that Spain has decoupled from other PIGS in pain, though the deficit will still be 6pc next year, and the economy is at serious risk of a double-dip recession as wage cuts and higher taxes bite in earnest. But none are safe yet.

An ominous pattern has emerged across much of the eurozone periphery: tax revenue keeps falling short of what was hoped. Austerity measures are eating deeper into the economy than expected, forcing further fiscal cuts. It goes too far to call this a self-feeding spiral, but such policies test political patience to snapping point.

There is little that these nations can do in the short-run as EMU members. They cannot offset fiscal tightening with full monetary stimulus or a weaker exchange rate – as Britain can. All they do can is soldier on, sell family silver to the Chinese and Gulf Arabs, beg the ECB to join the currency war to bring down the euro, and pray that the fragile global recovery does not sputter out.

Chancellor Merkel is ultimately correct. A mechanism for sovereign defaults is entirely healthy. Had it been in place long ago, EMU would have been stronger. The proper timing for this was at the Maastricht Treaty, or Amsterdam, or at the latest Nice, but in those days the EU elites were still arrogantly dismissive about the implications of a currency union. To wait until now borders on careless.

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QE2 risks currency wars and the end of dollar hegemony

The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.

China's commerce ministry fired an irate broadside against Washington on Monday. "The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a 'currency war'. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate," it said.

David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. "There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it," he said.

Pious words from G20 summit of finance ministers last month calling for the world to "refrain" from pursuing trade advantage through devaluation seem most honoured in the breach.

Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.

"It is becoming harder to mop up the liquidity flowing into these countries," said Neil Mellor, of the Bank of New York Mellon. "We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in," he said. Globalisation is unravelling before our eyes.

Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.

Mr Bloom said these countries are under mounting pressure to break free from the dollar. "They are all asking themselves whether these pegs are a relic of the past," he said.

China faces a variant of the problem with its mixed currency basket, a sort of "crawling peg". Commerce minister Chen Deming said last week that US dollar issuance is "out of control". It is causing a surge of imported inflation in China.

Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country's $180bn trade surplus into balance.

They say the strategy of holding down the yuan to underpin China's export-led model is the real source of galloping wage and price inflation on China's eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to "sterilise" these purchases and stem inflationary "blow-back".

But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.

The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.

So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.

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Aussie dollar breaks the buck as Australia, India fight Fed with 'quantitative tightening'

 The surging 'Aussie' captures the shift in the world's economic centre of gravity to the Pacific region. It was worth half a US dollar nine years ago. Photo: AFP

The long-awaited moment of "triple parity" seems imminent. The Swiss franc is already worth more than a greenback, and the Canadian dollar is seemingly poised to break through as well.

The surging "Aussie" - widely seen as a play on the China growth story and used by traders as a proxy for the Chinese yuan - captures the shift in the world's economic centre of gravity to the Pacific region. The currency was worth half a US dollar just nine years ago.

Australia's reserve bank said the "the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. The risk of inflation rising again over the medium term remains".

The move caught markets off guard. Credit growth has been cooling off over recent weeks and inflation is still just at 2.8pc - compared to 3.1pc in the UK - but the bank appears concerned about the risk of a wage spiral.

HSBC said emerging markets and commodity exporters such as Australia are opting for "quantitative tightening" to offset the liquidity effects of quantitative easing in the US, which is causing a flood of money into faster growing economies. Several states are toying with capital controls.

India's central bank has also tightened further, raising rates a quarter point to 6.25pc. It has imposed draconian housing curbs to reduce "excessive leveraging" and prick the bubble, limiting mortgages to 80pc of property values.

It may have responded with too little too late.

"Interest rates have been negative in real terms for 26 months, and heavily negative for several months," said Maya Bhandari from Lombard Street Research.

"Inflation is 9.8pc and is is going to get worse as the Fed's QE2 pushes up food prices, so a quarter point rate rise is not going to make much difference. They are relying on `administrative measures' instead of doing what they need to do," she said.

Ms Bhandari said the authorities had let rip with a "huge monetary and fiscal boost" before the elections in May 2009, leaving a legacy of overheating that is now coming back to haunt. The combined central and state budget deficit - including fuel subsidies - is nearly 11pc of GDP.

HSBC's currency team said the Australian dollar may be nearing its peak. "One concern relates to the deflating of the property bubble in China. This could happen gently but, if not, the Aussie will not avoid the fall-out. A sharp fall in Chinese property prices may very well lead to a deep examination of Australia's property bubble, and Australian banks," they wrote in a client note.

The report said Australia's lenders rely heavily on funding from abroad to finance the country's internal boom, creating a risky mismatch in liabilities. "Rationally or irrationally, this could turn very sour. The Aussie party looks set to come to an end soon," it said.

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Dollar plummets on report that EDF 500bn provides $ more in the economy of the pump

The dollar fell throughout Wednesday in the middle of the signs, that the Federal Reserve will pump $500billion in the economy over the next six months. Photo: Getty Images

Beige Book survey the Fed on business regional Wednesday said the u.s. economy expanded at a "modest pace" with little sign of acceleration last month, fueling speculation that the Governors of central banks may take additional measures to support growth.

Jack Ablin, placement head to Chicago-based Harris Private Bank told Bloomberg: "the beige book reiterates call for relief quantitative.La economic growth, is simply not accelerating."It remains to be seen what finally Fed purchase obligations will be.»

A report undertaken consultation Medley Global Advisors suggested that the Fed could start with the stimulus as early as next month, costs $ per month on the binding of achats.On knows that the u.s. Federal Reserve has a commitment to do more in the next 18 months.

The dollar plummeted to its lowest level against the euro since July and a minimum of 15 years against the yen.The euro has increased by 1. 06pc to $1.395 and the dollar ended at 81.05 yen.

Camilla Sutton, Scotia capital, currency strategist says Reuters: "we believe that the dollar ends lower year, but for the moment, we will no doubt be a period of negotiation over until we have a firmer idea where makers have in their heads."

In the meantime stocks and commodity recovered after the average China surprise mardi.La interest rates increase industrial Dow Jones rose 129.35 points, or 1. 18pc 11, standard 107.97.Le and Poor 500 index has been 11.78 points, or 1. 05pc 1,178.17, with more than 20 companies scheduled to report third quarter earnings today.Nasdaq Composite index rose points 20.44, or 0 84pc, 2,457.39.

Large companies, driving change market included Boeing Company, whose shares have increased 3 35pc after displaying a quarterly profit that beat expectations Wall Street.Delta Air lines and Airways Group have also reported strong profits.

Portal Yahoo! trooping 2pc after the announcement late Tuesday, the net income for the third quarter has more than doubled $396.1 m, or 29 cents per share.

Wells Fargo, the biggest U.S. home lender climbed 4 28pc after saying it was "eager" returning cash to shareholders after a record quarterly profit.

Lawrence Creatura, a Federated Investors Inc., New York-based Fund Manager said Bloomberg: "we have a variety of reports that indicate that the sky is not tomber.Hier company gains was a dark day for the market because of macro factors today it will be business tower management teams lead once more how."

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