– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

India’s voters have just given stalled world trade talks their biggest potential boost since the financial crisis spurred fears of rising protectionism.

By handing the governing Congress party a decisive victory, unshackled from the Communist party, Indians have created a chance to break a deadlock in negotiations on global commerce that foundered last year on a U.S.-Indian spat over farm trade.

Trade Minister Kamal Nath, whose dogged defence of India’s small farmers helped sink the talks, told Reuters on Sunday: “We believe that it is even more important to conclude the Doha round as one of the measures to extricate the global economic from going into a tailspin, and India is willing to play a leadership role in this.”

The unexpectedly clear Indian vote coincides with signs that U.S. President Barack Obama’s administration, after striking a protectionist tone to appease blue-collar voters, is warming to completing a World Trade Organisation accord. In recent speeches Obama has rightly identified trade as key to pulling the world out of recession.

U.S. Trade Representative Ron Kirk made positive noises on a visit to Geneva last week. He revealed nothing new but said Washington was committed to seeing the trade round launched in Doha in 2001 succeed and he did not want talks to start from scratch or throw away work already done.

He restated U.S. demands that major emerging economies — China, India, Brazil and South Africa — must open their markets more to American exports to achieve a deal. Without tangible benefits for business, it would be hard for Obama to push a WTO agreement through a trade-sceptical Democratic Senate.

The prospect of holding a decisive WTO ministerial before the summer break still seems remote. Before it is worth convening ministers, the United States, India and probably China must thrash out the complex dispute over ways to shield developing nations from a surge in agricultural imports.

This and the equally sensitive issue of cotton, where U.S. subsidies are a big obstacle, were the last two points to be resolved when last year’s WTO talks collapsed. Eighteen other areas had been provisionally settled.

With hindsight, it is extraordinary that the pro-trade Bush administration clinched an agreement on nuclear cooperation with India last year without linking it to a Doha accord. Obama has not set a date for concluding a U.S. trade policy review, but Washington should not squander the opportunity for an early understanding with a more market-friendly Indian government.

– John Kemp is a Reuters columnist. The views expressed are his own –

The current contango structure in crude oil futures and most other commodity markets — with future prices significantly above the spot market — is providing a strong incentive to buy and store record quantities of raw materials, with most of the cost borne by retail investors in exchange-traded funds and institutional investors in long-only commodity indices.

This “cash-and-carry” strategy rewards market participants with access to storage or finance at the lowest cost. It is providing huge profits for physical commodity merchants, investment banks, and the owners and operators of warehouses and tank farms during the downturn, and helps explain the record profitability from commodity operations reported recently by some of the largest banking and trading groups.

In the current market, the cash-and-carry strategy rewards well-connected “insiders” such as investment and commercial banks able to secure almost unlimited financing at zero-cost as a result of quantitative easing programmes.

DOING THE CONTANGO

In a contango market, the Futures Price = Spot Price + Finance (interest rate on the money borrowed to own the physical commodity) + Storage (cost of hiring tanks, tankers or warehouses) + Insurance (premiums for insuring the commodity against loss, sinking, damage, theft etc). Click here for PDF. More generally, the equation can be re-written to cover any market (whether contango or backwardation, when the futures price is below spot) so the Futures Price = Spot + Finance + Storage + Insurance - Scarcity/Prompt/Convenience Premium. The prompt premium is the additional price a consumer is prepared to have spare material on hand “just in case” rather than risk having to go out into the market and buy it at an uncertain price or even find it is unavailable.

When commodity inventories are low, the convenience/scarcity/prompt premium can become very large and dominates all the other terms in the equation, ensuring the futures price is below the spot, and the market is in backwardation. But otherwise the term is small and the cost of finance and storage exceeds the convenience/prompt premium and the market is in contango.

In practice, we can ignore the insurance term because (a) it tends to be quite small and (b) does not change very much. For this analysis, we will also ignore the prompt/convenience premium since markets are well supplied at present and expected to remain so for the foreseeable future, with high stocks of crude oil, aluminium and other commodities.

In this simplified world, Futures Price = Spot + Finance + Storage. In some sense, the futures price is above spot because by buying forward the purchaser avoids the finance and storage cost. Conversely, the spot price is at a discount because buying now and holding into the future incurs finance and storage charges.

So far, we have assumed the finance and storage costs are the same for all market players. But in practice the cost of finance varies over time and among market participants. On the storage side, the cost depends on whether you own tanks/vessels/warehouses; whether you have leased them on a long-term deal; and whether a special discount is available.

In principle, the Future Price = Spot + Finance + Storage relationship should hold for the marginal market participant doing the storage and reflects the marginal players financing and storage charges.

But for everyone else with lower financing and storage costs the actual cost of storage should be below the cost reflected by the contango. For these players, it pays to buy physical commodities, put them in storage, and then hedge the long physical position with a short futures position, pay the smaller storage and finance charges on the physical and receive the larger yield from the contango.

REWARDS FOR INSIDERS

Market participants with access to cheap finance (banks) or cheap storage (tank farm and warehouse owners, or those with long term deals) can make money on the physical deals.

This is one reason many commodity firms run a physical trading house and a warehousing company in tandem together with a futures brokerage. The point is to exploit synergies and run a balanced business that is somewhat insulated from the cycle.

The physical trading business directs metal to the warehousing company and tries to ensure they are full (and therefore earning rental income from the metal). Whether the company takes the income as rent (accruing to the warehousing arm) or as a cheap rent deal (with extra contango income accruing to the physical trading desk) is a matter for the tax accountants.

But it creates an attractive synergy. When the economy is booming, warehouse stocks will be low, so earnings on the warehousing company are poor, but futures turnover is usually high in a bull market, so the futures brokerage and speculative book make money. When the economy is in recession, futures turnover drops and commission earnings fall, but the warehouses will be full earning plentiful rental income.

Only a small number of metals trading companies are fully integrated (comprising a customer-oriented broker, a physical trading business, and a warehouse). But most others will have special arrangements with one or more warehousing companies. There are similar systems in oil — with banks taking leases on tank farm space or floating vessels to play the same strategy.

BACKWARDATION RISK

So far we have assumed that the physical and financial parts of the store and hedge game mature at the same time (ie the lease on the storage space and the futures positions mature on the same date). In this trade, there are no risks.

But it may be possible to spice up the returns by accepting some risk by mismatching the two legs of the deal. A close look at the shape of the futures curve reveals that the steepest contango is usually for the first day or month, with progressively smaller contangos thereafter.

Instead of taking a 3-month lease on some storage space and putting on a short position 3 months forward to hedge it, some physical traders will take a 3-month lease and put on a short position 1 month forward (earning the biggest bit of the contango) with the assumption they can roll the short forward by another month and then another when the correct time comes.

The risk here is the market flips into backwardation at some point before the 3 months is up. In which case rolling short positions forward will incur a cost not generate revenue.

Either the backwardation has to be paid (reducing total returns on the strategy) or the metal/oil has to be delivered before the 3 months are fully up against the maturing short position, in which case the player is paying storage costs on empty tanks/warehouses.

Long-term storage plays popular with many banks and trading houses at the moment, where shorts are repeatedly rolled, are a bet that the market will not flip into backwardation, and no one will organise a squeeze, before the storage deal matures.

This seems a fairly safe bet in the current environment of cheap money and plentiful inventories.

-- Clive Stafford Smith is the director of Reprieve, the UK legal action charity that uses the law to enforce the human rights of prisoners. The opinions expressed are his own. -

Samantha Orobator, a 20 year old British woman, is languishing in the Phonthong Prison in Laos, on a capital charge of carrying a pound and a half of drugs in her luggage. Under the languid Laotian legal system, she would normally have waited two years or more for a trial. However, the Laotians accelerated the schedule, announcing late on Thursday that the trial would be held this Monday. They omitted a few of the niceties: She faced the firing squad without a lawyer.

Anna Morris, our Reprieve barrister from London, was scheduled to meet with her on Tuesday, which may have contributed to the chosen trial date. Criticizing the Lao People’s Revolutionary Party is a criminal offense. Perhaps calling for a fair trial is considered too close to the line; the government reneged on its promise, made before Anna flew 9,344 kilometres (5,806 miles) from London to Laos, to allow three days of legal visits.

Controversy envelopes Samantha. She has been in prison since August 6, 2008, and yet she is due to give birth on September 6, 2009. Khenthong Nuanthasing, the Lao government spokesman, spoke to the BBC Tuesday morning. When asked whether Samantha became pregnant in the prison, he replied: “That’s impossible. A man or guard cannot act in that way *** she was pregnant when she was arrested in August.”

One might be sceptical at this. It would mean her gestation period was at least 13 months which, while plausible were she a blue whale, is not what we expect of human beings. Later Mr Nuanthasing changed his version of events, indicating that she might have been pregnant when she was arrested, but that she lost the first baby while in prison.

How she became pregnant is one pressing issue, but perhaps of most immediate concern is her health and the health of her unborn child. If she has already had one miscarriage in the prison, then Samantha must add it to one she suffered in 2006, when she was beaten by her boyfriend with a bicycle chain.

The Laotians announced Tuesday that they would not execute a pregnant woman, but they planned to plough forward with her trial within the next week, when she faces life in prison. Her prospects are dim. The U.S. State Department, in its 2008 report on Laos, notes that all judges have to be party members, and that a trial such as Samantha’s will be a foregone conclusion, stating quaintly that “judges usually decided guilt or innocence in advance…”

It is sobering to think that her child is already sixteen times more likely to die simply because Samantha will give birth in Laos rather than London. In Phonthong prison, the odds must be far worse. The State Department reports the total absence of meaningful medical care, and finds “[c]redible reports” that “some foreign prisoners were treated particularly harshly.”

Add to this the stress of a trial while five months pregnant, with a local lawyer who neither speaks the language nor prepares for trial, and the probability of another miscarriage mounts exponentially.

Samantha deserves to be judged only on a proper defense. But the one person who is indubitably innocent is her unborn child. The threat facing this child is an inhuman shame.

For more information about Samantha and how to help her, see www.reprieve.org.uk, or contact Reprieve, PO Box 52742, London EC4P 4WS. Tel: 020 7353 4640.

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

It’s tough on Ukraine, but European banks should pull out. It may not be the only Eastern European economy giving its western bankers a headache but that country’s political chaos and weak corporate governance outweigh the prospects of a return to growth.

Hungarians and Romanians, the bulk of whose loans are in foreign currencies, have seen their debts rise as their own currencies fall. And Sweden’s SEB and Swedbank have taken a pasting in their neighbouring Baltic states.

Austria’s Erste Bank managed to make a profit in the Czech Republic, Slovakia, Croatia, Serbia, Hungary and even Romania, (where it lifted bad loan provisions five-fold), albeit at a lower level than last year.

However, like the Swedes, it came a cropper in Ukraine.

The EU and the International Monetary Fund (IMF) have stepped in to the rot, but Ukraine is still floundering.

Its economy is expected to shrink by 10 percent this year and its politics are in chaos. Within the ruling elite, poisonous personal rivalries have prevented agreement on the basic economic reforms that the IMF is demanding before it writes more cheques.

The downturn is hurting the western banks: Erste, Swedbank and SEB all lost money there in the first quarter. Both the Swedes have written down all their remaining goodwill there.

All three are pulling in their horns. Erste has laid off 300 local staff. SEB has ditched its expansion plans. Swedbank concedes that short term growth in Ukraine will be curtailed, although a cheerful message on its website says it hopes “to capture the possibility for long-term growth.”

They should all capture the certainty offered by a near-term exit. Ukraine represents a tiny proportion of all three banks’ assets. The recovery, when it comes, will have only a marginal effect on profits, but in the meantime the country offers plenty of scope for management hassle.

Banks are generally slow to pull out of countries because of the political backlash. They will be accused of abandoning Ukraine when it most needs western support, but that only matters if a bank expects to set up there again. Unfortunately, Ukraine will remain the wild east for some years to come.

-- Neil Collins is a Reuters columnist. The opinions expressed are his own --

Here's a novelty -- an awkward process that this British government has actually got right. Labour has played a fine game of grandmother's footsteps in its realization of the inevitability of new nuclear power stations, and this week has clinched the sale of two sites for them.

The auction process, pioneered by Labour with the sale of radio spectrum for mobile phones, has once again raised much more than most observers expected.

Germany's RWE and Eon are now the proud owners of land at Wylfa (on Anglesey, an island off a remote corner of Wales) and Oldbury (Gloucester, England).

Considering the relentless opposition from the tree-huggers, wind farm fans and believers in bad science, the UK government has managed the shift from "Nuclear power? No thanks" to economic reality rather well.

Having been forced to step in and rescue British Energy, the nuclear generator that dared not speak its name, it engineered the sale of the state's holding to EDF of France last year before the capital markets seized up.

Now all the German owners of these little bits of Britain have to do is find the tens of billions of pounds needed to build the power stations. Let's hope they can get them up and running before Britain's lights start to dim, some time towards the end of the next decade.

-- Neil Collins is a Reuters columnist. The opinions expressed are his own --

It's hardly surprising that the shareholders in 3i, the listed private equity group, are deeply unhappy at the prospect of having to return 700 million pounds of the 1.75 billion pounds of capital they have received from the company in recent years.

The board has got itself into a hole. That paid-out capital, plus a further 400 million pounds in share buy-backs, was largely financed with borrowed money, and those debts are now coming up for repayment.

A 550 million euro convertible bond launched in August 2003 was designed to provide fresh equity, but it had to be rolled into a 430 million pound convertible bond, and the conversion terms are now pie in the sky. That bond falls due in 2011.

Were 3i an industrial company, it could blame hard times; were it a bank, it would already have abandoned any pretence that a rights issue was anything less than a rescue. It's neither. It's a sort of glorified investment company, valued in normal times by reference to its net asset value per share.

Analysts at Cazenove calculate the current NAV at 521 pence, against the credit-crunched market price of 330 pence. The brokers suggest a one-for-one issue at 175 pence, which would raise 738 million pounds before expenses.

It's almost impossible for an investment company to issue new shares at a significant discount to NAV. It's highly dilutive to shareholders, and begs the question: if the assets are really that valuable, why not sell some to raise the cash?

Until 3i has a convincing answer to that question, it will struggle to get out of the hole it's dug itself.

– John Kemp is a Reuters columnist. The views expressed are his own –

The bond market’s adverse reaction after the Fed announced no new asset purchase facilities or bond buyback programs highlights the fundamental difference between interest rates and quantitative easing (QE).

Rate cuts provide ongoing support for an indefinite period until the Federal Open Market Committee chooses to reverse them. In contrast, QE programs provide a one-off, time-limited boost that has to be continually reapplied to have the same effect.

With interest rates a decision to leave rates alone represents “no change” in policy; with QE, a decision to leave the scale and duration of the buyback program unchanged is a “tightening”.

QE is time-limited because it drives up bond prices and cuts yields only as long as buybacks continue, or are expected to do so. Once planned buybacks have been completed, or are not expected to be extended, the market will revert to its natural clearing equilibrium. Repeated doses of QE are needed just to keep yields unchanged.

This creates something of a dilemma for policymakers in both the United States and the United Kingdom. The Bank of England’s program to buy 75 billion pounds worth of government and corporate bonds will be completed in mid-June. The Fed’s program to buy $300 billion of medium and long-term U.S. Treasury securities finishes in September.

Once the current round of purchases are complete, both central banks will have to decide whether to embark on another one (intensifying criticism about inflationary financing of public debt) or end it (triggering a sharp yield increase).

In fact, yields will start rising well ahead of the formal end of the programs, unless the Bank and the Fed give a clear signal they will undertake further purchases.

The dilemma is especially pressing for the Bank of England given the imminent expiry of the current round. Officials will come under pressure to clarify their intentions at next week’s Monetary Policy Committee meeting. But the Fed too will face growing pressure over the summer to signal whether the existing programme will be extended beyond September.

It was the Fed’s failure to announce new and larger QE programs yesterday, and the implication that current support might expire in a few months, that caused the bond sell off overnight. Yields on 10-year U.S. Treasuries jumped to 3.16 percent, the highest since Nov. 2008 on Thursday, undoing all of the gains since the Fed announced its QE programme last month.

Terminating QE programs and not replacing them would amount to a sharp tightening of policy and trigger a large, destabilising rise in yields. So the central banks might opt to scale them back instead — continuing to buy debt, but in progressively smaller quantities — as a smoother way to withdraw exceptional support.

The problem is that if QE programs are not withdrawn fairly soon, they risk breaking down anyway under the weight of their own internal contradictions. Because the longer programs run, the more debt central banks will monetize, and the more fears of an eventual inflationary breakout will grow.

Eventually upward pressure on yields caused by increased fears about inflation will offset the downward pressure from QE purchases, neutering the programs’ effectiveness. At that point, ever larger quantities of QE will be needed to achieve the same degree of yield reduction or stabilization.

QE may have bought the central banks a little time but returns will diminish later in the year. The sooner they can articulate a managed retreat the more likely they are to retain some influence over the back end of the yield curve.

– John Kemp is a Reuters columnist. The views expressed are his own –

Comparisons between the current downturn and the Great Contraction of 1929-33 have multiplied as commentators and investors have tried to forecast the recession’s likely depth and duration. But as the U.S. economy shows signs of stabilising and attention switches to future inflation the more useful comparison is actually with the 1940s.

The massive build up of highly liquid assets (cash and bank balances) during the Second World War is the closest parallel to the current escalation of bank reserves as a result of quantitative easing programmes in the United States and elsewhere around the world. The relatively modest pick up in consumer prices after the war ended may hold lessons for the outlook for inflation over the next five years.

There is a risk the commodity markets may have over-estimated the speed with which excess liquidity will be transformed into higher inflation and higher prices.

The outbreak of war was accompanied by an unprecedented build up of liquidity in the U.S. financial system. Deficit-financed spending on armaments and the war effort finally eliminated the persistent under-employment of the previous decade and ensured strong growth in corporate revenues and household incomes.

At the same time, households and firms had little opportunity to spend the money. The Federal Reserve imposed strict limits on consumer credit from September 1941 onwards. Consumer durables disappeared from the shops as the government first restricted then banned production of motor vehicles, refrigerators, washing machines and other electrical appliances for civilian use to conserve output capacity for the war effort.

The result was a massive increase in cash and bank balances. After having been flat for the previous 20 years, the amount of cash in circulation quadrupled from $6 billion to $25 billion between 1939 and 1945. Bank deposits more than doubled from $43 billion to $101 billion (Click here for PDF).But while inflation rose when wartime price controls were lifted, the increase was nowhere near as much as expected given the massive overhang of liquidity which had built up.

To paraphrase Arthur Conan Doyle about the dog that did not bark at night time, the surprise was not that inflation rose so much after the war, but that it rose so little.

Consumer prices rose just 8 percent in 1946, 14 percent in 1947 and 8 percent in 1948, and actually declined in 1949 — and this was after the removal of extensive price controls that had limited increases for 5 years. There was no inflation outbreak.

LIQUIDITY DEMAND

In terms of the standard monetary equation (MV=PT), where changes in the money stock (M) and demand for liquid balances (cash and bank deposits) (V) are related to changes in output (T) and the price level (P), the increase in currency and bank deposits (M) was largely absorbed by an increased desire to hold liquid balances (a fall in V) by firms and households even after the war was over.

In non-technical terms, increased demand for liquid balances persisted for several years after the conflict had ended and helped mop up the increased amount of cash and bank deposits.

Increased demand for liquid balances ensured most of the extra liquidity created during the conflict remained safely bottled up within the banking system.

In their seminal “Monetary History of the United States”, Milton Friedman and Anna Jacobson Schwartz attributed increased demand for savings in the form of currency and bank deposits to widespread fear about a resumption of the depression and mass unemployment once wartime spending ended.

Even though the economy continued to grow strongly, households behaved as if another slump was imminent, and chose to save rather than spend accordingly.

Experience after the Civil War and World War One had taught them to fear the war’s end would be accompanied by a sharp recovery driven by speculation and inventory building, promptly followed by an equally sharp downturn.

Worries about a return of unemployment caused households and firms to hold far more cash than had been the case in the 1930s. As a result, much of the “excess liquidity” which caused policymakers to fear a surge in inflation was not, in fact, “excess” at all.

Only when the outbreak of the Korean War (1950) removed the spectre of unemployment and deflation did the liquidity overhang become a severe problem for inflation and monetary policy, forcing the Fed to begin a sustained campaign of interest rate increases and other measures to mop up excess liquidity.

The Friedman-Schwartz interpretation highlights the importance of household and corporate expectations when deciding how much liquidity in cash and bank balances the private sector wants to maintain, and whether increases in the money supply will have an impact on inflation.

So long as households and firms fear recession and unemployment, high demand for liquid balances and a cautious approach to spending and borrowing will prevent even sharp increases in the money supply from becoming inflationary. Only once the threat of renewed slump and unemployment has receded will money supply growth start to show in spending and prices.

INFLATION POSTPONED

The current build up of huge amounts of liquidity in the banking system as a result of quantitative easing, and soon from the monetisation of a substantial proportion of the government’s budget deficit, is resulting in a similar liquidity overhang.

But the experience of the 1940s suggests the market may be over-estimating the inflationary potential.

Everything depends on how far the searing experience of the past 18 months produces a lasting shift in saving and borrowing behaviour, or is quickly forgotten.

But over the next 18 months, fear of unemployment and the risk of a double-dip recession are likely to restrain corporate and individual spending, as well as bank lending, keeping many of those apparently excess bank reserves safely bottled up in the banking system.

Even beyond that, the need to rebuild devastated portfolios and a more cautious approach to spending and saving could result in a one-off increase in demand for currency and bank balances that will soak up some if not all of the recent rise in money supply.

The medium-term (3-5 year) outlook is still for faster rate of inflation than the advanced economies have been used to over the past decade (perhaps 3-4 percent per year). But expectations of a huge inflationary breakout may prove wide of the mark.

If true, corporate bonds at good spreads over benchmark government rates could provide unexpectedly attractive returns to investors. But investors betting on a resurgence of commodity prices could face a longer wait than anticipated, with contango payments in the meantime eroding the advantage of any eventual rise in the flat price.

-- Donald Steinberg is Deputy President of the International Crisis Group, www.crisisgroup.org. The views expressed are his own. --

Civilians are dying by the hundreds and possibly thousands in the northeast of Sri Lanka. As government troops converge on the remaining forces of the rebel LTTE (Tamil Tigers) in a tiny strip of coastal land, tens of thousands of civilians remained trapped in the crossfire -- getting killed and maimed in large numbers both by indiscriminate army shelling and by the rebels preventing them from fleeing, with equally lethal force.

Many thousands have managed to escape the free-fire zone in recent days, all with horrific tales to tell of those they left behind. Just how many civilians remain in the killing zone is not entirely clear. The government is saying that as many as 170,000 are now in government territory, with more than 100,000 people fleeing the zone since Monday.

Last month, however, they were claiming there were only 38,000 remaining to be liberated from LTTE control. Their current figure of 15,000 to 20,000 remaining with the LTTE should therefore be treated with great caution.

LTTE figures are also unreliable. The Red Cross says there could be 50,000 still trapped, and the UN publicly estimates 60,000. Sources on the ground put the figure significantly higher.

This is not just a numbers game. Knowing how many civilians remain trapped is critical both for preparing the international relief effort and for accountability. When the shooting stops, the government, which will surely defeat the rebels in this battle, must not be allowed to
hide missing thousands.

Unfortunately, the government is not allowing independent journalists into the conflict area to help establish these and other facts about what is happening there. Still, there are horrendous snapshots from aid workers and other reliable sources on the ground.

For example, an aid worker at one of the few remaining medical stations reported on Tuesday that the entire team was bunkered down due to the constant shooting, unable to treat any patients. He reported continuous heavy weapons fire in civilian areas with heavy casualties. He said that over 600 were seriously wounded in temporary medical posts, with about 100 of those dying soon after being admitted.

As firing has intensified, many of the injured are now not even bothering to come to medical points because it has become common knowledge no treatment is available. The ICRC reported on Wednesday that more than 1,000 seriously injured were in desperate need of treatment, but that medical facilities in what the government once called the safe zone have all but ceased to
function.

While the government and LTTE -- and their vigorous online supporters -- try to blame the other side for the current carnage, such accusations lead no where. The fact is, both sides are at fault, and both sides are almost certainly guilty of war crimes. The international community needs to put all possible pressure on the parties to end this madness, which is only causing extreme suffering among the civilian population.

The Sri Lankan government should halt its offensive, with its shelling of civilian areas, and accept a humanitarian pause monitored by the UN and the ICRC of at least two weeks to allow relief supplies to get in and a humanitarian corridor to be established for civilians to get out.

UN agencies and the ICRC should be allowed to assess the needs and numbers of the trapped civilians, and to bring in the relief supplies. The U.S. could help matters instantly by releasing its latest satellite images from the war zone. Relief agencies on the ground must be allowed full access to all areas and at all locations where either civilians or surrendered Tamil Tiger fighters might cross over into government-controlled areas.

Both civilians and fighters who agree to lay down their arms need stronger international guarantees of their safety. Only international supervision, unhindered by the government, can provide the necessary
level of protection. The recent surrender of two senior LTTE officials, including Daya Master, their former media coordinator, suggest that with better guarantees others would give up too.

The Tamil Tigers should immediately allow civilians to leave the area and cease forced recruitment. All means of influencing the Tamil Tigers must be explored, particularly stepped up restrictions on foreign
financing and support for the group. The Tamil diaspora has an important role in persuading the LTTE to agree to an internationally supervised pause and allow the trapped civilians to leave the target area.

In any case, continuing intransigence by the Tigers should not be an excuse for the government to delay a humanitarian pause or to act in a way that results in the death and maiming of its own citizens. Indeed, the government is obligated under the international doctrine of "responsibility to protect" to prevent these atrocities.

Finally, it should be made very clear by relevant governments and international organisations to leaders of both the Tamil Tigers and the Sri Lankan government that they will be held personally accountable for breaches of international humanitarian law. There is no excuse, and certainly no amnesty, for war crimes or crimes against humanity.

The world has woken up to this tragedy very late, but there is still time to save lives and lay the groundwork for future peace and reconciliation in Sri Lanka. The message must come from the highest levels: "The world is watching, and you will be held accountable."

-- Margaret Doyle and Paul Taylor are Reuters columnists. The opinions expressed are their own --

LONDON/PARIS, April 23 (Reuters) - Germany is to set up a system of bad banks before the summer recess to hold some 250 billion euros of toxic assets. Finance Minister Peer Steinbruek has assured taxpayers that his solution -- called "eine Bad Bank" (there is no German word for the concept) -- will not weigh on the budget.

He is fooling them, if not himself. If the rescue really were such a free ride for the taxpayer, some savvy commercial investor would have stepped in. Under the proposed scheme, the taxpayer will end up carrying the risk of "Schrottpapiere" (scrap paper).

Like governments everywhere, the Germans are desperate to get their banking systems moving again -- to save the economy by saving the banks, as British minister Baroness Vadera put it.

The snag is simple. Crystallising all the losses in the banking system might lead to widespread nationalisation of banks -- something most governments are keen to avoid.

But the alternative is equally unpalatable: that the state buys lots of "Schrottpapiere" from troubled banks at unrealistic prices, essentially mutualising all the losses and leaving the banks to keep their profits in private hands.

A German Finance Ministry document seen by Reuters admits this, saying, "Finance ministry examination has shown that in all models, there remains an insurmountable contradiction between the aim of removing assets from the balance sheet and the protection of the taxpayer: if the bank is to be unburdened, the taxpayer has to take on a substantial part of the risk."

The German plan is to allow banks to recognise losses on structured products over their lifetime, perhaps up to 20 years. The government would still guarantee those assets, but would only pay up at maturity if the final value of the assets is less than the "fair value" for which the banks must make provision.

That means any nasties would be pushed out -- certainly well beyond this September's Federal election, and probably one or two beyond that.

By giving the banks time to reserve for impaired assets, it allows them to earn their way out of trouble. And, the politicians get to pretend that there is no damage to Germany's vaunted fiscal stability.

However, it leaves a question-mark over the health of the banks. There is no real severance between the good and bad bank. And the need to build up reserves over a protracted period could act as a drag on the performance of banks -- and their willingness to lend.

It is puzzling why the German government needs to go down this tortuous route of creating special vehicles, with neutral parties to value assets and new accounting rules for reserving.

It is widely acknowledged that the biggest users of the scheme will be the Landesbanks, most of which are themselves owned by regional governments (although some have minority private sector shareholders). They have long been accused of using cheap state-backed credit to provide unfair competition to the commercial banking sector.

That these institutions, created to support regional economic development, ended up buying risky U.S. structured products shows just how far they had strayed from their original purpose. The state could in theory just break them up as it saw fit.

Pushing any assistance out into the future -- and structuring any asset protection on the basis that it can be argued that the shareholders had to take a hefty first whack -- seems designed to obfuscate the scale of any such rescue.

It is always a mistake, as Barack Obama's chief of staff Rahm Emanuel, memorably observed, to let any crisis go to waste.

A better course of action in this instance would be for Berlin to admit that the Landesbank model is broken, insist that their assets be run off over time, and give the private banking system a better chance to flourish when conditions improve.