The Basel Committee jammed banks’ gearboxes… not only in India

Amy Kazmin reporting on India quotes Rajeev Malik, founder of Singapore-based Macroshanti, in that “A well-oiled, well-functioning financial system is the gearbox of the economy”, “Financial system is ‘like a truck with a messed-up gearbox’” September 23.

The financial system’s gearbox got truly messed up when regulators decided that banks could leverage differently their capital based on perceived risk… more risk more capital, less risk less capital… as if what is perceived as risky is more dangerous to bank systems than what is perceived as safe.

And Kazmin writes: “The financial companies that had provided much of India’s credit growth in recent years are now struggling with access to funding themselves after the shocking collapse of AAA-rated infrastructure lender, IL&FS, last year.”

Could that have something to do with the fact that since 2004 Basel II regulations banks needed to hold only 1.6% in capital when human fallible credit rating agencies assigned an AAA to AA rating to a corporation?

And Kazmin writes: “With its own voracious appetite for funds to finance its fiscal deficit, New Delhi is now mopping up much of the country’s household savings through a clutch of small schemes such as post office savings that offer higher rates than commercial banks.”

Could that have something to do with the fact that since 1988 Basel I regulations, banks need to no capital at all against loans to the government of India… but 8% when lending to Indian entrepreneurs.

Sir, risk taking is the oxygen of any development so, with such a dysfunctional gearbox, how is India going to make it? None of the richer countries would ever have developed the same with Basel Committee’s bank regulations… and all their bank crises, those that always result from something safe turning risky, would have all been so much worse, as these failed exposures would have been held against especially little capital. 

Here is a document titled “Are the bank regulations coming from Basel good for development?” It was presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations. It was also reproduced in 2008 in The Icfai University Journal of Banking Law. 

@PerKurowski

What if prejudices in India had caused banks having to hold more capital when lending to women than when lending to men?

Sir, Martin Wolf, discussing India’s prospects mentions the “striking structural feature of India, whose significance goes far beyond economics, is social preference for sons.”, “Modi’s India is on course for rapid growth” February 7.

But the western world, by means of their bank regulators, also imposed on India that nutty preference for what is perceived as safe over what is perceived as risky. And that, for a developing country, given as risk taking is the oxygen of any development, is bloody murderous; as I have insisted on during the last two decades, in statements at the World Bank, in statements at the UN republished by an Indian university, in hundreds of Op-Ed and articles, and in innumerable letters to FT and to Martin Wolf.

Before these distorting regulations, banks invested in assets based on their risk adjusted yields; after, they now also adjust for the allowed leverages in order to maximize their returns on equity. That means overpopulating “safe”-havens and under exploring those “risky” bays, like entrepreneurs and SMEs, which all countries need to be explored if they are going to develop, or keep their development from regressing.

To think that what is perceived as safe (cars) is more dangerous to our bank systems than what is perceived as risky (motorcycles), only reminds me of that mutual admiration club of besserwisser experts that defended geocentricity… and of Martin Wolf as one of the inquisitors.

https://subprimeregulations.blogspot.com/2007/10/are-bank-regulations-coming-from-basle.html

@PerKurowski

Long term growth, development, in India and elsewhere, requires getting rid of Basel's regulatory risk aversion.

Sir, Eswar Prasad writes: “the real question for policymakers in India is not about how they can boost growth temporarily but how to create the environment to elicit private investment. Without that, durable longterm expansion will remain a mirage”, “Long-term growth in India depends on serious reform” October 17.

It is now ten years since at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled: “Are the Basel bank regulations good for development?”

Its first paragraph states: “It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

And from what I have seen, in terms of Basel’s banking regulations, India is proceeding as if just as papist as the Pope.

The risk weighted capital requirements; those that dangerously distort the allocation of bank credit in favour of what is perceived decreed or concocted as safe, and against what is perceived as risky, like SMEs and entrepreneurs, are still going strong there.

That is the danger of empowering technocrats that are more interested in showing off to colleagues what’s fashionable in Basel than wearing what they should wear back home.

PS. The document referred to was also reproduced in India, in October 2008, in The Icfai University Journal of Banking Law Vol. VI No.4

@PerKurowski

We urgently need one judge hauling a bank regulator to his court, in order to ask him one very simple question

Sir, Chris Giles writes that Raghuram Rajan, the head of the Indian central bank said he was a supporter of stimulus policies to “balance things out” in short periods when households or companies are proving excessively cautious with their spending, but eight years after the financial crisis he said we now “have to ask ourselves is that the real problem”. “Underlying performance suffers from loose policies, says India governor” May 16. About time!

Sir, as you know, for a long time I have held that any stimulus policy is really wasted as long as the risk-weighted capital requirements for banks impede bank credit to flow efficiently to the real economy. Those regulations are just another stimulus for bank lending to “The Safe”, and that is not the kind of stimulus the next generations need.

Those regulations odiously discriminate against the access to bank credit of those perceived as “The Risky” like SMEs and entrepreneurs.

And I would love to haul any of the big name bank regulators, like Draghi, Greenspan, Bernanke, Ingves, Carney or many other, in front of a judge to have him, under oath answering the following question:

Mr. Regulator, current risk weighted capital requirements for banks indicate a risk weight of 150% for what is rated below BB- and of only 20% for what is rated AAA to AA. Do you sincerely believe that what is rated below BB- and that one would therefore presume is not an attractive asset for a bank, to be so much riskier for the banking system than those rated AAA to AA?

If the regulator answers “Yes”, the judge should ask for a detailed explanation.

If the regulator, being under oath, truthfully responds “No”, then the judge should ask: Does that not indicate that there is something fundamentally wrong with the credit risk weighting?

And then persons like me, who for over a decade have not been able to extract an answer from the regulators, would at least have something to work with.

In the case of India, such trial evidence could help us to remind Raghuram Rajan that risk-taking is the oxygen of any development. And of that if some developed countries seem to have had enough of development, and do not want to risk climbing further up their ladder, this does not mean that a developing country should copycat such dumb credit risk aversion.

@PerKurowski ©

If Britain had applied current bank regulations when it was developing, it might even have found itself below India

Sir, you write: “Even if one puts to one side doubts about India’s economic statistics, private investment remains weak. The government has rightly emphasized improved administration, faster decision-making and greater ease of doing business” and you quote Eswar Prasad of Cornell University ideas with “Markets for land and capital remain distorted. Several public sector banks are in dire shape. They need recapitalization and radical reform”, “Modi fails to exploit India’s great opportunity” April 4.

But again you fail to mention the fact that the Basel Committee’s credit risk weighted capital requirements for banks, which by favoring “the safe” disfavor “the risky”, is as anti-development and pro-inequality as can be.

Do you really think that allowing banks to earn higher expected risk adjusted returns on equity with “the safe” than with “the risky” is the way to go for a country that has not reached sufficient altitude climbing the mountain of development?

And it is not that these bank regulations keep you high up, they also impose a fast descent. With it Britain has expelled its spirited and adventurous risk taking and embraced the risk aversion of the scared.

Hello India, we, Britain, will soon catch up with you, while climbing down.

When the Bible says “But the meek will inherit the land and enjoy peace and prosperity” I am sure it was not to excessive risk-adverseness it was referring.

God make us daring!

@PerKurowski ©

Sir, here’s what I would have told young Martin Wolf 40 years ago at the World Bank on India, had I been his boss

Sir, Martin Wolf covers a lot of terrain in his: “India’s growth is a light in a gloomy world” March 16.

He must surely have more knowledge about India than I so I have nothing to argue against his opinions.

BUT! At one point he writes “Markets for land, labour and capital are all highly distorted” and he also informs us “Forty years ago I worked on the Indian economy for the World Bank.”

Which brings me back to my obsession against the distortions in the allocation of credit produced by the risk-weighted capital requirements for banks, which Wolf so firmly has decided to ignore.

Let me be clear, if I had been Wolf’s boss 40 years ago, and if the banks of the world had then also been suffering the Basel Committee’s risk adverseness, I would have sat him down and firmly told him the following.

Listen young man. We represent the world’s premier development bank and so we know that true risk-taking is the oxygen of any development.

Wolf might have asked “True-risk-taking Sir?”

Yes. I do not refer to those risks that derive from building up excessive and dangerous exposures to what is “safe”… which is what the very low risk weights and resulting lower capital requirements for banks for what is perceived as safe currently does.

I refer to taking much, albeit low exposure risks on the risky, like lending to SMEs and entrepreneurs, something that is currently hindered by the higher risk weights and resulting higher capital requirements for banks for what is perceived as “risky”.

So young Martin, if you really want to help India, tell them to ignore the silly aversion against risk imposed by some developed countries’ bank regulators, who on their own decided they should not dare to climb more. Remind those in India that they cannot afford such nonsense. They owe their people the chance of much risky climbing.

And Sir, don’t ask me what steps I would have taken if young Martin had then ignored me J

PS. Here is the document I presented at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, and titled “Are the bank regulations coming from Basle good for development?” It was also reproduced in The Icfai University Journal of Banking Law Vol. VI No.4, India, October 2008

@PerKurowski ©

COP21 Paris, do not let a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

Sir, Narendra Modi is walking on a very fine and dangerous line between the “it is all humans’ obligation to encounter any global threat that could result from affecting the environment of our planet” and it is the responsibility of the rich. “Do not let the lifestyles of the rich world deny the dreams of the rest” November 30.

Of course, when it comes to assigning financial resources to mitigate or combat climate change, the rich countries have more to give. But I would always hold that the starting point of all these efforts must be that the poor and the rich, as humans, have an equal right to participate in fighting anything that threatens humanity… and that the right and duties of the poor are not lesser because they are poor.

Let not a divisive rich-poor political discourse take over the climate change debate, like in Copenhagen.

PS. Narendra Modi would benefit from understanding that bank regulators' credit risk aversion is much worse for the opportunities of India to develop than any coal aversion by self appointed climate change regulators.

PS. You want to see some real anti-climate change action? Throw out credit risk capital requirements for banks and adopt SDG weighted capital requirements for banks.

PS. And a renewed warning. If anything like a Basel Committee for Banking Supervision takes over the worldwide regulation on climate change… we are toast.

@PerKurowski ©

Raghuram Rajan, your own bank regulations are more important to mobilize development funds in India than the World Bank.

Sir, I refer to Victor Mallet’s and James Crabtree’s “Rajan issues call for World Bank and IMF reforms” October 8.

It states that Raghuram Rajan, Indian central bank governor and former chief economist of the International Monetary Fund, gave the example of financial regulations with global reach that would typically be discussed among representatives of advanced economies behind closed doors and presented only at a late stage to those of emerging markets. “Eventually what emerges is a compromise among the advanced countries, even though we’ve been at the table when the final vote is there,” Rajan said.

Not so! Technocratic members of a small mutual admiration club might discuss those financial regulations, but there is nothing to stop Raghuram Rajan to question those regulations openly; and there is nothing forcing India to accept those regulations, except of course that of their own local regulators also wanting to be seen as loyal members of such an exclusive and sophisticated club.

For instance, at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I questioned bank regulations coming out of Basel, based on the fact that developing countries cannot afford to have regulations that block them from the risk-taking needed in order to develop. And nowhere did I see India or any other developing country lending support to my arguments.

Of course I agree with Rajan supporting the request to increase the capital of the International Bank for Reconstruction and Development, but, for India, and for the financial resources India could mobilize for its development, he has much more important thinks to do.

He could request from the World Bank, as the world’s premier development bank, a clear opinion of how regulatory risk aversion, as currently expressed in risk weighted capital requirements for banks, harmonizes with the needs of developing countries… and even with the needs of developed countries, who also need economies moving forward in order not to stall and fall.

The World Bank has previously expressed some concerns. In its Global Development Finance 2003, in relation to the minimum capital requirements of the Basel II proposals, it stated that these “include the likelihood of increased costs of capital to emerging market economies; and an “unleveling” of the playing fields for domestic banking in favor of international banks active in developing countries”. But why has WB kept silence on it thereafter?

Raghuram Rajan, those risk weighted capital requirements odiously discriminate against the possibilities of “The Risky” to access bank credit in a fair way and, expressed in terms of trade, are just vulgar tariffs distorting the allocation of capital around the world… especially in the emerging and development countries. Do something about that! For a start don’t follow the Basel Committee; it has in fact no idea about what it is doing.

It has deemed the risky SMEs and entrepreneurs, those risky tough ones we must need to get going when the going gets tough, to be the untouchables of the banking sector.

PS. The document I presented at the UN was also published in “The Icfai University Journal of Banking Law” of India in October 2008.

@PerKurowski ©  J

Here are two heartfelt recommendations to India.

Sir, I refer to Henny Sender’s very comprehensive “India’s shadow banks step in to lend where others fear to tread” May 26.

I just want to add the following:

First, India, as a developing country, can certainly not afford bank regulations that favors the allocation of bank credit to the safer past than to the riskier future… and so it urgently needs to get rid of the distortions that the Basel Committee’s credit risk weighted capital (equity) requirements for banks produce.

And second, with respect to its private sector banks, these could also benefit from a major re-capitalization plan, like the one Chile did in the early 80s. The central bank should issue bonds using the proceeds to acquire the banks’ non-performing loans (which will permit the reversal of all provisions) and the banks would commit to repurchase those loans from the Central bank, plus interests, before they can proceed with any dividend payments.

That could turn it around much faster for India.

Of course Europe would also benefit from implementing a similar plan.

@PerKurowski

Here are two recommendations to Raghuram Rajan on how to get India’s banks to become functional banks

Sir, I refer to David Keohane’s and James Crabtree’s “India’s central bank struggles to ensure lenders pass on interest rate cuts” April 22.

There are references to a “broken down process of monetary transmission through which the wishes of the central bank are transmitted to the real economy”, and to “a banking system frozen by high rates of bad loans”.

The following is what I would advice Raghuram Rajan to do, if he really wanted banks to become functional financing efficiently the real economy.

First, get rid of stupid Basel bank regulations that, with their different equity requirements based on credit risks, so distort the allocation of bank credit. These introduce a regulatory risk-aversion that has no place anywhere, but much less in a developing country, since risk-taking is the oxygen of any development. In its place put for instance an 8 percent equity requirement on all bank assets, and throw out forever, the portfolio invariant credit-risk equity requirements. Of course that could create a big need for fresh bank equity, and so…

Second, in order to take away the dead weight caused by the bad loans, and to help to fill any new bank equity needs, the central banks should proceed like Chile did during its financial crisis. Namely capitalizing all the banks by purchasing their non-performing loans, against the commitment by the banks to repurchase these assets from the central bank with their retained earnings, before any substantial dividend payments to their shareholders could be made.

You would then have well capitalized banks, ready to give credit on non distorted terms to for instance “risky” SMEs and entrepreneurs, and simultaneously been made so much safer that, presumably, they would have to pay less interest rates to depositors, and in the medium or long terms less dividends to shareholders. Not bad for a couple of hours work eh?

@PerKurowski

With the Basel Committee’s injudicious regulations, it is very difficult for a bank to give credit judiciously.

Sir, Henny Sender holds that “Banks must lend more judiciously to prosper in emerging markets” April 8. Who could disagree with that? That applies of course to all markets and not only emerging markets.

But in order to do that, banks need to focus 100 percent on the borrower and not, as now, spend too much time looking at how it can structure the loan so as to be required to hold the least of equity against it.

When we read about Stan-Chart’s “commodity-related exposures” and that “much of the lending uses property as collateral” one gets the feeling that perhaps the “minimize the equity” objective might have triumphed the “know your client” criteria.

And this is but one of the should-be-expected, unexpected consequences of the Basel Committee’s injudiciously distorting credit-risk-weighted capital requirements..

@PerKurowski

What would Martin Wolf tell the Basel Committee for Banking Supervision, if he were India’s Development Minister?

Sir, I refer to Martin Wolf’s “India has a real chance to excel on growth” March 11.

Suppose Martin Wolf was a developing minister in a developing country like India and was presented with bank regulations which would allow banks in India to leverage much more their equity when lending to what from a credit risk was perceived as safe than when lending to what was perceived as risky; which of course means banks will be able to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky; which of course means banks will lend too much at low rates to what is perceived as safe and too little at relative too high rates to those perceived as risky… namely SMEs and entrepreneurs.

What would Martin Wolf say? Would he apply those regulations or would he show the proponents the door with a “Get out! Don’t you know that risk-taking is the essence of development? Do you really think your developed countries would have been able to develop with that type of regulations? Don’t you know that our safest of tomorrow might be among our riskiest of today?”

@PerKurowski

http://financefordevelopment.blogspot.com

With the risk aversion of the Basel Committee’s bank regulations, India stands no chance of sturdy economic growth.

Sir, I refer to your “A budget that bodes well for future Indian growth” March 3.

I differ. Achieving a sturdy economic growth, in a country which like India has accepted Basel II, and therefore stacks the access to bank credit in favor of those perceived as safe, the past, and against those perceived as risky, the future, is impossible, no matter how pro-growth a fiscal budget is.

Government technocrats will never ever be able to allocate resources with the same economical efficiency as free markets with undistorted banks.

Sir, just look at America, do you think the “Home of the Brave” would have gotten to where it is with such stupidly risk adverse regulations as those imposed by the Basel Committee?

India, to end ‘lazy banking’, you must first get rid of Basel’s bank regulations which orders banks to be ‘lazy’.

Sir, I refer to James Crabtree’s report “Modi promises to end India’s ‘lazy banking’” January 5.

It states that Narendra Modi, India’s prime minister, speaking at a summit of India’s public sector financial institutions, “promised to end the country’s heritage of ‘lazy banking’, a term often used to criticize risk-averse lenders”.

Good for him! But does Modi know that would mean India has to abandon the Basel Committee’s whole approach to bank regulations? 

Basel II and III both have, as their principal pillar, credit-risk weighted capital requirements; which allow banks to earn higher risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky… and which therefore stimulates banks to be risk averse… and lazy.

I sure hope Jayant Sinha and Arvind Panagariya understand the need for India to abandon such regulatory foolishness, which they currently have accepted; and sufficient strength to convince the rest of India of it. If successful, I am sure many in developing and develop countries will be much grateful for them setting the example and leading the way.

During the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I presented a document titled “Are the Basel bank regulations good for development?”. I then argued “Absolutely not! Since then I have become convinced these regulations are even more dangerous than I thought. At that time I had not realized the full effect of these capital requirements had in the risk-adjusted returns on bank equity. 

Those Basel II regulations caused the financial crisis 2007-08; that by driving banks excessively into “safe” segments like AAA rated securities, housing finance and “infallible sovereigns” (Greece) against almost no capital, leverages over 50 to 1. 

And those regulations, Basel II and III, are currently impeding the recovery of many economies precisely because they have ordered banks to be lazy… and not lend to “risky” small businesses and entrepreneurs.

Friends, please never forget, risk-taking is the oxygen of development

Friend-of-the-bank’s-owner ratings would be more useful than credit ratings when setting capital requirements for some banks.

Sir I refer to James Crabtree´s lunch with Raghuram Rajan, “Everyone expects you to be a prophet” August 16.

In his famous speech at Jackson Hole 2005 Raghuram Rajan said: “Something as intimate as credit risk is now being traded with strangers. In fact the same way as parent are asked ‘Do you know where your children are?’, bankers nowadays are asked ‘Do you know where your risks are held’”?

That was a somewhat incomplete observation because just as many parents would have answered “with their nannies”, bankers would then need to answer “in the hands of very few human fallible credit rating agencies”, because that was what Basel II approved in June 2004, instructed banks to do.

And of course, as was doomed to happen (see my letter in FT January 2003), soon thereafter some AAA ratings awarded to some securities guaranteed with mortgages to the subprime sector, became the nail in the coffer of those financial markets which even Rajan at that time called to be “in extremely healthy shape”.

And Rajan also concluded his speech admonishing regulators to allow “markets to signal the winners and losers” without reflecting that when it comes to the allocation of bank credit the risk-weighted capital requirements for banks are precisely distorting those market signals.

And I say all this because when now Rajan is quoted saying “Central bankers have had enormous responsibilities thrust on them to compensate, essentially for the failings of the political system”, he and we should not forget that central bankers, in their close nexus to bank regulations, also hold enormous responsibilities for the current failings of the banking system.

But I also say this because when I read Rajan complaining about “Many businesses groups treat public sector banks as their equity kitty”, and which of course is the same as the problem of private owners of banks also treating these as their equity kitty, it occurred to me that friends-of-the-bank’s-owner ratings could prove to be more useful than credit ratings when setting the banks´ capital requirements.

PS. Afterthought. Should not owner-controlled-banks and management-controlled-banks merit different regulations?

“Lazy banking” is not just an Indian phenomenon. The Basel Committee has decreed it to rule everywhere.

Sir, James Crabtree in his interview of Arundhati Bhattacharya “Toughest job in Indian banking for head of state-backed behemoth”, December 9, refers to the challenge “to shake off India´s reputation for what is known as ‘lazy banking’, a system in which stolid lenders, led by cautious bureaucrats, park deposit in ultra-safe government securities”.

I am sorry, described that way “lazy banking” does not solely happen in India. In fact the Basel Committee, with their risk weighted bank capital requirements, which allow banks to earn much higher risk-adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”, have in fact decreed lazy banking to rule everywhere.

Who’s really shortchanging who in India?

Sir, David Pilling in “India’s ‘bumble bee’ defies gravity”, February 16, writes: “By selling the licences on the cheap, the telecom ministry is accused of shortchanging the exchequer to the tune of $39bn.” 

Indeed, but, one could just as well argue that if selling the licenses for $39bn more, the exchequer would then be shortchanging the mobile telephone users, to the tune of $39bn plus expected returns more in fees, and over a very long time. 

In other words the $39bn are equal to taxes collected in advance,to be paid by users that are not even aware of it, meaning something which is not an example of transparency. 

In other words the $39bn will have to be repaid at the rate of return required by the telecom investor, rather than at the usually lower interest paid by the government on its public debt, meaning something which is not an example of economic rationality.

India, whatever you do, do not forget that risk-taking, not risk-aversion, is the oxygen of development.

Sir, Martin Wolf in “Crisis must not change India’s course”, February 8, would perhaps like to make clear to his green readers that when he writes “India can generate rapid growth by catching up on the world’s richest countries, almost regardless of the global environment” that it was not that “global environment” he was referring to. 

Wolf then recommends carefully watching the financial system and adopting the emerging global norms, because “Huge crisis may be socially manageable for high-income countries. They would be grossly irresponsible for a country like India”. I completely disagree. 

Global banking norms, which have emerged in the developed world, are designed to encourage banks to invest in what is not risky, completely ignoring the efficient capital allocation purposes of a bank, and that, though sad and not good, might be something acceptable for a high-income country that wants to hold on to what it’s got, is completely unacceptable for a poor developing country. 

A country like India cannot afford to forget that the cost of keeping its banks safe could be much larger than a bank crisis, because of all the developing opportunities foregone. Someone ought to have asked Mr. Wolf how his country developed and what banking norms were in place in his country before the current ones.

If not the dollar, then no other fiat currency either

Most of the world´s concern with the dollar is in fact not with the dollar itself but more of the “if not the dollar then what?” type, since, if looking at the forest and not the trees, makes it clear that no country´s fiat money stands a chance to survive a dollar failure. That is how globalized we have become… that is why some non US are even toying with the notion of supporting a tea party, no matter how doubly distant they feel from some of those partying there … no matter they serve corn on the cob instead of cucumber sandwiches… and others buy gold.

Let us suppose the US officially presented to the world the possibility of a 40% haircut on its debt. Would that be the same as an Argentinean haircut? No way José, since the day after the US would again find unwilling willing takers of US debt, and at quite low rates, because it would think that the day after the US imposed some debt ceiling that really became a real roof.

China, India? Good luck Warren Buffett, but we do not have all that much money to afford the luxury of trying.

In truth, if we would still use fiat money, then the Dollar II would still be better positioned than all other.

FT, be very careful going there!

Sir you say “Pakistan needs IMF help badly” October 22, and that the Fund should be flexible without compromising on reform. Sounds right! Then you argue that Pakistan should spend more on education and less on the military which also sounds right until… “The country has an unresolved conflict with its archrival, India, over Kashmir; has been sucked into fighting on its Afghan border; has a weak government; and is nuclear-armed” and then I am not so sure. What has to be searched for with urgency, the timing could be good as the crisis will afect India too, is an immediate search for how to solve the conflict since the last thing you would like to do to a nuclear-armed party is to weaken his other options.