Tuesday, October 7, 2008

Daily Souces 10/7

1. Edmund L. Andrews and Michael M. Grynbaum at the New York Times report that the Fed announced that it will begin purchasing large amounts of short term debt today in an effort to jumpstart the credit markets. Real Time Economics reprinted the Fed's official statement in total.

2. Ambrose Evans-Pritchard at the UK Telegraph has another analysis piece more or less accusing Germany and the European Central Bank of taking the same approach to the current financial crisis that Europe took in 1930. He argues that good allies of the US would have moved in parallel to the US Fed when it cut the fed funds rate to 2% in Spring. He says the consequence of keeping European rates high was a soaring Euro, which "set off an oil shock as crude metamorphosed into an anti-dollar with leverage." He goes on to point out:
"[T]he risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.

This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.

The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can."
The national approach to the financial system seems outdated--even if politics remain just so--given reports that the contagion has spread to the emerging markets. (See, for example the story in today's New York Times by Alexei Barrionuevo, Keith Bradsher, and Vinod Sreeharsha.) Edward Cody and Kevin Sullivan at the Washington Post report that 15 European Ministers (representing Euro-using nations) meeting in Luxembourg today doubled the guarantee on retail banking deposits to €50,000 ($68,000). Russia announced it would extend a $4 billion loan to Iceland to help stabilize the banking system there. Yesterday Craig Whitlock at the Washington Post had the story on Germany's go-it-alone strategy with a "massive intervention plan." The Wall Street Journal seems convinced that a unified approach is necessary, at least, as it followed yesterday's call for it with another by Ulrich Volz today entitled, "Europe Needs A United Approach To the Credit Crunch: National governments cannot stop the erosion of confidence on their own." Richard Baldwin has a post on Freeexchange which gives a short explanation of the credit default swaps (CDS) problem facing the global financial system. Evidently, several dozen trillion dollars worth of these financial instruments have been purchased. I am unclear on why a single bond default would precipitate a collapse of all (or even a considerable percentage of) several dozen trillion dollar's worth of CDSs, but given that it is the case, managing the problem would clearly call upon the resources of more than one central bank.

3. Edward Hugh's Russia Economy Watch reports that a key adviser to Russian President Medvedev has told the Financial Times that Moscow is now actively working to mend fences with the West. The adviser, Igor Yurgens, argues that the deal signed between EOn and Gazprom last week and other megadeals are evidence of the new strategy. I suspect that this strategy is aimed more at Europe than at the US, given the remarks at the Petersburger Dialog Friday.

4. Following remarks yesterday by the OPEC President and Ecuadorian Oil Minister, Maher Chmaytelli at Bloomberg reports that the Libyan Oil Minister (who is also head of the Libyan National Oil Company and the Libyan OPEC Governor) said in an interview that OPEC should cut production given the fall in the oil price due to the credit crisis. Simon Webb at Reuters interviewed the Iranian OPEC Governor, Muhamad Ali Khatibi today. He echoed the the concerns reported by other members:
"We are worried about demand," Khatibi said. "The financial crisis is deeper than we expected and this is definitely influencing world oil demand."
Ayesha Daya at Bloomberg also reports that the Qatari Oil Minister said in an interview today that Qatar was reducing their production down to their OPEC quota.Of course, Qatar was never the major quota breaker, that has reportedly been Iran and Saudi Arabia. And the real "decider" remains Saudi Arabia. But, in an interesting development given their prominent participation in the upcoming December OPEC meeting, Lucian Kim and Ellen Pinchuk at Bloomberg report that Gazprom "expects" OPEC to prevent a substantial fall in the price of oil. I would say that it is fairly safe to say that the views of Gazprom, when it comes to oil pricing, are pretty much those of Moscow. Political pressure is building on Riyadh from oil producers, and likely domestically, to cut production.

5. Platts has the interesting story that Kazakhstan's national oil company, KazMunaiGaz, is considering oil and gas asset acquisitions in Turkmenistan, Iran, and Russia. This follows Secretary Condeleeza Rice's visit to Almaty yesterday and, given the economic calculus involved in investments especially liable to nationalization, probably primarily a political decision.

6. In Juan Cole's round up for today on Informed Comment, he reported the following:
"Prime Minister Nuri al-Maliki has decided to seek a strong "united" government, offending Kurds who are committed to the soft partition of Iraq or even eventual Kurdish statehood. Al-Maliki's stance puts him at odds with Joe Biden, who argues for a weak federal Iraq."
In a related story, the Iraq Oil Report has a link to the announcement by Dana Gas and Crescent that they are now producing gas for power generation in Kurdish Iraq.

7. Xinhua reports that the city of Beijing has imposed increases on gasoline and diesel costs there as part of their effort to better the air quality in that city. Beijing represents a considerable portion of the Chinese vehicle fleet and this should produce a significant, if small, dent in demand.

8. MIT announced the completion of a new report which shows that the new power capacity being added in China is relatively modern. The emissions can theoretically, therefore, be relatively low. But as coal prices increase, the Chinese power companies turn to lower quality coal, which significantly increases dirty emissions.

9. Noah Shachtman at Wired has the story that the US Army is seeking to build the largest solar power plant in the world--500 MWe at Fort Irwin, California, in the Mojave Desert. What happened to the Axis Powers in WWII is a good demonstration of what happens to modern armies when they run out of fuel. The considerable extent to which the US is a net importer of transportation fuels is a potential Achilles heel to the US Armed Forces. I am all in favor of the construction of renewable and green energy generation by the US armed forces, but power generation will not solve the potential strategic problem of transportation fuel imports.

No comments: