Daily Sources 11/3

1. In an opinion piece in the Financial Times, Wolfgang Münchau argues that the financial crisis is likely to enlarge the eurozone as well as the EU. Münchau points out that the financial aid package given to Hungary by the European Union and the IMF last week has austerity measures that will ensure that Budapest meets the criteria for economic and monetary union. As I noted in an earlier post, Danes might now be rethinking the maintenance costs of a national currency as their benchmark lending rate is now 1.75% higher than the European Central Bank's. Countries which have banking systems too large to be defended by national authorities may decide to reverse their decisions to opt out of the eurozone, including Sweden and the Czech Republic. As for Iceland, which never joined the EU, the

"Reykjavik newspaper Frettabladid carried a poll last week showing approval for EU membership up from 48.9 per cent a year ago to 68.8 per cent now. The number in favour of adopting the euro is even higher."

Münchau also expects that support for eurozone membership will begin to grow in even the UK. That would be a tremendous sea change, to be sure, and might have some dampening effect, if not handled astutely by Washington, on the special relationship. The article is worth reading in full.

2. Andrew Batson at Real Time Economics has a translation of Premier Wen Jiabao's discussion of Chinese economic policy in a long piece published in the latest issue of the Communist Party Journal.

"Over the medium to long term, there is great market potential in expanding consumer spending. This is an advantage that our country has and also an important basis for resisting external shocks. We must make expanding domestic demand the fundamental basis of economic development."

Though there are obvious differences, my first response to reading this was China decides to turn inward, again. But there has been plenty of advice from the West that China do just that, including the recent editorial in the New York Times--which I was admittedly very snarky about. I think, therefore, you could read this as a sign of Beijing's determination to signal its desire to continue a policy of international financial cooperation at least for now. On the other hand, it is an important shift which also lays the groundwork, I think, for "decoupling"--or at least "an important basis for resisting external shocks."

3. Liz Sly at the Chicago Tribune reports that the al-Maliki government has announced plans to cut the salary of the sunni militias which had been central to the US strategy of increasing stability in Iraq from about $300/month to about $250/month. Sly's article does not mention whether this move is part of revamping the budget brought on by lower oil prices generally, but I imagine it likely a result of all public programs facing lower revenues. That said, it is obviously extremely divisive given the Shi'a government. The country is apparently in the middle of a political storm after Kurdish leader Massoud Barzani suggested that the Kurdish region might offer the US military bases if the Maliki government does not agree to a new status of forces agreement, per Juan Cole. It seems that the various political elements in Iraq are pursuing policies of division just as we are on the cusp of steep reductions in US forces, which at least arguably have been providing security. Not all that surprising, but still worth noting.

4. Cherian Thomas at Bloomberg reports that on November 1 the Reserve Bank of India lowered the repurchase rate--the rate at which the bank lends to commercial banks--by 0.5% (or 50 basis points) to 7.5%. The central bank also reduced the cash deposits reserve requirements for banks from 6.5% to 5.5% and in government debt from 25% to 24%. It also increased the amount of money commercial banks can borrow from the central bank to meet redemptions from mutual funds and non-banking financial companies from 0.5% of total deposits to 1.5%. "Citigroup Inc. economists Rohini Malkani and Anushka Shah estimate the steps will inject 1.2 trillion rupees ($24 billion) into the banking system."

5. Vipin V. Nair at Bloomberg reports that Tata Motors Ltd.'s sales dropped by 20% from a year ago in October. Tata is India's largest truck manufacturer.

"Maruti, the maker of half the cars sold in India, said sales fell 7 percent last month to 64,490. Bajaj Auto's sales of motorcycles, three-wheeled auto rickshaws and scooters plunged 31 percent to 191,840."

6. Seyoon Kim at Bloomberg reports that Finance Minister Kang Man Soo told the media that Seoul is planning a 14 trillion won ($10.8 billion) stimulus package for next year. About half of the money will be dedicated to infrastructure projects and tax breaks.

"An overseas trade report today highlights the risks to South Korea from the global financial turmoil. Exports, the main engine of growth, rose by the least in 13 months in October because shipments to China fell for the first time since 2002."

7. Edward Wong at the New York Times reports that the People's Republic of China's senior Taiwan negotiator Chen Yunli arrived in Taipei today for a five day of talks aimed at new economic and transportation deals. Chen is the highest ranking PRC representative to set foot in Taiwan since 1949 and follows the recent move by Taipei regulators to limit exposure to US agency debt. Pundits both on the island and in the mainland are allegedly wildly speculating as to whether Chen will meet with "President Ma Ying-jeou of Taiwan, who was elected last March after promising to improve both the economy and relations with the mainland."

8. Linda Gradstein at the Washington Post reports that Israel's director of domestic security told the outgoing Israeli cabinet that he was "very concerned" Israeli extremists would target for assassination government leaders pursuing a peaceful resolution with Palestine. Tel Aviv is worried about escalating vigilante violence from settler communities originally armed by the government.

"During Sunday's meeting, the cabinet decided to end government funding for infrastructure supporting outposts, which are Jewish homes in the West Bank that are not officially authorized by the Israeli government."

9. Reuters reports that the CEO of BP, Tony Hayward, told an industry conference: "According to our preliminary data, US demand was down 2 mb/d on the year over the last four weeks."

10. The Associated Press reports that Azeri officials announced that the first Kazakh shipment of oil has been put through the Baku-Ceyhan pipeline. "Oil from Tengiz, a Caspian field that is one of the world's largest, entered the Baku-Tbilisi-Ceyhan pipeline last week after being shipped across the Caspian Sea by ship, said Tamam Bayatli, a spokesman for pipeline operator BP." SOCAR officials have said that as much as 100 kb/d of Kazakh oil could eventually be sent via the pipeline.

11. Alan Johnston at BBC reports that naval vessels of Burma and Bangladesh are in a stand off at a disputed maritime boundary after Burma began exploration efforts in the area. "According to Bangladeshi sources, the dispute is taking place about 50 nautical miles south-west of an island called St Martin's."

12. Platts reports that on November 1 Russia cut its export duties on crude oil exports to $39.35/b on falling international crude prices had made exports unprofitable. Moscow also cut duties on exports of light oil products to $205.90/mt and $110.90/mt for heavy oil products.

13. Ellen Simon at the Associated Press reports that the Institute for Supply Management published their manufacturing index today showing that US manufacturing dropped sharply in October.

14. Nick Bunkley at the New York Times reports that US auto sales dropped sharply in October from a year ago. General Motors said sales were down 45% for that period. Ford said sales had dropped by 30.2% and Toyota reported an annual decline of 23%. Volkswagen reported a decline in sales of 7.9%. All categories of autos fell, but light trucks were hit the worst.