Daily Sources 2/18

1. Ambrose Evans-Pritchard at the UK Telegraph reports that Germany's finance minister, Peer Steinbrück, said,

"We have a number of countries in the eurozone that are clearly getting into trouble on their payments. ... The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

Evans-Pritchard writes:

"Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart.

The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs."

Edward Hugh, provides a useful, if somewhat small and blurry, graph of the sovereign bond and CDS spreads of some of the more relevant countries, courtesy of Fistful of Euros:



Meanwhile, Der Spiegel reports that Chancellor Angela Merkel's cabinet agreed today to change the bank bailout law so it can rescue Hypo Real Estate.

"The draft law would allow the federal government to initiate expropriation proceedings until June 30. 'The deadline makes it clear that the option of nationalization as a step toward stability is one which will not be available in the long term and is only conceived as a contribution to meeting the challenges presented by the financial crisis,' the bill reads."

In effect, legislators wanted to establish a levee against speculators acquiring the firm on the cheap--similar to Sarkozy's decision to use France's sovereign wealth fund to protect strategic industries (see Daily Sources 10/29 #3.) David Crossland at Der Spiegel reports on the debate in Germany over bailing out one of their carmakers, Opel.

2. Edward Harrison at Credit Writedowns posts that Switzerland is being threatened with national bankruptcy by its banking system, as per Arthur P. Schmidt interviewed by the Swiss daily Tagesanzeiger. Key excerpts:

"In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31% of all loans are in Swiss currency. Amongst household loans, they are almost 60%. ... At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs."

"According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion US$ are in circulation--which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion US$ through offshore financial centers."

Since the Swiss franc is getting stronger relative to the Eastern European nations, the terms of repayment are de facto getting much steeper, meaning that a good portion of those loans are basically bad. Given the amount loaned, that portion is enough to bankrupt the banks, which will force Bern to bail them out. The bail out will devalue the currency and make its sovereign debt difficult to roll over.

3. Edward Hugh at Fistful of Euros calculates that Ukrainian GDP fell at an annual rate of 20% in January.

"The Statistics Office don’t produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening."

(h/t Yves Smith at Naked Capitalism.)

4. Robin Kwong at the Financial Times reports that Taiwan's GDP contracted by 8.36% in the fourth quarter compared to a year earlier.

"'There is little hope of returning to positive economic growth until the fourth quarter of this year,' said Tsai Hung-kun of the national statistics agency.

The dire economic performance prompted Taiwan's central bank to make an unscheduled, 25 basis point rate [0.25%] cut on Wednesday, bringing the island's key interest rate to a record low of 1.25%.

Yen Tzung-ta, the bank's top economist, told reporters that 'by cutting rates, we want to send a signal: the central bank will maintain a loose money policy.'"

5. Indira A.R. Lakshmanan at Bloomberg reports that "Indonesian Foreign Minister Hassan Wirajuda told Secretary of State Hillary Clinton today that his country 'could be a good partner for the United States in reaching out to the Muslim world.'"

"'President Obama has a very strong constituency in Indonesia--of course without the right to vote,' Wirajuda said. 'The Indonesian government and the people of Indonesia would very much like to welcome President Obama on his trip to Indonesia. We cannot wait,' he added, to laughter from the local press corps, 'and I wish that Secretary Clinton would convey this to President Obama.'"

This is absolutely an invitation that should be accepted as soon as is practical.

6. Glenn Kessler at the Washington Post reports that Secretary Clinton today in Indonesia refused to deny that removing sanctions on Myanmar (Burma) was an idea under serious consideration as the Obama Administration reviews foreign policy.

"'Clearly the path we have taken in imposing sanctions hasn't influenced the Burmese junta,' she said, adding that the route taken by Burma's neighbors of 'reaching out and trying to engage them has not influenced them either.'"

Sanctions are a difficult issue. They rarely have success without universal condemnation, as was the case in South Africa. Countries which can count on outside help, such as Cuba, or whose commodities exports are key to international industry and commerce, such as Iran--and to a limited extent Myanmar--tend to prove immune to, and probably the internal stability of the regimes are strengthened by, sanctions.

7. Helene Cooper at the New York Times reports that President Obama said yesterday that he would send an additional 17,000 troops to Afghanistan in support of the 33,000 already there.

"The Administration’s review of Afghanistan policy is supposed to be completed before early April, when Mr. Obama heads to Europe for a NATO summit meeting at which he is expected to press American allies for more troops and help in Afghanistan."

Margaret Talev, Nancy A. Youssef and Warren P. Strobel at McClatchy Newspapers report that the troops will be deployed to southern Afghanistan where they will be used to target poppy production which is used by the Taliban to fund its activities. (h/t Juan Cole at Informed Comment who suggests the strategy is misguided, given that there are not many means of making a living available to farmers in Afghanistan.



That said, it seems to me that targeting the source of income of your enemy makes a lot of sense. As Marcus Tullius Cicero famously put it, the sinews of war are infinite money. However, any truly meaningful attempt to cut off the flow of money would have to address consumption, either by targeting it in the US as well as distribution, or by legalizing its production and consumption here. Addressing opium via the legalization of consumption is unlikely to have any success given the extreme unlikelihood of the rest of the world following suit. (Beijing, for example, has a particularly nasty history with opium which is responsible in part for its anti-colonial ideology.) That would leave seriously targeting consumption.

8. Faleh al-Khayat at Platts reports that the Iraqi Oil Ministry has softened the terms under which it was offering oil field concessions to international oil firms. Specifically, the Iraqi share in the joint ventures operating the fields would be reduced to 25% from 51%, though unanimous decisions would be required. Also, the terms under which firms were rewarded for maintaining production above certain levels were modified.

"The six oil fields on offer under 20-year service contracts are the major producing fields of Kirkuk and Bai Hassan in the north, and the two Rumaila fields, Zubair, West Qurna I and the three Meissan fields in the south. The two gas fields are Akkas in the western Anbar desert and Mansooriya northeast of Baghdad in Diyala province."

9. Eman Goma at Reuters reports that Kuwait is considering constructing a nuclear power plant with the help of a French firm to handle power generation and water desalination needs.

10. Sree Vidya Bhaktavatsalam and Christian Schmollinger at Bloomberg report that Soros Fund Management LLC bought 16 million shares of Petrobras’ ADRs, nearly doubling its holdings of the US-traded shares of the Brazilian national oil company, bringing Soros' stake to 1.45%.

11. Courtney Schlisserman at Bloomberg reports that housing starts fell by an annual rate of 17% in January. House supply is still growing, however, due to foreclosures.

12. Paul Swartz has a post at Follow the Money which demonstrates that home mortgage credit growth has gone negative--meaning that it is subtracting from the money supply, a deflationary pressure.



Which seems consistent with the remarks of the president of the Federal Bank of St. Louis, James Bullard, reported by Michael S. Derby of Real Time Economics:

"'We face some risk--at this point only a risk--of sustained deflation,' in an environment where core inflation is already running 'at zero to slightly negative rates. ...[O}ne important near term goal of monetary policy is to guide the economy away from this outcome.'”

Bullard, who is currently not a voting member of the FOMC, also said in his speech in New York City that "current Fed programs are helpful in aiding markets and the economy, but 'we remain far from the systematic approach I would like to see.'" The $75 billion plan to reduce mortgage payments the Obama Administration announced today is meant to address this in part, though it seems on the face of it that it would reduce money supply by reducing the total value of the loans. However, it would reduce that less than foreclosures, and perhaps restored debt equity ratios would help shore up consumer credit.