Daily Sources 2/9

1. Peter Boone, Simon Johnson, and James Kwak at Baseline Scenario have a long and detailed post on the likely direction of the global economy, which they say faces an economic environment similar to the one faced by Japan in the 1990s and a "lost decade" for the global economy is a likely outcome.

"[The] situation in emerging markets is moving sharply towards near-crisis, particularly as global trade contracts and there are immediate effects on both corporates and the financial system. Currency collapse and debt default will be averted only by fiscal austerity. The current IMF strategy - most clearly evident in East-Central Europe - is to protect creditors fully with programs that do not allow for nominal exchange rate depreciation. This approach increases the degree of contraction and social costs faced by domestic residents, while also making economic recovery more difficult. These programs will likely prove more unpopular and less successful than were similar programs in Latin America in the 1980s and in Asia in the 1990s. As East-Central Europe slips into deeper recession, there are severe negative consequences for West European banks with a high exposure to the region (including Austria, Sweden and Greece)."

Quite long and detailed, but worth reading if you have the time.

2. Marcus Hand at Lloyd's List reported Friday that the Thursday surge seen in the Baltic Dry Index of 14% was driven by a jump in Chinese iron ore imports. Given that there will be limited demand for steel in the near term--though the stimulus program should provide some sort of bottom--the recovery in the BDI could be short-lived. But, so far anyway, the BDI continues to show signs of recovery, so much so that you can even discern it from a year's-eye view:



Another potential reason for the recovery, however limited, indicated by the BDI has been the Chinese New Year. I don't see how the New Years would have an affect now; clearly the BDI couldn't have fallen all that much farther from its low.

3. David Pearson at Real Time Economics reports that Bank of France governor Christian Noyer said in a radio interview Saturday that there was no risk that any eurozone countries would leave the monetary union.

"There has been some speculation in recent weeks that one or two countries might seek to leave the system to escape its rigid policy rules. But Noyer observed that recent investment rating downgrades of sovereign debt by some rating agencies have been 'very excessively exaggerated.'"

4. Andrew Batson at Real Time Economics looks at the analyst disputes over the extent to which Beijing's official economic data represents reality. He includes a list of estimates by several banks regarding what the 6.8% official GDP growth for the fourth quarter represents in terms of annual GDP growth.



The story also quotes the head of China's National Bureau of Statistics--Ma Jiantang--as throwing water on the notion that electricity consumption growth is a good proxy for GDP growth, "‘You have negative growth in electricity consumption, so how can GDP be growing by 6.8%?’ People who hold this view do not actually understand the internal relationships of different factors in the economy." Fair enough, still I'd appreciate an explanation of those "internal relationships of different factors in the economy."

Meanwhile, Zhang Dingmin at Bloomberg reports that China's Ministry of Finance’s research institute published a report Saturday calling for depreciation of the renminbi to about 6.93 per dollar (or about $0.1443/renminbi, about a 1.5% depreciation from the current interbank rate.)

5. In a series of post, Edward Hugh at Fistful of Euros reports that the Latvian economy contracted by 10.4% in the fourth quarter, that the Bank of France expects a contraction of 0.6% in the first quarter, which would mean that it will have technically entered a recession, and that the German Federal Statistics Office announced this morning that December exports were up 3.7% in November and down 7.7% from a year before.

6. The Spanish finance minister, Pedro Sobles, has an opinion piece in Wall Street Journal Europe calling for further economic cooperation in the face of the financial crisis.

7. Joaquín Almunia--European commissioner for economic and monetary affairs--has an opinion piece at Wall Street Journal Europe which argues that the reluctance to moderate the excesses of the laissez faire system are gone, suggesting a new consensus.

"The period we are entering will be characterized by a more active involvement of the public sector in the economy and, in particular, by a more abundant and extensive regulation of the financial system. That system will have to be more transparent, its supervision more rigorous, cross-border coordination of supervisory authorities more efficient, and risk management more cautious. Consensus on all these aspects is very broad: The roadmaps which have been drawn up listing the initiatives to make this possible, at the European and global levels, are detailed and lay down a strict timetable. Europe has started delivering: We have taken steps to strengthen capital requirements, to have stricter regulation for credit rating agencies and to protect bank deposits. We have changed accounting rules and taken steps to bring the credit default swaps market into central clearing in the EU.

But we have no illusions about the scale of the task ahead. We need to deliver more and do so quickly, all while coordinating action at the international level. This requires urgently involving the emerging economies in this task and in the relevant international forums such as the International Monetary Fund and the Financial Stability Forum."

8. Edward Hugh at Fistful of Euros reports that the great bulk of the speculative attacks on the ruble have apparently been funded by the government itself! It turns out that Moscow had extended credit to the banks in an effort to combat the credit crunch, and that the banks had used the funds to finance speculative attacks on the ruble.

"Kommersant reported (Friday) that policy makers planned to reduce bank loans in an attempt to limit bets on the ongoing ruble devaluation. As a result the ruble remained safely within the target band all day Friday, and there was no need for any kind of intervention."

Meanwhile, Hugh lists a long roster of indicators showing that the Russian economy is going through a brutal contraction.

"If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualized [rate of contraction]. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualized rate."

Long, but worth a look.

9. Philip P. Pan at the Washington Post has an interesting piece which argues that recent moves by Russian President Medvedev suggest that he is increasingly asserting independence from Putin and that a break is developing between the two men.

"In a sign of tensions in the relationship, one Russian official, also speaking on the condition of anonymity, said Putin and Medvedev recently decided that a note-taker should keep minutes of their discussions because 'misunderstandings' had arisen following past meetings. 'It's a very bad sign,' the official said, arguing that a rift in the leadership could destabilize the government."

Tea leaves aside, the narrative that Putin is the absolute ruler of Russia with Medvedev as his pawn has been way oversold. That said, the notion that there is a real break between the two looks like wishful thinking to me at this stage. Either way, the article is well worth reading. Craig Whitlock, also at the Washington Post, on Sunday reported that Vice President Biden, said at an international security conference in Munich on Saturday that the Administration seeks to "reset" relations with Moscow.Biden said,

"The last few years have seen a dangerous drift in relations between Russia and members of our alliance. The US and Russia can disagree but still work together where its interests coincide."

Angela Merkel echoed the need to incorporate Russia into European security projects, but Nicholas Sarkozy and Polish prime minister Donald Tusk both appeared convinced of hostile intentions on the part of Moscow. Long, but also worth reading.

10. Shigeru Sato at Bloomberg reports that Japanese refiners have told the media that Saudi Aramco has slashed the amount of crude it will supply them by 11 to 14% from their annual contracted levels.

11. Jim Jelter at Market Watch on Saturday reported that Iraqi Oil Minister, Hussain al-Shahristani, told journalists that he expected OPEC to cut supply again in the March meeting. Al-Shahristani said that Baghdad thinks the price should be at least $70/b. (Revenues from the oil and gas sector account for about 90% of the government's budget.) Margaret McQuaile and Stuart Elliott at Platts report that OPEC's secretary general--Abdalla el-Badri--suggested that OPEC needs to comply completely with the current 4.2 mb/d supply cut before another cut could be agreed to. Badri said that 897 kb/d of supply needs to come offline before the 4.2 mb/d target is met. He also urged non-OPEC producers to join in the cut, saying "We urge Norway, Russia and Mexico to give a hand, because the situation is very difficult and we cannot handle it by ourselves." He also said that OPEC currently has 8 mb/d of surplus capacity shut in.

12. The Gulf Times reports that Iran's National Audit Office reported that $1.058 billion in surplus oil revenues for the 2006-7 budget has not been returned to the national treasury by the Ahmadinejad administration.

13. Shai Oster at the Wall Street Journal reported Friday that Chinese President Hu Jintao and Premier Wen Jiabao ordered the State Council on Thursday to make every effort to combat the drought now afflicting China. The drought is the worst seen since 1951 in some areas, and is likely to severely affect the wheat crop.

"The affected area is primarily in central and eastern China, covering the country's breadbasket where much of the winter wheat crop is raised. The area also includes the region surrounding Beijing, the capital, which hasn't had precipitation in more than 100 days. In all, 1.85 million livestock are short of water."

The International Grains Council forecast a sharp reduction in the world wheat 2009-2010 harvest in late January (see Daily Sources 1/30 #8.) In November, China's National Development and Reform Commission set grain self-sufficiency as a national security goal of 2020 (see Daily Sources 11/4 #5.)

14. Joshua Partlow at the Washington Post reports that the drought in Argentina has killed at least 1.5 million cattle there. The drought started a couple of years ago near Buenos Aires and has spread through the pampas--Argentina's breadbasket. The cattle are so starved that the government has recently reduced the minimum weight allowable for the market to 575 lbs from 615 lbs.

"Agricultural groups estimate that Argentina, one of the world's top grain exporters, has lost more than $5 billion from the weather and that it could significantly slow the nation's economic growth. The 2008 harvests of several crops came in far smaller than those of the previous year."