Daily Sources 3/6

1. Eurointelligence reports that credit default swaps for Austria traded yesterday at 264 basis points (2.64%), "meaning it costs €264,000 to insure €10m worth of Austrian bonds."

"Austria’s CDS are trading higher than Italy’s CDS. This has not yet translated into actual bonds spreads, which Austrian bond yields trading at 4.2%, while Greek bonds are at 5.8%. But sharp movements in the CDS are often an early warning of a change in bond rates. This is one to watch out for."

Meanwhile, Simon Johnson at Baseline Scenario points out that credit default swaps for major American banks have spiked again to levels not seen since mid-October.



American Express CDSs traded yesterday at 652.2. Johnson, a credible interpreter of markets being the former chief economist of the IMF and a professor at MIT, comments:

"The events of mid-September 2008 were traumatic and awful to behold. I saw that trailer and I don’t want to see the movie. But it is exactly into that scary future that we now head."

Worth reading in full. Rebecca Wilder at News N Economics points out that a recent OECD study shows that the fall in house prices in Europe has not passed through to construction as of yet.



European household consumption does not account for as large a share of GDP as it does in the US, and thus the cascade effects of rising debt to equity ratios on consumption and thus GDP should be less pronounced, if I understand correctly. However, construction will still get hit--and Ms. Wilder reports that German construction is already less than 6% of GDP, a historic low. Worth a look.

2. Charles Hawley at Der Spiegel reports that most observers in Germany believe that Chancellor Merkel's "grand coalition" is beginning to fray as the parties head into campaign mode. Not particularly good news given that international cooperation will thus be complicated.

3. Brad Setser at Follow the Money has a graph of Russian estimated treasuries and agencies holdings on the news yesterday that Moscow banned its wealth funds from investing in foreign government agencies--see Daily Sources 3/5 #4.



Setser comments:

"Russia’s sovereign fund was always quite conservative. Or at least its external portfolio was always managed fairly conservatively. It was primarily a fiscal stabilization fund, not an endowment fund — so this made some sense. Its existing guidelines implied that it couldn’t buy much of anything other than Agencies and Treasuries. Before the current crisis, Russia was planning to lift those restrictions so that its 'future' fund could take on a bit more risk to try to eke out higher returns. But the world has changed. And now even government-backed Agencies are too risky."

Emma O’Brien at Bloomberg reports that the ruble has not lost much value since Moscow gave notice to its banks that it would take a dim view of banks using bailout money to speculate against the ruble--see Daily Sources 2/9 #8.

"[Bank Rossii] purchased a net $862 million and €99 million (~ $125 million) in February, after selling a net $178 billion and €24 billion in the previous six months, it said yesterday. Bank Rossii’s Ulyukayev said last month the central bank will confine the ruble to a 39 to 41 trading range versus the basket in the first quarter, in an interview with Reuters."

Glenn Kessler at the Washington Post reports that Secretary Clinton will meet with Russian Foreign Minister Sergey Lavrov in Geneva today.

"In [an] NPR interview today, Clinton cast the overtures to Russian as part of a larger effort to engage antagonists such as Syria and Iran. 'We have a sense of urgency in the Obama administration,' Clinton said. 'We believe that there are a lot of challenges and threats that we have inherited that we have to address. But there are also opportunities. We are being extremely vigorous in our outreach because we are testing the waters, we are determining what is possible, we're turning new pages and resetting buttons. We are doing all kinds of efforts to try to create more partners and few adversaries.'"

Mark Landler at the New York Times reports that at a town hall meeting at the European Parliament today Secretary Clinton described Europe as "an essential partner" for the US in fighting climate change, terrorism, and the financial crisis.

"In her session at the European Parliament, the assembly’s president, Hans-Gerd Pöttinger, praised Mrs. Clinton, saying she sounded 'like a European.' The election of Mr. Obama, he predicted, would allow the administration to 'restore your country’s influence and its standing around the world.'"

Meanwhile, Secretary Clinton may have gone a bit overboard while declaiming that in regards to climate change, "we are long overdue in stepping up" and that "the United States has been negligent in facing up to its responsibilities." While I agree that climate change is a critical and pressing issue, the EU has passed quite a lot of laws to address the change, but its net carbon output isn't falling--and it is not clear that the current crisis will permit particularly strong actions in this arena.

4. Winnie Lee at Platts reports that in January, Chinese crude imports fell by 10.8% from December as imports from Angola and Iran grew by 50%.



Historically, there have often been large changes in suppliers share of China's crude import market. However, it is possibly significant that Sudan's exports to China fell by 56.2% from December as the ICC was heading for a decision--though I think it is unlikely. It is very notable that Brazil's crude exports have gone from basically nothing to 88 kb/d--almost 3% of total Chinese imports. NICOMEX reports that Petrobras concluded a deal with Beijing today to supply 100-160 kb/d. It is in the process of negotiating a $10 billion loan with China. It was earlier reported that the $10 billion loan had already been agreed to--see Daily Sources 2/19 #1.) It is also interesting that Venezuela is not even among the top 10 exporters to China in January.

The large number from Iran indicates that the country is likely cheating on its OPEC quota, which is more or less what everyone pretty much thought in the first place. Xinhua reports that the primary reason behind China's drop in imports is that most of the available storage is full, thus complicating its effort to purchase as much crude and products as it can in the current low price environment.

5. Stephanie McCrummen and Colum Lynch at the Washington Post report that president Omar Hassan al-Bashir has responded to the ICC warrant by expelling foreign aid groups from Sudan. Meanwhile, Bashir has moved to consolidate his political position domestically, framing himself as an anti-colonialist, saying, "We have refused to kneel to colonialism, that is why Sudan has been targeted." Ironically, Bashir was a major player in Chinese colonialism in Sudan, helping to bring its oil corporations in. Crowds yelled "Down, Down USA!" even though the US is not a party to the ICC.

6. Juan Cole at Informed Comment reports that former Iranian president, Ayatollah Akbar Hashemi-Rafsanjani met yesterday with Grand Ayatollah Ali Sistani in Najaf. "Sistani is said to have expressed concern about violence by extremists from both the Sunni and the Shiite side. Sistani declined Rafsanjani's invitation to visit Iran."

7. Samuel Cisnuk at UPI reports that Iraqi Prime Minister al-Maliki has put his support behind a two-pronged oil development strategy, which envisions rather incredible production increases:

"A plan has been drafted to boost Iraq's 2.4 mb/d crude-production capacity by 500 kb.d within six months, to 4 million bpd in two years and 6 million to 8 mb/d by 2013, relying in the first two phases mainly on domestic competencies and a recreated Iraqi National Oil Co. and a Supreme Petroleum Council.

The two-pronged plan means that development will be launched immediately on some of the fields that are simultaneously being tendered to IOCs in the ongoing licensing rounds, muddying the waters considerably. The plan has been launched to weaken the Oil Ministry, and the creation of an SPC will take much of the ministry's political steering power away and hand it to Iraq's political factions."

The Oil Ministry is regarded by many as a catspaw of the US government. The government's production plan is extremely optimistic, perhaps even manic. (h/t Jim Lobe's Iraq Oil Report.)

8. Robert Mackey at the Lede reports that Mullah Omar, leader of the Taliban, recently issued a letter calling upon the organization's members to halt attacks in Pakistan itself:

"Attacks on the Pakistani security forces and killing of fellow Muslims by the militants in the tribal areas and elsewhere in Pakistan is bringing a bad name to mujahedeen and harming the war against the US and NATO forces in Afghanistan."

Well worth reading in full.

9. John F. Burns at the New York Times reported yesterday the UK was to reestablish direct contact with Hezbollah in Lebanon.

"'It’s an interesting and positive development,' Paul Salem, the director of the Carnegie Middle East Center in Beirut, said of Britain’s move. 'Once the US starts talking with Syria and Iran, Hezbollah will be a difficult issue, and Britain’s opening up a direct channel with Hezbollah now could help defuse that.'"

10. Nariman Gizitdinov at Bloomberg reports that Kazakh President Nursultan Nazarbayev in his annual address at Astana promised to spend 600 billion tenge ($4 billion) in oil revenues to stimulate the economy. Nominal 2008 Kazakh GDP was about $141.2 billion, and the government has already announced it plans a 2.2 trillion tenge (~ $14.6 billion) plan (a little more than 10% of GDP). Oil revenues are thus expected to account for about 27% of the total stimulus budget.

11. Matthew Walter and Daniel Cancel at Bloomberg have a summary of recent moves by Chávez to nationalize basic foodstuff manufacturers, like Cargill earlier this week and Polar.

"National Guard troops occupied a rice mill owned by Mendoza’s company, Empresas Polar SA, last week, and Chávez directly warned Mendoza, 43, whose family has a net worth of $5 billion according to Forbes magazine, that he is now in the government’s cross hairs.

'You can’t work beyond the law, Mendoza,' Chávez said during a televised March 4 cabinet meeting, where he alleged the company was evading rules that require it to produce food at government-set prices. 'We could expropriate all of Polar’s plants.'"

If the government decides to expropriate Polar's assets, it will not offer cash as it has in past nationalizations, but rather bonds.

"In his latest crackdown, the president sent troops into rice mills to verify whether they’re complying with government regulations on production of price-controlled foods. The government began the process this week of seizing a rice plant owned by Cargill Inc., the biggest US agricultural company.

'We can’t allow monopolies like Polar,” Chávez said yesterday. 'That’s why we’ve ordered the intervention and possible expropriation of the plants, just like Cargill.'"

Well worth reading in full.

12. Sudeep Reddy at Real Time Economics reports that the Bureau of Labor Statistics announced that the official employment rate climbed to 8.1% in February, up from 7.6% in January. The broader employment category--U6--rose to 14.8%.

"We’ve already blown through the prior high point of the data series, which the Bureau of Labor Statistics started in 1994. An even broader (since discontinued) series hit 15% in late 1982, and we’re likely to fly right through that one next month."

Justin Fox at the Curious Capitalist posts a graph of the unemployment rate in the current slowdown versus previous recessions:

"What I get from the chart ... is that job losses from this recession are now worse than in 1981-1982, which is generally considered to have been the most severe economic downturn in the US since the Great Depression. Barring a more or less unimaginable turnaround in the month or two, they will be much worse. Just look at how steep that brown line is!"