Daily Sources 4/21

1. MORE GRIM FORECASTS FROM JAPAN AND THE IMF

MarketWatch reports that Tokyo is expected to cut its forecast for GDP growth to a 3% contraction for the year starting April 1. Mark Landler at the New York Times reports that the IMF released its global financial stability report today, estimating that banks and other financial institutions will suffer $4.1 trillion in aggregate losses in their holdings due to the financial crisis.

"In its global financial stability report, released Tuesday, the fund estimated that financial institutions would have to write down an estimated $2.7 trillion in loans and securities originating in the United States from 2007 to 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and $1.4 trillion last October."

The story finishes by noting that the response to the crisis has been uneven:

"The fund estimates that in the United States, for example, banks reported $510 billion in write-downs by the end of 2008 and face an additional $550 billion in 2009 and 2010. In the euro zone, banks reported just $154 billion in write-downs by the end of last year and still face $750 billion. British banks are in somewhat better shape: having written down $110 billion, they face $200 billion more, the fund said."

2. KNOW YOUR CHICKEN: CHINA TO CONSIDER NEW RULES ON LENDING, CONSIDERED BY SOME ANALYSTS THE KEY TO BOTTOMING THE GLOBAL CRISIS; BUT IF THEY'RE COUNTING ON US CONSUMPTION, THE PROGNOSIS DON'T LOOK GOOD ... DEFLATION IN GERMANY, BUT LOW INTEREST RATES SUPPORTING ITALIAN REAL ESTATE MARKET; SWEDEN, THE ECB, AND CANADA LOOK SET TO BOARD THE QE BUS

The Wall Street Journal reports that the China Bank Regulating Commission is considering rules which would ensure that new loans are going to the real economy as opposed to the asset markets or bank accounts.

"A sharp cutback in credit would run the risk of derailing the nascent improvement, and is precisely what officials aren't planning to do. But they aren't pushing on the accelerator, either. The central bank has put interest-rate cuts on hold since December. The government is also expressing concern that the lending surge could be adding to financial risks or isn't directly aiding businesses in need of cash.

'Banks ought to fully realize that dealing with the impact of the crisis is a long-term task, and should pay close attention to risks accumulated from a burst of lending,' the head of China's banking regulator, Liu Mingkang, said at the agency's quarterly meeting last week."

A chart of loan growth by the WSJ:



The loan growth is what Brad Setser identified yesterday as a potential "green shoot" in the global economy--see Daily Sources 4/20 #1. Jesse's Café Américain reproduces a chart from contrary investor.com which shows how "falling aggregate demand and the weaker dollar" has undone the import market in the US--with the EU the largest market for Chinese imports:



Beijing appears to be placing some trust, therefore, in soon to recover American consumer demand. However, as Jesse comments:

"This is the worst decline in retail sales in the post World War II era.

The US consumer has finally hit the wall. The folks in DC think they can crank this Frankenstein monster of reckless consumption back up again, given the right jolts of liquidity and spin.

To think that consumers will start borrowing and buying again without a meaningful change in the dynamic of their cashflows implying an increase in the median wage, is a hard to believe. Even for the reckless American consumer, this episode has been daunting to their over-confidence, and rightfully so."

Rebecca Wilder at News N Economics adds that bank lending has stalled at an annual rate of growth of about 2.2% and that the credit crunch is now fully evident in the data. She points out:

"However, there is one exception: as of March, real estate lending is still rising slightly, but only because households are drawing on existing home equity lines of credit. I see this as another shoe to drop on consumer spending."

Her comments:

"The chart illustrates lending on revolving home equity lines of credit (HELOC). Lending (blue line) is still rising through March at a 20% annual rate. Households are using these lines of credit (presumably) to finance consumption needs, and a 20% annual growth rate is likely unsustainable.

Eventually, the lines of credit will run dry; and households will be forced to cut back on spending, taking another leg down. Not shown here is non-revolving real estate lending, which is down 1.3% in March since its peak in January 2008."

Well worth a look. In the meantime, Karey Wutkowski and Juan Lagorio at Reuters report that the credit card companies are scheduled to meet with the White House Thursday to discuss fees and interest rates.

"Scott Valentin, an analyst at Friedman, Billings, Ramsey, said credit card companies could also eliminate some late payments, or over-limit fees, to please Washington.

'The card companies are sensitive to what is going on around them, and public perception, and the government actions that are being contemplated, and are trying to put on a good face,' he said.

Credit card issuers have received over $120 billion in taxpayer funds since October, money the government has asked them to use to expand lending.

But with US credit card defaults at record highs, lenders are trying to protect themselves by tightening credit limits and closing accounts, actions that have infuriated lawmakers, consumers, and even triggered a New York state attorney general inquiry.

'Some of the very banks we rescued compound the hardships of ordinary Americans with unfair fees and interest charges,' said Senator Carl Levin, a Michigan Democrat who has co-authored credit card legislation.

Citigroup Chief Financial Officer Ned Kelly said in a conference call Friday with analysts to discuss the bank's quarterly results that the credit card business has shifted from growth to risk management.

He added that higher prices on credit cards helped the bank, one of the largest US credit card issuers, to cushion its losses."

The piece, well worth reading in full, concludes:

"'The administration clearly wants to keep the money flowing to the consumer, and the credit card companies are trying to protect themselves, hopefully there will be a middle ground some place,' said Anton Schutz, president of Mendon Capital."

In the meantime, Eurointelligence notes that Il Sole 24 published a story today noting that the one-month Euribor fell to below 1% this month for the first time ever. Euribor is the the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank. This is reportedly goosing the Italian real estate market as about 42% of new mortgages are based on one-month Euribor.

"The savings in mortgage payments to Italian mortgage holders are indeed substantial (the same applies almost to the same extent to the 3-month Euribor based mortgages, which are popular in Spain)."

In the meantime, Lukanyo Mnyanda and Anna Rascouet at Bloomberg report that the German Federal Statistics Office announced today that German producer prices fell by an annual rate of 0.5% last month, after rising 0.9% in February. German bonds prices rose on that news and the news yesterday that European Central Bank policy maker Christian Noyer indicated there was "room" for further interest rate cuts by the organization. In addition, Johan Carlstrom at Bloomberg reports that the Riksbank cut its benchmark interest rate by 0.5% to 0.5% and indicated that it stands ready to take further measures to resuscitate Sweden's economy. And the Bank of Canada also today cut its benchmark rate to 0.25% from 0.5%, indicating that it will leave the rate at that level through 2009, according to Bloomberg's Greg Quinn.

"'Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010,' the central bank said in a statement from Ottawa today. The central bank will provide updates at each future policy decision, starting June 4, on its commitment to leave the key rate unchanged."

3. THE EU IS TRAINING DIPLOMATS IN ANTICIPATION OF LISBON TREATY RATIFICATION

Der Spiegel reports that "hundreds of bureaucrats" at the European Commission are taking courses in political analysis and public relations in preparation for the new role the commission would take should the Lisbon Treaty come into force.

"Among the key provisions of the treaty is the creation of a European External Action Service and the appointment of a 'foreign minister,' though the title has been renamed as the 'high representative of the Union,' as well as an EU president. The idea is to groom an EU diplomatic service so it can start its work the day the treaty--once known, and rejected by voters in France and the Netherlands, as the 'EU constitution'--goes into effect."

4. CHINA WORKING TO DEFUSE INTERNATIONAL WORRIES

Javier Blas at the Financial Times reports that Niu Dun, China’s Deputy Agriculture Minister, told the journalist Monday that "We cannot rely on [investments in] other countries for our own food security. we have to depend on ourselves." In November, Zhang Xiaoqiang, Vice Chairman of China's National Development and Reform Commission, has announced that the country will set as a strategic priority domestic production of 95% of their grain consumption through 2020--see Daily Sources 11/14 #5. Obviously food security trumps all other resource security concerns, but Beijing's recent change in strategy in terms of overseas oil and gas resource acquisitions--via joint ventures and loan agreements--and its decision to veer away from the strategy pursued by other food deficit nations like Saudi Arabia to purchase overseas agricultural production seems to demonstrate recognition in Beijing that its resource security policies as set forth so far have ignited worries globally about their intentions. Obviously, if your resource security is dependent upon overseas holdings, their security would require the projection of force overseas. The notion that China is slightly adjusting the cut of its jib is also reinforced by the news today--via Jeb Blount at Bloomberg--that Petrobras Chief Executive Officer Jose Sergio Gabrielli said in an interview with the news wire that the company is not offering crude as collateral for the $10 billion in loans coming from China.

In that vein, there was an interesting comment made yesterday noting the story picked up by the US Naval Institute's blog that there has been heavy trading in options for McDermott International on rumors that CNPC is considering purchasing the company. McDermott is, among other things, the US Navy's sole provider of nuclear fuel and nuclear fuel assemblies as well as a manager of the US Strategic Petroleum Reserve. I doubt it is happening as rumored, but should it prove the case, it surely would be a huge story. In the meantime, Edward Wong at the New York Times notes that Beijing is clearly attempting to manage global concerns about China's rise, most recently deciding to unveil its nuclear submarines to public scrutiny in an international review of the country's fleet.

"The officer, Vice Adm. Ding Yiping, deputy commander of the Chinese Navy, told Xinhua in an interview on Monday that 'suspicions about China being a "threat" to world security are mostly because of misunderstandings and lack of understandings about China.'

He added: 'The suspicions would disappear if foreign counterparts could visit the Chinese Navy and know about the true situations.'"

Military analysts have most recently been concerned by the Chinese decision to retrofit ballistic missiles with warheads designed to take out air craft carriers. The recent news that supertanker companies expect the global fleet to contract in the medium term on the back of dismal demand is met, today, by the report by Toby Anderson at Lloyd's List that 35 additional very large crude carriers will be required if Venezuela is to meet its plans for increased crude supplies to China. (I'm afraid all I have access to is the snippet advertising the story, for the previous forecasts about the shape of the global supertanker fleet, see Daily Sources 4/16 #8.)

5. JAN 12 LETTER FROM KURDISH LEADER BARZANI TO OBAMA INCLUDED PLEA FOR SUPPORT FOR KRG OIL POLICIES

Ben Lando at Iraq Oil Report writes of a previously undisclosed letter from Kurdistan Regional Government of Iraq's President Massoud Barzani urging the Obama Administration to support the KRG's oil policies, whereby they would lease concessions to international oil companies without the explicit assent of the central government in Baghdad.

"He is blunt in pressing for U.S. support for controversial oil contracts signed by the KRG, which have been condemned as 'illegal' by Iraq Oil Minister Hussain al-Shahristani, criticized by Prime Minister Nouri al-Maliki and referred to by Bush administration officials as unhelpful in the reconciliation process."

The Obama Administration has declined, as of yet, to take sides in the matter.

6. THE BUSH ADMINISTRATION OFFERED TO DROP OIL SANCTIONS ON IRAN IN 2008

Kate Dourian at Platts reports that Hooshang Amirahmadi, speaking at the Middle East Petroleum and Gas conference in Dubai, said he was party to negotiations with Tehran in 2008 where the US offered to suspend sanctions on Iranian oil and gas in return for a six week suspension of uranium enrichment.

"'The bottom line is that the US offered to suspend sanctions on oil and gas in return for Iran freezing uranium enrichment for six weeks,' [Amirahmadi] said.

The offer was rejected by Tehran and the response to the US request for a 'wish list' from the Iranian leadership was: 'Leave us alone.'

Amirahmadi said when asked what type of sanctions the US was offering to suspend that it applied to executive orders dating back to the Clinton era, which imposed a trade ban against Iran, including trade in oil and gas, and prohibiting US investment in Iran's energy sector.

Other sanctions which were legislated, such as the Iran-Libya Sanctions Act (ILSA) of 1996--later amended to drop Libyan sanctions--was not included in the offer as it would require a congressional vote."

7. SAUDI ARABIA PUTS ANOTHER OIL PROJECT ON HOLD

Kevin Baxter at Reuters reports that Saudi Aramco has put the $9 billion Manifa offshore oilfield project on hold for six months.

"The Manifa project is in line to become Saudi Arabia’s largest offshore field, capable of producing 900,000 barrels of crude. However, the heavy sour crude the field holds makes it expensive to process and not economically viable in the current financial climate."

This delay is on top of delays for a number of domestic Saudi Aramco projects slated for export--see Daily Sources 4/14 #6.

8. VIETNAMESE ECONOMY EXPANDING!

Jason Folkmanis and Nguyen Dieu Tu Uyen at Bloomberg report that Vietnamese Prime Minister Nguyen Tan Dung told investors at a conference in Hong Kong yesterday that Vietnam's economic growth is rebounding after slowing in the first quarter.

"'The stimulus package has already had a good effect on the economy, and we believe it will have more impact,' he said. 'Growth will accelerate in the second, third and fourth quarters. We are targeting 5% to 5.5% growth for the year.'

Vietnam’s economy expanded 3.1% in the first quarter from a year earlier, the slowest pace on record, according to figures from the General Statistics Office in Hanoi.

Stimulus money will be invested in projects in areas including transportation and energy, Dung said. The $8 billion amount includes money from the government budget, according to the prime minister, who didn’t specify if any of the funds he was referring to had been included in the budget prior to the creation of stimulus plans."

9. HOW TO HELP MOLDOVA

Louis O'Neill, former OSCE ambassador and head of mission to Moldova, has an opinion piece in today's Wall Street Journal where he suggests a way to bolster Moldovan sovereignty in the current circumstance. To wit:

"With all these forces still tugging at a relatively new, unconsolidated and poor nation, it seems a proper time and in everyone's interest to give Moldovan sovereignty a boost. After all, every nation recognizes Moldova's territorial integrity and sovereignty, but also the right for Transdniestria to have a special status within a unified country. A serious restart of the '5+2' talks on Transdniestria comprising Russia, Ukraine, the Organization for Security and Cooperation in Europe, the EU, the US as well as Moldova and Transdniestria, could lead to a real settlement. Such a deal could open important new areas of trust in a reinvigorated US-EU-Russian relationship and improve the lives of people on both sides of the Dniester."

Well worth reading in full.