Frances Robinson at Bloomberg reports that the European Central Bank released its June Financial Stability Report today which suggested that eurozone banks may lose another $283 billion by the end of next year. About $365 billion of losses have already been reported by the sector.
"'There is no room for complacency because the risks for financial stability remain high, also bearing in mind that the credit cycle has not yet reached a trough,' ECB Vice President Lucas Papademos said at a press briefing in Frankfurt today. 'Policy makers and market participants will have to be especially alert in the period ahead.'"That said, Papademos indicated the bank's assessment that the banks were sufficiently capitalized to withstand plausible scenarios including severe downturns. He also indicated that the ECB saw no need to take further measures at this time to address the crisis. In the meantime, Eurointelligence reports that FT Deutschland has acquired a copy of the draft summit declaration by the EU summit this week which includes a promise for additional funds to the IMF.
"The article says the unexpected increase in IMF funds suggest that governments expect more countries to get into financial difficulties. The papers talks about large credits to the Baltic Republics, but also to Poland. The summit text also explicitly rules out any additional stimulus packages."2. MOSCOW EXPRESSES CONFIDENCE IN THE DOLLAR
Susanne Walker and Dakin Campbell at Bloomberg report that Russian Finance Minister Alexei Kudrin said that Moscow has confidence in the dollar and that the country has no "immediate plans" to switch reserve currencies. I suggested in an earlier post that the decision by the BRIC countries--and possibly Mexico--to purchase SDR-denominated bonds has more to do with accepting more clout within the IMF than deciding to replace the dollar--see Daily Sources 6/12 #1.
3. GEORGIA CONTINUES TO BE BOGGED DOWN BY POLITICAL TURMOIL - BELARUSSIAN TENSIONS WITH RUSSIA CONTINUE TO GROW
Yevgeny Bendersky at the Compass reports that political turmoil continues to bedevil the Russian near abroad in Georgia. Large scale protests are continuing in Georgia as the opposition has resorted to some (unserious) physical attacks on members of the Saakashvili government.
"Saakshvilki's opposition continues to blame him in mismanaging the country's politics and resources. On June 12, Georgian opposition leader David Gamkrelidze accused Mikhail Saakashvili that he sold to Russia the country's only main railroad. Speaking at a meeting held in front of the Parliament of Georgia, Gamkrelidze said: 'What other crime can the country's main official do? We already have a divided territory, strategic objects are sold to Russia...the country lost investments because of President's actions....' Gamkrelidze also noted that the contract for the sale of the rail road has not yet been signed, due to the fact that protests continue in Tbilisi. According to the Interfax News Agency, Chairman of the 'Russian Railroads' Vladimir Yakunin is due to arrive in Georgia, with one of the possible topics for his visit to be the discussion over the sale of the Georgian railway. The representatives of 'Georgian Railways' Joint Stock Company, denied information on the planned visit by Mr. Akunin."Bendersky also notes that Victor Chernomyrdin was released from his post as Ambassador to Ukraine and that President of Belarus Alexander Lukashenko has instructed his government to prepare proposals to introduce customs and border clearance with Russia. Well worth reading in full. Meanwhile, Ellen Barry reports that Lukashenko decided not to attend the summit meeting inaugurating the Collective Security Treaty Organization in Moscow Sunday, a military alliance originally to include Russia, Belarus, Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Lukashenko reportedly decided not to sign the agreement due to the recent imposition of a ban on dairy product imports by Russia on Belarus.
"Beginning June 6, Russia banned a list of around 1,200 Belarussian milk and dairy products, saying they violated new packaging rules imposed last year. The ban dealt a crushing blow to Belarus’s dairy industry, which sends 95% of its exports to Russia."Uzbekistan also declined to become a formal member of the alliance at this time.
4. FDI INTO CHINA CONTINUES TO FALL, STIMULUS NOT TRANSLATING INTO INCREASED DEMAND FOR IMPORTS
Terence Poon at the Wall Street Journal reports that foreign direct investment in China in May fell by 17.8% from a year previous to $6.379 billion, according to data released by the Ministry of Commerce today.
"Actual FDI in China's western and central regions fell more than 30% in the January-May period from a year earlier, sharper than the drop for the overall country. Yao [Jian, spokesman for the Commerce ministry,] said the disparity is because the financial crisis is prompting foreign companies--many of which are based in the more developed coastal regions--to increase their existing investments in China, rather than attract new companies to invest in the country.AFP reports that Chinese Premier Wen Jiabao said during a visit to Hunan province that:
Referring to deepening export declines in May, Mr. Yao said the government will double short-term export-credit insurance to $84 billion this year from $43.2 billion in 2008, providing insurance coverage for around 15% of total exports, up from 6.5%. He added the ministry is working to improve trade financing for the export of heavy machinery."
"As the outlook of the global economy remains unclear and external demand continues to decline, the recovery of our economy is not firmly rooted yet. We must not underestimate these difficulties."He indicated that Beijing would adjust the stimulus program to adapt to changing economic conditions. Brad Setser at Follow the Money notes that the industrial production number released Friday of an increase of 8.9% year over year in May combined with the data released on Thursday showing imports and exports down 25.2% and 26.4% respectively leads to some questions.
"Lets do some very rough ballpark math. I’ll start by assuming that about 40% of China’s industrial production--pre-crisis--was exported. I think that is about right, but I don’t have the actual number. Help here would be appreciated. If industrial production for export was 40% of total production and if it fell by around 25%, the 60% of industrial production that is far domestic use would need to be up around 30% to generate 9% y/y growth.Setser notes that if such domestic demand is supporting industrial production, then it hasn't spilled over into demand for the world's goods, plotting a graph of South Korean and US exports to the country--both of which are down:
That is a big increase. And it isn’t totally implausible. Lending and investment are way up. So are stimulus driven auto sales. But it also raises the question of why it took China so long to really stimulate domestic demand if it had such latent capacity to grow without relying on exports."
Well worth reading in full.
5. SOUTH KOREA TO ASK US FOR WRITTEN DECLARATION OF NUCLEAR PROTECTION
Blaine Harden at the Washington Post reports that South Korean President Lee Myung-bak is en route to Washington DC for a meeting with President Obama where he is expected to ask for a written promise of US nuclear protection.
"Lee and Obama, in what will be their second meeting, will also discuss a free trade agreement between their two countries.6. IRANIAN LEADER OF THE REVOLUTION CALLS FOR INVESTIGATION INTO ELECTION, TNES OF THOUANDS DEFY BANS ON PROTESTS, MOUSAVI CALLS FOR CALM, AHMADINEJAD SEEKS TO LINK UNREST TO FOREIGN INFLUENCE
It was signed in 1997, but has not been ratified by the Senate, primarily because of concerns about imports of South Korean cars into the United States and strict limits in South Korea on imports of US beef."
Thomas Erdbrink at the Washington Post reports that Ayatollah Ali Khamenei, Leader of the Revolution [LOTR], ordered the Guardian Council on Sunday to launch an investigation into the election results this Friday which showed President Ahmadinejad winning with 63% of the vote. The Guardian Council was instructed by the LOTR to issue its findings within 7-10 days. His instructions followed a meeting with opposition candidate Mousavi on Sunday, where the LOTR urged him to use legal avenues to challenge the election, and the two then jointly urged calm. Riots had broken out over the weekend.
"Pro-reform candidate Mir Hossein Mousavi attended the rally at Tehran's Revolution Square on Monday afternoon, making his first public appearance since the election. Another opposition candidate, Mehdi Karroubi, also planned to attend.Ali Sheikholeslami and Ladane Nasseri at Bloomberg report that "hundreds of thousands" of protesters defied the ban on the protest to rally in Tehran. Mousavi appeared at the protest and urged the crowd to remain calm. President Ahmadinejad postponed a trip to Moscow today--a sure sign that the situation is unstable. In a news conference yesterday, Ahmadinejad sought to link the opposition to foreign influence, saying that Iran is "not afraid of threats." Obviously the political environment is very tense in Iran just now, here is Italian TV footage of protests in the country yesterday:
Thousands of Mousavi's supporters went ahead with the demonstration despite an Interior Ministry ban. There was virtually no police presence in the area as the protesters marched from Revolution Square, along Azadi Street to Freedom Square. They chanted slogans against Ahmadinejad, denounced what they charged was vote rigging and vowed to keep protesting. They also appealed to police monitoring the demonstration to join them."
(h/t Juan Cole at Informed Comment.) Footage from the 1979 revolution:
The Old Guard clearly will notice similarities. How it will play out is awfully difficult to see, but I believe that the situation may get out of hand if the regime is unable to reassert legitimacy under the Iranian Constitution ... I will try and post on that a little later today.
7. NETANYAHU SPEECH ENDORSES TWO STATE PRINCIPLE
Isabel Keshner at the New York Times reports that the prime minister of Israel, Benjamin Netanyahu, in a speech on Sunday endorsed the principle of a two-state solution.
"But he firmly rejected American demands for a complete freeze on Israeli settlements in the West Bank, the subject of a rare public dispute between Israel and its most important ally on an issue seen as critical to peace negotiations.Hamas has recently adopted a policy shift allowing for a peace agreement along the lines of the 1967 borders, but it seemed at the time that Netanyahu could not maintain a coalition if he accepted the principle of a two state solution--see Daily Sources 6/12 #9. The full text of the speech was carried by Haaretz. (h/t Joshua Keating at FP Passport's Morning Brief.)
And even his assent on Palestinian statehood, given the caveats, was immediately rejected as a nonstarter by Palestinians.
In a half-hour speech broadcast live in Israel, Mr. Netanyahu, the leader of the conservative Likud Party, laid out what he called his 'vision of peace': 'In this small land of ours, two peoples live freely, side-by-side, in amity and mutual respect. Each will have its own flag, its own national anthem, its own government. Neither will threaten the security or survival of the other.'
But Mr. Netanyahu insisted on 'ironclad' guarantees from the United States and the international community for Palestinian demilitarization and recognition of Israel’s Jewish character."
8. SAUDI ARABIA CALLS FOR MORE INVESTMENT IN PRODUCTION CAPACITY FROM REST OF WORLD
Nadim Kawach at Emirates Busines 24/7 reports that in an address to an oil industry conference in Beijing, Mohammed Madi, Chief Representative in Beijing of Aramco's Saudi Petroleum, said:
"We must recognize that depressed oil prices are not only detrimental to the economies of petroleum producing nations but also to the interests of consuming countries. That may seem counterintuitive, but consider that sustained and timely investments in petroleum projects and infrastructure are essential for maintaining future supplies at adequate levels.Well worth reading in full.
Current oil prices do little to encourage the necessary massive investments, and without them we may experience supply shortages once demand picks up in the future. Unfortunately, our industry may already be sowing the seeds for future problems. If others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar to, or worse than, what we witnessed in 2008."
9. UGANDAN OFFICIAL OIL RESERVES UPPED TO 2 BILLION BARRELS, WORRIES ABOUT POTENTIAL CONFLICT WITH THE DEMOCRATIC REPUBLIC OF CONGO
Eric Watkins at the Oil and Gas Journal reports that the Ugandan Finance Minister Syda Bumba announced that Ugandan confirmed oil reserves were at 2 billion barrels as of June, up from 300 million barrels in 2006. The announcement came
"amid concerns about a military confrontation between Uganda and its neighbor, Congo (former Zaire).
According to newswire reports, Congo has established a border post in the disputed region of Goli near the northwestern Ugandan district of Nebbi, near Lake Albert and along the oil-rich Albertine rift.
'I believe this is just aggression,' said Betty Adima, commissioner for Nebbi district. 'It is provocation. That is the simplest way I can put it,' Adima told the Agence France Presse.
The Ugandan government has sent a protest note to Congo over the incursion, but has no plans to deploy troops of its own in the disputed region at the moment, according to a spokesman for the Ugandan defense ministry."
10. GLOBOVISIÓN CALLS FOR DIALOGUE WITH CHÁVEZ, LLOYD'S LIST PUTS VENEZUELA ON LIST OF MOST RISKY COUNTRIES FOR SHIPPING
Patrick Markey at Reuters reports that Globovisión owner Alberto Ravell on Saturday appealed for a dialogue with the Chávez administration, saying:
"The president should know that if he wants to talk we are ready. We should have a dialogue like in any civilized country. Our door is always open, now it is up to the president to decide. ... The president has called and told us to behave correctly or he'll close us down, but what is behaving correctly? Not informing people?"Meanwhile, Jerry Frank at Lloyd's List reports that the Lloyd’s and London company insurance markets’ Joint War Committee has reacted to Chávez's renewed nationalization drive by placing the country on its list of most risky places for shipping. The list includes Somalia, Nigeria, Ivory Coast, Pakistan, Sri Lanka, the southern coast of Thailand, Georgia and parts of Indonesia, Malaysia and Philippines. In March, the National Assembly passed a law transferring the administration of ports from state and municipal authorities to the federal government--see Daily Sources 3/16 #11. In April, the Chávez administration began a campaign to oust those governors that opposed his move to federalize the ports--see Daily Sources 4/22 #7.
"[Neil] Roberts [the Lloyd’s Market Association-based secretary of the JWC, said]: 'The US has also raised its fears over the substandard implementation of the International Ship and Port Facilities Security Code.'Meanwhile, Robert Mayer at Platts reports that Venezuelan oil minister Rafael Ramirez said Friday that it has entered into negotiations to acquire a 49% stake in the Dominican Republic's Refidomsa 34 kb/d refinery. "Refidomsa gained 100% control of the refinery in June 2008 upon buying Shell's 50% stake in the company for $110 million." The purchase reportedly would include plans for expanding the refinery.
Most of the world’s marine hull war risk insurance business is written out of London, and Venezuela’s new status will mean shipowners operating in the country could face new terms and conditions and/or additional premiums.
'Ultimately, this is an advisory note and it up to underwriters to decide how they wish to act on this decision,' added Mr Roberts.
The JWC’s decision covers the whole of Venezuela, including all of its offshore installations stretching 200 nautical miles off the coast that as part of its international law of the sea Exclusive Economic Zone."
11. US HOUSEHOLD NET WORTH FELL AT 16.25% ANNUAL RATE IN Q1
Rebecca Wilder at News N Economics reports that the Federal Reserve's flow of funds report for the first quarter of 2009 indicates that household net worth fell at an annual rate of 16.25%. She plots a graph of the ratio of net wealth to disposable income from Q1 1951 to Q1 2009:
"Between 2005 and 2007, this ratio averaged a whopping 6.2. During the period 2005-2007, tangible asset values fell almost 1%, while financial assets grew a huge 16%! Liabilities likewise grew almost 18%, mostly on accumulated mortgage debt. Oh man."Well worth reading in full.