Daily Sources 6/4

1. BANKS OF CANADA, ENGLAND, AND EUROPE MAINTAIN BENCHMARK INTEREST RATES, B.O.E. AND E.C.B. REITERATE INTENTION TO ENGAGE IN SOME Q.E., SPEECH BY GERMAN F.M.--AND S.D.P. CHANCELLOR CANDIDATE--INDICATES INTEREST IN CHANGING THE STRUCTURE OF THE EUROPEAN MONETARY UNION

Daniel Kruger and Chris Fournier at Bloomberg report that the Bank of Canada today decided to leave its benchmark interest rate unchanged at 0.25%.

"The Bank of Canada ... said the 'unprecedentedly rapid rise' in the currency could 'fully offset' recent improvements in financial markets and consumer confidence and prolong the recession.

'The bank is confirming that the rise in the currency isn’t backed up by the fundamentals,' said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign-exchange dealing firm. 'While we do see some 'green shoots," for the economy to strengthen we can’t have the Canadian dollar as strong as it’s been in recent weeks. Once everyone gets a chance to digest this, you’ll see some US dollar strength."

Meanwhile, Jennifer Ryan at Bloomberg reports that the Bank of England also left its benchmark interest rate unchanged at 0.5 today, and reiterated its intention to purchase £125 billion (~$205 billion) in government and corporate bonds.

"While the bank’s decision last month was unanimous, some policy makers did favor spending the full authorized total of 150 billion pounds and the panel said it will seek permission to print even more money than the maximum if needed. Minutes of today’s decision will be published on June 17."

And Gabi Thesing and Christian Vits at Bloomberg report that the European Central Bank [ECB] also left its benchmark interest rate unchanged today at 1%.

"Asked if the bank will expand its bond plan, [ECB President Jean-Claude] Trichet replied: 'We have decided to embark on a 60 billion-euro purchase of covered bonds, full stop.'"

Meanwhile, Daniela Schwarzer at Eurozone Watch reports that German Foreign Secretary Frank-Walter Steinmeier in a speech yesterday at Budapest suggested that the current structure for the European monetary union ought, under the current circumstances, be rearranged, Schwarzer's analysis:

"# He explicitly acknowledges the problem of divergent economic developments in the EMU. This fact has been on the table for a few years now. As early as 2005, data on the first years of EMU pointed to these problems, and the trend of cyclical and structural divergence has even been acknowledged by the ECB in pursuing its monetary policy for an increasingly heterogeneous Eurozone economy. But Germany (which itself has been diverging from EMU average for instance in the years of its sever economic slump 2003/4 and subsequently recorded a very strong current account surplus) had so far not picked up this issue politically. It is hence the first time that a German member of government says what the current developments are: a possible threat to the existence of the EMU.
# In order to tackle this problem, Steinmeier suggests stronger policy coordination. In other words: the Lisbon Agenda is not sufficient an instrument to cope with divergence and asymmetric shocks in the EMU. This is no surprise to most economic analysts of EMU (even not in the German administration), but a new political statement from Berlin.
# He explicitly names wage, social and tax policies as an object for closer coordination in the EMU and speeks out strongly against tax and wage dumping. Again, this should be no surprise from a social democrat before two important elections dates - but it is a clear departure from the Berlin mainstream. For instance regarding the commonly held view that due to the 'Tarifautonomie' (i.e. the fact that social partners negotiate wages (more or less) independently in Germany) nothing can be done in the field of wage policy anyway. What Steinmeier may in fact mean is that some countries should be pushed towards giving up certain systems (e.g. wages indexed on inflation as is the case in Spain), which reinforce cyclical divergences in the EMU.
# He also requests a stronger coordination of fiscal stimulus in the current crisis--rightly so, but in direct opposition to the position held by the Chancellor and the Finance Minister."

Worth reading in full.

2. REPORTERS TAKEN TO CHINESE S.P.R.S

Denis McMahon at China Journal reports that he was taken on a reporting trip to Zhenhai and Zhoushan, two SPRs located south of Shanghai, arranged by the State Council Information Office.

"On the face of it, the visit was seemingly a massive step forward in transparency for the Chinese government. But, while staring at 50 identical 100,000 cubic meter (~ 630,000 barrel) tanks neatly formed into rows is certainly impressive, it doesn’t really tell much about the state of China’s reserves. And while the officials we met were friendly and open, the key policy questions of where the oil comes from, how they bought it and under what conditions the reserves may be tapped were deferred to more senior officials--who weren’t there.

While the reporters may have been a little unsure as to what they were getting out of the experience, Beijing clearly knew exactly what it was doing from the unity of message coming from the National Energy Bureau officials traveling with us: The reserves are full."

It seems that Beijing is signaling it would like a lower price, no?

3. MALAYSIA CONSIDERING SETTLING TRADE WITH CHINA IN LOCAL CURRENCIES

Shai Oster at the Wall Street Journal reports that Malaysian Prime Minister Najib Abdul Razak told the media after meeting with China's premier, Wen Jiabao, on Wednesday that:

"We can consider whether we can use local currencies to facilitate trade financing between our two countries. ... What worries us is that the [US] deficit is being financed by printing more money. That is what is happening. The Treasury in the United States is printing more notes."

The notion being to replace trade settlements in dollars with the ringgit and yuan. In May Bloomberg reported that Brazil's foreign minister told the media in Beijing that Brazil and China were considering a plan to settle in local currencies--see Daily Sources 5/20 #4.

4. VIETNAMESE NAVAL STRATEGY VS. CHINA TO MIRROR CHINA'S NAVAL STRATEGY VS. U.S., MALAYSIAN SHIPS MAY HAVE ENTERED OIL RICH AREA DISPUTED WITH INDONESIA

Feng at Information Dissemination comments on Vietnam's recent decision to purchase six project 636 kilo submarines for $1.8 billion. (Kilo class is the NATO designation for diesel-electric submarines made in Russia. Wikipedia states that the project 636 submarines are thought to be one of the quietest diesel-electric submarines in the the world.) Feng believes that the submarine purchase was made in an attempt to be able to project force into the China South Sea, and in particular, to the Spratly Islands, control over which is disputed by all the nearby nations, mostly because it is thought that oil and gas reserves lie under them.



Feng points out that the navies of countries further away from Vietnam, like, say, Australia, present a different challenge for the People's Liberation Army Navy [PLAN] than Vietnam, simply because Vietnamese ships would be operating mostly in areas over which the Chinese would be able to assert air superiority. Thus:

"[Vietnam is] actually adopting the same strategy that PLAN [has] supposedly [adopted to counter the capabilities of the US Navy]. Basically, Vietnam is [buying] a lot [of] small, fast ships equipped with long range missiles (and nothing else much ...) [and] quiet submarines."

Of course, Hanoi cannot make purchases on the scale that Beijing can, but it is presented with more or less the same dilemma facing Beijing when considering what it should do in case of a confrontation with the US. Interesting observation. Meanwhile, AFP reports that Malaysia's deputy prime minister Muhyiddin Yassin called for calm amidst reports that Malaysian warships had entered waters off northeastern Borneo also claimed by Indonesia, saying:

"We want to avoid any form of provocation that can cause unpleasantness. We must handle the matter with caution."

"International borders in the area off Borneo island have yet to be determined, with each country claiming the area as its own.

Malaysia claims the area based on a 1979 maritime chart, while Indonesia bases its claims on the 1982 UN Convention on the Law of the Sea (UNCLOS), which states the area belongs to Indonesia.

Muhyiddin said the Malaysian security forces patrolling the Ambalat waters had performed their duties responsibly and in accordance with regulations."

The head of Malaysia's military, Abdul Aziz Zainal, told the media that ships had not entered the Ambalat region, and that he would be in Jakarta Tuesday to discuss the matter.

5. OBAMA'S SPEAKS AT CAIRO TODAY

The New York Times carried the full text of President Obama's much anticipated speech in Cairo today. Key excerpts:

"Islam has always been a part of America's story. The first nation to recognize my country was Morocco. In signing the Treaty of Tripoli in 1796, our second President John Adams wrote, 'The United States has in itself no character of enmity against the laws, religion or tranquility of Muslims.'"

"Just as Muslims do not fit a crude stereotype, America is not the crude stereotype of a self-interested empire. The United States has been one of the greatest sources of progress that the world has ever known. We were born out of revolution against an empire. We were founded upon the ideal that all are created equal, and we have shed blood and struggled for centuries to give meaning to those words – within our borders, and around the world. We are shaped by every culture, drawn from every end of the Earth, and dedicated to a simple concept: E pluribus unum: 'Out of many, one.'"

"Make no mistake: we do not want to keep our troops in Afghanistan. We seek no military bases there. It is agonizing for America to lose our young men and women. It is costly and politically difficult to continue this conflict. We would gladly bring every single one of our troops home if we could be confident that there were not violent extremists in Afghanistan and Pakistan determined to kill as many Americans as they possibly can. But that is not yet the case."

"

The sooner the extremists are isolated and unwelcome in Muslim communities, the sooner we will all be safer."

"Around the world, the Jewish people were persecuted for centuries, and anti-Semitism in Europe culminated in an unprecedented Holocaust. Tomorrow, I will visit Buchenwald, which was part of a network of camps where Jews were enslaved, tortured, shot and gassed to death by the Third Reich. Six million Jews were killed--more than the entire Jewish population of Israel today. Denying that fact is baseless, ignorant, and hateful. Threatening Israel with destruction--or repeating vile stereotypes about Jews--is deeply wrong, and only serves to evoke in the minds of Israelis this most painful of memories while preventing the peace that the people of this region deserve.

On the other hand, it is also undeniable that the Palestinian people--Muslims and Christians--have suffered in pursuit of a homeland. For more than sixty years they have endured the pain of dislocation. Many wait in refugee camps in the West Bank, Gaza, and neighboring lands for a life of peace and security that they have never been able to lead. They endure the daily humiliations--large and small--that come with occupation. So let there be no doubt: the situation for the Palestinian people is intolerable. America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity, and a state of their own.

For decades, there has been a stalemate: two peoples with legitimate aspirations, each with a painful history that makes compromise elusive. It is easy to point fingers--for Palestinians to point to the displacement brought by Israel's founding, and for Israelis to point to the constant hostility and attacks throughout its history from within its borders as well as beyond. But if we see this conflict only from one side or the other, then we will be blind to the truth: the only resolution is for the aspirations of both sides to be met through two states, where Israelis and Palestinians each live in peace and security.

That is in Israel's interest, Palestine's interest, America's interest, and the world's interest."

"Palestinians must abandon violence. Resistance through violence and killing is wrong and does not succeed. For centuries, black people in America suffered the lash of the whip as slaves and the humiliation of segregation. But it was not violence that won full and equal rights. It was a peaceful and determined insistence upon the ideals at the center of America's founding. This same story can be told by people from South Africa to South Asia; from Eastern Europe to Indonesia."

"At the same time, Israelis must acknowledge that just as Israel's right to exist cannot be denied, neither can Palestine's. The United States does not accept the legitimacy of continued Israeli settlements."

"And we will welcome all elected, peaceful governments--provided they govern with respect for all their people.

This last point is important because there are some who advocate for democracy only when they are out of power; once in power, they are ruthless in suppressing the rights of others."

A bit later in the speech, President Obama seems to echo yesterday's op ed in the Wall Street Journal by the prince of Dubai which argued that education was key to winning hearts and minds in the Middle East--see Daily Sources 6/3 #8.

"Many Gulf States have enjoyed great wealth as a consequence of oil, and some are beginning to focus it on broader development. But all of us must recognize that education and innovation will be the currency of the 21st century, and in too many Muslim communities there remains underinvestment in these areas. I am emphasizing such investments within my country. And while America in the past has focused on oil and gas in this part of the world, we now seek a broader engagement.

On education, we will expand exchange programs, and increase scholarships, like the one that brought my father to America, while encouraging more Americans to study in Muslim communities. And we will match promising Muslim students with internships in America; invest in on-line learning for teachers and children around the world; and create a new online network, so a teenager in Kansas can communicate instantly with a teenager in Cairo."

The speech is best read in full.

6. IRAN'S L.O.T.R. DISMISSES CAIRO SPEECH IN ADVANCE, IRAN ANNOUNCES CONSTRUCTION ON PARS PIPELINE BEGINS, WITHOUT HAVING DECIDED ON FINAL PATH

Thomas Erdbrink and William Branigin at the Washington Post report that Iran's Leader of the Revolution [LOTR] Ayatollah Ali Khamenei said:

"People of the Middle East, the Muslim region and North Africa--people of these regions--hate America from the bottom of their heart"

shortly before President Obama's speech in Cairo. LOTR Khamenei said that "beautiful speeches" would not reverse this feeling. Meanwhile, PressTV reports that construction on the Pars (or Persian) Pipeline has begun, but that Ahmad Noorani, the head of economic affairs at the Iranian embassy in Turkey, suggested:

"Another route could go through Iraq and Syria and then go through the Mediterranean to Greece and Italy."

(h/t reader Geoff.)

7. HOLBROOKE SAYS ADMINISTRATION HAS ASKED CONGRESS FOR ADDITIONAL $200 MILLION IN AID FOR PAKISTANIS DISPLACED BY FIGHTING WITH TALIBAN

Karen DeYoung at the Washington Post reports that Richard Holbrooke, special representative for Afghanistan and Pakistan, said at a press conference with Pakistani President Asif Ali Zadari in Islamabad yesterday that President Obama had asked Congress for an additional $200 million in aid for those displaced by the fighting with the Taliban.

"[W]ithin hours of his arrival, Holbrooke said the 'dramatic increase' in aid was 'symbolic of our commitment and support.'

Holbrooke emphasized that his hastily arranged three-day visit was 'at the personal instruction of President Obama' and reflected White House concern about Pakistanis fleeing heavy fighting in the Swat Valley and surrounding regions northwest of Islamabad, the capital."

The trip is also an outgrowth of concern that the central government will not reestablish control in areas where the extremists have been flushed out, failing to provide for security and services, making it a simple matter for the Taliban to return once the offensive has ended.

8. RELIANCE TO HALT GASOLINE EXPORTS TO IRAN ON U.S. SANCTION FEARS

Dev Chatterjee & Piyush Pandey at the Economic Times reports that Reliance has decided to stop exports of petroleum products to Iran in an effort to stave off restrictions on sales of products to the US market.

"Reliance was exporting 2% of its total output, worth around $280 million, from its two refineries in Jamnagar to Iran. A top RIL official, who requested anonymity, confirmed that the gasoline exports to Iran were stopped last month. However, he refused to elaborate on this issue.
...
RIL exports petroleum products worth $14 billion annually, of which around 5% is exporting to the US."

As of late, the UAE has been providing Iran with about 80% of its product imports.

9. ETHIOPIAN SOMALI SECESSIONISTS WARN AWAY OIL PROSPECTORS

Barry Malone at Reuters yesterday reported that the Ogaden National Liberation Front (ONLF)--or secessionists from the ethnically Somali Ogaden region--have emailed a warning to oil companies not to operate in that area of Ethiopia.



The email statement said:

"In order to accommodate these immoral and gluttonous rushes for oil in Ogaden, Ethiopia killed, raped and illegally detained thousands of Ogaden civilian and imposed economic and aid blockade at a time of when there was a full-blown drought in the Ogaden.

ONLF has persistently warned these unscrupulous multinational companies and their governments ... the ONLF has been left no alternative but to take all measures necessary to protect the inalienable rights of the Ogaden people."

10. O.A.S. VOTES TO LIFT BAN ON CUBA, BUT CUBA MUST ENGAGE IN DIALOGUE IN ORDER TO RE-ENTER ORGANIZATION

Mary Beth Sheridan at the Washington Post reports that the Organization of American States [OAS] voted to lift its 47 year old suspension of Cuba. The language of the resolution doesn't seem to explicitly require anything specific of Havana, outside of initiating a process of dialogue which itself must be in conformity with the practices, purposes, and principles of the OAS.The press release includes the actual language of the resolution (in Spanish only).

"RESUELVE:

1. Que la Resolución VI adoptada el 31 de enero de 1962 en la Octava Reunión de Consulta de Ministros de Relaciones Exteriores, mediante la cual se excluyó al Gobierno de Cuba de su participación en el Sistema Interamericano, queda sin efecto en la Organización de los Estados Americanos.

2. Que la participación de Cuba en la OEA será el resultado de un proceso de diálogo iniciado a solicitud del Gobierno de Cuba y de conformidad con las prácticas, los propósitos y principios de la OEA."

More or less:

"RESOLVED:

1. That Resolution VI adopted on January 31, 1962, in the Eighth Consultative Meeting of External Relations Ministers, by which the government of Cuba was excluded from participating in the Inter-American System, is hereby repealed in the Organization of the United States.

2. That the participation of Cuba in the OAS will be a result of a process of dialogue initiated at the request of the government of Cuba and in conformity with the practices, purposes, and principles of the OAS."

(Course, I wouldn't rely on my Spanish for this, but it does seem that only the dialogue itself must be conducted with the principles in mind, and that the sticking point is whether the dialogue would be initiated--or even participated in--by Havana.) Sheridan reports that Dan Restrepo, who is head of Western Hemisphere affairs at the White House, argued that the language was stronger that it might appear given the preamble which emphasize democracy and respect for human rights as part of the OAS's fundamental principles.

11. MEXICAN DRUG GANGS MOVING TO HONDURAS--MAY BE ASSISTED BY CROSS-SPECIAL FORCES TIES

Ken Ellingwood at the Los Angeles Times reports that the drug war in Mexico has spilled over into Guatemala, as gangs have found the environment easier to operate in there.

"During the last year and a half, the Zetas have carved a bloody trail across Guatemala's northern and eastern provinces. More than 6,000 people were slain in Guatemala in 2008. Police say most of the killings were linked to the drug trade.

As the recent blood bath shows, the violence is now threatening the capital, deep in the interior.

Authorities say Mexican drug gangs, primarily the Zetas and rivals from the state of Sinaloa, are ramping up operations in Central America to evade increased marine patrols near Mexico as they relay drug shipments to the United States and Europe."

The Zetas are a gang that was formed by former members of the Mexican special forces in the 1990s.

"Guatemalan police commanders say their 20,000 officers cannot match the firepower of the Mexican traffickers, who have made growing use in Mexico of military-type arms, such as 40-millimeter grenades and .50-caliber rifles capable of piercing armor.

Recent seizures in Guatemala have yielded similar weapons. 'These are things we have seen only in photos of Iraq and the Gulf,' said Larios, the police commander. 'Not in Guatemala.'

But devising a response is complicated by Guatemala's troubled past. The memory of the army's brutal conduct during the civil war means that it would be politically dicey for Guatemalan leaders to respond by mobilizing the military, as Calderon has done in Mexico."

Further, the Zetas have reportedly received assistance from former Guatemalan special forces known as the Kaibiles--named for a Mayan leader who evaded capture by conquistadors led by Pedro de Alvarado in the 16th century. Mexican special forces received training from the Kaibiles in the 1990s, as well as from Brazilian special forces, and the US Army. Analysts are worried that the drug war may spill into Honduras as well.



The best English-language coverage of the drug war's effects on Latin America is in the Los Angeles Times. A must read.

12. GLOBAL AIR PASSENGER TRAFFIC DOWN 7.5% IN 1ST 4 MOS., FREIGHT TRAFFIC DOWN 22%

Eileen Ng at the Associated Press reports that the International Air Transport Association recently announced that global passenger demand fell 7.5% in January-April from the same period a year ago while cargo demand fell 22%.

"IATA Director-General Giovanni Bisignani said airlines are facing an 'emergency situation' and should be given greater commercial freedom to serve global markets and consolidate."

Bisignani said that Asian carriers, which represent 44% of the global air cargo market, will be hit hardest by the crisis.

13. PENSIONS GETTING HIT GLOBALLY

Leo Kolivakis at Pension Pulse gives a rough summary of major difficulties facing major pensions globally, as pensions find themselves unable to meet their obligations given the current crisis. "Pension tension" is being seen in the US, Canada, and throughout Europe, including at the European Central Bank. His list is well worth considering, as well as his comment:

"The global pension crisis is really a crisis of modern day capitalism. If we don't figure out a long-term solution to this crisis, we risk having a new class of elderly poor who were cheated out of their pensions."

14. GEORGETOWN UNIVERSITY MAY LEAD NEW GENEVA CONVENTION PROTOCOL EFFORT

Jeff Stein at Spy Talk reports that Georgetown University's new Center on National Security and the Law's legal scholars have been pushing for a new international agreement to update the Geneva Convention to address terrorism and stateless armies. The center was until recently led by Neal Katyal, who joined the Obama Administration to become the Principal Deputy Solicitor General.

"'Soon,' [Matthew] Gerke, [a fellow at the center who worked for three and a half years in the Pentagon and in Iraq on rule of law issues,] said, the Center on National Security and the Law hopes to 'roll out' a campaign for a new Geneva Convention, hopefully boosted by an American figure with international stature.

Its first step would be to mount a new push for Senate ratification of the 'Additional Protocol No. 2, Relating to the Protection of Victims of Non-International Armed Conflicts.'"

In 1977, the Carter administration signed two additional protocols to the Geneva Convention which had provided rules for handling non-state combatants, but the Senate refused to ratify the treaty, "as it has ever since." Worth reading.

15. LOW SULFUR BUNKER FUEL REQUIREMENTS MAY ADD 4 MB/D NEW DIESEL DEMAND TO MARKET--ROUGHLY 10 MB/D ADDITIONAL CRUDE DEMAND

John Kingston at the Barrel reports on the interesting observation about the incoming low sulfur specifications for shipping use by Carlos Cuervo, SVP for supply and trading at World Fuel Services, who argues that low sulfur product from the bottom of the barrel, or low sulfur fuel, will start seeing considerable more demand starting next year. However, after 2015:

"It won't be even lower-sulfur bunker fuel that will allow shipowners to meet the requirements, Cuervo said. Instead, it will be marine diesel. There just simply won't be enough low-sulfur bottoms, of 0.5% sulfur by 2020, to meet the needs of shipowners. Diesel will fill the gap."

Cuervo estimates that the move to diesel by shipowners driven by the incoming low sulfur requirements will mean for an additional 4 mb/d of demand for diesel globally.

"As he noted, given that an efficient refinery can produce about 40% diesel, it's as if we need another 10 mb/d of crude supply to make 4 mb/d of diesel."

It's an interesting concern ... just now refiners would probably welcome additional diesel demand, given the size of inventories here in the US. But, in the run up of prices from 2007-8, some argue that the price of crude was chasing the diesel crack, and that could get real steep given a recovery in the global economy. Kingston notes there hasn't been a lot of interest so far in setting up refineries to produce low sulfur bunker fuel--

"They generally have viewed fuel oil the way Dracula views sunrise. 'How are you going to put a lot of money into something you've been trying to get rid of?' [Cuervo] said."

Worth reading in full.

16. NORTH AMERICAN RAIL TRAFFIC DOWN

Atlantic Systems Inc.'s Railfax report is out, showing that total North American rail traffic for the week ended May 30 was down 24.7% from the comparable week a year earlier. ASI plots the percent change in total North American rail traffic year over year for the week ended May 30, in 13 week rolling averages:



Coal volumes transported by train for the year ended May 30 was down 9.5% from the year previous.

17. INITIAL JOBLESS CLAIMS DOWN SLIGHTLY LAST WEEK, ANALYSTS EXPECT HEADLINE UNEMPLOYMENT TO HIT 9.2%

The Associated Press reports that the Labor Department released data today showing initial jobless claims fell slightly last week to a seasonally-adjusted 621,000 from the previous week's revised total of 625,000.

"The total jobless benefit rolls fell by 15,000 to 6.7 million, the first drop since early January. Continuing claims had set record highs every week since the week ending Jan. 24. The continuing claims data lag initial claims by one week.

Still, the number of initial claims remains stubbornly high, above the 605,000 level reached five weeks ago. That was the lowest level in 14 weeks.

The four-week average of claims, which smoothes out fluctuations, rose by 4,000 to 631,250."

Analysts expect unemployment to rise to 9.2%.