Daily Sources 2/19

1. Andrew Batson at Real Time Economics posted last night a translation of parts of the remarks made by Fang Shangpu--the deputy director of China's State Administration of Foreign Exchange--in a press conference. Some excerpts of the excerpts:

"Regarding the issue of purchases of US treasury bonds, Premier Wen Jiabao in his February 1 interview with the UK’s Financial Times explicitly stated that whether China continues to buy, and how much it buys, will be decided in accordance with China’s needs, as well as the requirement to preserve and increase the value of the foreign exchange reserves."

This appears to be official boilerplate as he repeats the same idea just a bit later.

"With the current international financial crisis still continuing, spreading and deepening, we firmly oppose trade and investment protectionism. We also hope that the major reserve currency countries can take active measures to effectively deal with the financial crisis and economic recession, in order to recover economic growth and financial stability as soon as possible, effectively protect the interests of investors and strengthen investor confidence."

"Investors" here means Chinese government investments in US sovereign and agency bonds. "Investment protectionism" is a barrier to China's external resources policy, like the US Congress's decision to block the acquisition of UNOCAL by CNOOC and probably meant as a direct reference to Canberra's recent decision to review Chinese investments in Australian mining companies. That said, Fang seems to say that Beijing will continue to purchase dollars in pursuit of domestic stimulus:

"For the next step, we will actively support the nation’s need for foreign-exchange funds to expand domestic demand and increase imports, and provide financing support and facilitation to companies’ foreign investments to help build the national economy."

Well worth reading--and if you have Mandarin, the post includes a link to the full Chinese transcript. Chen Deming, China's minister of commerce, has an opinion piece in today's Wall Street Journal Asia which reiterates SAFE's warning against protectionism. He stresses how much demand China added over 2008 and Beijing's commitment to stimulate it in the face of the crisis:

"Today's unprecedented financial crisis has inflicted a severe impact on China and other countries as well. China's economic growth has slowed, exports have plunged and unemployment pressure has mounted. Yet even so, China still firmly believes that trade protectionism isn't a solution to the world's problems. In 2008, amid a contraction in global trade, China imported $1.133 trillion worth of goods from countries around the world -- an 18.5% increase over the prior year. These imports are boosting the economic development of China's trading partners. Since the crisis broke out, the Chinese government has decisively put forward a series of measures aiming at stimulating domestic demand. Given the size and openness of our country, the growth in China's domestic markets can be translated into greater market potential and investment opportunities for other countries. This year China will continue to increase imports and send buying missions abroad for large-scale purchase of equipment, products and technology."

Well worth reading in full. Nadia Rodova at Platts has a follow up story on the news of Beijing's loan agreement with Rosneft and Transneft which reports that Rosneft has made clear that the oil contracted for under the agreement will be paid for at the market rates prevailing at the time of deliveries. Deliveries--of 300 kb/d for 30 years--are slated to commence in 2011. (for the story a few days ago, see Daily Sources 2/17 #5.) Meanwhile, Dale Crofts at Bloomberg reports that Petrobras announced it had signed a $10 billion loan agreement with China’s Development bank today. This comes after raising $1.5 billion in 10 year bonds via the capital markets on February 4th, just a week after stating that credit on the international markets was too dear (see Daily Sources 2/5 #8). I imagine the terms of this most recent agreement are generous.

2. Yves Smith quotes at length from a Lloyd's List article--not made free to the public--which throws cold water on the notion that recovery in the Baltic Dry Index is an indicator that global trade has bottomed.

"Box throughput at Singapore, the world’s largest container port took a 19% dive in January this year to 2m teu compared to 2.4m teu for the first month of 2008.

Singapore’s sharp drop in volumes in particular reflect the collapse in the Asia- Europe trade where it is a key relay port transhipping exports from surrounding countries to Europe and the Middle East.

... Hong Kong, saw January throughput plunge 23% in January..."

"At Malaysia’s largest port, Port Klang, the picture was not much better. Port Klang Authority general manager Lim Thean Shiang told local press that the port had seen a 16% drop in volumes in the first month of the year compared to January 2008."

"China’s Ministry of Transport said throughput of the country’s coastal ports has fallen for three consecutive months on a month-on-month term. China coastal ports handled 8.2m teu in January, down 15% from the same month last year and 10% from December.

The country’s third largest port, Shenzhen, saw throughput fall by 18% to 1.5m teu in the first month of this year. The proportion of empty boxes at east Shenzhen’s Yantian port district has risen from 60% to 80%, according to the city government....

The picture was equally grim for one of Southeast Asia largest exporters with the country’s [Indonesia's] trade minister Mari Pangestu forecast that its exports could fall by at least 20% this year."

The explanation of the recovery of the BDI so far--an increase of iron ore imports by China's steel industry--seems insufficient to explain the rise in the index, but the port traffic data is especially grim.

3. Hiroko Tabuchi at the New York Times reports that the Bank of Japan said today it would purchase ¥1 trillion (~$10.7 billion) in corporate bonds, extend its purchases of commercial paper and maintain its benchmark lending rate at 0.1%. Ron Harui and Kim-Mai Cutler at Bloomberg report that Barclays Capital analyst have noted that credit default swaps have risen to as much as 120.7 this week, in what they argue is a sign that the markets are reassessing their valuation of the yen as the best fiat store of value.

4. Eurointelligence reports that Poland has entered into talks with the European Central Bank regarding entering the European Exchange Rate Mechanism II. In brief, ERM-II establishes a band within which the adopting country's currency will trade against the euro. Yesterday, P O Neill at Fistful of Euros posted that the European Commission released its economic assessment of EU member states and announced it had begun "excessive deficit procedures" for six member countries whose deficits exceed 3% of GDP. They are Ireland, Greece, Spain, France, Latvia, and Malta.

5. Meanwhile, Lynnley Browning at the New York Times reports that UBS, the largest bank in Switzerland, had agreed to turn over the names of investors suspected of using the bank to avoid taxes. The bank has admitted to conspiring to defraud the IRS and agreed to pay $780 million to settle the case.

"But to some, turning over any names at all heralds the end of the secret Swiss bank account, whose traditions date to the Middle Ages.

'The Swiss are saying that this is the end of Swiss banking as they knew it,' said Jack Blum, an offshore tax specialist. 'Nobody will trust the security of the Swiss bank account.'"

To me, this is a better indicator of the stresses the international financial system is under than much of the news we get. When institutions abandon customs over 500 years old, "once in a century" is rendered an understatement. (The second, by the way, seen from Europe, given that the Bank of England cut rates to the lowest seen since its inception 315 years ago. see Daily Sources 1/9 #2.) The credibility of the argument that Switzerland will have to join the monetary union has just gone up considerably.

6. RIA Novosti reports that Naftogaz announced today via its website that it will likely be unable to keep current on its payments for Russian natural gas. The statement reads:

"The national joint stock company Naftogaz of Ukraine is giving notice of the possible deterioration of the situation with payments to Gazprom following a disastrous growth in utility companies' debts to its structures."

7. Steve Bryant at Bloomberg reports that the Turkish central bank cut its benchmark interest rate by 1.5% to 11.5%, "the lowest since Turkey began inflation targeting in 2002."

"The bank’s fortnightly survey of businessmen and economists on Feb. 9 showed expectations for inflation falling to 7.16%, below the bank’s goal of 7.5% at the end of this year."

8. Ayesha Daya, Haris Anwar and A. Craig Copetas at Bloomberg report that the United Arab Emirates is preparing a plan to stabilize its financial sector.

"'If we want the banks to lend again to real estate, then obviously governments will have to put a plan,' Sultan Ahmed bin Sulayem, who also sits on a committee studying the effects of the global credit crisis on Dubai’s economy, said in a Feb. 17 interview in his office. 'I know, I am aware, that the central bank and the federal government are taking steps to lend money.'"

9. Geoff King at Platts reports that Norwegian E&P company DNO said today that tie-in operations connecting the Tawke oil field to Iraq's northern pipeline are nearly complete and that the company is set to substantially increase production. "The company said in September that output from Tawke was averaging 11 kb/d but that this could be increased to 90 kb/d." Meanwhile, Juan Cole at Informed Comment reports that Iraqi-Kurdistan Prime Minister Nechirvan Barzani is stoking fears of an Arab-Kurdish civil war should the US withdraw prior to a final agreement on the region's status. In late November, Kurdistan received a shipment of arms from Bulgaria without seeking approval from Baghdad while complaining that al-Maliki was attempting to establish a praetorian guard answerable only to him. (see Daily Sources 11/24 #7.) Prof. Cole also reports rumors that several factions upset with the centralizing policy of al-Maliki are conspiring to set up a vote of no confidence.

10. Pamela Constable, Karen DeYoung and Haq Nawaz Khan at the Washington Post report that neither the Pakistani government nor their Taliban counterparts in Swat are willing to formalize the accord announced Monday. (see Daily Sources 2/17 #4.) The reaction in the press to the potential deal has been something close to incredulous. However, I think that Secretary Clinton had the right idea when she refused to comment on the issue more than to say that she was waiting to find out what the notion behind the deal was before making a conclusion.

From my far remove I regard the problem that Pakistan faces--and which the Taliban addresses--as lawlessness. If there is no sheriff in Swat who will obey the decisions of Islamabad without some sort of ratification by the local Islamicist political leaders, then there is, in effect no law. If the appeals process established by the accord were to be governed by the national judicial system, then the Sharia courts would be re-incorporated into the central government. (Also, if I understand correctly, Pakistani law already gives some jurisdictional precedence to Sharia and Sharia Courts in some instances--family law, for example. Given that my understanding is correct, that would mean that the move was entirely consistent with the Pakistani Constitution.) Secretary Clinton is absolutely right to have been so circumspect with regard to the accord--it may provide Islamabad with some needed breathing room in the current strongly centrifugal environment.

11. Steven Bodzin at Bloomberg reports that according to a confidential document obtained by the wire service that Venezuela's plans to boost crude production by 12% in a joint venture would cost $18.4 billion as opposed to estimates given in June by the Energy and Oil Minister, Rafael Ramirez, of $8 billion.

"'It will be very tricky for companies, big or small, to get that level of funding,' said David Thomson, a Latin America energy analyst for Wood Mackenzie in Edinburgh. 'Even if there wasn’t a credit crunch on, raising $10 billion to $20 billion for Venezuela wouldn’t be the easiest.'

Given past nationalization moves by Chávez, a self-avowed revolutionary socialist, Thomson said, 'Banks aren’t going to touch it with a bargepole.'"

Given that Chávez looks to be President for life, I suspect that even given the long term perspective of the oil and gas industry, even policy-driven investments would be few in number. That said, Total recently indicated that it would turn to Venezuela in preference to Brazil (see Daily Sources 2/17 #6) and they may be convinced that they will receive preferential treatment because Chávez's movement is modeled in part on the Fifth Republic and there are few state companies with the requisite technical capabilities for developing the Orinoco belt. (see Venezuela vs ExxonMobil.) Still, $18.4 billion would be an awfully big bet on historical sympathy.

12. Robert DiNard at the Barrel reports that President Obama will make his first visit abroad--for six hours--to Canada today, where he will meet with Canadian Prime Minister Steven Harper. Canada is America's largest trading partner and our largest source of crude oil--and an important part of the Obama Administration's energy strategy going forward. That said,

"Beyond oil sands development, the future Canada-US energy relationship will also hinge on how well the countries bilaterally handle their shared power grid. The US will not be able to get to its ultimate goal of a far more energy efficient grid without Canada, and it is uncertain how much money and effort Ottawa is willing to spend on this, or other energy infrastructure.

The newly minted US economic stimulus package contains around $11 billion in spending on the transmission system, while Canada's stimulus plan contains C$0 (US$0) for smart grid development. Canada is leaving the matter to each province, hardly a promising framework for a continent-wide solution."

Well worth reading in full, though I am unclear on how long Harper will be the primary point of contact, considering that he shuttered the parliament to put a stop to a no confidence vote in December. Keith Johnson at Environmental Capital notes that Jeff Rubin, chief economist at Canada’s CIBC investment bank, argues that the suspension of investment in Canada's oil sands due to the low price environment will in due course create another supply side shortage:To wit:

"Rather than growing by close to 400,000 barrels per day, due to rapidly expanding oil sands production, total Canadian production is likely to rise by only a third of that by 2010. Hardly an auspicious picture for the Canadian oil sands, a region that the IEA expects will be the single largest source of new crude supply, almost three times as important as Saudi Arabia over the next two decades […] If oil prices were to stay at current levels, [global] production, instead of plateauing around 88 million barrels per day by 2012 as we had previously forecast, would decline at an accelerating pace between now and 2015. By 2015 production would decline to around 76 million barrels per day, a level roughly 10% lower than last year’s level."

I do not think that this forecast, however, will persuade many financial authorities to pursue policies which would destroy the significant economic stimulus (a progressive one at that) rendered by cheap oil in the near term. In related news, John M. Broder at the New York Times reports that the EPA is expected to regulate carbon emissions for the first time.

"The environmental agency is under order from the Supreme Court to make a determination whether carbon dioxide is a pollutant that endangers public health and welfare, an order that the Bush administration essentially ignored despite near-unanimous belief among agency experts that research points inexorably to such a finding.

Lisa P. Jackson, the new EPA administrator, said in an interview that she had asked her staff to review the latest scientific evidence and prepare the documentation for a so-called endangerment finding. Ms. Jackson said she had not decided to issue such a finding but she pointedly noted that the second anniversary of the Supreme Court decision, Massachusetts v. EPA, is April 2, and there is the wide expectation that she will act by then."

Oil sands production emits considerable carbon--at levels similar to coal.

13. Calculated Risk posts on the recent unemployment numbers from the Department of Labor.

"The four week moving average is at 619,000, the highest since 1982.

Continued claims are now at 4.99 million--another new record--above the previous all time peak of 4.71 million in 1982."

14. Jack Healy at the New York Times reports that the producers price index rose by a seasonally adjusted rate of 0.8% in January. "Producer prices excluding volatile food and energy costs rose 0.4 percent"

15. The EIA reported today that crude oil stocks fell 200,000 barrels to 350.6 million barrels for the week ended February 6. According to a Bloomberg survey, analysts had expected a 3.2 million barrel build. The stock level is well above the five year historical average for this time of year, but still below the recent high seen in July 2007. Gasoline stocks grew by 1.1 million barrels, in the upper range of the historical average, and in contrast to analyst expectations of 500,000 barrel draw. Distillate stocks fell by 800,000 barrels and are still above the historical range. Taken in isolation, the news is mixed, given that the stocks level for crude is still historically high and the reduction of refinery utilization is matched by a build in gasoline--as the price of gasoline climbs, crude may follow until European arbitrage opens up. That said, considered alone the build in gasoline stocks should presage a drop in price.

Daily Sources 2/18

1. Ambrose Evans-Pritchard at the UK Telegraph reports that Germany's finance minister, Peer Steinbrück, said,

"We have a number of countries in the eurozone that are clearly getting into trouble on their payments. ... The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

Evans-Pritchard writes:

"Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart.

The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs."

Edward Hugh, provides a useful, if somewhat small and blurry, graph of the sovereign bond and CDS spreads of some of the more relevant countries, courtesy of Fistful of Euros:



Meanwhile, Der Spiegel reports that Chancellor Angela Merkel's cabinet agreed today to change the bank bailout law so it can rescue Hypo Real Estate.

"The draft law would allow the federal government to initiate expropriation proceedings until June 30. 'The deadline makes it clear that the option of nationalization as a step toward stability is one which will not be available in the long term and is only conceived as a contribution to meeting the challenges presented by the financial crisis,' the bill reads."

In effect, legislators wanted to establish a levee against speculators acquiring the firm on the cheap--similar to Sarkozy's decision to use France's sovereign wealth fund to protect strategic industries (see Daily Sources 10/29 #3.) David Crossland at Der Spiegel reports on the debate in Germany over bailing out one of their carmakers, Opel.

2. Edward Harrison at Credit Writedowns posts that Switzerland is being threatened with national bankruptcy by its banking system, as per Arthur P. Schmidt interviewed by the Swiss daily Tagesanzeiger. Key excerpts:

"In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31% of all loans are in Swiss currency. Amongst household loans, they are almost 60%. ... At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs."

"According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion US$ are in circulation--which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion US$ through offshore financial centers."

Since the Swiss franc is getting stronger relative to the Eastern European nations, the terms of repayment are de facto getting much steeper, meaning that a good portion of those loans are basically bad. Given the amount loaned, that portion is enough to bankrupt the banks, which will force Bern to bail them out. The bail out will devalue the currency and make its sovereign debt difficult to roll over.

3. Edward Hugh at Fistful of Euros calculates that Ukrainian GDP fell at an annual rate of 20% in January.

"The Statistics Office don’t produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening."

(h/t Yves Smith at Naked Capitalism.)

4. Robin Kwong at the Financial Times reports that Taiwan's GDP contracted by 8.36% in the fourth quarter compared to a year earlier.

"'There is little hope of returning to positive economic growth until the fourth quarter of this year,' said Tsai Hung-kun of the national statistics agency.

The dire economic performance prompted Taiwan's central bank to make an unscheduled, 25 basis point rate [0.25%] cut on Wednesday, bringing the island's key interest rate to a record low of 1.25%.

Yen Tzung-ta, the bank's top economist, told reporters that 'by cutting rates, we want to send a signal: the central bank will maintain a loose money policy.'"

5. Indira A.R. Lakshmanan at Bloomberg reports that "Indonesian Foreign Minister Hassan Wirajuda told Secretary of State Hillary Clinton today that his country 'could be a good partner for the United States in reaching out to the Muslim world.'"

"'President Obama has a very strong constituency in Indonesia--of course without the right to vote,' Wirajuda said. 'The Indonesian government and the people of Indonesia would very much like to welcome President Obama on his trip to Indonesia. We cannot wait,' he added, to laughter from the local press corps, 'and I wish that Secretary Clinton would convey this to President Obama.'"

This is absolutely an invitation that should be accepted as soon as is practical.

6. Glenn Kessler at the Washington Post reports that Secretary Clinton today in Indonesia refused to deny that removing sanctions on Myanmar (Burma) was an idea under serious consideration as the Obama Administration reviews foreign policy.

"'Clearly the path we have taken in imposing sanctions hasn't influenced the Burmese junta,' she said, adding that the route taken by Burma's neighbors of 'reaching out and trying to engage them has not influenced them either.'"

Sanctions are a difficult issue. They rarely have success without universal condemnation, as was the case in South Africa. Countries which can count on outside help, such as Cuba, or whose commodities exports are key to international industry and commerce, such as Iran--and to a limited extent Myanmar--tend to prove immune to, and probably the internal stability of the regimes are strengthened by, sanctions.

7. Helene Cooper at the New York Times reports that President Obama said yesterday that he would send an additional 17,000 troops to Afghanistan in support of the 33,000 already there.

"The Administration’s review of Afghanistan policy is supposed to be completed before early April, when Mr. Obama heads to Europe for a NATO summit meeting at which he is expected to press American allies for more troops and help in Afghanistan."

Margaret Talev, Nancy A. Youssef and Warren P. Strobel at McClatchy Newspapers report that the troops will be deployed to southern Afghanistan where they will be used to target poppy production which is used by the Taliban to fund its activities. (h/t Juan Cole at Informed Comment who suggests the strategy is misguided, given that there are not many means of making a living available to farmers in Afghanistan.



That said, it seems to me that targeting the source of income of your enemy makes a lot of sense. As Marcus Tullius Cicero famously put it, the sinews of war are infinite money. However, any truly meaningful attempt to cut off the flow of money would have to address consumption, either by targeting it in the US as well as distribution, or by legalizing its production and consumption here. Addressing opium via the legalization of consumption is unlikely to have any success given the extreme unlikelihood of the rest of the world following suit. (Beijing, for example, has a particularly nasty history with opium which is responsible in part for its anti-colonial ideology.) That would leave seriously targeting consumption.

8. Faleh al-Khayat at Platts reports that the Iraqi Oil Ministry has softened the terms under which it was offering oil field concessions to international oil firms. Specifically, the Iraqi share in the joint ventures operating the fields would be reduced to 25% from 51%, though unanimous decisions would be required. Also, the terms under which firms were rewarded for maintaining production above certain levels were modified.

"The six oil fields on offer under 20-year service contracts are the major producing fields of Kirkuk and Bai Hassan in the north, and the two Rumaila fields, Zubair, West Qurna I and the three Meissan fields in the south. The two gas fields are Akkas in the western Anbar desert and Mansooriya northeast of Baghdad in Diyala province."

9. Eman Goma at Reuters reports that Kuwait is considering constructing a nuclear power plant with the help of a French firm to handle power generation and water desalination needs.

10. Sree Vidya Bhaktavatsalam and Christian Schmollinger at Bloomberg report that Soros Fund Management LLC bought 16 million shares of Petrobras’ ADRs, nearly doubling its holdings of the US-traded shares of the Brazilian national oil company, bringing Soros' stake to 1.45%.

11. Courtney Schlisserman at Bloomberg reports that housing starts fell by an annual rate of 17% in January. House supply is still growing, however, due to foreclosures.

12. Paul Swartz has a post at Follow the Money which demonstrates that home mortgage credit growth has gone negative--meaning that it is subtracting from the money supply, a deflationary pressure.



Which seems consistent with the remarks of the president of the Federal Bank of St. Louis, James Bullard, reported by Michael S. Derby of Real Time Economics:

"'We face some risk--at this point only a risk--of sustained deflation,' in an environment where core inflation is already running 'at zero to slightly negative rates. ...[O}ne important near term goal of monetary policy is to guide the economy away from this outcome.'”

Bullard, who is currently not a voting member of the FOMC, also said in his speech in New York City that "current Fed programs are helpful in aiding markets and the economy, but 'we remain far from the systematic approach I would like to see.'" The $75 billion plan to reduce mortgage payments the Obama Administration announced today is meant to address this in part, though it seems on the face of it that it would reduce money supply by reducing the total value of the loans. However, it would reduce that less than foreclosures, and perhaps restored debt equity ratios would help shore up consumer credit.

Because it's Funny

FDA Approves Depressant Drug For The Annoyingly Cheerful


FDA Approves Depressant Drug For The Annoyingly Cheerful

The Onion

Daily Sources 2/17

1. Hiroko Tabuchi at the New York Times reported on Monday that the Japanese government announced that GDP had shrunk by 3.3% in the fourth quarter from the third. The annualized rate is a 12.7% contraction.

2. Eurointelligence reports that Le Monde has a story on the recent four country tour of the Austrian finance minister, Josef Pröll, to Bucharest, Sofia, Kiev and Zagreb in support for a €150 billion plan to support the eastern European economies. He has been arguing that the Austrian financial sector is solvent. However, as Yves Smith at Naked Capitalism notes, Austrian banks have apparently lent as much as €230 billion, or 70% of Austrian GDP, to the ex-Soviet bloc. She quotes at length from a piece by Ambrose Evans-Pritchard at the UK Telegraph:

"Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay–-or roll over-–$400 billion this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. …

'This is the largest run on a currency in history,' said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. …"

Ms. Smith reports that the Austrians are allegedly confident that Berlin will bail them out. Meanwhile, today Eurointelligence reports that the Narodowy Bank Polski said it was difficult to justify entering the European monetary union, pushing the zloty to its lowest level since joining the EU, and presumably exacerbating the losses of those banks invested in the country. Laura Cochrane at Bloomberg reports that emerging-market stocks today took a beating on the growing fears around the eastern European economic troubles, led by eastern European mining and financial companies.

3. Andrei Batrak, Martin Doerry, Christian Neef and Matthias Schepp of Der Spiegel conducted an interview of Russian foreign minister Sergei Lavrov recently, where he evinced optimism regarding US-Russian relations. In part his optimism is an outgrowth of the crisis; apparently in his view wealth created the luxury for certain conflicts to bloom:

"Lavrov: We can no longer afford the luxury of little geopolitical games, because we all face challenges that directly affect our citizens. So we should no longer ideologize problems, we should instead honestly express our own national interests, understand the legitimate interests of our partners, and have no more hidden agendas, where one thing is said while something else is done behind someone's back. The signals that we are receiving indicate that our Western partners are aiming for the same objectives."

He also indicated that Russia has already agreed to allow the transit of supplies to US troops in Afghanistan, though I infer that Moscow may look for some further quid pro quo for permitting the transit of munitions.

"SPIEGEL: Let's look ahead. The war in Afghanistan is the greatest foreign policy challenge that the new US administration faces. Russia must also have an interest in preventing the West from failing in the Hindu Kush. How can you help?

Lavrov: In April 2008, we signed an agreement with NATO concerning the transit of nonmilitary goods over Russian territory to Afghanistan. Up until now, such agreements have only been made with Germany and France, and recently one was concluded with Spain. In late January, the US asked us to apply the NATO agreement as the basis for supplying the American contingent. We immediately consented and have also agreed with NATO to make Russian military transporters available to the peacekeeping troops in Afghanistan. We could also work more closely together to curb drug trafficking."

Lavrov was Russia's Ambassador to the UN from 1994 until he was appointed Foreign Minister in 2004 by Vladimir Putin. Worth reading in full.

4. Pamela Constable at the Washington Post reports that Islamabad has announced it has agreed with the Taliban to introduce sharia courts into the Swat valley.

"'There was a vacuum . . . in the legal system. The people demanded this and they deserve it,' said Amir Haider Khan Hoti, chief minister of the North-West Frontier Province. The new system will include an appeals process, something the Afghan Taliban justice system did not allow for."

Jane Perlez at the New York Times reports that the new accord puts into effect agreements made by Benazir Bhutto in the early 1990s and Prime Minister Nawaz Sharif in 1999. The agreements to put in place sharia courts had never been honored. Despite the clear desire for a means of legal redress of issues, the lawyers movement appears to regard the decision as a jurisdictional challenge.

"'This means you have surrendered to a handful of extremists,' said Athar Minallah, a leader of a lawyers’ movement that has campaigned for an independent judiciary. 'The state is under attack; instead of dealing with them as aggressors, the government has abdicated.'"

That said, historically the modern nation state was been built in part via competing jurisdictions, and the general desire for rule by law is something that it is in the US interest to encourage. (see The Law in Pakistan.) That said, the Associated Press reports that NATO immediately criticized the decision, with spokesman James Appathurai saying:

"It is certainly reason for concern. We should all be concerned by a situation in which extremists would have a safe haven. Without doubting the good faith of the Pakistani government, it is clear that the region is suffering very badly from extremists and we would not want it to get worse."

5. India's Economic Times reports that today Russia and China signed a $25 billion energy deal whereby Beijing would lend $15 billion to Rosneft and $10 billion to Transneft in return for 20-years supply of 300 kb/d.

"Russian crude will be supplied through a long-delayed pipeline project agreed to late last year. The pipeline, which extends from western Siberia to the Pacific coast, is to be linked to China from the Siberian city of Skovorodino, 70 kilometers (44 miles) north of the Sino-Russian border."

The deal is very similar to the $6 billion loan CNPC provided Rosneft to purchase remaining Yukos assets in 2005. Meanwhile, Michelle Wiese Bockmann at Lloyd's List reports that Lukoil Trading and Shipping Supply chief executive Gati Al-Jebouri told journalists that the company expects to supply more crude to the international markets, given a reduction in domestic consumption.

6. Carola Hoyos at the Financial Times reports that Christophe de Margerie, Total SA CEO, told the media that he doesn't believe the world will ever be able to produce more than 89 mb/d of oil. It was not clear from the story whether Mr. Margerie included biofuels or NGLs in his definition of oil. He noted that in the current financial environment, national oil companies--which control about 70% of the world's proven reserves--will have a hard time financing new investments. He expects more than 1.5 mb/d of potential supply from the Canadian oil sands and Venezuelan Orinoco belt to have been shut in by low prices. Hoyos implies that Margerie expects prices to rebound in the medium term, which make some sense of his decision to focus on development in Venezuela as opposed to Brazil as per reports on Friday. (see Daily Sources 2/13 #9.) Meanwhile, Simon Romero at the New York Times reports that Hugo Chávez's referendum to abolish presidential term limits passed over this weekend. If the economic indicators recently published by the Center for Economic and Policy Research are facts, then it is easy to see why.

"- The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7% in 5.25 years, or 13.5% annually.
- Most of this growth has been in the non-oil sector of the economy, and the private sector has grown faster than the public sector.
- During the current economic expansion, the poverty rate has been cut by more than half, from 54% of households in the first half of 2003 to 26% at the end of 2008. Extreme poverty has fallen even more, by 72%. These poverty rates measure only cash income, and does take into account increased access to health care or education.
- Over the entire decade, the percentage of households in poverty has been reduced by 39%, and extreme poverty by more than half.
- Inequality, as measured by the Gini index, has also fallen substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and 47 in 1999. This represents a large reduction in inequality.
- Real (inflation-adjusted) social spending per person more than tripled from 1998-2006.
- From 1998-2006, infant mortality has fallen by more than one-third. The number of primary care physicians in the public sector increased 12-fold from 1999-2007, providing health care to millions of Venezuelans who previously did not have access. - There have been substantial gains in education, especially higher education, where gross enrollment rates more than doubled from 1999-2000 to 2007-2008.
- The labor market also improved substantially over the last decade, with unemployment dropping from 11.3% to 7.8%. During the current expansion it has fallen by more than half. Other labor market indicators also show substantial gains.
- Over the past decade, the number of social security beneficiaries has more than doubled.
- Over the decade, the government’s total public debt has fallen from 30.7 to 14.3% of GDP. The foreign public debt has fallen even more, from 25.6 to 9.8% of GDP.
- Inflation is about where it was 10 years ago, ending the year at 31.4%. However it has been falling over the last half year (as measured by three-month averages) and is likely to continue declining this year in the face of strong deflationary pressures worldwide."

The source primarily used in the CEPR paper is the Banco Central de Venezuela. That said, the paper argues that one shouldn't look at the time prior to the government's reorganization of PdVSA as a guide to economic performance. Perhaps, but Caracas can only loot PdVSA for so long--consumption driven growth provided by subsidies via oil revenues and nationalizations can only run as long as production remains normal and there are remaining oil companies willing to make large investments in the country. The nationalization of a national oil company's project would probably put an end to any international interest whatsoever.

Joshua Partlow at the Washington Post has an especially interesting article emphasizing the legal nature of the leftist turn in South America.

"[F]rom the Venezuelan charter in 1999 to the new constitutions in Ecuador last year and Bolivia last month, a team of Spanish legal scholars influenced the conception, drafting or implementation of the documents, which have stirred domestic class tensions and harmed relations with the US government. The leader is Roberto Viciano Pastor, an author and constitutional law professor at the University of Valencia whose technical, and some say ideological, assistance in writing the constitutions is generating new scrutiny across South America."

The effort to win political dominance via democratic appeals to revamp the legal landscape--whatever the criticisms of the protagonists and their true intentions--demonstrates an interest in legitimizing change via established rule of law, and in itself should be encouraging. Partlow quotes Brazilian president Luiz Inácio Lula da Silva who said last month:

"What we have achieved in these last years was, in truth, the result of the deaths of many people, many young people, who decided to take up arms to bring down the authoritarian regimes in Chile, in Argentina, in Uruguay, in Brazil, in almost all the countries. They died, and we are doing what they dreamed of doing--and we have won this by democratic means."

Vis-a-vis the on-going struggle with Exxon-Mobil, Platts reports that Exxon today announced it had a 103% replacement rate for oil produced in 2008. Most of those bookable barrels come from Canada's oil sands--which require expertise to exploit similar to what is found in Orinoco. But, in news consistent with Mr. Margerie's predictions, Matthew Cook at Platts reports that federal agency Statistics Canada announced over the weekend that Canadian oil production fell 3.31% to average about 2.68 mb/d in 2008.

Meanwhile, Spencer Swartz at Dow Jones reports that IEA chief Nobuo Tanaka told reporters:

"If OPEC is aiming at rapid increases by cutting supply maybe it would not be good for economic recovery. We think OPEC countries should take a closer look at the market and make a flexible decision."

And Luke Pachymuthu at Reuters reports that Iraqi Oil Minister Hussain al-Shahristani told journalists that OPEC should make further cuts should prices not recover. Such noise should be taken with more than a grain of salt, given that Iraq is not subject to OPEC supply quotas.

7. Shobhana Chandra at Bloomberg reports that the Federal Reserve Bank of New York’s general economic index fell to minus 34.7% in January from minus 22% in December. The index measures manufacturing activity in New York.

8. Phred Dvorak at Real Time Economics posts the extremely worrisome story that Littler Mendelson, a leading employment-law law firm consulted on roughly half of all layoffs in the US, is currently working on roughly an additional two million layoffs this quarter.

"Applying his admittedly unscientific methodology, Mr. Mathiason estimates the US could lose around three million jobs from January through March, or one million a month."

Worth reading in full.

Daily Sources 2/13

1. Brian Swint at Bloomberg reports that the European Union’s statistics office announced today that GDP in the Eurozone fell by 1.5% in the fourth quarter from the third. GDP in the fourth quarter fell at a rate of 1.2% from the fourth quarter in 2007, the only drop for a full year period on record since the inception of the monetary union.

"[European Central Bank] board members Lucas Papademos, Juergen Stark and Jose Manuel Gonzalez-Paramo as well as Spanish central bank Governor Angel Fernandez Ordonez and Belgian Governor Guy Quaden said this week that the Frankfurt-based bank may cut rates next month."

2. Edward Hugh at Fistful of Euros reports that official German statistics released today show a 2.1% contraction of German GDP in the fourth quarter.

"A 2.1% quarterly contraction, for those who are confused by the way we economists do things is equivalent to an 8.4% annualized rate of contraction, which is quite something (although in fairness some of this comes from Q3 when there was a big build up in inventories, which has now unwound)."

Hugh also posts that the Estonian Finance Ministry released data showing that the economy shrank by an year over year rate of 9.4% in the fourth quarter."The contraction was 4.2% quarter over quarter. That is 16.8% annualized." Analysts are calling the contraction the worst economic crisis in the history of the country since its independence in 1991. Hugh also posts that the Czech Statistical Bureau announced today that GDP dropped by 0.6% in the fourth quarter from the third. At an annual rate it grew by 1% in the fourth quarter. And in a final bit of bleak news from Hugh today, preliminary government estimates are that Italian GDP fell by a seasonally-adjusted rate of 1.8% from the third quarter to the fourth.

"Across 2008 as a whole, the Italian economy fell 0.9%, ISTAT said, the most pronounced decline recorded since 1993.The Italian economy officially fell into recession in the third quarter of 2008. And one more interesting detail, Italian GDP is now back at the same level it was in Q4 2005, and falling. This is pretty worrying, and even more so given there are quite a lot more people in Italy then there were in 2005."

And in another bit of frankly exhausting bad economic news, Eurointelligence reports that French industrial production was down 1.6% quarter over quarter in the fourth, 8.6% year over year.

3. The G7 meeting in Rome began today, and in that context Rebecca Wilder at News N Economics produced an analysis and set of illustrative graphs showing that G7 growth rates are falling across the board while unemployment soars across the board. Here is her graph of G7 economic performance:



Worth a look. Eurointelligence reports that France will seek greater controls over hedge funds in the meeting this weekend--while publicly accusing Berlin of protectionism.

4. Kevin Hamlin at Bloomberg reports the much ballyhooed news that a survey of economists conducted by the wire service produced a median expectation of growth of 6.6% in China in the second quarter following expansion of 6.3% in the first quarter of 2009.

"The value of new loans in January was more than double the record set a year earlier, according to figures released by the People’s Bank of China yesterday.

The lending multiplies the effect of the government’s spending in ways that wouldn’t be possible in the U.S. and Europe, where banks are burdened by toxic assets, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong."

Analysts have also taken note of the surge in iron ore imports in China, possibly due to restocking needs, potentially due to the infrastructure spending Beijing announced in December. (The rebound in iron ore imports has been named the primary cause of the rebound in the Baltic Dry Index, an index of shipping which is considered by many economists to be a good indicator of global trade.) Juliet Ye at the China Journal also notes that vouchers which various cities have introduced are spurring some consumption.

"In Hangzhou, capital city of eastern Zhejiang province, civil servants are to get 5% to 10% of their salaries in the form of consumer vouchers, according to one report. The vouchers are intended to be spent at local shops. Unlike actual money, they can’t be deposited at the bank for a rainy day, forcing consumers to spend."

Apparently vouchers are at the center of a discussion in which policymakers are considering how best to goose consumption--and the fact that Beijing is beginning to consider a boost in consumption an important goal is encouraging, from the American perspective.

"Local governments say the results are encouraging. The municipal government of Chengdu said that almost all shopping vouchers have been consumed. In Hangzhou, over 44 million of the 100 million yuan coupons have so been used by Feb. 5, 13 days after delivery of the vouchers, according to the Southern Metro Daily newspaper. On Monday, Jiang Zengwei, China’s vice minister of commerce, said in a press conference that issuing shopping vouchers is a effective way to spur consumption."

Still, some are pessimistic about the extent to which a vouchers program can spur consumption. I have, on the other hand, seen somewhere an analysis showing that in the US food stamps have the largest multiplier effect in terms of stimulus, because they cannot be horded. That said, Yves Smith at Naked Capitalism was at some pains to throw cold water on the estimates in a post today.

"Consider some basics. China's economy is not as export dependent as many believe, but exports have made a significant contribution to growth. Commercial real estate development has been another big driver. Those two have gone into reverse.

Let's deal with the notion of "stimulus" making up for the slack. The famed half trillion dollar plus package announced some months ago was largely spending already budgeted and planned. Analyst views vary (and further input welcomed) but from what I have seen, only 1/6 to 1/3 was new spending, and most of that occurred in the second year of this two-year program."

She also notes that Michael Pettis, one of the more prominent China-watchers, is very skeptical about the loan growth numbers, who argues they are the result of bad lending practices driven by the desire to keep Beijing happy, and thus a credit bubble, likely to burst quickly given the current global economic situation.

5. Alexander Kwiatkowski at Bloomberg reports that OPEC has reduced its forecast for 2009 oil demand by 530 kb/d to 85.13 mb/d. It now predicts a decline in demand in 2009 from 2008 of 580 kb/d or 0.7%. OPEC's numbers are somewhat higher than the EIA and IEA's forecasts for 2009 which are both 84.7 mb/d. However, as Keith Johnson at Environmental Capital notes, OPEC sees new demand destruction coming from Asia as opposed to the developed world. This is especially interesting because OPEC is in a place to know as oil imports for the major economies in Asia are overwhelmingly dominated by Middle Eastern crudes. From OPEC's analysis:

"The Chinese economy is dependent on exports and the slowing world economy is imposing a large burden on Chinese industrial production, which is leading to less use of oil products, particularly diesel. Hence, China’s oil demand is forecast to show a growth of only 2.3% this year down from 4.9% last year, a loss of 210 thousand barrels per day."

6. The January data from the California port of Long Beach shows a 23% decline year over year in container traffic.



Long Beach is the second busiest port in the United States, the 15th busiest container cargo port in the world, and about 13% of total US container cargo passes through it. And in further evidence of a gloomy economic outlook, the port of Marseilles reported a 24% decline in overall traffic in January year over year:



(The graph somewhat confusingly labels 2008 data 2009, but I think demonstrates the point well enough.) Some of the decline in the port is due to strikes, first by the oil workers, and later by nearly all the transportation unions. Still, the numbers from both ports do seem to indicate a weak global economy.

7. Marc Santora at the New York Times reports that a suicide bomber blew herself up in a crowd of Shiite pilgrims south of Baghdad today.

"It was the latest in a series of attacks directed at Shiite pilgrims in recent days, which Iraqi and Western officials said were aimed at stoking sectarian violence."

8. Ethan Bronner at the New York Times reports that Hamas today told the media that an agreement for an 18-month long cease fire was just days away. A senior Israeli official told the journalist that nothing had been agreed upon yet, however.

"The new prospective accord, again being mediated by Egypt, is aimed at rebuilding Gaza after the war and involves both reconstruction and reconciliation between Hamas and the West Bank-based Palestinian Authority, according to Ismael Ridwan, a Hamas spokesman, who spoke by telephone after extensive talks between Egyptian and Hamas officials.

He said among the materials that would be allowed to flow into Gaza in the new arrangement were cement and steel, which Egypt would monitor. Those materials are desperately needed for rebuilding, but the agreement would not allow pipes, cables and chemicals that Israel fears could be used for bombs."

Clearly, Tel Eviv will be unlikely to make deals prior to the formation of a government.

9. In an especially interesting note, Eduard Gismatullin at Bloomberg reports that the CEO of Total, SA, Christophe de Margerie, told reporters in London today that the company plans to expand activities in Venezuela as opposed to Brazil. He said that there was plenty of competition in Brazil and that therefore Venezuela provides a better opportunity.

10. Platts reports that Indonesia has concluded a deal to supply LNG from 2011 to 2020 to the Japanese consortium of Kansai Electric, Osaka Gas, Kyushu Electric, Chubu Electric, Toho Gas and Nippon Steel. However, the contract would be for 3 million tonnes a year from 2011-15 and 2 million tonnes a year from 2016-2020. The current contract through 2011 was for 12 million tonnes a year at $8-9/MMBtu (~ $46.40-$52.20/b on a Btu basis.)

11. James Morgan at the BBC reports that global warming may reduce the number of fish in the oceans by as much as 50% by 2050 according to a report first published at a meeting of the American Association for the Advancement of Science today.

"Thirty-three nations in Africa, Asia and South America are highly vulnerable to the impact of climate change in fisheries, according to scientists from the World Fish Centre.

Of these, 19 were already classified by the United Nations as 'least developed' because of their particularly poor socioenomic conditions.

'Economically, people in the tropics and subtropics likely will suffer most, because fish are so important in their diets and because they have limited capacity to develop other sources of income and food,' said Edward Allison, director of policy, economics and social science at WorldFish. "

(h/t Yves Smith at Naked Capitalism.)

12. Walter Pincus and Joby Warrick at the Washington Post reports that the Director of US National Intelligence, Dennis C. Blair, told the Congress yesterday that the financial crisis is the primary near-term security threat facing the US.He said, "Roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown." He also indicated that were the financial crisis to continue for a year to two that the world would likely witness "high levels of violent extremism" as well as "regime-threatening instability."

"In answer to a question about whether he was shifting assets to cover the financial downturn, Blair said that by leading off with the economic situation he "was trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." He said he was not refocusing the intelligence community's basic collection and analytic work from traditional concerns such as terrorism, Afghanistan, Pakistan, Iran, North Korea, Russia and China."

Very informative article well-worth reading. I personally am heartened to read that the head of US intelligence has such a clear-headed approach to the analysis of the evolving global environment. That said, perhaps diverting assets to developing scenarios for how the financial crisis in a variety of nations critical to the national interest would be an especially reasonable and wise allocation of funds.

13. Justin Lahart, Timothy W. Martin and Janet Adamy at the Wall Street Journal report that the Commerce Department released data showing that consumer spending fell by the inflation-adjusted rate of 3.7% in the fourth quarter. Apparently a great deal of that reduction is coming out of food purchases:



14. Brian Blackstone at Real Time Economics reports that the latest Fed survey shows that average household worth declined "by 22.7% from 2007 until October 2008. The median, or midpoint, fell a more modest 17.8%, suggesting declines were centered among wealthier families."