Daily Sources 6/1

1. BOTH OFFICIAL AND PRIVATE CHINESE PMI'S SHOW MANUFACTURING GROWING IN MAY, IN BEIJING SPEECH GEITHNER FULLY BACKS INCREASED CHINESE INPUT INTO INTERNATIONAL FINANCIAL SYSTEM DECISIONS

Liu Li at the Wall Street Journal reports that both the official Chinese purchasing managing index (PMI) as well as the privately-produced index produced by the CLSA which has a large following indicate that the manufacturing sector was expanding in May.

"China's official Purchasing Managers Index, issued by the China Federation of Logistics & Purchasing, came in at 53.1 in May, compared with 53.5 in April, the third month the indicator has stayed above 50, after remaining below that level for five consecutive months. A PMI reading above 50 indicates growth, while a reading below 50 indicates contraction.

Meanwhile, the CLSA China PMI, which is compiled by U.K.-based research firm Markit Group Ltd., rose to 51.2 in May, from 50.1 in April, marking the second consecutive month the CLSA PMI was above 50, after eight months below the key level."

Meanwhile, China Journal's Sky Canaves posted the full text of Timothy Geithner's speech at Peking University today. Key excerpt:

"As part of this process of reform[ing the international financial system], the United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China’s importance in the global economy.

I believe that a greater role for China is necessary for China, for the effectiveness of the international financial institutions themselves, and for the world economy.

China is already too important to the global economy not to have a full seat at the international table, helping to define the policies that are critical to the effective functioning of the international financial system."

Geithner reiterated the meme that US-Chinese cooperation is required for the successful management of the current roster of problems facing the globe.

2. CHINA'S NATIONAL ENERGY ADMINISTRATION CHIEF TOLD MEDIA THAT SUBSTANTIAL AMOUNT OF CHINESE OIL PURCHASES IN 1H 2009 WERE FOR STOCKPILING PURPOSES AND NOT CONSUMED, ON BACK OF OPEC DECISION TO LEAVE OUTPUT AS IS, CHINA RAISES RETAIL PRICES ON GAS

John Liu at Bloomberg reports that Zhang Guobao, the director of China's National Energy Administration, told reporters today that

"Crude stockpile facilities at most countries have been fully filled in the first half. It will be difficult for those countries to greatly increase crude reserves in the second half as they did in the first."

Mr. Zhang provided more evidence that Chinese stockpiling had put a bottom on the price of crude, saying that "a substantial portion" of the crude oil trade in the first half had been due to stockpiling, and that the consuming countries weren't, in fact, consuming the oil they had purchased. Zhang said:

"Analysts should pay attention to this phenomenon when predicting the future trend of oil prices."

And Ben Sharples at Bloomberg reports that Fereidun Fesharaki suggested at an oil conference in Darwin Australia that there is a scenario where:

"sometime in the middle of summer, there will be a $20 drop in the price of oil because of the huge inventory build-up taking place."

He expects OPEC to cut production again if prices reach $40/b--though it is unclear whether the managers of China's SPRs will cooperate at that point. Meanwhile, Platts reports that China's National Reform and Development Commission announced it was raising the retail price of gasoline and diesel by 400 Yuan/metric ton ($7.85/b) on Sunday.

"In south China's Guangdong market, the retail price of gasoline rose 6% to Yuan 5.35/liter, Yuan 5.76/liter and Yuan 6.24/liter for 90 RON, 93 RON and 97 RON, respectively, while the retail price of gasoil rose 6.6% to Yuan 5.50/liter."

(American markets tend to offer 87-93 RON gasoline. 5.35 Yuan/liter ~ $2.97/gallon.) If $2.50-3.00/gallon begins to cut into demand in the US, I suspect it may limit the growth in consumption in China driven by record new car purchases resulting form the stimulus program.

3. ERNST & YOUNG REPORT THAT MIDDLE EAST OIL COMPANIES TO SPEND LESS ON NEW OIL PRODUCTION CAPACITY THAN REST OF WORLD

Spencer Swartz at Environmental Capital reports that Ernst & Young published a report today which shows that the national oil companies of the Middle East will be outspent by the national oil companies of Russia, China, and South America on developing production capacity. Only African national oil companies will spend less.

"E&Y, which looked at data from 20 of the biggest national oil companies, says spending should total about $270 billion this year. Chinese and Indian companies will top the list with $100 billion; South America, led by Brazil, will spend $91 billion; Russia and the former Soviet republics, $36 billion; the Middle East, $29 billion; and Africa, $21 billion."

I am unsure of what this means, after all the competitive advantage of Middle Eastern oil is mostly that it is relatively easy to get out of the ground and a great percentage of the world's spare production capacity happens to be in the Middle East.

4. SUN ZHE ARGUES BEIJING'S PRIMARY CONCERN RE: PYONGYANG IS WHETHER OR NOT IT CAUSES TOYKO TO CHOOSE TO BUILD NUCLEAR WEAPONS

Andreas Lorenz of Der Spiegel conducted an interview with Sun Zhe, professor at the Institute for International Studies at Beijing's Tsinghua University, regarding North Korea's intentions, Beijing's worries, and potential outcomes given the noise coming from Pyongyang.Key excerpt:

"Sun: The only way to exert pressure on Pyongyang is to cut off deliveries of energy and food.

SPIEGEL: Is that what will happen now?

Sun: No. I don't think that our government will radically alter its policies toward North Korea. It is in a particularly bad position. If it goes along with international sanctions, it gives the impression that it is serving as the handmaid to American foreign policy. It won't let that happen under any circumstance.

SPIEGEL: Will China do anything to antagonize the North Koreans?

Sun: More than anything, Beijing wants to prevent Japan from using the situation in North Korea as an excuse for becoming a nuclear power itself."

Dr. Sun indicated that he thought the way forward would be for the US to engage in direct talks with Pyongyang and to try and arrange a "soft landing" for the country. Worth reading in full.

5. U.K. MILITARY COMMANDERS TELL BROWN HE'S UNDERMINING CENTRAL PILLAR OF U.K. INTERNATIONAL STRATEGY

Kim Sengupta at the UK Independent reports that British senior commanders have warned Gordon Brown that unless the country commits a size-able force to the effort in Afghanistan, it will lose credibility with the US.

"Mr Brown has until now turned down, on cost grounds, the generals' proposal to send 2,500 extra troops in support of the projected US-led 'surge' against the Taliban. Instead, he has authorized a deployment of 700 temporary troops to cover the period of the forthcoming elections in that country. But The Independent has learnt that defense chiefs have persuaded the Government to review the situation in the autumn. Even then, any increase is likely to be in the hundreds rather than in the numbers that the Army believes are needed.

In a sign of the private concern felt by senior military personnel over the Government's stance, General Sir Richard Dannatt, the head of the Army, has publicly warned that Britain's strategic alliance with US is at risk unless British forces are seen to be pulling their weight in Afghanistan.

In a speech to the international relations think-tank Chatham House he said: 'Britain's calculation has long been that maintaining military strategic "partner-of-choice" status with the United States offers a degree of influence and security that has been pivotal to our foreign and defense policy. But this relationship can only be sustained if it is founded on a certain "military credibility threshold".

'Credibility with the US is earned by being an ally that can be relied on to state clearly what it will do and then does it effectively. And credibility is also linked to the vital currency of reputation.' General Dannatt added that 'unfairly or not' British performance in Iraq and Afghanistan has already been called into question by some in the US administration."

Worth reading in full. (h/t Greg Scoblete at The Compass.)

6. SERIOUSNESS ON SETTLEMENTS SURPRISES ISRAELI CABINET, GIVES OBAMA MORE CREDENCE FOR UPCOMING MIDDLE EAST TRIP

Marc Lynch at the Abu Aardvark's Middle East Blog notes that the Israeli negotiating team has reportedly been shocked by the Obama Administration's unwillingness to back down on the issue of no new settlements--and his apparent ability to consolidate support for the position in Congress. Lynch notes that Saudi paper al-Hayat published on the front page today an interview with General Petraeus where he argues that a resolution of the Israeli-Palestinian conflict will increase US security. Lynch remarks:

"As Obama leaves for Saudi Arabia and Egypt, he will thus benefit from the headlines and op-eds in the Arab press featuring his strong stand on the settlements. His team has done an outstanding job setting the stage, establishing its credibility both with Israeli and Arab audiences and generating real momentum. It should help him get a receptive audience for the much-anticipated address, and allow him to point to deeds matching words (the most frequent Arab criticism of his outreach thus far)."

7. FINANCIAL CRISIS WILL LIKELY FORCE CONSOLIDATION OF GULF'S FINANCIAL SECTOR

JCW at Frontier Markets reports that AT Kearney recently published a study which concluded that the Gulf banking sector was ripe for consolidation, given the current financial crisis.

"AT Kearney’s study notes that the banking market in the [Gulf Cooperation Council] is largely fragmented, as the top three banks account for just 14% of market share. 'We see great potential for regional banks to consolidate and grow regionally,' said Dr. Alexander von Pock, senior manager of the Financial Institutions Group of AT Kearney Middle East."

Perhaps the private sector will take the lead in creating a regional market going forward, given that the UAE's recent decision to withdraw from the monetary union project--see Daily Sources 5/20 #5.

8. NEW ATTACK IN BALUCHI IRAN, TEHRAN CLOSES BORDER WITH PAKISTAN, PAKISTAN VOWS TO DESTROY MILITANTS RESPONSIBLE

Thomas Erdbrink at the Washington Post reports that five people have died in an arson attack Monday in Zahedan, where a mosque was destroyed by a bomb attack last week.

"Monday's arson attack capped several days of violence in the volatile southeastern province of Sistan va Baluchistan, where an Islamist group called Jundullah has asserted responsibility for the mosque bombing Thursday."

On Saturday, Iran summoned the Pakistani Ambassador to discuss the group, which is based in Pakistan. Saleem Shahid at the Dawn reports that on Monday Iran completely closed its border to Pakistan. The Tehran Times reports that Pakistan's interior ministry has vowed to wipe out the group, having shared all the intelligence they have on the insurgency with the ISI and military intelligence. Strangely, the story reports that the interior ministry had reported that it had shared its information with the FIA, or the interior ministry's branch of intelligence, the Federal Investigation Agency. (For the last two items, h/t to Juan Cole at Informed Comment.)

9. OPEC SUPPLY UP BY 405 KB/D IN MAY FROM APRIL

Karyn Peterson and Mark Shenk at Bloomberg report that according to a survey by the news wire OPEC supplied the market 405 kb/d more crude in May, or 1.5% more, than it had April.

"Saudi Arabia, the United Arab Emirates, Kuwait and Qatar were the only OPEC members to produce less oil than their respective targets during both April and May.
...
Iran, OPEC’s second-biggest producer, raised daily output by 80,000 barrels to 3.78 million, the biggest increase of any member. The country’s production is now averaging 444,000 barrels a day above its target, exceeding the quota by more than any other member, according to the survey.

Venezuela reduced output by 25,000 barrels to 2.1 million barrels a day, the only production decline. The country produced 114,000 barrels a day in excess of its target of 1.986 million last month, the survey showed."

10. CHÁVEZ NOW TARGETING MILITARY, CONFLICT WITH MARIO VARGAS LLOSA DRAWS IRE OF BRAZILIAN SENATE, AND CHÁVEZ BACKS OUT OF PROMISE TO DEBATE HIS INTELLECTUAL OPPONENTS

Fausta Wertz at the Compass has an excellent summary of recent moves by the Chávez administration to put an end to all significant sources of opposition to his government in Venezuela, including more recently efforts to oust any objectors inside the military. Her account of Chávez's conflict with Mario Vargas Llosa is especially interesting. He was arrested on May 25, causing the Brazilian Senate to, on May 29, officially ask for an explanation for why the Peruvian writer had been detained. Of course, in late May Brazilian papers reported that Caracas was in the process of negotiating loans for as much as $4.3 billion from the Brazilian state development bank--see Daily Sources 5/22 #6--and the Senate has just launched an investigation into Petrobras, the state oil company, itself for tax evasion and the illegal granting of contracts--see Daily Sources 5/28 #7. Wertz's account:

"Chávez is in the middle of a four-day-long cadena, celebrating the 10th anniversary of his TV program Aló Presidente, which all licensed TV and radio stations in the country have to broadcast live. During yesterday's rambling monologue he invited the conference speakers to debate him live at 11AM Saturday morning. Mario Vargas Llosa agreed almost immediately after Chávez issued the invitation, on the condition that it would be a debate with Chávez himself. Enrique Krauze also agreed, requesting that there be clear rules for a debate so it wouldn't become a [Chávez] monologue, saying

'It would be a splendid opportunity for the Venezuelan TV audience, who for ten years have watched president Hugo Chávez daily for four or five hours, in an almost total monologue.'

Jorge Castañeda also agreed under the same conditions.

I have met Mario Vargas Llosa and he is a brilliant speaker, a most erudite and knowledgeable man with a first-rate mind. I have also met Enrique Krauze, who is equally impressive. You better have all your ducks in a row if you're going to debate any of the two, much more so if you are going to debate the two together.

Chávez must have recognized that; he backtracked.

At first Chávez refused to debate Mario Vargas Llosa, stating "In order for me to debate Vargas Llosa, he would have to be president of Peru," but later on he stated he would moderate the debate between the Cedice participants and his - unnamed - supporters,

'I can help as moderate the debate, but the debate is among intellectuals, and I am simply a president, a soldier.'

Of course, Mario Vargas Llosa, upon hearing that, deplored that Chávez is not a man of his word and denounced that Chávez was not interested in a dialogue, since 'autocrats do not know how to dialogue.'

Chávez canceled today's TV show with no explanation."

Well worth reading in full.

11. CUBA & U.S. TO RESUME DIRECT TALKS ON MIGRATION AND DIRECT MAIL, OAS VOTE EXPECTED TO FAVOR HAVANA

John Whitesides at Reuters reports that Cuba has agreed to a US proposal to resume talks regarding migration issues between the two countries and the possible establishment of a direct mail link. Direct talks on migration had been eliminated in 2003. Havana also indicated an interest in counter-terrorism, counter-narcotics trafficking, and hurricane disaster responses--all areas where the two countries have had significant cooperation despite their ideological hostility. Whitesides reports that at the OAS meeting tomorrow the vote to readmit Cuba is expected to pass--readmission requires a two-thirds majority.

12. BRAZILIAN INDUSTRIAL PRODUCTION UP 1.1% IN APRIL FROM MARCH, DOWN 14.8% ON THE YEAR

Andre Soliani and Iuri Dantas at Bloomberg report that Brazilian industrial production rose by 1.1% in April from March, the fourth straight month over month increase seen in the country. April's industrial output was down 14.8% from the year previous.

13. NUMBER OF SUPPLIERS SHIPPING TO THE U.S. NO LONGER IN FREE FALL, BUT 31% ARE SEEING 50% OR MORE DECLINES IN VOLUMES; PRICES FOR SHIPPING APPEAR TO BE RECOVERING, BUT ONLY ON THE BACK OF IDLED CARGO SPACE

Phil Izzo at Real Time Economics reports that according to Panjiva, Inc, the number of companies exporting to the US is no longer in freefall, but that

"Panjiva compiles a Watch List of manufacturers suffering a 50% decline in volume shipped to US customers in the most recent three month period, versus the same period a year ago. In April, 31% of significant suppliers were on that list, up from 30% in March and 24% as recently as December of last year."

Rates appear to be recovering for shipping per the Baltic Dry Index:



but this appears to be due, in part, to the shipping industry idling a considerable portion of their respective fleets.

14. INCOMES RISE BY 0.5% ON INVESTMENTS, NOT WAGES, AND CONSUMER SPENDING FELL 0.1% IN APRIL FROM MARCH; IMF EXPECTS JOB LOSSES TO CONTINUE WELL INTO 2010; ISM PMI STILL INDICATES DECLINE AT 42.8 IN MAY, BUT UP FROM APRIL; GM INDICATES WHICH 14 FACTORIES IT WILL SHUTTER IN THE U.S. AS PART OF BANKRUPTCY FILING

The Associated Press reports that data released today showed that consumer spending fell by 0.1% in April from March, but incomes rose by 0.5%, surprising economists, and on top of flat wages and salaries, meaning, presumably, that the balance was made on returns on investments. Meanwhile, Bob Davis at Real Time Economics reports that the number two man at the IMF, John Lipsky, said in an interview that he didn't expect unemployment to begin to fall in the developed nations until "well into next year." Lipsky said:

"Economic data may indicate that GDP has stopped contracting and started increasing, but the ‘man on the street’ will not be completely convinced things have turned around until they can stop worrying about losing their jobs."

(Though I suppose the survey data on confidence is pretty good, considering.) And Justin Lahart at Real Time Economics reports that the Institute for Supply Management's PMI rose to 42.8 in May from 40.1 in April. (Anything above a 50 indicated expansion; anything below indicates contraction.) Lahart quotes the chair of the ISM, Norbert Orr:

"I believe we’re in the recovery stage right now. We’ve seen a dramatic improvement in new orders that comes as a result of the major inventory correction."

Meanwhile, Nick Bunkley at the New York Times reports that GM has designated 14 factories that it will close in the US as a part of its filing for bankruptcy.

Daily Sources 3/25

1. Jason Clenfield at Bloomberg reports that Japanese exports fell 49% in February year-over-year. Shipments to the US fell 58.4%. Automobile exports fell 70.9%. "Exports to Europe dropped a record 54.7%, shipments to Asia declined 46.3% and goods sent to China slumped 39.7%." Imports fell 43%.

2. Geoffrey A. Fowler at China Journal reports that Beijing's decision to shut down access to youtube.com coincided with the release on March 20th of a video by the Tibetan government in exile of Chinese security forces beating Tibetan protesters. This is the offending video:



Karin Brulliard at the Washington Post reports that a peace conference which was to publicize the role of sports in unity and the reconciliation of differences was canceled today because the South African government had denied the Dalai Lama the visa required for his attendance.

"Two of three South African Nobel peace laureates who had invited the Tibetan leader, retired Archbishop Desmond Tutu and former president FW de Klerk, said Monday that they would boycott the event, and organizers said the third, former president Nelson Mandela, would probably do the same. The Norwegian Nobel Committee also backed out."

A spokesman for South African President Kgalema Motlanthe told the media that South Africa would not welcome the Dalai Lama under any circumstances nor at any time.

3. Peter Stein at China Journal reports that Fan Gang, the head of China's National Economic Research Institute and a member of the People's Bank of China's monetary policy committee, responded to President Obama's televised remarks yesterday today by saying:

"Of course [an alternative is necessary] in the long run, if we want to avoid the cyclical problems associated with the dollar standard."

Mr. Fan also addressed the question of managing the renminbi.

"Fan says while China is eager to keep its currency stable, there is pressure to let the yuan fall-—'not just domestic pressure, but regional pressure,' as other Asian currencies weaken, making them more competitive. Rather than let the yuan fall against the dollar, he suggests that China should make reference more to the other currencies in the basket it uses to set the yuan’s exchange rate. 'Eventually, China’s currency should be related to other currencies, not just the dollar,' he says.

Fan worries that the Fed’s quantitative easing is raising the risk of dollar inflation and devaluation, which 'is a concern not just for China but for everyone.'"

(By the way, the Federal Reserve Bank of Atlanta's macroblog had a post yesterday by SVP in charge of research for the Atlanta Fed, David Altig and Daniel Littman, an economist at the Cleveland Fed, which was at pains to show that the Fed's move is not, strictly speaking, "quantitative easing." The reason (basically): quantitative easing is about increasing liabilities only--or quantity of bank reserves from the perspective of central banks--whereas the FOMC's most recent move was also explicitly about increasing the number of assets on the Fed's balance sheet. h/t Mark Thoma at Economist's View.)

Meanwhile, Phil Izzo at Real Time Economics reports that in a conference hosted by the Wall Street Journal yesterday Paul Volcker seemed to be both reassuring to Beijing while simultaneously dismissive of the primary complaint. The former head of the Fed and current chair of the White House’s Economic Recovery Advisory Board, said that the US's greatest strengths were its history and reputation, and that that shouldn't be put at risk by deliberately inducing inflation:

"One historic way of getting yourself out of this situation—-or trying to—-is to inflate. Either you do it deliberately or you allow it to happen. And if we permit that to happen then I think all these dollars will come tumbling down on us. I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery. I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery."

All of which would seem to reassure Beijing. On the other hand, Volcker appeared unmoved by the naif taken advantage of by slick Uncle Sam act coming from Beijing:

"I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to appreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us."

Indeed, were Chinese long term strategy to include dislodging the dollar from its reserve currency status, perhaps the policy of overloading the US with debt long after it was clear that the debt was unsustainable would be a reasonable policy.

Meanwhile, China Daily News today reported that the government raised "the benchmark retail prices of gasoline by 290 yuan (US$42.46) per ton, or 5%, and diesel by 180 yuan per ton, or 3.7%." The National Reform and Development Commission did not specify whether the increases were for factory gate prices or retail prices. Either way, the decision should put downward pressure on demand for gasoline and diesel. The prices are well above comparable US prices.

4. Eurointelligence notes that the vote of no confidence removing Czech Prime Minister Mirek Topolánek from office yesterday basically means that the largest obstacle to the Lisbon Treaty is now the Czech Republic.

"[The] really worrying aspect of the Topolanek resignation lies in the politics of Lisbon ratification. The Czech parliament’s lower house has accepted the Treaty, but the Senate has yet to vote. [Jean] Quatremer quotes MEP Elmar Brok as saying that this could mean the end of the Lisbon Treaty."

P O Neill at Fistful of Euros reports that in a speech to the European Parliament today, Topolánek said:

"that President Barack Obama’s massive stimulus package and banking bailout 'will undermine the stability of the global financial market.' … Topolanek bluntly said that 'the United States did not take the right path.'

He slammed the US’ widening budget deficit and protectionist trade measures — such as the 'Buy America'-—and said that 'all of these steps, these combinations and permanency is the way to hell.' 'We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way,' he said.

'Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market,' said Topolanek."

5. Anna Shiryaevskaya at Platts reports that Gazprom may exercise its option--which expires in April--of purchasing a majority stake in gas fields in West Siberia and a 20% stake in oil production company Gazprom Neft from Italian oil and gas companies Eni and Enel. The assets were purchased by Eni and Enel in the April 2007 tender of Yukos properties. A deal to purchase the assets might be announced in Italian Prime Minister Silvio Berlusconi's April 6-7 visit to Moscow.

6. Simone Meier at Bloomberg reports that Munich's Ifo Institute's business climate index, based on a survey of 7,000 executives, fell to 82.1 from 82.6 in February.

"Ifo’s gauge of current conditions declined to 82.7 from 84.3. Still, the measure of expectations increased to 81.6 from 80.9.

'The Ifo’s absolute level is still depressingly low,' said Carsten Brzeski, an economist at ING Group in Brussels. 'Nevertheless, the gradual improvement of the Ifo’s expectation component is at least a tender green shoot of stabilization.'"

7. Doris Leblond at the Oil & Gas Journal reports that at a press conference yesterday meant to officially launch France's adoption of countrywide 10% ethanol requirement in gasoline in fact let the public know that the initiative would take longer to complete than previously thought. Jean-Louis Schilansky, president of the oil trade group UFIP, said at the conference that he expected 75% of the country's retail station network would offer 10% ethanol gasoline by the end of the year.

"The government's purpose in introducing the E10 at least 5 years ahead of the EU is that is should reduce carbon dioxide emissions in France by 1 million tonnes/year by 2010."

8. David Jolly at the New York Times reports that the IMF announced via a communique from Washington that it would provide a $17.5 billion loan to Romania under a two-year stand by arrangement. An additional $9.7 billion loan from the European Union and other bodies will be forthcoming as part of an international stabilization package.

9. A post of Willem Buiter, which originally appeared on his Maverecon.com blog, was reposted on VOX EU arguing that the eurozone is vulnerable because there is no single fiscal organization that can recapitalize either the European Central Bank or cross border financial institutions when they make systemically dangerous decisions.

"When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person, Timothy Geithner, the US Secretary of the Treasury.

Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Eurozone member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose national central banks are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.

This situation is intolerable. We need a fiscal Europe ... ."

10. Travis Pantin at the UAE National reports that the Gulf Cooperation Council secretariat decided at a conference in Manama yesterday that the original deadline for a common currency for the member nations of January 1, 2010, is untenable.

"Although the GCC states still plan to complete preliminary steps to prepare for introducing the common currency by December, the process will not be finalised until a dedicated GCC monetary council is created towards the end of this year.

'As soon as the monetary council is ratified by the member states, one of its tasks is to set the new timetable for introducing the physical currency,' said Nasser al Kaud, the deputy of the assistant secretariat general for economic affairs at the GCC."

The GCC, minus Oman, agreed to create a monetary council as a prelude to a joint central bank and monetary union in an accord late last year--see Daily Sources 12/30 #4. The GCC originally decided to form a monetary union by 2010 in 2001.

11. Upstream online.com reports that Oil Minister Hussain Shahristani told the media today that the Kurdistan Regional Government refuses to allow oil to be exported from the country via the national oil pipeline network.

"'Work is continuing to connect the (northern oilfields) to the Iraqi network. But there are objections from the KRG to handing over the oil, claiming that companies that developed the oilfields should be rewarded,' Reuters quoted Shahristani saying in an interview published in today's pan-Arab Asharq al-Aswat A newspaper."

12. The AFP reports that Morocco has begun a clampdown on Shia worshipers in the primarily Sunni country.

"The independent Arabic-language newspaper Al Jarida Al Aoula has reported that dozens of people suspected of having Shiite sympathies have been arrested since Friday in Tangiers in the north, Essaouira in the south and Ouyazze 120 kilometres (75 miles) north of Rabat."

The country simultaneously began a clampdown on homosexuality. Morocco cut ties with Iran a few weeks ago in response to the statement by a former speaker of the Majlis calling Bahrain the 14th province of Iran.

13. Mary Beth Sheridan at the Washington Post reports that Secretary of State Hillary Clinton today begins a trip to Mexico, the first of three cabinet level visits to the country which will precede President Obama's scheduled visit there from April 16-7.

"A senior State Department official said Clinton's trip will highlight the broad range of issues on which the neighbors interact. Mexico is the United States' third-largest trading partner and maintains close contacts with U.S. officials in areas ranging from agriculture to immigration.

'The idea of this trip is to not allow Mexico to be pigeonholed by one or two issues,' the official said Tuesday, briefing reporters on condition of anonymity. That approach will undoubtedly please Mexican authorities, who have angrily rejected suggestions by US military officials that the country could increasingly become ungovernable or even turn into a 'failed state.'"

Spencer S. Hsu and Joby Warrick at the Washington Post report that yesterday the Obama Administration announced that it would move 450 law enforcement officers to the border of Mexico to help combat violence erupting from conflicts with the drug cartels.

"Instead of proposing a costly new package, federal officials said they will redirect resources to cut off the financial lifelines supporting the cartels, in particular the estimated $18 billion to $39 billion in cash, wire transfers and other smuggled payments moving each year from the United States to Mexico.

The other US focus is 'to get its own house in order,' O'Neil said, increasing enforcement against the 90% of guns from the United States that are used in crimes in Mexico and acknowledging a $65 billion domestic market for illegal drugs that drives demand."

"Acknowledging" that US demand is the reason for the drug cartels' success in Latin and South America does nothing. Either steps towards ending this Prohibition need to be taken or the US needs to seriously target consumption. What does it mean to have outlawed cannabis and cocaine when our current and the last two presidents--at the very least--have admitted to their consumption?

14. Bryan Keogh and Andrea Jaramillo at Bloomberg report that Peru will sell 10 year dollar denominated bonds yielding 4.5% more than US treasuries. It is the first dollar-denominated debt the country will have sold in two years and Lima has hired Goldman Sachs and JP Morgan Chase to manage the sale. In September it was reported that foreign banks account for about 51% of Peru's financial system--see Daily Sources 9/30 #4. In January, two months after hosting an APEC conference, Peru's finance minister told the press that Lima was in talks with both the Fed and the People's Bank of China to arrange dollar swaps for the sol--see Daily Sources 1/15 #14.

15. Courtney Schlisserman at Bloomberg reports that US durable goods orders rose by 3.4% in February from January. "Excluding transportation equipment, orders gained 3.9 percent, the most since August 2005."

16. The EIA reported that for the week ended March 20 crude stocks grew by 3.3 million barrels to 356.583 million barrels, the largest commercial stockpile of crude seen in the US since July 23, 1993. According to a Bloomberg survey, Wall Street analysts had expected a 1.1 million barrel build. Gasoline stocks fell by 1.1 million barrels versus analyst expectations of a 650 kb drop, and are at the top of the historical range for this time of year. Distillate stocks fell by 1.6 million barrels versus Wall Street expectations of a 100 kb drop, and are well above the historical range for this time of year.