The news today is overwhelmingly about what is beginning to look like a full-fledged financial meltdown in the US. Obviously, the consequences of a meltdown would be profound, but take a little while to think through. Here are the major stories on what's happening in NYC, and a few interesting items that could have been lost in the mix:
1. Heather Landy and Neil Irwin at the Washington Post write that Lehman Brothers filed for bankruptcy Monday morning. (I wonder whether the new draconian private bankruptcy laws passed at the behest of the banking industry apply to them.)
2. David Hilzenrath at the Washington Post reports that New York will allow AIG to lend money to itself.
3. Michael J. de la Merced and Mary Williams Walsh at the New York Times report that the Fed has asked Goldman Sachs and JP Morgan Chase to put together a $70 billion bail out package for AIG.
4. Binyamin Appelbaum and Zachary A. Goldfarb at the Washington Post report that the Bank of America made a deal to purchase Merrill Lynch for $50 billion over the weekend.
5. The Associated Press reports that the Federal Reserve reported today that industrial output dropped 1.1% last month, far exceeding analyst expectations of 0.3%. The decline was led by an 11.9% decline in motor vehicle and motor vehicle parts production. Output in mining--which includes oil and gas--fell 0.4% in August.
6. Andrew Batson at the Wall Street Journal reports that China abruptly decided to lower benchmark interest rates today on the fear of an economic slow down, and in response to financial news out of NY. The People's Bank of China will reduce the one year benchmark lending rate 0.27 percentage points to 7.2%. Inflation in China fell below 5% in August. Deposit rates (for individual savers) at banks remain at 4.4%, which presumably encourages spending.
7. Randy Fabi at Reuters reports that MEND declared an oil war on Sunday, warning all oil workers to leave the Niger Delta. Evidently the fighting is the worst the region has seen in some time with the Nigerian army, navy, and air force all involved in moves against the militants. Militants set fire to one of Shell's flow stations in the region today. This follows a call for a ceasefire by the MEND on Thursday.
8. Chris Obore of the Kampala Monitor writes that Erik Solheim, the Norwegian Minister of Environment and International Development, has warned Ugandan officials that Norwegian aid was at risk if the country did not more carefully address environmental and transparency concerns.
9. Alison Smale at the New York Times reports that the former European Union envoy to Kabul--Francesc Vendrell--has said that Afghanistan is in the worst shape it has been in since 2001.
10. Interesting op-ed in Wall Street Journal Asia by Richard Bush and Kenneth Lieberthal pointing out the main differences in American foreign policy messages to Taiwan and Georgia. Countries the authors believe face similar dilemmas.
Monday, September 15, 2008
Sunday, September 14, 2008
Saturday, September 13, 2008
Friday, September 12, 2008
Daily Sources 9/12
1. The Financial Times published a series of articles yesterday--including an editorial--on China's evident willingness to use its foreign exchange holdings to further political ends. Jamil Anderlini reported that China's State Administration of Foreign Exchange (SAFE) purchased $150 million in Costa Rican government bonds in January in return for Costa Rica essentially de-recognizing Taiwan as a sovereign nation. The deal was originally arrived at in an agreement signed on June 2007, which stipulated the switch in Chinese recognition in return for the purchase of $300 million in Costa Rican bonds and a $130 million grant. Evidently, this information came to light because La Nacion, Costa Rica's largest newspaper, won last Friday a court case which resulted in a judge ordering the government to make the information public.
In a companion piece, Jamil Anderlini noted that while the establishment of the China Investment Corporation (CIC) in September 2007 caused much consternation worldwide, SAFE, through a Hong Kong subsidiary, was quietly establishing stakes of less than 1% in corporations worldwide. It took stakes in companies as diverse as: BP, Total, BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank. The Financial Times has helpfully provided a list of SAFE investment in British corporations here.
The FT also editorialized that sovereign wealth funds should be more transparent about their aims and that China should allow the renminbi to appreciate further against the dollar. Brad Setser at Follow the Money has used the imbroglio to announce the publication of a 60 page or so (of actual text) report on Sovereign Wealth and Sovereign Power: the Strategic Consequences of American Indebtedness. I have yet to read the tome, but it will likely be influential.
On one key level, my response to this is "I'm shocked! Just shocked!" Perhaps it is worrying that China is willing to use its foreign exchange reserves to meet foreign policy goals, but I suspect the only difference between that and the de rigeur behavior of economic powerhouses worldwide is that it was a direct, as opposed to an indirect effort. China and Taiwan have been playing this game for years now and it is hardly surprising to me, at least, that China would use any financial asset they have at their disposal to legitimize their claim to Taiwan. (Though I do feel sympathy for Taipei.)
I would also note though the text of the FT's editorial is fairly calm, the series and the headlines are fairly obviously designed to elicit worry and upset nationalists--which is pretty annoying to see from the FT, though I suppose it is arguably meant as an object lesson. Obviously, the financial world wants to encourage "unregulated" access to Chinese assets and a freely floating renminbi. Though some--in Wall Street anyways--view FDI into China and free exchange as unambiguous in its benefits and ends, it seems hard to argue this to Beijing when its overseas investments are regularly responded to as if they were efforts at colonization. The distinctions seem awful fine.
In any case, we will see how the West responds to CIC possibly being a part of the consortium riding to the rescue of Lehman, as per Henny Sender, Francesco Guerrera and Peter Thal Larsen in the Financial Times today. Barclays, beneficiary of SAFE funds, is also a potential suitor. Also related: a paper published today at Vox arguing that the renminbi is not significantly misaligned.
2. China Daily announces that China may cut its dollar holdings. (h/t Jesse's Cafe Americain.)
3. Naked Capitalism notes that both Japan and China have posted declining growth. In order to protect export to the US, China will have to purchase dollars. Also, per Real Time Economics, US consumer spending dropped 0.3% in August, leading many to conclude that that engine of American and international economic growth will remain dormant at least through 2009, which may mean that China needs to buy a lot of dollars.
4. David Barboza at the New York Times writes that corporations in China are under intense pressure from the government to allow their workers to unionize.
5. Saul Hudson at Reuters has an analysis of potential future, given the recall today of Venezuela's Ambassador to the US, and the expulsion of the US Ambassador to Venezuela.
6. Jeremy McDermott at the Telegraph reports that Evo Morales has expelled the US Ambassador to Bolivia.
7. Aleya Begum at Upstream Online writes that Colombia has pledged, despite all the contretemps with Venezuela, to maintain flows of gas to Venezuela through pipeline opened this January at reduced rates.
8. Simon Romero at the New York Times has more on this story, with the US expelling the Venezuelan Ambassador and declaring that the top two intelligence officials in Caracas were involved in FARC operations in Colombia. Sanctions are being considered, I believe.
9. Hurricane Ike appears to have nudged a little north, satellite courtesy the NOAA:
It is a category 2 now. A bunch of refineries have shut down in response. As a result, the cash market is heading north, while the futures market is heading south, as per The Barrel at Platts. Expect higher prices at the pump.
In a companion piece, Jamil Anderlini noted that while the establishment of the China Investment Corporation (CIC) in September 2007 caused much consternation worldwide, SAFE, through a Hong Kong subsidiary, was quietly establishing stakes of less than 1% in corporations worldwide. It took stakes in companies as diverse as: BP, Total, BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank. The Financial Times has helpfully provided a list of SAFE investment in British corporations here.
The FT also editorialized that sovereign wealth funds should be more transparent about their aims and that China should allow the renminbi to appreciate further against the dollar. Brad Setser at Follow the Money has used the imbroglio to announce the publication of a 60 page or so (of actual text) report on Sovereign Wealth and Sovereign Power: the Strategic Consequences of American Indebtedness. I have yet to read the tome, but it will likely be influential.
On one key level, my response to this is "I'm shocked! Just shocked!" Perhaps it is worrying that China is willing to use its foreign exchange reserves to meet foreign policy goals, but I suspect the only difference between that and the de rigeur behavior of economic powerhouses worldwide is that it was a direct, as opposed to an indirect effort. China and Taiwan have been playing this game for years now and it is hardly surprising to me, at least, that China would use any financial asset they have at their disposal to legitimize their claim to Taiwan. (Though I do feel sympathy for Taipei.)
I would also note though the text of the FT's editorial is fairly calm, the series and the headlines are fairly obviously designed to elicit worry and upset nationalists--which is pretty annoying to see from the FT, though I suppose it is arguably meant as an object lesson. Obviously, the financial world wants to encourage "unregulated" access to Chinese assets and a freely floating renminbi. Though some--in Wall Street anyways--view FDI into China and free exchange as unambiguous in its benefits and ends, it seems hard to argue this to Beijing when its overseas investments are regularly responded to as if they were efforts at colonization. The distinctions seem awful fine.
In any case, we will see how the West responds to CIC possibly being a part of the consortium riding to the rescue of Lehman, as per Henny Sender, Francesco Guerrera and Peter Thal Larsen in the Financial Times today. Barclays, beneficiary of SAFE funds, is also a potential suitor. Also related: a paper published today at Vox arguing that the renminbi is not significantly misaligned.
2. China Daily announces that China may cut its dollar holdings. (h/t Jesse's Cafe Americain.)
3. Naked Capitalism notes that both Japan and China have posted declining growth. In order to protect export to the US, China will have to purchase dollars. Also, per Real Time Economics, US consumer spending dropped 0.3% in August, leading many to conclude that that engine of American and international economic growth will remain dormant at least through 2009, which may mean that China needs to buy a lot of dollars.
4. David Barboza at the New York Times writes that corporations in China are under intense pressure from the government to allow their workers to unionize.
5. Saul Hudson at Reuters has an analysis of potential future, given the recall today of Venezuela's Ambassador to the US, and the expulsion of the US Ambassador to Venezuela.
6. Jeremy McDermott at the Telegraph reports that Evo Morales has expelled the US Ambassador to Bolivia.
7. Aleya Begum at Upstream Online writes that Colombia has pledged, despite all the contretemps with Venezuela, to maintain flows of gas to Venezuela through pipeline opened this January at reduced rates.
8. Simon Romero at the New York Times has more on this story, with the US expelling the Venezuelan Ambassador and declaring that the top two intelligence officials in Caracas were involved in FARC operations in Colombia. Sanctions are being considered, I believe.
9. Hurricane Ike appears to have nudged a little north, satellite courtesy the NOAA:
It is a category 2 now. A bunch of refineries have shut down in response. As a result, the cash market is heading north, while the futures market is heading south, as per The Barrel at Platts. Expect higher prices at the pump.
Thursday, September 11, 2008
Daily Sources 9/11
1. The economic blogosphere--specifically Follow the Money and naked capitalism--is abuzz regarding the following stories.
a) David Oakley at the Financial Times reported yesterday that outflows from emerging markets reached $29.5 billion over the last three months, the highest levels seen since 1995 (and the Asian Financial Crisis).
b) Joanna Slater in today's Wall Street Journal reports that, as one might guess considering the story above, many central banks in emerging economies have begun taking steps to defend their currencies against the dollar. Central Banks involved include those of Argentina, South Korea, Russia, Thailand, India, and Pakistan.
2. The Economic Times has the story that the International Energy Agency has asked India to remove their oil subsidies. Although the government has already reduced its subsidies in some areas, there are some in which I doubt it will ever make reductions. Most importantly: propane, which many poor Indians use to cook.
3. Bloomberg reports that Vietnam may cut coal exports by 89% by 2015 in order to meet domestic demand. It is expected to export 28 million tons this year. The National Coal & Mineral Industries Group said it may face a shortage as early as 2012 and may source imports from Australia and Indonesia at that time.
4. Robin Wigglesworth at the Financial Times reported Tuesday that the Saudi Central Bank has issued three times as much debt so far as of July than it had in all of 2007, in an attempt to absorb excess capital. Since the riyal is pegged to the dollar, the recent rise in both has encouraged international banks to withdraw their riyal deposits. Which in turn has forced Gulf banks to look to local money markets to finance lending, siphoning down the local money supply and raising the cost of money. Saudi Arabia wants to encourage this liquidity squeeze further by introducing more treasuries as part of an effort to curb inflation. Saudi annual inflation hit 10.6% in June.(1)
5. Robin Pagnamenta and Angela Jameson at the London Times report that OPEC is sending a high level delegation to Moscow to discuss closer cooperation.
6. Ian James and Vladimir Isachenkov of the Associated Press report that two Russian strategic bombers landed in Caracas yesterday. The Tu-160s have flown to Venezuela on a training mission, and will carry out maneuvers over neutral waters in the coming days. (The planes are not loaded, so to speak, with bombs during these.) NATO fighters escorted the planes on their trip from Russia to Venezuela.
7. Jeb Blount at Bloomberg reports that Petrobras has announced reserve estimates for the Iara field of 3-4 billion barrels. The Iara field is part of the ongoing deep sea finds Brazil has made in salt deposits known as the Santos Basin.
Iara is part of concession block BM-S-11, which also holds the Tupi field and is estimated to have 5-8 billion barrels in recoverable oil. BG drilled the exploration well and said it found 26-30 APIº oil.(2)
8 billion barrels of oil are equal to about 94 days of world consumption (at ~85 mb/d) and about 400 days of American consumption (at ~20 mb/d) and 640 days of American imports (at ~12.5 mb/d). 12 billion barrels of oil are equal to about 141 days of world consumption, 600 days of American consumption, and 960 days of American imports. (Assuming everything remains constant, of course.)
8. Joe De Capua and Chinedu Offor report via Voice of America that MEND, the primary militant group in the Niger Delta, has called for a cease fire in response to the Nigerian government's decision to create an agency to develop the region. Evidently, MEND trusts this effort more than ones of the past because they believe it comes at the initiative of Vice President Jonathan Goodluck, who is a native of the Niger Delta region.
9. James Kanter at the New York Times writes that members of the European Parliament's Industry Committee backed changing mandated biofuel use from 10% (of the transportation fuel mix) in 2020 to 4%. Environmentalists praised the move, which followed reconsideration of the mandates in the Environment Committee in July. The fledgling biofuel industry is understandably upset, given the cost of the infrastructure in place and under construction.
10. Michael M. Grynbaum at the New York Times reports that the trade deficit reached a record high in July, as larger exports were more than offset by higher oil prices. Economists are looking forward to the numbers for August, as oil fell below $125/b in that month.
11. Craig Torres and Liz Capo McCormick at Bloomberg write that the Fed will likely have to provide the financial industry an unprecedented infusion of cash to prevent further blow ups. (h/t Jesse's Cafe Americain). Yikes.
(1) Reuters: Saudi Inflation Hits 30-Year High on Food, Rent
(2) BG Press Release
a) David Oakley at the Financial Times reported yesterday that outflows from emerging markets reached $29.5 billion over the last three months, the highest levels seen since 1995 (and the Asian Financial Crisis).
"The hardest hit stock markets in dollar terms are Ukraine, which has fallen 58.8 per cent this year in part on geopolitical worries; China, down 57 per cent amid fears it had risen too far on a bubble; Hungary, down 49 per cent on worries over growth; Pakistan, down 46.7 per cent amid political turmoil; and Vietnam, down 46.4 per cent in the face of a sharp rise in inflation.
Russia been under pressure, with the benchmark RTS index down 4.4 per cent yesterday and 46 per cent since its May 19 peak.
Emerging market sovereign bond yield spreads have risen to 330 basis points over Treasuries – highs not seen since mid-2005 – from 300bp at the start of last week amid rising risk aversion."
b) Joanna Slater in today's Wall Street Journal reports that, as one might guess considering the story above, many central banks in emerging economies have begun taking steps to defend their currencies against the dollar. Central Banks involved include those of Argentina, South Korea, Russia, Thailand, India, and Pakistan.
The sums involved are large. Russia spent about $14 billion in August alone, the largest such drawdown in its reserves in at least a decade, as foreign investors fled following the conflict with Georgia. South Korea has spent more than $21 billion -- or roughly 8% -- of its reserves in the past five months to assist the ailing won.
2. The Economic Times has the story that the International Energy Agency has asked India to remove their oil subsidies. Although the government has already reduced its subsidies in some areas, there are some in which I doubt it will ever make reductions. Most importantly: propane, which many poor Indians use to cook.
3. Bloomberg reports that Vietnam may cut coal exports by 89% by 2015 in order to meet domestic demand. It is expected to export 28 million tons this year. The National Coal & Mineral Industries Group said it may face a shortage as early as 2012 and may source imports from Australia and Indonesia at that time.
4. Robin Wigglesworth at the Financial Times reported Tuesday that the Saudi Central Bank has issued three times as much debt so far as of July than it had in all of 2007, in an attempt to absorb excess capital. Since the riyal is pegged to the dollar, the recent rise in both has encouraged international banks to withdraw their riyal deposits. Which in turn has forced Gulf banks to look to local money markets to finance lending, siphoning down the local money supply and raising the cost of money. Saudi Arabia wants to encourage this liquidity squeeze further by introducing more treasuries as part of an effort to curb inflation. Saudi annual inflation hit 10.6% in June.(1)
5. Robin Pagnamenta and Angela Jameson at the London Times report that OPEC is sending a high level delegation to Moscow to discuss closer cooperation.
6. Ian James and Vladimir Isachenkov of the Associated Press report that two Russian strategic bombers landed in Caracas yesterday. The Tu-160s have flown to Venezuela on a training mission, and will carry out maneuvers over neutral waters in the coming days. (The planes are not loaded, so to speak, with bombs during these.) NATO fighters escorted the planes on their trip from Russia to Venezuela.
7. Jeb Blount at Bloomberg reports that Petrobras has announced reserve estimates for the Iara field of 3-4 billion barrels. The Iara field is part of the ongoing deep sea finds Brazil has made in salt deposits known as the Santos Basin.
Iara is part of concession block BM-S-11, which also holds the Tupi field and is estimated to have 5-8 billion barrels in recoverable oil. BG drilled the exploration well and said it found 26-30 APIº oil.(2)
8 billion barrels of oil are equal to about 94 days of world consumption (at ~85 mb/d) and about 400 days of American consumption (at ~20 mb/d) and 640 days of American imports (at ~12.5 mb/d). 12 billion barrels of oil are equal to about 141 days of world consumption, 600 days of American consumption, and 960 days of American imports. (Assuming everything remains constant, of course.)
8. Joe De Capua and Chinedu Offor report via Voice of America that MEND, the primary militant group in the Niger Delta, has called for a cease fire in response to the Nigerian government's decision to create an agency to develop the region. Evidently, MEND trusts this effort more than ones of the past because they believe it comes at the initiative of Vice President Jonathan Goodluck, who is a native of the Niger Delta region.
9. James Kanter at the New York Times writes that members of the European Parliament's Industry Committee backed changing mandated biofuel use from 10% (of the transportation fuel mix) in 2020 to 4%. Environmentalists praised the move, which followed reconsideration of the mandates in the Environment Committee in July. The fledgling biofuel industry is understandably upset, given the cost of the infrastructure in place and under construction.
10. Michael M. Grynbaum at the New York Times reports that the trade deficit reached a record high in July, as larger exports were more than offset by higher oil prices. Economists are looking forward to the numbers for August, as oil fell below $125/b in that month.
11. Craig Torres and Liz Capo McCormick at Bloomberg write that the Fed will likely have to provide the financial industry an unprecedented infusion of cash to prevent further blow ups. (h/t Jesse's Cafe Americain). Yikes.
(1) Reuters: Saudi Inflation Hits 30-Year High on Food, Rent
(2) BG Press Release
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