Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Bearish Roach Losing China Stimulus OptimismFrom The Financial Times:I've been an optimist on China. But I'm starting to worry Financial Times By Stephen Roach Published: July 29 2009 03:00 | Last updated: July 29 2009 03:00 On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009. A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer. That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short-fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending. Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn--three times the pace in the first half of 2008 and the strongest six-month lending surge on record. Read the rest of the article Labels: bailout, banking system, China, Emerging markets, financial crisis, infrastructure Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Capital Flowing Out of Developing CountriesFrom Nouriel Roubini’s RGE Monitor:The reversal of capital inflows due to deleveraging or losses in financial markets has been one of the most significant effects of the financial crisis on emerging and frontier economies. After a period in 2007 and 2008 when many emerging markets faced the problem of dealing with extensive capital inflows, now capital flows have reversed. Private capital flows in 2009 are expected to be less than half of their 2007 levels, posing pressure on emerging market currencies, asset markets and economies. Countries that relied on readily available capital to finance their current account deficits are particularly vulnerable. Furthermore, capital outflows pose the risk that governments may react with some type of capital controls or barriers to the exit of foreign investments.Note that the piece later adopts a different tone on capital controls, accepting their use on a temporary basis and noting that Iceland, Ukraine, Argentina, Indonesia and Russia, among others, have already adopted them. Foreign direct investment (FDI) is considered by many to be a major and more stable source of financing for many developing countries. FDIs slowed down sharply in recent quarters ...Read the whole analysis here. Labels: capital controls, economic crisis, Emerging markets, IMF, Nouriel Roubini Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citi Warning on BrazilFrom Bloomberg, courtesy of Marxmail. Stocks in New York opened sharply lower, following losses worldwide. Could be a rough day on Wall Street.Brazil Stocks May 'Capitulate' on Economy, Citi Says (Update4) By Roger Neill and Michael Patterson Feb. 18 (Bloomberg) Brazil stocks may drop in the "next few weeks" because valuations climbed too high given the outlook for a "very sharp" recession in Latin America's biggest economy, according to Citigroup Inc. Brazilian shares trade for about 9.5 times estimated profits, above the long-term average price-to-earnings of 9, after the market rallied more than its developing-country peers since November, Citigroup strategist Geoffrey Dennis wrote in a research note dated yesterday. The benchmark Bovespa index has climbed 5.7 percent this year, the second-best performance after China among the world’s 20 biggest equity markets. Brazil stocks will "capitulate" as the economy contracts and the U.S. recession lasts through the third quarter, Dennis wrote. Investors should wait for the Bovespa to drop below 35,000 before they buy Brazilian stocks, he wrote. The Bovespa lost 4.8percent yesterday, the steepest retreat in a month, to 39,846.97. "The market’s sharp fall on Tuesday is likely to be followed by further losses over the next few weeks," wrote Dennis, Citigroup’s New York-based head of Latin America equity strategy. Shares are "likely to capitulate to this barrage of economic weakness at home and abroad," he wrote. 'Defensive' Stocks Dennis reduced his rating on Brazilian stocks to "neutral" from "overweight," saying the downgrade is a "trading call." He maintained his year-end target for the Bovespa at 55,000 and kept his "bullish long-term view." Within Brazil, investors should buy shares of "defensive" companies including utilities, phone companies and makers of consumer staples, while reducing holdings of raw-material producers and financial companies, Dennis wrote. The Bovespa today slipped 0.4 percent to 39,674.39. Mobile- phone carrier Tim Participacoes SA, picked by Citigroup as a preferred defensive stock, increased 6.1 percent to 6.95 reais. Dennis increased his rating on Colombian stocks to "overweight" from "neutral," citing the market’s "defensive" characteristics. Colombia’s benchmark IGBC Index has climbed 2.5 percent this year. Labels: Brazil, Emerging markets, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Crowding Out Bites BackMany economists, like James Galbraith here, have rightly dismissed arguments to the effect that deficit spending, especially in today's highly peculiar circumstances, will result in decreased (or "crowd out") domestic investment here in the US. But the Financial Times has an article today which features a complaint from Latin American former finance officials to the effect that such issuance, by hugely increasing the supply of safer debt backed by the US and developed country treasury departments, may well choke off the ability of poorer countries to issue debt. It's a concern that deserves to be heard.Economists warn on LatAm credit squeeze By Stephen Fidler in London Published: December 4 2008 18:07 | Last updated: December 4 2008 21:20 Huge volumes of US Treasury bonds issued as part of an effort to reverse an economic slump threaten to stop access to credit by Latin American governments facing financing needs of an estimated $250bn next year, a group of prominent economists from the region has warned. The risk that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year has not been much emphasised in the scramble to save the US economy. But the economists said “powerful and innovative” new mechanisms were required to deal with the threat in order to direct money back into the region. Read the rest of the article Labels: bailout, Emerging markets, financial crisis, James K. Galbraith, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Survey: How Bad in Emerging Markets?From Der Spiegel (translated into English, though). Hat tip to Yves SmithSPIEGEL ONLINE 11/04/2008 04:54 PM THE GHOST OF ARGENTINA What Happens when Countries Go Bankrupt? By SPIEGEL Staff First it was mortgage lenders. Then large banks began to wobble. Now, entire countries, including Ukraine and Pakistan, are facing financial ruin. The International Monetary Fund is there to help, but its pockets are only so deep. No, Alexander Lukyanchenko told reporters at a hastily convened press conference last Tuesday, there is "no reason whatsoever to spread panic." Anyone who was caught trying to throw people out into the street, he warned, would have the authorities to deal with. Lukyanchenko is the mayor of Donetsk, a city in eastern Ukraine with a population of a little more than one million. For generations, the residents of Donetsk have earned a living in the surrounding coalmines and steel mills, a rather profitable industry in the recent past. Donetsksta, a local steel producer, earned 1.3 billion euros ($1.65 billion) in revenues last year. But last Tuesday the mayor, returning from a meeting with business leaders, had bad news: two-thousand metalworkers would have to be furloughed. Lukyanchenko doesn't use the word furlough, instead noting that the workers will be doing "other, similar work." But every other blast furnace has already been shut down, and one of the city's largest holding companies is apparently gearing up for mass layoffs. Under these conditions, how could panic not be rampant in Donetsk, the capital of Ukraine's industrial heartland? In Mariupol, a steelworking city, a third of the workers have already been let go. The chemical industry, Ukraine's second-largest source of export revenue, is also ailing. In the capital Kiev, booming until recently, construction cranes are at a standstill while crowds jostle in front of currency exchange offices, eager to convert their assets into US dollars. Donetsk is in eastern Ukraine, 8,100 kilometers (5,030 miles) from New York's Wall Street and 2,700 kilometers (1,677 miles) from Canary Wharf, London's financial center. But such distances are now relative. The world financial crisis has reached a new level. No longer limited to banks and companies, it is now spreading like wildfire and engulfing entire economies. It has reached Asia and Latin America, Eastern Europe, Iceland the Seychelles, the Balkan nation of Serbia and Africa's southernmost country, South Africa. It is a development that has investors and speculators alike holding their breath. Some are pulling their money out of troubled countries, while others are betting on a continued decline -- and in doing so are only accelerating the downturn. Central banks are desperately trying to halt the downward trend, but in many cases the plunge seems unstoppable. Read the rest of the article Labels: currencies, Der Spiegel, Emerging markets, financial crisis, financial crisis bailout, IMF, World Bank, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Swap Lines Extended To At-Risk CountriesAs we expected (see blog post of October 22nd, "Not a Slow News Day"), the Fed has extended a lifeline facility to a number of pivotal, mainly emerging economies (Brazil, South Korea, Mexico and Singapore), whose currencies have been falling through the floor as a result of mass-repatriations under the impetus of the rush to safety in the US dollar. As usual, Yves Smith was on the ball:Wednesday, October 29, 2008 Fed Establishes New IMF Facility. Dollar Swap Lines with Brazil, South Korea, Mexico, and Singapore ... Today, the Fed provided Brazil, South Korea, Mexico, and Singapore with dollar swap lines of $30 billion each (hat tip readers Robertm, Dwight). From the Fed's press release: Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies. Federal Reserve Actions In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. Read the rest of the post Labels: currencies, Emerging markets, financial crisis bailout, IMF, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Explaining Yesterday's Mega-RallyMany people may still be a little puzzled by the impressive surge on Wall Street yesterday, despite the clear preopnderance of gloomy news (though taking into account the near-certainty of a big Fed cut today). The answer involves the yen carry trade, about which we posted a couple of items last weekend. Today's Financial Times takes up yesterday's story:Overview: Relief-rally but worldwide uncertainties persist By Dave Shellock in London and Michael Mackenziein New York Tuesday Oct 28 2008 16:30 Global equities staged a big rebound led by Asian and US markets as a sharp fall in the Japanese yen infused bargain-hunting for risky assets and offset grim US economic data. The improvement in investor risk appetite also extended to emerging market assets - which have come under severe pressure lately - as the yen registered sharp declines against its leading rivals amid talk of currency intervention and even a possible rate cut by the Bank of Japan. Ashraf Laidi, chief currency strategist at CMC Markets, said: "Yen-selling intervention would not be successful as long as Japan does not cut interest rates." Read the rest of the article Trying to jumpstart carry trades when a lot of emerging markets are still experiencing exceptional currency volatility is risky. Accordingly, the FT noted a just today: Yen rallies as growth fears return By Peter Garnham Wednesday Oct 29 2008 06:45 The turmoil on global currency markets continued on Wednesday as the yen advanced amid fears over a global economic slowdown. The yen's rally erased some of its losses during a volatile trading session on Tuesday. Maurice Pomery at IDEAGlobal said predicting moves on the currency market was close to impossible amid a lack of liquidity and increasingly volatile price action. Read the rest of the article Right now, Wall Street is pretty much flat. The Fed will cut later in the day, and China has already done so, so there may be a continued upside. But, to quote the latter article again, from Maurice Pomery, "Expect the unexpected and we see wild swings through this week continuing," Labels: currencies, Emerging markets, financial crisis, Financial Times, stock markets, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Carry Trade: Key To Understanding Crisis TurnA fine piece by the Financial Times' John Authurs on the unwinding of this trade, and the impact it has been having on the recent, otherwise partially inexplicable, US dollar strength. Understanding this trade is absolutely essential to understanding the turn the crisis has taken. Apologies for the image: it's the only link I can find to this article.Read the article "Chaos Carries a Risk for Emerging Markets" Labels: currencies, Emerging markets, financial crisis, John Authers, Yen carry trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interpreting Friday's CrazinessSome snippets from today's Financial Times lead piece. All are horrific.Looming recession batters stocks By Michael Mackenzie in New York and Michiyo Nakamoto in Tokyo and Song Jung-a in Seoul Friday Oct 24 2008 12:10 Traders said the massive reversal of currency positions in favour of the yen, reflected further liquidation of the so-called "carry trade", in which investors had borrowed at low Japanese interest rates to fund risky global investments. . . . The sharp rise in the yen forced further sales of risky assets, with equities, commodities and emerging markets suffering sharp declines while investors sought the safety of owning short-term government paper. Redemption requests from investors in mutual and hedge funds intensified the wave of forced selling. . . . "The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations," said Ashraf Laidi, chief currency strategist at CMC Markets. . . . Kazuyuki Sugimoto, vice finance minister, warned that rapid and excessive currency moves were not desirable for the economy, prompting speculation that the government might intervene in the currency markets or that the Bank of Japan might cut interest rates. However, analysts said neither move would be effective. . . . But one thing from the print version of the same article really caught my eye: Jack McDonald, president of Conifer Securities, a prime brokerage for small and medium-sized hedge funds said: "Funds will only have a good idea about the actual size of redemptions towards the end of November." That will be something to look forward to, indeed. If we make it that far. Read the rest of the online edition article Labels: currencies, Emerging markets, financial crisis, hedge funds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Our Recapitalization, Your ProblemLooks like the collateral damage burden of the largely Western fight to save the global financial system may be shifting somewhat to the usual victims:From the Financial Times: Financial crisis stalks new victims By Peter Garnham Friday Oct 17 2008 14:15 The next leg of the turmoil gripping global financial markets could see the currencies of some emerging market commodity producers plunged into crisis. Until recently, emerging market currencies have held up well as the focus of markets was the turmoil wrought by problems engulfing the financial system in the developed world. However, as the credit crisis reached a crescendo over the last month, emerging markets' currencies began to come under pressure as foreign investors facing liquidity problems at home repatriated funds. Read the rest of this article Labels: Emerging markets, financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
