Here are a few of the many stories I am following: The risk of trade wars escalates as Brazil accuses the United States and China of currency manipulation. In turn, the IMF is upset at Brazil for imposing capital controls. In Belgium, the king wants to end the "unprecedented hell" that has left Belgium without a government for 211 days smack in the midst of a budget crisis. China is set for multiple rounds of credit tightening even though China's growth is weakening. Interest rates in Portugal and Spain suggest more bailouts coming up. Ireland is pondering the Iceland Solution and that has the IMF more than a bit upset.
Brazil has warned that the world is on course for a full-blown "trade war" as it stepped up its rhetoric against exchange rate manipulation.
Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders.
"This is a currency war that is turning into a trade war," Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil's new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe.
If the world's shell-shocked investors thought that 2011 might see an outbreak of peace in the currency wars, they were sadly mistaken. Not only did Brazil last week take more action to stem the rise in the real but Chile, one of the most free-market of emerging economies, has also unveiled a campaign of intervention against its currency.
With a sense that the battles against destabilising capital inflows are here to stay has come a determination to set new rules of engagement on controlling them. But given the uncertainty and political explosiveness around the issue, any such venture faces a tough future.
The International Monetary Fund last week revealed an attempt to put itself at the centre of the debate, releasing a study arguing for global rules to constrain governments' use of capital controls. But observers doubt that it will broker a deal soon. "The IMF has made a pre-emptive grab for power without a clear idea of what it is asking for," says Eswar Prasad, a former senior IMF official now at Cornell University.
The case for global rules is that one country's actions can spill over to others. Last year's rash of direct currency market intervention to slow speculative capital inflows, for example, proved self-perpetuating as country after country rushed to stop its own exchange rate being the only one to rise.
China's December exports rose by double digits, possibly fueling tension with Washington ahead of Chinese President Hu Jintao's U.S. visit next week.
Exports rose 17.9 percent, producing a $13.1 billion trade surplus, though growth was down from November's 34.9 percent surge, customs data showed Monday. Imports gained 25.6 percent over a year earlier, down from the previous month's 37.7 percent growth but reflecting China's relatively strong economic growth.
December exports of $154.1 billion might be the highest monthly level ever for China, which overtook Germany in 2009 as the world's biggest exporter, according to Cohen.
Imports were $141 billion. The trade surplus was the third-lowest monthly level in 2010 and down sharply from November's $22.9 billion.
Beijing promised more exchange rate flexibility in June and the yuan has risen by about 3.5 percent against the U.S. dollar since then. Analysts expect the currency to rise by about 5 percent this year, but that is too little for critics who say the yuan is undervalued by up to 40 percent.
Beijing also faces criticism that it is hampering access to its finance industries and is improperly supporting its fledgling producers of solar, wind and other renewable energy technology by shutting foreign suppliers out of government-financed projects.
Those last two paragraphs also smack of trade wars. Currently, China is on the Congressional back burner, but that will change as soon as the US economy stalls even a bit.
People's Bank of China Governor Zhou Xiaochuan ordered lenders to increase funds on deposit at the authority six times in 2010, as the yuan's interest-rate advantage over the dollar attracted capital that stoked inflation. The yuan may gain the most among currencies in the so-called BRIC nations, rising 5.4 percent by year-end, compared with a 0.8 percent drop for Brazil's real, a 0.3 percent increase for Russia's ruble and 5 percent advance for India's rupee, according to Bloomberg surveys of strategists.
"We will probably see a round of pretty intense tightening in the first half," said Ren Xianfang, an economist in Beijing for Lexington, Massachusetts-based research company IHS Global Insight. "The yuan's appreciation in 2011, particularly in the first half, should be faster than last year."
The reserves, which exceeded $1 trillion in 2006 and $2 trillion in 2009, will reach $3 trillion by June 30, according to UBS AG estimates.
Premier Wen Jiabao is seeking to sustain the economy's growth to create millions of jobs each year, while preventing rising prices for homes and food from fueling social unrest. Benchmark borrowing costs for Chinese banks have risen to a two- year high, fuelling an 11 percent decline in the benchmark Shanghai Composite Index of stocks in the past 12 months.
While a stronger currency and higher rates may help tame inflation, they also risk attracting capital from abroad. In November, consumer prices rose 5.1 percent from a year earlier, the most in 28 months, food costs jumped 11.7 percent and property prices gained 7.7 percent, government data show.
"The risk of a widening interest-rate gap attracting hot money inflows may be part of the reason behind the central bank's inclination to use the reserve ratio tool more frequently than interest rates," said Wen Pengyong, an economist at Essence Securities Co., a Shenzhen-based brokerage.
Unprecedented Hell In Belgium As Debt Crisis Escalates
Belgium's king will make a fresh bid to end the 211-day post-election deadlock that has left the country without a full-time government and fanned concern that Europe's debt crisis will widen.
Belgium's 10-year borrowing costs jumped to an almost two-year high last week, prompting business leaders to demand an immediate coalition deal between feuding parties in the Dutch- speaking north and French-speaking south.
"Financial markets will be merciless if the country doesn't extricate itself from this unprecedented hell as soon as possible," billionaire financier Albert Frere told Le Soir newspaper.
For the first time, investors view western European government bonds as riskier than emerging- market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.
European leaders may discuss expanding the 750 billion-euro ($965 billion) financial backstop for indebted nations at their next summit, Handelsblatt reported yesterday, citing German government officials it didn't identify. German Chancellor Angela Merkel has said she opposes increasing government-funded aid for euro countries and her chief spokesman, Steffen Seibert, said yesterday that "no decision has been taken about widening the rescue fund."
The extra borrowing cost over German bonds, a gauge of the risk of investing in Belgium, has risen to 126 basis points from 79 basis points on election day June 13.
The spotlight shifts later this week to southern Europe for sales of some of the $1.1 trillion that euro-region governments need to borrow on bond markets in 2011. Portugal will auction bonds maturing in 2014 and 2020 on Jan. 12. Spain follows on Jan. 13 with the sale of bonds maturing in 2016.
Portugal's 10-year yields rose 50 basis points to 7.10 percent last week, while Spain's rose 6 basis points to 5.51 percent.
The market has signaled it's all over for Portugal. Spain is next.
Iceland has finally emerged from deep recession after allowing its currency to plunge and washing its hands of private bank debt, prompting an intense the debate over whether Ireland might suffer less damage if adopted the same strategy.
Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year.
The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.
Iceland's president, Olafur Grimsson, irritated EU officials last month when he said his country was recovering faster because it had refused to bail out creditors – mostly foreigners.
"The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn't pump money into them in order to keep them going; the state should not shoulder the responsibility," he said.
The Irish press reported that EU officials "hit the roof" when Irish negotiators talked of broader burden-sharing. The European Central Bank is afraid that any such move would cause instant contagion through the debt markets of southern Europe.
Comparisons between the Irish and Icelandic banks must be handled with care. Iceland is tiny. It could walk away from liabilities equal to 900pc of GDP without causing a global systemic crisis.
Ireland is 12 times bigger. The balance sheets of Irish banks are $1.3 trillion (£822bn). The interlocking ties with German, Dutch, Belgian, and British banks create a nexus of vulnerability. Bondholder defaults would risk contagion to Spain and Portugal, where the banks rely heavily on foreign capital markets.
Of course, banks are only half the story. Nobel economist Paul Krugman said Iceland has been able to eke out recovery sooner because it never joined the euro.
"Iceland devalued its currency massively and imposed capital controls. And a strange thing has happened: although it experienced the worst financial crisis (anywhere) in history, its punishment has been substantially less than that of other nations," he said, referring to Baltic states pegged to the euro.
Two years later, the krona is down 30pc, aluminum smelters are firing on all chimneys to meet export demand and local produce has displaced imports, including such exotica as vegetables and tomatoes grown in greenhouses.
The underlying tale of Ireland and Iceland, and the tale of the 1930s, is that a devaluation shock may cause a violent crisis – that looks and feels terrible while it happens – but the slow-burn of policy austerity and debt deflation does more damage in the end.
To Ireland With Love
Once again I implore Ireland to tell the IMF and EU to go to hell in response to the IMF's Trojan Horse offering. Flashback November 28, 2010: To Ireland With Love.
I believe we have all heard the story and know how it ends.
Iceland's President Olafur R. Grimsson said his country is better off than Ireland thanks to the government's decision to allow the banks to fail two years ago and because the krona could be devalued.
"The difference is that in Iceland we allowed the banks to fail," Grimsson said in an interview with Bloomberg Television's Mark Barton today. "These were private banks and we didn't pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks."
Vote the Bums Out and Tell the EU and IMF to Go to Hell
Unfortunately, the idiots running Ireland's government, especially Minister Brian Cowen, don't see it the way Iceland's president does.
However, Iceland's government did not see it that way either, but the citizens of Iceland took matters into their own hands and voted the bums out, rejecting "Icesave".
Regardless of what deal Cowen signs, I see no reason it need be binding on the next Irish Parliament. Indeed, I recommend to to citizens of Ireland that they firmly tell their representatives that if they vote for Cowen's proposed budget, they will be voted out of office.
This was a blatant effort to force people into accepting a need to raise taxes. To balance the budget I made every possible program cut offered. It was not enough. To balance the budget I had to raise sin taxes and gas taxes.
There are worse solutions of course, like hiking income taxes or corporate income taxes.
Exercise Misses the Mark
Where was a proposal to privatize the prison system using non-union labor?
Where was the proposal to eliminate prevailing wage laws?
Where was the proposal to eliminate defined benefit plans for all government workers?
Where was the proposal to virtually privatize every conceivable government job to the private sector?
What about programs that could be eliminated entirely?
I sorted out some but not all of the more ridiculous ones.
Does the state need a ....
Acupuncture Department
Office of AIDs
Air Research Board
3 different agencies for alcohol and beverages
2 Apprenticeship Councils
Art Council
Asian Pacific Islander Legislative Caucus
Bureau of Automotive repair
Barbering board
Biodiversity council
Calvet Loan program
Climate Change Portal
Coastal Commission
Cool California
4 Delta agencies
Digital Library
Bureau of Electronic and Appliance Repair
Employment Training Panel
Energy Commission
Equalization Board
2 Fair Employment agencies
Film Commission
Flex Your Power
Healthy Family Program
Hearing Aid Dispensers Bureau
Home Furnishings Bureau
Humanities Council
Independent Living Council
Indoor Air Quality Program
Economic Development Bank
Interagency Ecological Program
Labor and Workforce Development
Latino Legislative Caucus
Learn California
Little Hoover Commission
Maritime Academy
Managed Risk Board
Museum for History
MyCali Youth Portal
Native Heritage Association
Natural Community Planning Program
Naturopathic Medicine Community
Outreach
Peace Officer Standards Board
Postsecondary Education Commission
Prison Industry Authority
Privacy Protection Office
Psychology Board
Railroad Museum
Recovery Task Force
Refugee Branch
Regents of the U of C
Save Our Water commission
Smart Growth Caucus
Status of Women Commission
Take Charge California
We Connect
Wetlands Information System
Workforce Investment Board
California does not need ANY of those. Moreover I assure you I missed dozens more that could be cut back if not eliminated entirely. What the heck do those cost? And how much can be saved by my suggestions above.
I propose the LA Times re-do their preposterous exercise meant to convey the idea that taxes have to be raised. They don't. In fact, I bet they could be lowered.
It's exceptionally rare I agree with what Bernanke has to say. This is one of those rare times. Please consider Bernanke Rejects Bailouts
"We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."
The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies.
The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers.
Mr. Bernanke played down the risk of a major municipal-bond crisis, noting that muni markets have been functioning normally, with healthy trading volumes and lots of issuance. But he said that if municipal defaults did become a problem, it would be in Congress's hands, not his.
"This is really a political, fiscal issue," he said.
Lawmakers also are drawing a line in the sand. Senior House Republicans say they will oppose any state requests for money. "If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government," House Budget Committee Chairman Paul Ryan said Thursday.
At least three House committees are planning hearings on local budget woes. Rep. Devin Nunes (R., Calif.) plans to introduce a bill to require states to disclose the size of their public-pension obligations in order to keep their federal tax-exempt bonding authority.
The bill, the Public Employee Pension Transparency Act, will explicitly bar state and local governments from receiving help from the federal government to cover their pension obligations.
"There are 242 Republicans, and I can't imagine one that would be in favor of a bailout," Mr. Nunes said.
Many Democrats are wary as well. "We need to be prepared with a plan in case we are approached by one or more states," said Sen. Kent Conrad, (D., N.D.), chairman of the Budget Committee. Neither the House nor the Senate would be "very interested in bailouts to states," he added.
On a recent broadcast of CBS's "60 Minutes," Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances, said the U.S. could see "50 to 100 sizable defaults," in 2011 amounting to "hundreds of billions of dollars."
Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with.
Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely.
3. Cutbacks in US Cities and States
With Republican governors holding a majority of governorships, with Republicans holding a majority in the House, and with a far more conservative Senate, there is going to be little enthusiasm for increasing aid to states. There will be some aid to states of course, but nowhere near as much as needed to prevent cutbacks. Expect to see a huge number of layoffs and/or cutbacks in services. Cutbacks in cities and states will be a good thing, but that will counteract other gains in employment. The unemployment rate will stay stubbornly high.
Whitney Overstates and Incorrectly States the Problem
In regards to Bernanke's Meredith Whitney's estimate of "50 to 100 sizable defaults in 2011 amounting to hundreds of billions of dollars" I actually agree with Bernanke.
The key word is "entirely". Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with.
I do not entirely agree with it either. A critical point is that by saying "entirely", Bernanke implies he agrees with some of it.
While there could be 50 to 100 municipalities taking that action, many cities that take that action will be small. Moreover, as pessimistic as I am, I doubt we hit that total in 2011. Rather, I see this crisis spreading out over a fair number of years, not necessarily a big bang in 2011 specifically.
Like Whitney, I do expect to see one or more major bankruptcies such as Detroit. I also see renewed interest by a large number of cities. I suspect Bernanke is bright enough to see the same thing.
However, in many instances when cities do declare bankruptcy, one of the major goals will be to shed untenable public union pension plans along with union salaries, not necessarily bond obligations in general.
Nonetheless, I expect this to rattle the municipal bond market across the board. The time to invest in munis will be after yields soar and after we get a better handle on which cities may go the bankruptcy route, and why.
Whitney's estimate of "hundreds of billions of dollars" is where she is most likely to be wrong.
Might hundreds of billions in unfunded pension obligations be shed by the time this crisis is over? Absolutely, and that is a major theme.
After all, the state pension deficits are $3 trillion or more, and that does not include city, county, and local obligations. However, defaulting on pension obligations does not appear to be what Whitney meant.
Addendum:
"Jail4Bail" Writes "We haven't seen the cutbacks in operations that would precede any bankruptcy."
Hello Jail,
It won't necessarily happen that way. Cutbacks make the plans more solvent, prolonging the agony, while bankruptcies will eliminate the need for many cutbacks.
Thus, the correct approach (and some cities will realize this in 2011) is bankruptcy comes first. Working out cutbacks and details come second. I expect this to happen in Michigan in particular.
Portugal is the spotlight du jour in the sovereign debt crisis. Belgium is not far behind. On Saturday Reuters claimed Germany and France want Portugal to accept aid, citing Der Spiegel.
Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading to other countries, German magazine Der Spiegel reported on Saturday.
Without citing its sources, the magazine said government experts from both European heavyweights were concerned Lisbon will soon not be able to finance its debt at reasonable rates, after its borrowing costs rose at the end of last year.
Berlin and Paris also want euro zone countries to publicly commit to do whatever it takes to protect the bloc's single currency, including topping up a 750 billion euro ($968 billion) rescue fund if necessary.
Absurdity of "Stopping the Spread" Statement
This headline is making the rounds but nearly a day later I still cannot find anything about it in Der Spiegel.
Mish Note: See Addendum for Der Spiegel German reference and a reader's comments
I do have a few quick comments.
Note the absurdity of the statement "Germany and France want Portugal to accept an international bailout as soon as possible in order to prevent its debt crisis spreading". The fact that Portugal needs a bailout is 100% proof the crisis has spread. So are rising sovereign debt yields across the board relative to Germany. The only exception now is France.
Portugal is in the process of making a private placement of bonds to diversify its investor base, the finance ministry said on Friday without giving any details of the operation. "I can confirm that an operation is taking place but we will make no comment about the buyer," a spokeswoman at the finance ministry told Reuters when asked about market talk that China could be buying Portuguese bonds.
Assuming the story is true (once again I have no reason to doubt it in spite of a lack of details), the only conceivable private placement at this moment is China.
The lack of details this weekend suggests an attempt to paper over the crisis with bullsweet, hoping something will stick. It won't. Is Belgium next?
[Belgium has] been without a full-time government for 200 days. It overshadows the 194 days it took to resolve a 2007 political deadlock.
The world record is currently held by Iraq, which had no permanent government for 290 days.
The New Flemish Alliance won the most seats in June's elections. Party leader Bart De Wever wants greater autonomy for Dutch-speaking Flanders. But the head of Wallonia's French-speaking Socialists, Elio Di Rupo, opposes any such move.
As the two struggle to strike a deal, Prime Minister Yves Leterme has stayed on as the head of a caretaker government.
After numerous rounds of negotiations between the victors of this summer's federal elections, Belgium is still without a government. The two major parties, the Flemish nationalists and the French speaking socialists, have been gridlocked for months. Unless they manage to find common ground in the weeks ahead, the country may have to call another election.
No one likes the prospect of new elections as they are likely to strengthen each of the largest parties in the two language areas of Belgium, rendering future compromise nigh impossible. The New Flemish Alliance, which favors gradual secession of the Dutch speaking part of the country, has been adamant so far in demanding increased autonomy for the region. Walloon socialist leader Elio Di Rupo previously offered the Flemish financial reform, including a transfer of competences from federal to regional governments worth some €15 billion. But the nationalist balked at parallel requests to give Brussels—an independent, bilingual region within Flanders of which the population is largely French speaking—a fixed subsidy of €250 million to alleviate part of its massive debt burden.
Whereas Flanders is the economic powerhouse of Belgium, the south remains impoverished and subject to high unemployment rates. With the socialists in power, the Walloons nevertheless enjoy a welfare state for which the Flemish say they are footing the bill.
The lack of political stability may well harm Belgium's credit rating in the near future. As one of the most highly indebted countries in Europe with government spending equaling almost 50 percent of GDP, Belgium's ability to borrow is pivotal.
Belgium's CD&V Rejects Interim Government Proposal
The CD&V, Belgium's Flemish Christian Democratic party, rejected a proposal from Didier Reynders, the country's finance minister, for a short-term government to address the country's budget deficit, the Belga news agency said, without saying where it got the information.
The party wants negotiations to continue on forming a government that is "endowed with full responsibilities," Belga said.
Belgium cannot put aside its differences to tackle the debt crisis. Will the debt crisis wait? I think you know the answer to that.
China has been shopping for European sovereign debt for some time. The so-called 'red knight' for the struggling Eurozone periphery has come in with timely aid for Greece, and offered support to Ireland and Spain.
On Thursday Spanish daily El Pais reported that China has offered to purchase Spanish sovereign debt worth about $7.89 billion. There is euphoric expectation that China, armed with its $2.6 trillion reserves, will emerge as the ultimate white knight for Europe. Is that belief founded on facts and substantiated by strategic thinking?
Analysts at Capital Economics have said "China is unlikely to be able or willing to do much to solve the debt crisis in the euro-zone," even though the popular perception is that it will.
"China's leaders naturally want to be polite to foreign hosts and visitors, but their actions frequently fall short of the expectations raised by their words," write Julian Jessop, chief international economist and Mark Williams, senior China economist, in a note.
Significantly, the analysts also point out that eurozone's difficulties go beyond finding investors to buy sovereign bonds each month.
The willingness of China or anyone else to buy sovereign bonds will not alone see the region through its more complicated systemic difficulties.
Ever since the peripheral debt crisis began to threaten the common currency and the union, China has offered support to efforts to stabilize the eurozone.
China reiterated the commitment on Tuesday saying it supported Europe's efforts to deal with the peripheral debt crisis and said Beijing will not cut down its holdings of European sovereign bonds "EU members have taken a number of steps to actively respond to the sovereign-debt crisis," Chinese Vice-Premier Wang Qishan said at the two-day EU-China High Level Economic and Trade Dialogue which concluded in the Chinese capital on Tuesday.
"We hope these measures will quickly produce results and lead to a steady recovery of the EU economies," Wang added.
The big impact is Germany and France are thinking about raising the EU debt guarantee from 750 billion Euro to basically "unlimited".
Germans are raging in the comments section, since it seems unthinkable that we might guarantee our neighbours' debts in an unlimited way.
What's even more disturbing is that at the moment around 70% of the Germans want to leave the Euro. But, this is not being represented by the parties in parliament.
From far right conservative CSU to far left semi-communist LINKE *every* party in parliament is pro Euro. People are very angry and upset because they feel ignored by the politicians.
Now we have a few votes coming up on state level in the next months. It seems that Merkel's conservative party will fail at these elections. Liberal democrats have a high probability of failing to get into the parliaments at all. It might be very well the case that Merkel will be overthrown by June. This is not a conspiracy theory, it's mainstream media thought.
Actually that comment is slightly inaccurate in one respect. Only 30% would get into the Euro today if they had to do it over again. I cannot speak for the rest of the translation. I assume it is accurate.
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