Category Archives: Brazil

BRICs Add $60 Billion Reserves as Zhou Derides Dollar

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They don’t like to buy dollars but they don’t want their currencies to appreciate and risk export market share.

And Bernanke, Geithner, and Obama want them to let their currencies appreciate to help our exports and ALSO want them to buy dollars and treasury securities because they think we need that to fund our deficit spending.

It is one confused and sorry state of affairs on our part.

On balance it looks like our exports won’t be going up nearly as fast as imports especially with crude prices higher. And a good chunk of domestic demand will be channeled towards imports (including those new fiats…). And with flattish GDP and rising unemployment and talk of spending cuts and tax increases it’s starting to look very grim again.

Not to mention no plan to cut imported energy bills anytime soon.

BRICs Add $60 Billion Reserves as Zhou Derides Dollar

by Shanthy Nambiar and Lilian Karunungan

June 8 (Bloomberg) — Reserves Reversal

Asian central banks, excluding China, ran down foreign-
exchange reserves by more than $300 billion in the 12 months
ended April 30, according to London-based HSBC Holdings Plc.
Russia’s slid by $213 billion in the eight months ended March 31,
central bank data show. Brazil’s reserves dropped $5.7 billion
in the six months ended Feb. 27.


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Obama on Energy and Food

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(email exchange)

This will drive up prices of food and energy longer term.

Still no plan to quickly bring down crude demand to offset declines in supply side incentives.

>   
>   Obama doesn’t buy the idea that US tax credits encourage oil and
>   gas production. His FY-2010 budget would delete eight such tax
>   breaks – start importing Brazilian ethanol.
>   


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Obama on quality of US securities

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Obama Says Investors Can Be Fully Confident in US

by Kim Chipman and Alan Bjerga

Mar 14 (Bloomberg) — President Barack Obama said investors can have “absolute confidence” in Treasury bills as he sought to assuage China’s concern about the safety of its holdings of U.S. debt.

“Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the U.S.,” Obama said today at a press conference in Washington after meeting Brazilian President Luiz Inacio Lula da Silva.

Sounds a lot like all the other CEOs just before they defaulted.

This is embarrassing. Maybe some day we will have a president who can give the right answer-

The US government makes payment in dollars by crediting accounts at its Federal Reserve Bank.

This process is not inherently constrained by revenues.

The notion of solvency is inapplicable.

Chinese Premier Wen Jiabao, whose country is the single largest overseas owner of U.S. government debt, said two days ago that he was “worried” about holdings of Treasuries and wanted assurances that the investment is safe.

Take him to the Fed and show him how the debits and credits work.

The U.S. is counting on overseas purchases of its debt to finance Obama’s $787 billion package intended to help pull the world’s biggest economy out of a recession.

Federal spending is in no case inherently revenue constrained.

This kind of unanswered rhetoric perpetuates the myths that diminish our real standard of living.

Obama noted today that investment flows into the U.S. are rising. Total net purchases of long-term equities, notes and bonds increased to $34.8 billion in December, compared with net selling of $25.6 billion in November, according to a Treasury Department report last month.

This has nothing to do with solvency. Maybe some day we’ll get a president who understands that.

“I think it’s a recognition that the stability not only of our economic system but also our political system is extraordinary,” Obama said.

The main reason foreign governments accumulate USD financial assets is to keep their own real wages and standard of living down to drive exports to the US.

That’s a ‘good thing’ for us that Obama also doesn’t understand.

He said the private sector has helped make the country the world’s “most dynamic economy.”

OK, whatever ‘dynamic’ means in this context.

Lula, who presides over the world’s 10th-biggest economy, said he’s concerned that investor “flight” toward the relative safety of U.S. securities will mean there’s less money to invest in emerging economies.

He’s just ignorant about how the monetary system works.


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Brazil Discovery May Contain 8 Billion Barrels of Oil

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About 90 days of world consumption.

Exxon’s Brazil Discovery May Contain 8 Billion Barrels of Oil

by Joe Carroll

Mar 13 (Bloomberg) — Exxon Mobil Corp.’s oil discovery off the coast of Brazil may hold enough crude to rival the nearby Tupi prospect as the Western Hemisphere’s largest find in three decades.


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Re: View from Europe (cont.)

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(email exchange)

>   
>   On Tue, Dec 23, 2008 at 2:43 PM, Russell
>   wrote:
>   
>   Warren:
>   
>   You have known I have been negative on this
>   market collapse for a long time.
>   

Yes!

I was more hopeful for the right political response after it went bad in July. :(

>   
>   And what happens on a day to day basis only
>   stirs the pot. The reason for trucks not being
>   able to lift anything at the ports is that trade
>   finance has disappeared and the reason why
>   the Baltic Dry Index declined 98% in 90 days.
>   The banks are technically bankrupt. I said that
>   about Citi way back when.
>   

Yes, they weren’t bankrupt back then, and they were open for business. Now that the government has let it go bad after an OK Q2, previously sort of OK/money good assets have further deteriorated and are no longer money good if this is left to its own ways.

A $1 Trillion of the right fiscal response turns it all around.

Idle Cranes From Long Beach To Singapore

Idle shipping cranes at Frozen Ports From Long Beach to Singapore portend a bleak 2009-2010.

Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month. Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

“You take it for granted until it blows up,” said Bernard Hoekman, trade economist at the World Bank, in an interview. “Now it’s blowing up.”


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Fed swap lines

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Recession’s Grip Forces U.S. to Flood World With More Dollars

By Rich Miller

Nov. 24 (Bloomberg) — The world needs more dollars. The United States is preparing to provide them.

In an all-out assault on capitalism’s worst crisis since the Great Depression, the U.S. is taking on the role of both lender and borrower of last resort for the global economy.

To help fight the worldwide dollar squeeze, the Fed has set up currency swap lines with more than a dozen other central banks. Some arrangements, including those with Europe, Britain and Japan, are open-ended, allowing the Fed’s counterparts to draw as many dollars as they need. The U.S. has also established individual $30 billion swap lines with Brazil, Mexico, South Korea and Singapore.

In a speech to a banking conference on Nov. 14, Bernanke characterized these efforts as an “internationally coordinated approach” among central banks to fulfill their function as lenders of last resort.

I’d characterize it as a pure Fed ‘give away’ program.


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FOMC minutes on swap lines

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The FOMC doesn’t seem to treat the swap lines any differently than the domestic lending arrangements:

In view of a further widening in financial market strains internationally, the Committee considered proposals to establish temporary reciprocal currency (“swap”) arrangements with several additional foreign central banks. Members unanimously approved the following resolution, which effectively permitted the Foreign Currency Subcommittee to establish a swap line with the Reserve Bank of New Zealand.

“The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the New Zealand dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account.”

Meeting participants also discussed a proposal to set up temporary liquidity-related swap arrangements with the central banks of Mexico, Brazil, Korea, and Singapore. In their remarks, participants focused on the outlook for complementarity between these swaps and the new short-term liquidity facility that the International Monetary Fund was considering; on the governance and structure of the swap lines; and on the particular countries included. Several participants pointed to the international reserves held by the countries and the importance of ensuring that these temporary swap lines, like the others that had been established during this period, be used only for the purposes intended. On balance, the Committee concluded that in current circumstances the swap arrangements with these four large and systemically important economies were appropriate, and it unanimously approved the following resolutions.

“The FOMC directs the Federal Reserve Bank of New York to establish and maintain a reciprocal currency arrangement (“swap arrangement”) for the System Open Market Account with each of (i) the Banco Central do Brasil, (ii) the Bank of Korea, (ii) the Banco de Mexico, and (iv) the Monetary Authority of Singapore. Each such swap arrangement would be for an aggregate amount not to exceed $30 billion. Drawings under the arrangement require approval. Unless extended by the Committee, each such swap arrangement shall expire on April 30, 2009.

The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the Brazilian real, the Korean won, and the Singapore dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account.

The FOMC delegates to the Foreign Currency Subcommittee the authority to approve individual drawing requests of up to $5 billion under each of the aforementioned swap arrangements with the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, and the Monetary Authority of Singapore.”

In addition, to address the sizable demand for dollar funding in foreign jurisdictions, the FOMC authorized the expansion of its existing swap lines with the European Central Bank and Swiss National Bank; by the end of the intermeeting period, the formal quantity limits on these lines had been eliminated. The quantity limits were also lifted on new swap lines set up with the Bank of Japan and the Bank of England. The FOMC authorized new swap lines with five other central banks during the period. In domestic markets, the Federal Reserve raised the regular auction amounts of the 28- and 84-day maturity Term Auction Facility (TAF) auctions to $150 billion each. Also, the Federal Reserve announced two forward TAF auctions for $150 billion each, to be conducted in November to provide funding over year-end. In total, up to $900 billion of TAF credit over year-end was authorized.

Despite the substantial provision of liquidity by the Federal Reserve and other central banks, functioning in many credit markets remained very poor, a situation that reflected market participants’ uncertainty about their liquidity needs and their future access to funding as well as concerns about the health of many financial institutions. To strengthen confidence in U.S. financial institutions, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement on October 14, which included several elements. First, the Treasury announced a voluntary capital purchase plan under which eligible financial institutions could sell preferred shares to the U.S. government. Second, the FDIC provided a temporary guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as all balances in non-interest-bearing transaction deposit accounts. The statement included notice that nine major financial institutions had agreed to participate in both the capital purchase program and the FDIC guarantee program. Third, the Federal Reserve announced details of the CPFF, which was scheduled to begin on October 27. After this joint statement and the announcements of similar programs in a number of other countries, financial market pressures appeared to ease somewhat, though conditions remained strained.

The expansion of existing liquidity facilities as well as the creation of new facilities contributed to a notable increase in the size of the Federal Reserve’s balance sheet. The amount of primary credit outstanding rose considerably over the intermeeting period, with both foreign and domestic depository institutions making use of the discount window. TAF credit outstanding more than doubled over the period. Credit extended through the Primary Dealer Credit Facility rose rapidly ahead of quarter-end; although it subsided subsequently, the amount of credit outstanding remained well above the levels seen before mid-September. The Term Securities Lending Facility (TSLF) auctions conducted over the intermeeting period had very high demand; in addition, dealers exercised most of the options for TSLF loans spanning the September quarter-end.


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Rush to join the euro

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As the Belgian bank giant Fortis collapses, citizens of that country appreciate the bonheur of belonging to the eurozone. Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do. The banking and financial crisis is quickly changing perceptions. Across Europe, there is a bit of a scramble to join the euro. Politicians from Scandinavia to Eastern Europe, fearful of the abyss, are re-evaluating the wisdom of going it alone (Denmark, Sweden, Norway) or postponing structural reform (Hungary, Poland). Brazil and Mexico have secured a swap line from the Federal Reserve Bank. When it comes to liquidity conditions, size seems to matter after all.

‘Had it not been for the euro, Belgium would have devalued and sharply increased interest rates — just as Iceland was forced to do.’

Yes, but only because they don’t understand what other options are, like sustaining output and growth via fiscal measures, setting interest rates where they want them for further public purpose (including the option of a zero rate policy), and letting private corps with external currency debt problems default on them and convert them to equity in bankruptcy while sustaining the ongoing business as desired for further public purpose (keeping the banks open while they are legally getting reorganized) etc etc.

It’s the blind leading the blind.


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Re: Banks cutting foreign currency loans in Eastern Europe

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(email exchange)

Thanks!

>   
>   On Fri, Oct 31, 2008 at 7:25 AM, Bob wrote:
>   

`Panic’ Strikes East Europe Borrowers as Banks Cut Franc Loans

By Ben Holland, Laura Cochrane and Balazs Penz

Oct. 31 (Bloomberg)- Imre Apostagi says the hospital upgrade he’s overseeing has stalled because his employer in Budapest can’t get a foreign-currency loan.

The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe’s developing markets and local currencies plunge.

Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe’s fastest-growing economies.

Plunging Currencies

Since the end of August, the forint has fallen 16 percent against the Swiss franc, the currency of choice for Hungarian homebuyers, and more than 8 percent versus the euro. Foreign- currency loans make up 62 percent of all household debt in the country, up from 33 percent three years ago.

That’s even after a boost this week from an International Monetary Fund emergency loan program for emerging markets and the U.S. Federal Reserve’s decision to pump as much as $120 billion into Brazil, Mexico, South Korea and Singapore. The Fed said yesterday that it aims to “mitigate the spread of difficulties in obtaining U.S. dollar funding.”

Plunging domestic currencies mean higher monthly payments for businesses and households repaying foreign-denominated loans, forcing them to scale back spending.

No More Dreaming

The bulk of eastern Europe’s credit boom was denominated in foreign currencies because they provided for cheaper financing.

Before the current financial turmoil, Romanian banks typically charged 7 percent interest on a euro loan, compared with about 9.5 percent for those in leu. Romanians had about $36 billion of foreign-currency loans at the end of September, almost triple the figure two years earlier.

In Hungary, rates on Swiss franc loans were about half the forint rates. Consumers borrowed five times as much in foreign currencies as in forint in the three months through June.

‘Serious Problems’

Now banks including Munich-based Bayerische Landesbank and Austria’s Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.

The east has been the fastest-growing part of Europe, with Romania’s economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.

IMF Help

Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.

Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.

These come with ‘conditions’ which means contractionary fiscal adjustments.

Panicked Customers


Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was “excessively high and risky,” especially because Romanians with their communist past aren’t used to the discipline of debt.


`Cheaper, Riskier’

Turkish savings in foreign currencies exceeded loans by about 30 percent as of the end of 2007, according to a January Fitch report. In Poland foreign exchange loans were double deposits, and in Hungary they were triple.

“We’ve been observing a return to a good old banking rule to lend in a currency in which people earn,” said Jan Krzysztof Bielecki, chief executive officer of Poland’s biggest lender, Bank Pekao SA. It stopped non-zloty lending in 2003. “Earlier, banks competed on the Swiss franc market watching only sales levels and not looking at keeping an acceptable risk level.”


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Fed macro policy

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>   
>   On Wed, Oct 29, 2008 at 11:45 PM, Morris wrote:
>   
>   This is the 64,000 dollar question…will unlimited FED lending to ENTIRE
>   world-with IMF help-created recovery? Push on string? Hyper inflation?
>   Question of the day…would love others inputs.
>   

I’d say yes, it’s inflationary and the channels at least as follows:

1. The outstanding international dollar debt was an expansionary force when it was growing, to the extent the USD borrowings were spent. Some of that USD spending was overseas, some in the US.

Growing debt, if directed towards spending, is expansionary.

For example, you may borrow to build a house, or buy a new car.

But if you borrow to fund financial assets, your pension fund, or to buy mortgage backed securities, for example, it’s merely the rearranging of financial assets.

This increased ‘leverage’ and has no direct effect on demand, beyond the demand created by the financial institutions themselves. This includes all the hiring of employees for the financial sector which all counts as GDP.

(While this may not be deemed ‘useful output’ it is accounted for as GDP, like bridges to nowhere, and does function to support people’s livelihood. Yes, better to have employed them doing something deemed useful, but that’s another story)

2. Should the USD loans default, the financial institutions lose capital, meaning the shareholders (and bondholders, depending on the size of the loss) lose their nominal wealth. This may or may not reduce spending. Most studies say it’s a weak effect at best.

And for each institution to continue to function it needs to replace capital.

(In our ‘loans create deposits’ world, infinite capital is available at the right price, if the government has a policy to sustain domestic demand.)

For US institutions with USD denominated capital, losses result in a reduction of their USD capital.

Their liabilities remain the same, but their assets fall.

And any assets sold to reduce USD funding needs are sold for USD.

3. Institutions with capital denominated in other currencies, go through the same fundamental process but with another ‘step.’

When their USD assets are impaired, they are left with their USD liabilities.

They now have a ‘mismatch’ as non dollar assets including non dollar capital are supporting the remaining USD liabilities.

To get back to having their assets and liabilities matched in the same currency, they need to sell their assets in exchange for USD.

Until they do that they are ‘short’ USD vs their local currency, as a rising USD would mean they need to sell more of their local currency assets to cover their USD losses.

Technically, when the assets they need to sell to cover USD losses are denominated in non dollar currencies, this involves an FX transaction- selling local currency to buy USD- which puts downward pressure on their currencies.

Additionally, they need to continue to fund their USD financial assets, which can become problematic as the perception of risk increases.

4. The Fed’s swap lines ($522 billion outstanding, last i saw) help the rest of the world to fund themselves in USD.

In an effectively regulated environment, such as the US banking system, this works reasonably well but still carries a considerable risk that we decide to take as a nation for further public purpose. (it is believed the financial sector helps support useful domestic output, etc.)

Any slip up in regulation can result in the likes of the S&L crisis, and arguably the sub prime crisis, which results in a substantial disruption of real output and a substantial transfer of nominal and real wealth.

The Fed is lending to foreign CB’s in unlimited quantities, secured only by foreign currency deposits, to world banking systems it doesn’t regulate, and where regulation is for foreign public purpose.

The US public purpose of this is (best I can determine) to lower a foreign interest rate set in London called ‘LIBPR,’ and ‘perhaps’ to ‘give away’ USD to support US exports.

The Fed yesterday, for example, announced $30 billion of said lending to Mexico and Brazil for them to lend to their banks. The Fed must be a lot more comfortable with Mexico and Brazil’s bank regulation and supervision than I am, and certainly than Congress would be if they had any say in the matter.

5. The problem is that once the Fed provides funding to these foreign Central Banks, who then lend it all to their banking systems, they remove the foreign ‘funding pressure’ that was causing rates to be a couple of % higher over their (didn’t change our fed funds rate). Taking away the pressure takes away the incentives of the pressure to repay $US’s introduces.

The Fed is engaging in a major transfer of wealth from here to there. Initially its prevents the transfer of wealth back to the US, as would have happened if they had been forced to repay and eliminated their USD liabilities and losses.

That same force if continued develops into large increases in USD spending around the world as this ‘free money’ going to banking systems with even less supervision and regulation than ours soon ‘leaks out’ to facilitate increasing foreign consumption at the expense of USD depreciation.

Note the bias- the ECB gets an unlimited line and Mexico is capped at $30 billion.

This means the Fed is making a credit judgment of Mexico vs the ECB, which means the Fed is aware of the credit issue.

Conclusion, the Fed is beginning to recognize the swap lines are potentially explosively inflationary, as evidenced by not giving Mexico unlimited access.

The swap lines are also problematic to shut down should that start to happen, just like what shutting down lending to emerging markets did in the past.

Shutting down the swap lines would trigger the defaults that the unlimited funding had delayed, and then some, triggering a collapse in the world economies.

It’s a similar dynamic to funding state owned enterprises- the nominal costs go up and the losses go up as well should they get shut down.

Keeping them going is inflationary, shutting them down a major disruption to output and employment.

It is delaying the circumstances that were headed toward a shut down of the European payments system, but leaving the risks in place for the day the swap lines are terminated.

7. Bottom line- it looks to me that the swap lines are a continuation of the weak dollar policy Bernanke (student of the last gold standard depression) and Paulson have been pushing for the last couple of years.

This time they are ‘giving away’ dollars to foreigners, in unlimited quantities, ultimately to buy US goods and services.

They are doing this to support export led growth for the US, at the direct expense of our standard of living. (declining real terms of trade)

They are doing this to increase ‘national savings’- a notion applicable under the gold standard of the early 1930’s to prevent gold outflows, and where wealth is defined as gold hoards. This notion is totally non applicable to today’s convertible currency.

It is a failure to understand the indisputable Econ 101 fundamental that exports are real costs and imports real benefits.

They believe they are doing the right thing and that this is what’s good for us.

The unlimited swap lines are turning me into an inflation hawk longer term.

But the USD may not go down against all currencies, as potentially the inflation will hit other currencies as well.

Where to hide? I’m back to quality rental properties and energy investments.

The world is moving towards increased demand with no policy to make sure that doesn’t result in increased energy consumption and increasing inflation.

Comments welcome!

Warren


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