Tag Archives: Wen Jiabao

Greece Ends Week In Absurdum

In spite of the alleged deal of another bailout package for Greece, the spreads on Greek CDS rose to the absurd level of 2150 basis points, that is 21,5 percentage points above the benchmark – the German bonds. Yesterday Chinese Prime Minister Wen Jiabao arrived in Europe to check on China‘s investments. Dear God!

“Given its obvious interest in the stability of euro zone it will be keen to find what progress, if any, has been made in tackling the region’s fiscal problems.”

Gavan Nolan

"Reductio ad absurdum" by Rodion Tikhomirov

The Chinese premier Wen Jiabao arrives in Europe Friday, and the main topic of discussion when he meets Europe’s leaders is likely to be Greece. China has been taking a keen interest in Europe’s periphery over the last few years.

The European Council on Foreign Relations estimates that 40% of Chinese investment in the EU is in eastern Europe and the peripherals, excluding Ireland.

  • In Greece the Chinese shipping company Cosco in 2008 signed a 35-year lease on a container port in Piraeus.
  • Jiabao’s deputy Zhang Dejiang visited Greece in 2009 with more offers of investment.

Of course, the reason China is so interested in Greece at the moment is that it is at the heart of the euro zone debt crisis.

China has made several public proclamations of support in favor of Greece and the other peripherals, though it is not clear if it has backed this up by buying large amounts of government bonds.

“Nonetheless, given its obvious interest in the stability of euro zone it will be keen to find what progress, if any, has been made in tackling the region’s fiscal problems,” credit analyst Gavan Nolan at Markit Credit Research writes in his weekly Market Wrap.

Of course, the reason China is so interested in Greece at the moment is that it is at the heart of the euro zone debt crisis.

China has made several public proclamations of support in favor of Greece and the other peripherals, though it is not clear if it has backed this up by buying large amounts of government bonds.

“Given its obvious interest in the stability of euro zone it will be keen to find what progress, if any, has been made in tackling the region’s fiscal problems,” Gavan Nolan points out.

So, what will Wen Jiabao find?

Well, the news that Greece and the EU had agreed a new five-year austerity plan last night was trumpeted as a great success.

But according to Markit the market participants are aware that the passage of the austerity bill through the Greek parliament is far from a formality.

Prime minister George Papandreou is in a stronger position after winning the no confidence vote earlier this week.

“But his control over his own party is still tenuous,” Nolan notes.

Another member of PASOK  declared Friday that he would vote against the bill, shrinking the already slim majority.

The vote begins on Tuesday but could last until Thursday.

Greece’s spreads closed the week at an unprecedented  record of 2150 basis points, reflecting the political uncertainty.

“But that is not the only doubt that the CDS markets are grappling with,” Nolan writes.

“The extent and form of private sector participation in the proposed bailout are still not clear. It seems that there will be an “informal and voluntary” rollover of debt similar to the Vienna Initiative.”

Nicholas Sarkozy and other European leaders have said Friday that they have been in discussion with financial institutions about a rollover, and there will be “no difficulties or concerns”, according to Sarkozy.

“But it remains to be seen just how “voluntary” this rollover is, and how they will incentive bondholders to participate,” Nolan comments.

Adding: “The answers to these questions are crucial for the CDS market and will influence spread direction. It should also be remembered that the total net notional outstanding for Greek sovereign CDS is just over EUR5 billion, and has been falling for some time.”

“This is small beer compared to the government bond market.”

“Unfortunately there have been several media reports that have been quoting the misleading gross notional figure; the lessons of the Lehman Brothers credit event auction clearly haven’t been learnt.”

China, on the other hand, has seen a considerable increase in its CDS net notional, particularly in recent months. It is now the 10th largest sovereign in terms of CDS exposure, according to DTCC figures.

The sovereign’s spreads have also widened in recent weeks, though they are nowhere near the levels they reached in the darkest days of the recession.

Premier Jiabao declared victory over inflation in an op-ed article in the Financial Times, Friday.

“Perhaps he is right, but the activity in the CDS market suggests that the Chinese economy faces more than one challenge in the months and years ahead,” Gavan Nolan concludes.

See also:

Markit Economic Research: HSBC Flash China Manufacturing PMI. 23062011.

Markit Economic Research. China PMI Flash Comment. 23062011.

MORE@Scribd

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Currency: The Weapon of Choice in Trade Wars

During the European debt crisis, in a matter of days, the dollar strengthened by around 10%. The weakness of the Euro and resultant appreciation of the Renminbi by over 14% reduced Chinese exporter’s earnings and competitiveness. Some of the moves reversed equally quickly when markets stabilised. Volatility of currency exchange rates has increased markedly in recent months.

“The US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese.”

Satyajit Das


“To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese,”  author Satyajit Das writes in a blog post at the EUROintelligence.com, Monday. “The Euro is now the “Drachmark”  – a derisory combination of the former Greek Drachma and German Deutschemark,” he adds.

The former trader, and author of the “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives,” goes on:

Investors assumed that the Euro would be a new Deutschemark, supported by German commitment to fiscal and monetary rectitude avoiding Gallic and Mediterranean extravagance. Instead, investors have been left holding a currency underpinned by unexpected German extravagance and Gallic and Mediterranean rectitude.

Despite sclerotic growth, public debt approaching 200% of GDP and a budget where borrowing is greater than tax revenues, the Japanese Yen has risen to its highest level against the dollar in 15 years. China is even switching some of its currency reserves into Japanese government bonds with returns only apparent under powerful electron microscopes.

Fears about the value of any currency have seen a resurgent interest in gold. Traders are now reading their John Milton: “Time will run back and fetch the age of gold.”

Amongst currencies, it is simply a race to the bottom. On 27 September 2010, the Brazilian Finance Minister Guido Mantega stated the obvious speaking of an “international currency war” as governments around the globe compete to lower their exchange rates to boost competitiveness.

Arcane currency shenanigans point to deeper, unresolved economic issues that policymakers are unwilling or unable to confront but whose resolution is crucial to a sustainable recovery and growth.

Since the end of the de facto gold standard and Bretton Woods, currencies increasingly have become weapons of choice in trade and economic wars. In the German and Japanese model of economic development, an undervalued currency is a key mechanism for maintaining competitive costs and high levels of exports to drive growth. Successive generations of emergent countries, most notably China, copied the model.

Despite tensions, the model worked well in a world of strong economic growth and increasing trade. It was a question of dividing growing wealth. The model is more problematic in a world of low growth.

Currently, the world may be entering a period of lower growth. Consumer spending, funded in developed countries by debt, has slowed. Given significant over capacity in many industries, business investment is weak. Under increased pressure from money market vigilantes, governments are cutting spending and raising taxes, embracing the “new austerity”.

As growth slows, maintenance of competitiveness requires businesses to manage costs brutally.

Cheaper currency values assist in remaining competitive, avoiding the need to overtly cut costs by reducing wages or cutting benefits, explicitly lowering living standards.

During the global financial crisis, the repeated manoeuvring of China, Japan and Germany to maintain the low value of the Renminbi, Yen and Euro against the dollar was designed to maintain export volumes to cushion the worst effects of the recession.

To a large extent, it reflects the underlying structure of economies heavily geared to exports.

Angela Merkel has repeatedly stated that she sees no change to the export driven German economic model in the near term. For Japan, falling living standards combined with an ageing, falling population means increasing dependence on exports.

For China, increasing wages pressures and domestic inflation means that rising production costs must be offset by other means, including an undervalued currency.

The problem of shifting models is great. In 1985, the Plaza Accord forced Japan to effectively revalue the Yen, setting off a rise from Yen 230 per dollar to Yen 85 per dollar.

The rise in the Yen reduced Japanese export competitiveness and led to a recession. To stimulate the economy, the Bank of Japan and Government pumped large amounts of money into the economy.

Rather than assisting recovery, the money set off a commercial real estate and stock market boom that collapsed spectacularly at the end of 1989 plunging Japan into the “ushinawareta junen” – the Lost Decade.

Aware of the Japanese experience and at risk of repeating the experience, China has fervently resisted revaluing its currency, despite pressure from the US. Recently, Chinese leaders have spoken about the economic and social catastrophe that would result from a major renminbi revaluation.

Chinese Premier Wen Jiabao told an European business conference that: “If we increase the yuan by 20 percent-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil. If China’s economy goes down, it’s not good for the world economy.”

In order to forestall, European calls, led by French President Sarkozy, for a revaluation of the Renminbi, Wen cunningly voiced support for Chinese purchases of Greek debt.

Wen urged Europe not to “join the choir to press China to allow more yuan appreciation.”

The unstable currency order creates distortions, frequently preventing action to deal with economic problems. It leads to countries pursuing odd and sometimes contradictory policies.

For example, financial triage, cutting the unsustainable and unlikely to survive countries out of the Euro, would restore their competitiveness through devaluation. But Germany is unlikely to allow weaker countries to leave the common currency precisely to avoid a sharp increase in the value of the Euro, making its exports less competitive. Contrary to popular view, the Germany has much to lose from changes in or abandonment of the Euro.

Recent German economic performance has benefited from the effects of a stronger Yen relative to the Euro making its exports more competitive. German corporate profitability has recovered strongly to pre-crisis levels.

More recently, Japan has intervened in currency markets to prevent the Yen testings its 1995 high of Yen 79.75 against the dollar.

Interest rate policies pursued, in part, to manage currencies also perpetuate economic dislocations.

Paralleling the events after the Asian monetary crisis in 1997/1998, the flight to dollars during periods of European instability pushes down interest rates on U.S. government debt. Paradoxically, lower interest rates reduce pressure for deficit reduction by lowering the cost of servicing public debt.

Major reserve currencies, like the dollar, Euro and Yen, provide some ability to offset changes in value by invoicing trade in their own currencies. Unfortunately, for minor currencies, the fact that trade continues to be denominated in the major currencies creates difficulties where a one day move in foreign exchange markets can wipe out the entire profit margin.

The higher volatility means that the cost of hedging the risk of such currency moves is large, reducing profitability.

The currency crisis highlights the “beggar thy neighbour” policies pursued by many economies. China, Japan and Germany have consistently pursued policies that emphasise high domestic savings, low domestic consumption and an undervalued currency to drive its export driven economies.

These global imbalances contributed significantly to the current financial problems.

A global economic order where a few countries save and lend to finance their exports while other countries act as consumers of last resort is unsustainable.

A system where each country seeks to maximise its own competitive position and financial security at the expense of trading partners is not viable.

 

Satyajit Das

 

An emerging toxic combination of inflexible global currency arrangements, a destructive cycle of currency devaluations, trade restrictions and the need of governments to rein in spending to balance budgets is reminiscent of the 1930’s.

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They threaten a period of prolonged global economic stagnation.

The globalization of complex financial relationships, much lauded before the crisis, is now proving a liability in resolving the crisis.

Optimists must rely on Israeli politician Abba Eban’s observation that “History teaches us that men and nations behave wisely once they have exhausted all other alternatives.”

By Satyajit Das

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EU’s Bank Rescue Turning Into Political And Economic Catastrophe

QE Expectations Continues To Fuel The Risk Rally

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A QE Fixation

Japan Struggle To Weaken Yen

The Ultimate Trading Weapon


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Mysteriet i Chiasso

Mysteriet i Chiasso

Det sies at sannheten er det første offeret i en krig. Vi vet ennå ikke sannheten om de to asiatene som ble tatt med 134 milliarder dollar i kofferten på grensen til Sveits forrige fredag. Kanskje får aldri vite den. Det som er sikkert, er at finanskrisen ikke er over.

To personer av asiatisk opprinnelse ble arrestert i byen Chiasso på den italiensk-sveitsiske grensen 3. juni etter at tollerne fant amerikanske statsobligasjoner til en verdi av 134 milliarder dollar gjemt i en koffert.

134 milliarder dollar er ufattelig mye penger. For å få et bilde, kan du forestille deg følgende:

• Med 134 milliarder dollar ville du vært USAs fjerde største kreditor, etter Kina, Japan og England.

• Hadde nasjoner vært til salgs, kunne du kjøpt Slovakia og Kroatia – og dessuten ha nok igjen til å kjøpe Moldova og Kambodsja.

• Du kunne arrangert tre olympiader.

• Du kunne dekket alle utgiftene til den norske stat i et år.

Ingen private personer eller institusjoner kan håndtere et så stort beløp som dette – kun nasjoner.
Og det er bare to, tre nasjoner i verden, foruten USA, som kan bla opp amerikanske statsobligasjoner for 134 milliarder dollar.

Forutsatt at papirene er ekte.

Dumper dollar?

Det er gitt svært lite opplysninger i saken. Det er ikke fastslått hvor at de to smuglerne hører hjemme, bare at de er i 50-årene og var utstyrt med japanske pass.

Et avgjørende spørsmål er om de amerikanske gjeldspapirene er ekte eller falske.

Spørreundersøkelser på nettet viser at fleste tror statsobligasjonene er forfalskninger. (Om lag 60/40). Men oberst Rodolfo Mecarelli i det italienske finanspolitiet mener. ifølge tyske medier, at de er ekte.

Obligasjonene blir nå undersøkt av italiensk politi og USAs Secret Service. Dersom det er ekte vare, betyr det at en regjering mest sannsynlig står bak det mystiske smuglingsforsøket.

Både Kina, Japan og Russland har gitt signaler om at de ønsker å redusere sin beholdning av amerikanske gjeldspapirer på grunn av den fallende dollarkursen.

Men statslederne vet godt at hvis de dumper milliarder av dollar åpenlyst i markedet, vil det utløse full panikk. Å selge dem i mindre porsjoner via en anonym konto i Sveits, er en måte å kvitte seg med dollarpapirene uten å skape for store bølger.

Om obligasjonene er ekte, vil det være katastrofalt for det amerikanske finansdepartementet. Det vil bety at USA har mistet oversikten over sine utstedte statsobligasjoner, og at pengepolitikken i verdens største økonomi er ute av kontroll.

Hvordan vil det globale finansmarkedet reagere på det, mon tro?

Forfalskninger i omløp?

Det gjør ikke saken bedre om obligasjonene er falske.

Kinesiske myndigheter har satt spørsmålstegn ved sikkerheten til amerikansk gjeld; om USA noen gang blir i stand til å betale tilbake pengene, og om dollarkursen vil holde seg såpass stabil de kommende årene at de ikke endre opp med tap på sine investeringer.

Dersom det er forfalskninger, er ikke Kinas statsminister Wen Jiabao den eneste som vil sette brillene på nesen og ta en ny grundig kikk på obligasjonene sine.

I USA er administrasjonen er i gang med et historisk gigantsalg av obligasjoner for å finansiere underskuddet på statsbudsjett som øker med om lag 200 milliarder dollar i måneden.

Bare mistanken om at det kanskje finnes forfalskede statsobligasjoner i omløp, kan føre til massivt salg av dollarpapirer, sende rentene i USA til himmels og dollaren i rett graven.

Krigføring?

Uansett – bare en regjering (eller diktator) med tilgang til en sentralbanks kunnskap og teknologi kan lage troverdige forfalskninger av verdipapirer som dette.

“Operasjon Bernhard” var navnet på en hemmelig tysk plan under andre verdenskrig som gikk ut på å destabilisere den britiske økonomien ved å overflømme landet med falske sedler.

Tyskerne produserte til sammen falske penger for 134 millioner pund.

I 1989 ble det oppdaget en falsk amerikansk pengeseddel av så høy kvalitet at det praktisk talt er umulig å avsløre. I dag antas det at det er en falsk seddel for hver 10 000 dollarseddel.

Det er fremdeles et mysterium hvem som har produsert den såkalte “superdollaren” . USA har beskyldt Nord-Korea for å stå bak falskmyntneriet for å sabotere amerikansk økonomi, men også Iran, Syria, Kina og kriminelle bander i Russland har vært mistenkt.

I januar 2007 hevdet den tyske avisen Frankfurter Allgemeine Zeitung at “superdollaren” er produsert av den amerikanske etterretningstjenesten CIA for å finansiere hemmelige operasjoner uten å be Kongressen om penger.

Januar 2008 ble denne teorien forsterket i en rapport fra McClatchy Washington Bureau.

Sannheten?

Det har vært påfallende lite omtale av saken i mediene.

Mangelen på informasjon gjør også at konspirasjonsteoriene florerer.

Det er likevel et besynderlig sammentreff at det i mars ble opplyst at det var akkurat 134 milliarder dollar igjen av USAs krisepakke (TARP) på 700 milliarder som ble vedtatt i fjor høst.

Det er neppe Japan som prøver å bølle med USA. Kina sitter på amerikanske obligasjoner for hundrevis av milliarder dollar. Det er ingen logikk i at landet skulle finne på noe som kan rasere sine egne valutareserver. Det samme gjelder for Russland.

Det er ikke utenkelig at Nord-Korea kan stå bak forfalskninger, men selv ikke Kim Il-Sung er så dum at han sender to “bananer i pyjamas” til Sveits -av alle steder – med en koffert proppfull av falske obligasjoner. Er det noe de kan i Sveits, så er det penger.

Er papirene ekte, er det Italia som får jackpot. Silvio Berlusconi kan innkassere 40 prosent av beløpet som straffegebyr i henhold til landets lover. Det er nok til å dekke Italias forsvarsbudsjett i halvannet år. Men Berlusconi er neppe i stand til å skaffe amerikanske statsobligasjoner for 134 milliarder dollar, verken ekte eller falske.

Da gjenstår det bare ett land – USA selv. Eventuelt i samarbeid med Kina eller Japan.

Kanskje tilhører pengene Kina, og at man har prøvd å få dem til Europa for å opprette en investeringsenhet som skulle kjøpe varer fra Kina for å styrke eksporten og landets handelsbalanse.

Kanskje har USA har solgt statsobligasjoner i hemmelighet til for eksempel Japan i flere år for å dekke over at underskuddet på statsbudsjettet er større enn opplyst, fabulerer de mest konspiratoriske.

Når nasjoner tar i bruk metoder som ikke tåler offentlighetens lys, er det som regel i de alvorligste krisetider.

“I krigstid, når sannheten er så verdifull, må den beskyttes av med bodyguard av løgner.” sa Winston Churchill en gang.

Det eneste som er sikkert, er at finanskrisen ikke er over.

Den kan også være i ferd med å forverres.

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