by Jules Evans | Mar 11, 2008 | Global system
Dark times in western markets. The financial press at the moment reads like a particularly gloomy prophesy from the Middle Ages. This from Euroweek:
Undreamt of volatility in dollar swap spreads…Debt professionals watched in disbelief as dollar swap spreads shot out to their widest level in years. ‘Now the world is definitely coming to an end, right? It’s been nuts, just nuts’, said a stunned swaps dealer on Thursday in New York.
The surge in levels was so savage that some onlookers suggested it presaged the failure of a major US financial institution…Citigroup has taken a terrible beating through subprime, and its failure, or that of a big bank like it, is whispered as a possibility in the corridors of Wall Street.
The market was also upset by the news from Ambac, the troubled monoline bond insurer. It’s not getting a bailout from the banks after all, but intends to raise $1.5 bn of new capital in the stock market. If Ambac is downgraded, over $1 trillion of securities it has insured face a rating downgrade as well, which could spark a vast bond firesale and consequent losses for banks holding that paper.
Mortgage bonds are screwed too, as are hedge funds who own lots of mortgage bonds, including the Carlyle Group’s hedge fund, Carlyle Capital, which owned several billion dollars’ worth of mortgage bonds, and which now appears to be heading for default. And who is the biggest investor in Carlyle Capital? Citigroup.
Meanwhile, in other markets, things are looking fantastic. The IPO of China Railways managed to attract $68 billion in Chinese retail orders. $68 billion! The Middle East is also completely flush with cash. Russia is embarking on a $1 trillion infrastructure renovation programme.
And these investors are now buying up Wall Street bit by bit – Credit Suisse has sold a big stake in itself to Qatar’s sovereign wealth fund, while Citigroup is being propped up by other big Middle East investors at the moment.
This may not be enough to save it though. Even they think it might go down without US government support. This from Dow Jones last week:
Mideast sovereign wealth funds may fail to save troubled U.S. banking giant Citigroup unless more cash is pumped into the lender, the head of a $13 billion Dubai-owned investment firm said Tuesday.
Sameer Al Ansari, Chief Executive of Dubai International Capital told delegates at a private equity conference that it will take more than the combined efforts of the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi investor Prince Alwaleed bin Talal to save the bank.
“It’s going to take more than that to rescue Citi,” Ansari said. He added that more write downs are expected and that Gulf investors would be required to bolster Citi.
We’re seeing a major shift in the balance of power. Just 15 years ago, western financial institutions like the IMF, the US Treasury and Citigroup called the shots in emerging markets, and emerging market countries had to go to them on their best behaviour, like Oliver Twist saying ‘please sir, could I have some more!’.
Now, as one banker from the beleagured UBS told me today, ‘these developing countries don’t need us anymore’. No, I replied. They don’t need you…they own you.
by Alex Evans | Mar 7, 2008 | Climate and resource scarcity, East Asia and Pacific, Global system
Meanwhile, on the Time magazine blog, Simon Elegant has been sitting in on Wen Jiabao’s ‘work report’ to delegates at the National People’s Congress.
It took two and half hours but there was no question then and in subsequent comments by senior officials that inflation is very much on their minds. Wen said their target for the year is 4.8 per cent, which seems optimistic given that its currently running at 7.1 per cent (January) and rising. With inflation, as with everything else, perception is just as important as reality. And that’s where the problems lies for Beijing. With most of the rise coming from food (80 plus per cent according to the government) these jumps really hit hard.
His colleague Jodie Xu, meanwhile, has been seeing the impacts up close in Beijing’s food market:
Wang Litian, a 67 year old retired worker from Beijing Bus Factory, recently faced an impossible choice: cut her medical expenses by not taking painkillers or cut down on her food spending. Wang lives with her husband, son and daughter-in-law and a granddaughter The family’s income is mostly spent on food and medicine. But with the food prices continuing to soar, they now have a choice between food or medicine. “Last year, our food expense was a little over one thousand yuan a month. It has risen to over two thousand now,” Wang says, waving her hands in agitation. “My salary has just been increased by 200 yuan a month, but the food prices rise much faster.”
Wang isn’t alone in suffering from a recent bout of inflation that hit the food sector hardest. A retired factory director who gives his name only as Old Ma grumbles about the price of lamb. “Our quality of life is steadily declining. Last year, my family could afford to have meat twice a week. Now we only eat meat once every month.” Ma, says his family of seven budget 1,500 yuan a month for food. But now that means most meals consist of cabbage and potatoes. To get cheaper prices, Old Ma delays his daily visit to the food market until four o’clock in the afternoon. “The later I go, the cheaper the price is. I exchanged the quality for the quantity. If the price doesn’t stop going up, it won’t be long before people start to protest.”
As Simon Elegant recalls, it’s not hard to see why the CCP are so worried about inflation: it was one of the main drivers of protests at Tiananmen nearly 20 years ago…
by Alex Evans | Mar 7, 2008 | Conflict and security, Influence and networks
The Cult of the Dead Cow, a noted hacker group, has just conducted some interesting research on government computer network security vulnerabilities (hat-tip: John Robb). CDC’s headline conclusion:
(1) Web site security on government and military web servers is stronger in China than in the west.
And also – er:
(2) Adult content is out of control with Chinese Communist Party (CCP) middle-management types.
Here’s the full story. Fortunately, as CDC explain, they have a clear and responsible policy on information privacy:
WHY CULT OF THE DEAD COW WILL NOT PUBLISH WESTERN SECURITY HOLES We ain’t stupid. We have shared our findings with some security experts, selected journalists and NGOs, and they’ve been corroborated. But that’s it. We have zero interest or motivation in providing a roadmap for bored teenagers, criminals, or any government agencies.
WHY CULT OF THE DEAD COW WILL PUBLISH CHINESE GOVERNMENT DATA We couldn’t care less about these assholes. Any country that props up dictators and practices genocide doesn’t catch a break from us. China should be grateful that we just found this bone-polishing material.
Eat your heart out, Stephen Spielberg.
by Alex Evans | Mar 1, 2008 | Africa, Climate and resource scarcity, Economics and development, Global system
Lots of concerns lately about stagflation, given how commodity prices have continued their inexorable rise even as the US economy falters. Inevitably, some have wondered whether it means it’s the 1970s all over again. But here’s another reason to think about dusting off those flares: what about the risk of a new third world debt crisis?
Consider how rising commodity prices – especially food and energy – are affecting low income countries. I saw a very worried-sounding email this week from UNDP in Yemen, noting that the country is 75% dependent on food imports, that the price of a bag of wheat is now over two and a half times its level a year ago – and that fuel subsidies are already going to absorb 30% of government expenditures this year “against a backdrop of declining revenues due to a combination of reduced production and rising local consumption of oil and its derivatives”. Not good.
On top of that, consider how much aid is being diverted towards coping with these price increases. As I noted back at the start of the year, we already know from the International Energy Agency that oil importing low income countries in Africa have seen all of their aid and debt relief over the past three years offset by increased costs for energy imports. That’s before food prices are even factored into the equation – and as WFP head Josette Sheeran’s alarm bell-sounding interview last week underscores, there are plenty of problems on that front too.
If aid isn’t enough to offset the problem, then it follows that some countries may have to take out loans to cope with the balance of payments problems. One place they might look to is the IMF; the Institute of Development Studies’ Stephany Griffith-Jones made such a proposal in January, when she wrote in a letter to the FT that
When oil prices went up in the 1970s, the International Monetary Fund created low conditionality oil lending facilities. These helped sustain growth and facilitate adjustment in many developing economies. Should not a similar facility be created now in the IMF to ease the burden, especially on the poorest countries? Or should not existing IMF facilities, like the different windows of the Poverty Reduction Growth Facility, be modified to provide rapid, significant, cheap, low conditionality loans to poor countries facing the external shock of a large deterioration of their terms of trade?
The Fund itself subsequently confirmed that this was already happening: “several countries already receiving support under the International Monetary Fund’s poverty reduction and growth facility have recently requested additional lending in response to a terms of trade shock”.
But of course it may not be the Fund that emerges as the key lender in all this. Just as in the 1970s, the world economy is suddenly awash with petrodollars from newly flush oil producers – hence all the fuss about the rapidly evolving role of sovereign wealth funds. China, too, is also starting to invest some of its vast dollar reserves – now around $1,500 trillion – in Africa. So far, these investments have concentrated on commodity producers rather than importers, but this could change if China comes to regard balance of payments lending as an inexpensive means of purchasing influence more generally.
In all cases, the underlying question on balance of payments loans to poor countries is: what happens if – as many commentators believe – the current food and oil price shock isn’t just a cyclical blip, but is instead a longer term structural shift? Are low income countries just supposed to keep borrowing?
One to add to the agenda when food prices come up at the IMF / World Bank spring meetings, perhaps…
by Alex Evans | Feb 27, 2008 | Climate and resource scarcity, Global system
Ed Crooks, writing on the FT’s energy blog, flags up some new work from Cambridge Energy Research Associates on how we got to $100 oil – and how much higher prices can go.
On the former, CERA list four key drivers: the “growing shadow of fear over supply reliability”, demand continuing to rise despite high prices, inventory levels continuing to fall, and ongoing human resource and equipment constraints. Financial markets have also intensified the process, they say, through demand for derivatives such as crude oil futures which “did not unilaterally create the momentum toward $100, but … did react to growing perceptions about potential supply inadequacy and exacerbate the underlying oil price trend”.
So where will it all end? According to Ed Crooks, CERA “raises the question of how much higher prices can go, but does not answer it”. That said…
The piece appears to suggest that the “break point” for oil prices, as illustrated in figure 6 with some cute little blue figures, is about $120. At that point, factors such as the rise of energy efficiency, alternative fuels and other policy changes, as well as the economic impact, really begin to take their toll on demand.
But as one observer notes in the comments on Ed’s post, maybe CERA don’t pin themselves down to an exact figure because “every other time they’ve answered it they’ve been spectacularly wrong”:
CERA Prediction Record
2002: predicted $20, actual $26.16
2003: predicted $20, actual $31.07
2005: predicted $20 to low $30, actual $65
2007: predicted low $60 range, actual $72 as they state above.
An awful lot depends on how resilient the major emerging economies (and especially China) prove to the downturn in the US. Watch this space…
