Posts of February 2013

Where's Yer White People Now? On 'Saving' Egypt

♠ Posted by Emmanuel in IMF,Middle East at 2/27/2013 11:08:00 AM

I borrowed the line in the post title from The Ten Commandments when the Hebrews were being persecuted by the Egyptians: "Where's your Moses now?" Nowadays, I'd like to ask the current Egyptian leadership--especially the Muslim Brotherhood--something similar: Where's yer IMF white people now brandishing $4.8 billion? Daily reports emanating from Egypt talk about an economy teetering on the brink of collapse. I guess those "Internet Freedom" fantasists did not reckon that the dupes who supposedly tweeted their way to overthrowing Mubarak didn't imagine that those "bad old days" of dictatorship could now be the "good old days." Bravo; what an improvement.

Although I have written much about the "Internet Freedom" folly of Egypt, there is more to be said (unfortunately). The Christian Science Monitor points out something I hadn't recognized before but is surely true: Given that the government uses Egyptian pounds to fund food and energy subsidies, the currency's further depreciation will only make it more difficult to fund the purchase of these (usually imported) goods. So...

The pound had steadily declined since Mubarak was pushed from power with the country's grim economic outlook straining its foreign reserves. Billions in hard currency have been spent by the central bank trying to protect the country directly, as well as on wheat and fuel imports that the government subsidizes for domestic consumers. But notice my use of the word "had." Of late, the pound's decline is no longer "steady." Since about Jan. 13, the pound's decline against the dollar has been precipitous.

That's particularly dangerous for Egypt, since so many dollar-dominated commodities are subsidized by an Egyptian government that receives most of its revenue in pounds. In other words, every bushel of wheat or barrel of oil that the government purchases is far more expensive in domestic terms, which in turn further depletes the government's foreign currency reserves, makes investors even more nervous about the chances of a pound collapse, and so puts more pressure on the pound. The very definition of a vicious cycle.

Actually, Egypt not confronting the matter of subsidies head-on is quite a problem in itself. If I may elaborate on the formulation above:

The Islamist government refuses to roll back subsidies as demanded by the IMF so it may avail of a $4.8B bailout;
Other lenders supposedly waiting on the sidelines for an IMF deal as a seal of good housekeeping do not want to contribute absent an IMF program;
The deteriorating political climate causes further falls in the value of domestic currency
As the political climate gets worse, subsidy removal insisted upon by the IMF becomes an even more remote prospect; return to (1).

Nobody likes these things to happen. However, I am dismayed by the Muslim Brotherhood-dominated government counting on its superior organization to win elections claiming this to be the "democratic" result. I am equally dismayed by the Internet fantasists who long insisted that the overthrow of Mubarak was "democratic" and would lead to better outcomes. There is nothing of that sort.

As I said, where's yer white people now with $4.8 billion? Will the clerics even approve of Egypt taking this money? Perhaps religious fundamentalists (the Brotherhood) and economic fundamentalists (the IMF) don't mix, but they haven't even gotten that far to even consider the issue.

UPDATE: The ever-elusive IMF deal is now said by Moodys to occur in 3Q2013 at the earliest. Dig the "tough sell" line about gaining public approval--it's my understatement of the day. Let's say I am not holding my breath.

Too Long in Exile: ADB's Kuroda Next BoJ Guv'nor?

♠ Posted by Emmanuel in Japan at 2/25/2013 07:50:00 AM

It is curious that Western financial new media is finally paying attention to Asian Development Bank President Haruhiko Kuroda. Despite being the head of the most prominent regional lender in our part of the world, he has so far toiled in relative obscurity outside Asia. How obscure is he? His Wikipedia entry consists of two sentences despite being the ADB chief since 2005 [!] Talk about the stereotypical faceless Asian bureaucrat and you may have his photo in there somewhere.

Still, he is now being portrayed as the front-runner in becoming the next Bank of Japan chief since his views are similar to those of PM Shinzo Abe. Besides, he is said to command the support of the opposition DPJ as well, paving the way for his nomination. Kuroda is quite Asian in the sense that he does not hesitate from actively intervening in the markets if the situation calls for it:

As Japan's top financial diplomat from 1999 to 2003, he aggressively intervened in the exchange-rate market to weaken the yen to support the country's export-reliant economy, a sign he will be keen to keep any sharp yen rises in check. He has called for the BOJ to achieve its 2 percent inflation target in two years by pumping money into the economy through unorthodox steps, such as expanding government bond purchases and buying shares. Inflation in Japan has rarely reached 2 percent since the early 1990s.

Ironically, Kuroda is believed by many in the ruling LDP to be ideal for the job precisely because he has spent so much time cottoning up in absentia to the movers and shakers of Asia and beyond as ADB president. Despite gaining next to no attention elsewhere, rest assured that the Manila-based lender commands considerable clout in the Pacific Rim. Quoting PM Abe:

“(We want) someone who can articulate (Japan’s policy) in the inner circle of international finance and win understanding (from foreign countries),” he said. “Someone who can use theory to counter criticism against monetary policy is needed.”

...and here:

Mr. Kuroda’s global experience — as vice minister for international affairs at Japan’s powerful Finance Ministry from 1999 to 2003, and as president of the Manila-based Asian Development Bank starting in 2005 — could also help Tokyo navigate foreign criticism that its monetary policies are intended to weaken the yen to give Japanese exporters a competitive edge.

I ultimately believe that Japan will be aiming to weaken its currency regardless of who takes the job of BoJ governor; it's just that they believe the diplomatically assured Kuroda will be more able than his putative competitors to smooth ruffled feathers. See, for instance, the Koreans complaining about Japan re-engaging in currency war by using unprecedented measures to reflate the Japanese economy.

There is, however, a catch: Japan's grip on the Asian Development Bank has actually increased in recent years despite its fading economic fortunes. Together with the United States, Japan is co-largest shareholder in the institution, but Japanese officials like Kuroda are far more involved in its day-to-day operations. Moreover, China has made limited inroads at the ADB despite surpassing Japan as the region's largest economy. In no small part, Japanese regional influence is strongly conditioned on being able to choose the bigwigs at the ADB. In turn, Kuroda's stewardship of the ADB is believed to be a decisive factor as to why Japan's sway over it remains strong. Pulling him out midway through his second five-year term as ADB president may not bode so well for Japanese influence at the institution:

Abe advisers say Mr. Kuroda's main weakness is his apparent indispensability in his current position—president of the Asian Development Bank, a post he has held since 2005. He is less than two years into his five-year term.

Some Japanese officials worry that if Mr. Kuroda leaves early for the BOJ slot, Japan risks losing the perch it has controlled since the founding of the Manila-based institution in 1966. For Japanese finance officials, the ADB is Japan's equivalent of the World Bank for the U.S. or the International Monetary Fund for Europe—an international financial institution they expect to run, a platform for global influence. Losing the ADB for Japan would be a blow, especially at time of growing insecurity about the country's diminished standing in the region.

I simply do not think that erosion of Japanese influence at the ADB will happen overnight even if Kuroda is pulled out in a last-ditch effort to reflate Japan's economy. It will remain the institution's top shareholder and Japanese officials will still hold key positions. On the other hand, if Kuroda's successor proves unpopular, you never know if others can muscle in on turf the Japanese have long held to be their own.

2/27 UPDATE: The deed is done. Kuroda has been nominated to succeed Shirikawa.

Japanese Stimulus: Enough White Elephants Yet?

♠ Posted by Emmanuel in Japan at 2/24/2013 01:40:00 PM

When it comes to the most pigheadedly wasteful spending to supposedly jump-start an economy, portly and profligate Americans only have one serious rival: the Japanese. Granted, the Japanese have been attempting to escape stagnation for over two decades now instead of America's one. Still, the sheer pointlessness of their entire endeavour is something to behold. In contrast to America's infrastructure which is on par with that of Damascus after the umpteenth rebel mortar assault--the American Society of Civil Engineers gives the US a "D" and estimates $2.2 trillion needs to be spent--Japanese infrastructure is nowhere near as dire.

That hasn't, however, stopped the Japanese government from embarking on massive ("shovel-ready"?) construction projects time and again in the hopes that they will provide the foundations for Japan's recovery. With the LDP back in power, doling out projects to favoured contractors is once again on the agenda, with more train routes, bridges, and highways to nowhere on the drawing board. Throw in various ports and stations used once in a blue moon and you have white elephant projects up the wazoo. As the Reuters article notes, the "challenge" posed by PM Shinzo Abe is spending $100B in 15 months on infrastructure:

"We cannot simply continue to build roads and infrastructure the way we used to at a time when the population is ageing and shrinking," says Takayoshi Igarashi, a public policy professor at Japan's Hosei University who has advised the previous Democrat administration on rebuilding from the 2011 earthquake, tsunami and Fukushima nuclear accident...

Since he took power in December, Abe has earmarked 10 trillion yen ($107 billion) for new infrastructure and upgrades over the next 15 months - half of it funded by government debt. That is equivalent to a quarter of the amount that the Organisation for Economic Cooperation and Development estimates the entire world needs to spend on transport infrastructure each year.

Government spending is a classic remedy for weak growth. But it is one Japan has tried over and over - pouring roughly $2 trillion into concrete and steel since 1990 in a vain effort to resuscitate the economy, now in its fourth recession since 2000. Economists warn that, without reforms to lift Japan's long-term growth potential, more such spending will produce only a temporary jolt that swells a government debt already worth more than double national output...

It's not as if Japan needs yet more infrastructure when there is already much more than necessary to get around?

The world's 61st largest country, Japan has 1.2 million km (745,000 miles) of roads, the world's fifth-largest network. It has 680,000 bridges, almost 10,000 tunnels, 250 bullet trains and 98 airports. Government critics have long derided many as white elephants - unnecessary, costly and environmentally harmful. The airport in Ibaraki, 85 km (53 miles) north of Tokyo, for example, opened in 2010 at a cost of about $225 million as a hub for low-cost carriers. Today, it handles just six flights a day. Construction of the nearly $5 billion Yanba Dam in northwest Japan began in 1967 to help power the needs of a growing population. With Japan's population now shrinking, it remains unfinished 45 years later.

And there may be hundreds of billions more in spending in store

Yet the money represents only what Abe hopes to spend by April 2014. He has suggested spending similar sums every year for a decade - if he holds onto power that long. With the private sector and local communities expected to match government investment, this would add up to 200 trillion yen ($2.16 trillion) over 10 years - or roughly 40 percent of GDP.

Last, there will be no one to use all this new infrastructure as a shrinking population implies a shrinking workforce. Perhaps there won't even be enough folks to build all these white elephants:

It is not even clear who would use all of the new infrastructure, or even who would build it. Thanks to Japan's low birthrate, the population is declining by more than quarter of a million a year, government statistics show, with its working-age population shrinking at double that pace. According to Health Ministry projections the number of Japanese is expected to fall by nearly a third, to below 90 million, by 2060. That means fewer cars on Japan's roads. Japanese automotive research company Fourin Inc. estimates car sales in Japan will fall from nearly 5.4 million last year to 4.5 million in 2020, and to about 3 million a year by 2040. Japan's construction workforce is also shrinking: today it is a third smaller than in 1997 and building firms are already having trouble finding workers to rebuild areas from the 2011 disaster.

I've suggested that mass immigration [1, 2] is a much more promising solution to reversing Japan's demographic woes and quite possibly its deflationary ones as well, but that's never quite been on the cards. See if all these public works projects make a difference; I honestly cannot see why they will now when they did not before.

Redefining 'Lame': Proposed EU-US Trade Deal

♠ Posted by Emmanuel in Americana,Europe,Trade at 2/22/2013 01:52:00 PM

If you're wondering about scant coverage of the proposed EU-US FTA in what purports to be the IPE Zone, nobody said that I had to cover rather pointless trade deals. While I am not entirely indisposed to doing so, the ones I do mention at least have some entertainment value alike the (rather unlikely) EU-MERCOSUR deal which has been decades in the pipeline. Unfortunately, an EU-US FTA ranks right up there with a New Kids on the Block reunion on my radar screen. Who the £$%^ cares? The overall premise is overwhelmingly underwhelming. Let us count the ways:

(1) Exporting stuff nobody buys at home because folks are hard up doesn't assure sales abroad when your trade partner is equally hard up. The underlying premise of this FTA, trade creation, is highly dubious. We owe a debt of gratitude to none other than Karl Marx in the stupefaction sweepstakes evident here: We know that both the EU and the US are terminally stuck in reverse gear. Both economies are shrinking. Household incomes in both have been stagnant-to-declining for well over a decade. Hence, lowering trade barriers doesn't really matter when there's not enough money to go around despite unprecedented easy money policies on both sides of the Atlantic. Why are we to believe that ridding EU-US trade of the negligible 3% average tariffs remaining will result in much of anything when trillions in stimulus-- far greater inducements to consume--have failed to get these economies out of their respective ruts? Peugeot cars selling well in America--dreaming is free, no?

You'd think that countries go abroad in search of more promising markets than those at home once they reach saturation alike what Marx said, but here you have two equally saturated markets wishfully thinking that salvation lies in each other. You keep dreaming.

(2) Stated potential gains from this FTA are likely overstated. People clowning with DGSE models is usually the source of wildly overestimated gains from lowering trade barriers. It has been some sort of pastime estimating gains (if any) from this FTA. I am thus astounded that the claimed gains for both sides exceed some that I've seen made for the completion of the (global) Doha Round. It's easy enough to get a hold of the software, set optimistic parameters and wind up with trade creation figures in the tens of billions and I suspect that's what's going on here.

(3) Tariff lines won't be negotiated where they are highest--in agriculture. European agricultural subsidies are, in a number of ways, even worse than already-high American ones. The assumption going in is that both parties will want opt-outs for their respective agricultural lobbies. End result? No progress where substantial reductions in tariffs actually are possible.

(4) Most of the expected gains lie from reducing non-tariff barriers alike through standards harmonization. The EU admits as much:

Given the low average tariffs (under 3%), the key to unlocking this potential lies in the tackling of non-tariff barriers. These consist mainly of customs procedures and behind the border regulatory restrictions. The non-tariff barriers come from diverging regulatory systems (standards definitions notably), but also other non-tariff measures, such as those related to certain aspects of security or consumer protection.

Once again, think of agriculture. Famously, the US has had no luck gaining access for its genetically modified foodstuffs and meat products using beef hormones in European markets. I doubt whether the Europeans are willing to make significant concessions over these issues now when they have not been willing to do so before. Moreover, why are we to believe that, say, harmonizing automobile crash safety testing is going to unlock the sales of Peugeots Stateside multiplied across dozens of other industries?

(5) Canada has been negotiating an FTA with the EU for four years now with limited progress over issues that will almost certainly reappear when Europe negotiates with the 10x larger United States. Chances are that discussions will be even more contentious given the money at stake. The EU-Canada deal isn't exactly a promising precedent. From Reuters:

EU Trade Commissioner Karel De Gucht had hoped to wrap up talks for a free-trade agreement with Canada in Ottawa in early February, when he met his Canadian counterpart Ed Fast. But negotiations are held up over contentious issues including agricultural exports, intellectual property and the ability being to bid for government contracts on both sides of the Atlantic. "What was on the table was simply not feasible," De Gucht told the European Parliament's trade committee, when asked by one lawmaker to explain why a deal had not been reached. "On a number of issues they will have to make additional exceptions," he said, referring to the Canadians.

Also consider that negotiating this deal would terminally wound the Doha Development Agenda and you must wonder how desperate the brokeback Yanks and their European counterparts have become. Make no mistake that they would not have even proposed going down this road if things weren't so bad that they are now trying to make lemonade out of the lemons they've been dealt with.

Here is my fearless prediction: There will be heated negotiations--and perhaps even a done deal sometime around when Obama (mercifully) exits. Even so, it will all have been for not much of anything in the end.

If this is the rescue plan for both America and Europe, they are as delusional as they come.

(6) 2/23 UPDATE: To throw another monkey wrench into the proceedings concerning (surprise!) agricultural products, the EU has now applied blanket tariffs against US bioethanol exports over "dumping":

The EU will place a duty on all U.S. bioethanol imports to the 27-nation bloc from Saturday, in a move that has prompted Washington to express "serious concerns" and that comes as both sides prepare to launch negotiations on a free-trade deal. The European Union will levy a 9.5 percent tariff on all bioethanol coming from the United States, the bloc's Official Journal said on Friday, concluding a 15-month investigation that argued U.S. bioethanol was being dumped, or sold below cost.

Since most bioethanol is a component in blended fuel, the ruling sets a fixed charge of 62.30 euros ($82.38) per net tonne of bioethanol present in fuel. Brussels says that U.S. incentives to produce clean fuels constitute an illegal subsidy under world trade rules, and have allowed U.S. producers to sell cheap fuel to Europe, an accusation rejected by U.S. producers.

The US will likely appeal as FTA negotiations get underway. It's not such a good omen after so many unresolved squabbles over agricultual products, don't you think?

2014 Sochi Winter Games = 1936 Berlin + Oligarchs?

♠ Posted by Emmanuel in Russia at 2/21/2013 02:47:00 PM

A vainglorious leader with an authoritarian streak; a country with a chip on its shoulder against Anglophone powers; and massive Olympic spending to burnish a national reputation--where did we see all these things before? The parallels are not exactly edifying, but they're there nonetheless.

Reuters has a very interesting take on this latest Olympic boondoggle. Despite what the article mentions, I honestly doubt whether the Russians are pouring an unprecedented $50 billion into the 2014 Sochi Winter Olympics. Still, even if they spent even half that much it would be an astounding amount given that (a) it isn't the Summer Olympics which is a far more watched event and (b) Sochi isn't even a second-tier Russian city with a population of under 350,000.

There is a twist to this story, however: The Russian government, likely being ever-so-wise as to the financial calamities that have befallen any number of previous Olympic hosts, is making the Russian oligarchs foot the bill in a big way. As far as Russian politics go, we have a perverted if still comprehensible form of justice here. For, the guy who handpicked Vladimir Putin from obscurity, Boris Yeltsin, also oversaw the fire sale of various Soviet-era natural resource empires (that still dominate Russian industry) at a time when the West was foisting then-fashionable privatization of the commanding heights. It's only "fair" that the Yeltsin's main political benefactor be able to, ah, extract privileges from Yeltsin's economic benefactors.

In other words, part of the quid pro pro from all those years ago when the oligarchs were made very wealthy men out of a select few is footing the Sochi Olympics bill. It's not easy falling politically afoul of Putin as some oligarchs have found. That said, do not think the oligarchs are opening their pocketbooks willingly to the extent Putin expects them to for his pet project:

Above the Black Sea city of Sochi, one of Russia's richest men is spending billions of roubles to turn a patch of mountainside into a global showpiece. Metals magnate Vladimir Potanin has paid for new buildings, new lifts and hundreds of snow canons in the hope of transforming slopes not far from sub-tropical Sochi into a world-class ski resort. Like most of the plans to host the Winter Olympic Games next year, Russia's ambitions for the ski village and other venues are outsized in scale and ambition. Total investment to make the sleepy region fit to welcome thousands of competitors and the world's media is expected to exceed $50 billion, according to Russia's international news agency RIA Novosti. That would make it the most expensive games, summer or winter, ever staged. The 2010 Winter Olympics in Vancouver, Canada, cost a mere $3.6 billion, according to an estimate by PricewaterhouseCoopers, though others put the bill closer to $6 billion.

While Russia's President Vladimir Putin has not flinched at Sochi's eye-popping expense, some private investors and wealthy oligarchs, recruited by Putin to help foot the bill, are chafing at how much they are expected to do. In a rare challenge to the Kremlin they are demanding that the state help with the rising costs. Though precise figures on who is paying for what in Sochi are hard to obtain, RIA Novosti says private investors have spent nearly $25 billion. Federal and regional budgets have accounted for some $13 billion of the costs incurred to date, according to Deputy Prime Minister Dmitry Kozak.

The amounts we are talking about here are staggering. Q: When does a guy reportedly worth $14.5 billion complain about money? A: When the task he is asked to help complete will supposedly total $50 billion...

Potanin, whose estimated fortune of $14.5 billion makes him Russia's fourth richest man, according to Forbes, is complaining of at least $530 million of extra work his company was required to do. Now he wants the government to boost its contribution to his projects by cutting interest rates on his debt, which includes money borrowed through a line of credit with state bank Vnesheconombank of up to $750 million. "We are carrying out talks with the government on the compensation of a part of these expenditures through interest rate subsidies," said Potanin, speaking to Reuters. "Many see this as a form of government support. But actually it is only compensation for expenditures, which are not characteristic of ... commercial projects."

Oleg Deripaska, another billionaire oligarch [his boat is pretty nice I gather], has similar complaints, reflecting the complex, symbiotic relationship Putin has with Russia's rich elite. "The bargaining power is with the oligarchs until 2014, because they can come to the state for money or threaten that the construction won't get done in time," said Bruce Bower, a partner at the investment firm Verno Capital, who has lived in Russia since 2005. Putin wants the Games to project a positive image of Russia to the world and may endure the rising bills with a fixed smile, said Bower. The Russian president may hope to recoup a return on the investment later. Whether the oligarchs will as well is far from clear.

I honestly cannot see any of the participants gaining financially from this spectacle of trying to make a Potemkin Village of Sochi for international consumption. Not that many of us should be duped so easily.

England's Comeuppance to EU Exit: Scots Exit UK

♠ Posted by Emmanuel in Europe at 2/17/2013 07:32:00 AM

British politics are weird. No sooner did British Prime Minister David Cameron appease Eurosceptics within his party by promising a referendum on the UK remaining in the EU by 2017 that he warned the independence-minded Scottish National Party (SNP) about breaking away from the United Kingdom through a yes vote in their referendum scheduled for next year meaning its automatic exit from the EU. In other words, he is offering his compatriots a decisive break from the European project while threatening his Scottish peers that breaking away from the UK would mean they would no longer be in the EU. In one case, EU membership is cast by the same person in a negative light and in the other in a positive light depending on the audience in question. It hinges on the understanding that Scotland is far more positive about remaining in the EU than England is.

The question surrounds the meaning of nationhood for international treaties to which Scotland was privy to as part of the UK. If Scotland attains independence, will it have to go through the entire process all over again as a new nation? The weight of opinion says "yes":

The British government on Monday intensified its campaign to stop Scotland leaving the United Kingdom, publishing a legal opinion saying it would forfeit its membership of international bodies such as the European Union if it chose independence. The pro-independence Scottish National Party (SNP) that runs Scotland's devolved government plans to hold a referendum on emotionally charged subject next year, and has played down the impact of a "Yes" vote on Scotland's international status.

But the 57-page legal opinion - drafted for the British government by two independent experts on international law - said the implications could be far-reaching, likening the situation to the 1991 collapse of the Soviet Union when Russia was declared the USSR's legal successor but the 14 other Soviet states had to forge their international relations anew. The overwhelming weight of international precedent suggested Scotland would be legally deemed a "new state", it said - a scenario that would force it to re-apply to join international bodies such as the EU, the United Nations and NATO.

Scotland is also holding on to the ideas that the English will readily allow the former to keep the pound and that (declining) revenues from the North Sea oil fields will keep the new state afloat:

The government's intervention came as a panel of experts, including two Nobel prize-winning economists, issued a report saying the SNP's plan to keep the British pound in the event of independence was a sound strategy, suggesting it would also be wise to keep the Bank of England as the central bank.

The SNP argues that North Sea oil revenues combined with Scotland's fishing, farming and whisky industries would be enough to keep an independent Scotland solvent. But critics say the oil is running out, that Scotland would lose disproportionately generous British government subsidies, and that it would struggle to raise enough tax to pay its bills.

It's a neat case of "what goes around comes around" to isolationist English alike those in the ruling Conservative Party: So you want to leave the EU but don't want to allow the Scots to leave the UK, eh? You likely can't have it both ways. And here's the clinching irony of it all: If the UK voted in a (Tory-sponsored) referendum to leave the EU, English parliamentarians cannot suggest that Scotland will lose the benefits of EU membership by declaring independence since they will all have left the European Union.

As I said, British politics are weird--more so if they involve Europe.There is impeccable retro-imperial logic to it all in that Rule Britannia would of course not have tolerated supranational authority alike the EU while thinking it impossible that Scotland could ever break away.

Of Quota Reform and American IMF Hegemony

♠ Posted by Emmanuel in Americana,IMF at 2/17/2013 05:16:00 AM

Two things strike me as notable with the recent news that the US plans to finalize changes in the shares of quotas at the IMF and thus the voting rights there:

1. Given that the US has effective veto power at the IMF by virtue of having more than 15% of quota shares when a quorum of 85% is necessary to make a decision, it alone has the ability to unblock the quota reform process which remained deadlocked during the 2012 presidential elections at a time when it has become by far the world's largest debtor:

The Obama administration is hoping to move ahead shortly with legislation to finalize IMF voting reforms agreed in 2010, which will make China the third-largest voting member in the global financial institution, a senior U.S. official said on Saturday. The official, speaking at the end of a Group of 20 meeting of finance ministers in Moscow, said the administration was actively discussing legislation with relevant members of Congress.

The 2010 package cannot be finalized until it gets the go-ahead from the United States, which has effective veto power over the historic deal that was meant to have been approved by all IMF member countries in October last year, but was stalled by the U.S. presidential election.

2. For all the hullabaloo about China becoming the IMF's third-largest shareholder and giving LDCs more of a voice in the institution, its head remains a European by tradition. What's more, the ultimate percentage of quotas shifted from developed countries to developing countries is actually not all that large at--wait for it--a 6% realignment:

This completes the 14th General Review of Quotas with an unprecedented doubling of quotas and a major realignment of quota shares—a shift of more than 6 percent from over-represented to under-represented members and a more than 6 percent quota shift to dynamic emerging market and developing countries.

Why does it take so much time to accomplish relatively little?

Sharia Chameleon: Egypt's Clerics Decide on IMF?

♠ Posted by Emmanuel in Egypt,IMF at 2/14/2013 11:33:00 AM

People who are not distracted by business or trade from commemorating God - Sura 24:37

There's an interesting new complication in Egypt's never-ending quest to obtain IMF loans (which we aren't even sure the IMF wants to give anyway). Islamist lawmakers from the Salafist party want to add even more difficulties to the whole process as if there weren't enough. Remember, the Salafists are even more conservative than the Muslim Brotherhood-allied Freedom and Justice Party (FJP). The main bone of contention of the Salafist Islamic hardliners, as you probably know already, will surround the IMF charging interest (riba) on these emergency loans. Strictly speaking, the Quran disavows charging of interest. The famous quotation on usury is this one:

Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, "trade is like usury", but Allah has permitted trade and has forbidden usury - Al Baqra 2:275

It is here where the controversial new Egyptian constitution rammed through the legislature by the FJP with a little help from the Salafists has thrown a further money wrench into the bailout proceedings since it mentions consulting the clerics on matters relating to sharia law:

The Salafist Nour Party says the loan agreement, seen as vital to easing a deep economic crisis, must be approved by a body of senior scholars at Al-Azhar, a religious institution whose new role is embedded in the constitution. Such a challenge could complicate the Muslim Brotherhood-led administration's effort to finalize the International Monetary Fund deal that was tentatively agreed last year but shelved following political unrest in Cairo.

Abdullah Badran, head of the Nour Party's bloc in the upper house of parliament, told Reuters the move was intended to "activate the role of the Senior Scholars' Authority in all matters pertaining to sharia (Islamic law)". He said the party was studying its legal options. The Nour Party believes the IMF agreement must be vetted by the scholars because it includes a loan on which Egypt will pay interest - something that is forbidden under Islamic law.

The constitution states that the opinion of Al-Azhar's Senior Scholars' Authority must be sought "on matters pertaining to Islamic sharia". It does not say whether their opinion is binding on government nor make clear the scope of Al-Azhar's role. The article is one of several written into the constitution by the Islamist-dominated committee that finalized the document in December, fast-tracking it into law despite the objections of liberals, leftists, feminists and Christians, among others.

A contention that erstwhile Muslim Brotherhood stalwart President Morsi has made is that the 1.1% concessional rate charged by the IMF hardly constitutes "usury," but it's certainly possible to argue that it's a rate of interest nonetheless. In other words, the interest rate doesn't matter so much as violating the principle that no interest should be charged to begin with.

And just when you thought things could not possibly get worse for Egypt, the path to an IMF bailout may have become even more torturous.

More Than WTO, Vatican Needs Third World Head

♠ Posted by Emmanuel in Religion,Trade at 2/12/2013 07:49:00 AM

Aside from China's arranged leadership succession, there are two more noteworthy ones this year at global institutions. The one we had long expected is that of WTO director-general. Since the WTO's formation in 1995, there has only been one from a developing country, Supachai Panichpakdi of Thailand. Adding insult to injury, he only served half a term because of internal politics at the WTO which meant he headed the institution for three years from 2002 to 2005. Meanwhile, the Frenchman Pascal Lamy served one full four-year term from 2005-2009 and is currently serving another from 2009 to September 1, 2013.

For his second term, I thought that he was not an ideal candidate since (1) he failed to move forward the Doha Round of trade negotiations--then in danger of becoming the most protracted in WTO/GATT history--and (2) he failed to gain the support of developing countries to move things forward despite them gaining an ever-larger share of world trade. The past four years appear to have validated my concerns: Not only has the Doha Round become the most protracted in history by quite some margin with no end in sight, but developing countries have also been lukewarm about its completion. Here's a chart that tells the tale:

To make a long story short, let's just say that someone from an LDC has headed the WTO for far less than around forty percent of the time that the organization has been in existence. Bottom line: we are overdue for a WTO director-general from the developing world.

The more surprising succession event, meanwhile, is at the Vatican. With the rather unexpected resignation of Pope Benedict XVI, the door is opened to what I have long advocated aside from someone from the developing world heading international organizations alike the World Bank (it's never happened there), IMF (ditto) and WTO (only once). That is, someone from outside Europe or the developing world should head the Catholic Church. Actually, three successors to Saint Peter (San Pedro) have already done so--albeit a very long ago: Pope Victor, Pope Miltiades and Pope Gelesius were from North Africa.

A definitional problem here though is of constructing an argument for the underrepresentation of LDC voices at the Vatican. It's more challenging to obtain descriptive statistics alike that for merchandise trade on the growth of the Catholic Church in the developing world vis-a-vis the developed world. INdeed, you can look at any number of pertinent things here:

1. The number of ordained priests and bishops;
2. The number of regular church attendees;
3. The number of baptized

I am more inclined to use 1 and 2 as metrics given the rapid secularization of Western Europe in particular, but there are methodological issues for determining the number of practicing Catholics
that even Vatican bean counters recognize:

The percentage of Catholics practicing their faith is declining almost everywhere around the globe. Almost all bishops report it, but it's difficult to prove statistically. Each year, the Vatican's own statisticians compile mountains of data about the number of Catholics, baptisms, priests and religious, weddings and annulments in each diocese and country.

The numbers illustrate trends over time, but many factors lead to the variations, said Enrico Nenna, the chief statistician in the Vatican's Central Office for Church Statistics. "It's very difficult to quantify Catholic practice, although many have tried with many different formulas," he said. "The only way to get an accurate picture of religious practice would be to carefully choose a cross section of the population, do a census, and then conduct interviews repeated over time."

Absent longitudinal surveys, it is harder to make sense of the faith's fate. However, what you can be sure of is that traditional strongholds in Western Europe are in clear decline whereas there are more signs of hope in the developing world going by metrics alike those identified above. That is, Western Europe is a markedly shrinking market. Add in the fact that it's been scores of centuries since a non-European pope was elected and the case is made even stronger for one. Interestingly enough, British bookies are already offering odds on various putative successors should you be a betting man.

Care to take a punt on the next pope, as the Brits would say? As long as he's from the developed world, I am quite indifferent actually.

Growing Export Markets by Immigration to Canada

♠ Posted by Emmanuel in Migration at 2/10/2013 03:10:00 PM

Pro-migration voices like myself usually argue that the exchange of people is mutually beneficial for destination and source countries alike. Destination countries--usually wealthier Western nations experiencing declining birth rates--benefit from having newer workers joining the labour force whose activities help generate revenues to fund commitments made to previous generations. Meanwhile, source countries benefit from remittances sent and know-how gained by their migrants.

The Conference Board of Canada, however, has a novel addition to the benefits of migration: how about the destination countries growing their exports to the source countries of migrants in the process? HSBC Global Connections has a summary of the findings:

A recent paper, Immigrants as Innovators, published by the Conference Board of Canada, found a direct relationship between higher immigration and increased imports and exports from a particular country, a relationship that was independent of the wealth, geographic distance and language of the other country. A 1% increase in immigrants in Canada is associated with a 0.11 % increase in exports, which might not sound like much until you translate the figure into dollars.

Why does this happen? In the past, emphasis has been on the value of "learning English" as a source of migrants' eventual advantages. Consider, though, if the opposite holds true of them bringing their own unique languages, skills, and global networks to the benefit of Canada. A recent example is that of Filipinos who immigration rates to Canada lead all comers:

The report’s author Michelle Downie, senior research associate at the Conference Board, says immigrants have social and business networks, language skills and knowledge of their home culture that makes it easier for international relationships to form. “Businesses can put too much of a premium on Canadian experience—English-language skills and how people fit into Canadian culture—without considering the assets of the international experience immigrants are bringing,” says Downie.

The report offers the example of Filipinos, whose immigration rates to Canada rose faster than any other nationality in the last decade. “Between 1999 and 2008, the value of goods exported from Canada to the Philippines increased from $360 million in 1999 (in constant 2008 dollars) to nearly $560 million in 2008,” states the report. “The increase in the value of exports to the Philippines coincides with increases in permanent residents from that country.”

Good stuff; the entire paper is downloadable from the Conference Board of Canada after registering online. To paraphrase an American leader from when the US was still more envied than pitied, migrants ask not what their destination country can do for them, but what they can do for their destination country.

HM Imported BoE Guv'nor: Most Powerful CBanker

♠ Posted by Emmanuel at 2/07/2013 11:41:00 AM

I am currently watching former Bank of Canada Governor Mark Carney testify before Britain's Monetary Policy Committee about what he will do once he assumes the equivalent position at the Bank of England in July. These are difficult times for the UK; of that there's no doubt as a double-dip recession threatens to become a triple-tip recession. As always, it is debatable what role monetary policy plays in helping economic recovery along with even "Helicopter" Ben Bernanke circling overhead with the point that it can only do so much (and by extension him).

Aside from importing another country's central banker who has attained "rock star" status in the arcane ways of monetary policy setting, another intriguing aspect of Mark Carney taking this highest of high-profile jobs is that he will wield unprecedented power as far as BoE heads are concerned once he starts. If his predecessor Mervyn King was regarded by more than a few as too ostentatious by some in his manner, Mark Carney need not put on any airs since he will in fact wield powers beyond those possessed by his predecessors. It's all in the name of regulating banks better that new powers will be vested in Mark Carney. Testifying before the MPC, Adam Posen stated:

Bank of England Governor Mervyn King is too powerful and planned changes at the bank will worsen the situation by the time Canada's Mark Carney succeeds him, a former senior policymaker at the bank said on Tuesday. Adam Posen, speaking to legislators about three years on the bank's Monetary Policy Committee that ended in August, said the bank's non-executive directors, finance ministry officials and politicians were unable to effectively hold King to account.

New laws going through parliament are set to give the Bank of England's governor sweeping powers over financial regulation, something that raised further difficulties, Posen added.

The Telegraph reiterates this point about power:

That will not be true in the UK. When he takes over at the Bank, Carney will become the most powerful national central banker in the world – able to direct UK lenders to restrict all kinds of lending as he sees fit. The only check on his control is that he will have to operate via a set of committees.

Ditto CTV News:

The issue is critical, said John Thurso, a Liberal Democrat MP and member of the committee, because with the Bank of England taking on new responsibilities as the regulator of financial institutions, Carney will de facto become the most powerful governor the 319-year-institution has ever seen."The question is, does the governor become the constitutional monarch of the bank with the power but who will defer to the advisers of the committees, or does he become the emperor of the bank?" he said.

It all fits in with his intention to target the money supply more closely. That said, while concentrating a lot of lending discretion in the hands of one individual in the name of enhancing regulation may be just what is needed to shake up the BoE at this point, what will lawmakers do if this experiment goes awry? In a way, importing a subject from other parts of the realm already is an extreme action which will not likely be repeated. Just think of the uproar if they end up with the monetary equivalents of, say, Sven-Goran Eriksson or (heaven forbid) Fabio Capello.
What do all three have in common? When they were appointed, the English public very much lauded the selection of these superstars in their fields of endeavour. Hopefully, though, Mark Carney will better be able to deal with being in Britain's harsh public eye and get on with the job at hand. Expectations are high once more with their latest import, and the stakes are so much greater here than advancing in mere international football tournaments since the future of a global financial capital is at stake.

Will there always be a Bank of England?

United States vs S&P: Sovereign Ratings Next?

♠ Posted by Emmanuel in Americana,Credit Crisis at 2/05/2013 03:07:00 PM

It is with great interest that I am following the ongoing civil suit by the United States against the rating agency Standard and Poor's. Awhile ago, Tim Sinclair over at Warwick University came out with a book entitled "The New Masters of Capital" describing how credit rating agencies supposedly had powers of nearly life and death on any number of countries and firms via the act of rating. I was not very receptive to this all-encompassing argument. First, the parent companies of S&P, Moodys and Fitch's have hardly outperformed broad market indices--which they would if they truly were "masters of capital." Second, while developing countries may be adversely affected by ratings decisions of these firms and affect their ability to access global capital markets, others are not so vulnerable. Japan and the US among others appear insensitive to credit downgrades. What's more, governments alike those in the US and Europe give them sanction to issue ratings in the first place. Think of America's SEC granting "Nationally Recognized Statistical Rating Organization" (NRSRO) status.

I believe my second argument is validated by the US declaring that it will file a civil suit against S&P causing its parent firm McGraw-Hill's stock to plunge in double-digit percentages. In other words, a true "master" would not be accountable to someone else:

The government said in a court filing it was seeking civil money penalties from S&P and McGraw Hill. "Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P's rating criteria and models," the government said.

Shares of McGraw-Hill plunged 13.8 percent on Monday after the company said it was expecting the lawsuit, marking their biggest one-day percentage decline since the 1987 stock market crash, according to Reuters data. The news also caused shares of Moody's Corp, whose Moody's Investors Service unit is S&P's main rival, to slide 10.7 percent.

I think it's evident where "power" lies here: the state with sanctioning power over credit rating agencies. The case mainly deals with conflict of interest in S&P being asked by various financial services concerns to rate mortgage-backed securities, collateralized debt obligations and what else have you for a fee. There was indeed some of that going on, but why now? Also, why S&P instead of the others alike Moodys and Fitch's? Some thoughts:

Ratings on mortgage-related securities were vastly overstated; the question is whether these errors came from flawed models / judgement OR deliberately being paid to inflate credit ratings;
This stuff is really old--2007 or 2008 vintage--so why is it only being prosecuted now?
Why S&P in particular? It's the biggest rating agency yes, but was it really alone in issuing flawed ratings?

Being ever-so-cynical, I am thinking that this action may have something to do with forthcoming credit downgrades of US sovereign debt. Think about it: filing the case has already depressed their stock valuations and reminded them that government displeasure is costly. Moreover, Uncle Sam can readily shut them out of the business of rating a huge swathe of dollar-denominated securities if it revokes their NRSRO status. Revocation of NRSRO status would mean that they can no longer pass judgement on US Treasuries among other things:

Under the Credit Rating Agency Reform Act, an NRSRO may be registered with respect to up to five classes of credit ratings: (1) financial institutions, brokers, or dealers; (2) insurance companies; (3) corporate issuers; (4) issuers of asset-backed securities; and (5) issuers of government securities, municipal securities, or securities issued by a foreign government.

The United States may be reiterating that it can easily put them out of business Stateside if it chooses to. Given America's runaway debt expansion, what better time is there of reminding them of this fact than now when eminently justified downgrades are on the horizon? Downgrades may not so adversely affect US borrowing costs in the near-term, but the loss of prestige may be enough to motivate America to take action now. New masters of capital? You must be joking. When the world's largest debtor has got the credit rating agencies by the balls in so stark a fashion, I think they're more like the jesters of capital.

Bottom line: The US economy may be a sick joke, but the official econocomedians still lord it over the jesters of capital as recent events have demonstrated. As for me, I'll do my own due diligence when investing in securities instead of believing in either Uncle Sam or his NRSRO flunkies--and you should too.

EU-Mercosur FTA vs Trade-Willing 'Pacific Alliance'

♠ Posted by Emmanuel in Europe,Latin America,Trade at 2/03/2013 06:44:00 AM

Which does not belong? In case you missed it, recent talks between EU and Latin American leaders again failed to produce an FTA that has long been under consideration, EU-MERCOSUR. This was at a CELAC gathering in Santiago, Chile where European leaders who bothered to make the trip alike Angela Merkel found that while there were non-MERCOSUR nations keen on trade deals, Argentina was (surprise!) not. What's more, el presidente Cristina Fernandez senses that the Latin American grouping now has the upper hand and says Argentina will make a counter-proposal later this year:

(T)he EU's most ambitious goal – to finally sign a free trade agreement with South America's trade bloc, Mercosur – was not achieved after years of negotiation. Even though individual leaders, like the presidents of Chile, Brazil and Colombia, pushed for more free trade, the head of the second largest Mercosur country, Argentina's Cristina Fernandez de Kirchner, vehemently opposed it...

"We are very concerned about certain protectionist tendencies in some countries," [Merkel] said on the sidelines of the meeting. Merkel also made it perfectly clear whom she meant, saying that she'd talk to the Argentine president about the subject. However, de Kirchner defended Argentine protectionism and poured more cold water on the proceedings. After these long negotiations, the conditions had fundamentally changed, meaning it had become a matter for Mercosur to discuss, she said. The bloc would make a new proposal to the EU by the end of the year at the earliest.

However, do note that there Argentina's position is at one extreme likely shared by the likes of Bolivia, Cuba, Venezuela, and so forth. (Raul Castro is now the head of CELAC which includes Latin American and Caribbean states sans the white majority-populated United States and Canada.) OTOH, there is also a coalition of the trade-willing that have broken away in yet another American grouping (I've lost count) deemed more progressive on trade matters:

Mercosur’s main achievement in the past year has been to suspend Paraguay, because its congress impeached its left-wing president, and admit Venezuela, which complies with few of the group’s rules. Meanwhile, it is being outshone by the Pacific Alliance, a newly formed group of faster-growing, free-trading Colombia, Chile, Mexico and Peru. Not by coincidence, these four already have free-trade deals with the EU. It was clear which countries the Europeans wanted to do business with. “We only have to look at the facts,” Mr De Gucht said. “The most open economies in the region are the ones that have had the most success.” Others have taken notice: Paraguay and Uruguay, another Mercosur member, have applied for observer status at the Alliance.

EU Trade Commissioner Karel de Gucht's assertion is perhaps self-serving, but it does reinforce the point that some are more willing to trade than others. Expansion of the so-called Pacific Alliance would make this point more evident.

South Korea Declares Int'l Currency War on Japan

♠ Posted by Emmanuel in Currencies,Japan,South Korea at 2/01/2013 08:56:00 AM

Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. (Western nations have long been on this path, having implemented them after the global financial crisis.)

In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency:

South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention.

The selloff in Seoul markets this week turned into a warning sign. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.

"Korea is going to be the first domino, and it's that domino effect that the yen's depreciation clearly risks," said Rob Ryan, currency and rates strategist at RBS, referring to the increasing likelihood that Korea announces some form of currency control measure soon. "The real trigger has been the equity market reaction and the outflows from Korea. I think the concerns over intervention are a little overdone just yet, but clearly it is a big risk if the yen continues to weaken..."

The old state-guided development is returning with a vengeance as the government is seeking the cooperation of conglomerates and state-owned firms alike in stemming Korean won strength:

South Korea has understandably been the most vocal of Asian policymakers on the subject of the yen. Heavyweight Korean exporters such as Samsung Electronics Co and Hyundai Motor Co, which compete directly with Japanese electronics and auto companies, have seen their competitiveness eroded as the won increased in value from as low as 15 per yen to near 11.8 over the past six months. Foreigners have sold a net 1.8 trillion won ($1.65 billion) Korean stocks this month. The stock market is down 3 percent so far this year. Foreigners have been buying Taiwanese stocks, but those volumes are far lower than they were in 2012...

The Korean government will tell state-controlled firms to refrain from borrowing abroad and will further tighten rules on banks' currency derivatives trading to ease volatility in foreign exchange markets, Choi said. Seoul was opposed to imposing an outright levy on financial transactions, such as the Tobin tax being debated in Europe. But it would consider similar measures should speculation in the won intensify over time, he said.

There are follow-on effects that may be even direr. China, for one, is South Korea's single largest export market and may not take so kindly if the won is regulated further:

Still, many believe policy risks are rising. Nearly half of Japan's trade is with the Asia-Pacific region and China may not stand pat if Korea imposes currency controls given it is Korea's largest export market. In addition, capital controls have gained some acceptability as a policy response in emerging markets to deal with easy money in the developed world. Even the International Monetary Fund, traditionally a champion of liberalised markets, has conceded that capital controls are sometimes necessary.

I guess the trick is to spook hot money but not real investors who are in it for the longer haul. Where does that divide lie? Hard to tell, but Korea risks negating market sentiment if it goes overboard with these efforts to throw sand into the wheels of international finance and trade. It's not surprising that international currency war has finally hit East Asia--but remember who started it in the first place despite repeated denials.