Gimme $40B: Mexico Next In Line at IMF Trough

♠ Posted by Emmanuel in ,, at 4/01/2009 11:57:00 AM
It's depressing enough to drive you to drink some tequila: Deserved or undeserved, Mexico has acquired a reputation for repeated balance-of-payments shortfalls. Every decade or so in recent history, something major happens. During the early Eighties, Mexico was hard hit when the Paul Volcker-led Federal Reserve increased policy rates Stateside to combat high inflation, making Latin countries that borrowed large amounts off foreign capital unable to pay. Then, of course, the Tequila Crisis of 1994 was brought on by domestic unrest coupled with unchecked government spending that could not be funded as election time rolled around. Given the year on the calendar, you could very well say that Mexico was overdue for some action on the BOP shortfall front before the second decade of the new millennium rolled around.

Once more, Mexico finds itself in trouble for largely understandable reasons. With 80% of its exports heading Stateside, its economic fortunes are highly intertwined with those of Estados Unidos. Plus, the demise of the US housing boom means less work for Mexicans--legally employed or otherwise--in jobs relating to the construction industry. Hence, remittance flows have slowed markedly. In recent, years, however, Mexico has maintained relatively sound economic management practices. Certainly, I would say Mexico is better run than the US, which should be in far greater trouble if it weren't for the dollar being an international reserve currency and the Mexican peso not being one.

The IMF has been crafting a facility for countries like Mexico--not very hard-hit but keen on obtaining some form of insurance nonetheless. Its latest iteration as of 24 March is called the Flexible Credit Line (FCL). From the IMF blurb, here are a few of its salient features:
The Executive Board of the International Monetary Fund (IMF) today approved a major overhaul of the IMF’s lending framework, including the creation of a new Flexible Credit Line (FCL). “These reforms represent a significant change in the way the Fund can help its member countries—which is especially needed at this time of global crisis,” said IMF Managing Director Dominique Strauss-Kahn. “More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth.”

Mr. Strauss-Kahn invited strong-performing countries that may be hit by the global crisis to use the new Flexible Credit Line which he said “could strengthen further their economic position...”
The key difference with the FCL is that release of loans will no longer hinge on meeting conditionality requirements by certain dates:
In the past, IMF loans often had too many conditions that were insufficiently focused on core objectives.

This modernization is to be achieved in two key ways. First the IMF will rely more on pre-set qualification criteria (ex-ante conditionality) where appropriate rather than on traditional (ex post) conditionality as the basis for providing countries access to Fund resources. This principle is embodied in a new Flexible Credit Line. Second, implementation of structural policies in IMF-supported programs will from now on be monitored in the context of program reviews, rather than through the use of structural performance criteria, which will be discontinued in all Fund arrangements, including those with low-income countries. While structural reforms will continue to be integral to Fund-supported programs where needed, their monitoring will be done in a way that reduces stigma, as countries will no longer need formal waivers if they fail to meet a structural reform by a particular date.
The IMF appears chuffed that a relatively sound economy like Mexico is giving this new facility credence by taking out a $40B line. At the same time, Mexico wants the financial community to see this not as a "bailout" but rather as insurance as mentioned earlier. From Bloomberg:
Mexican President Felipe Calderon is betting that the benefits of being able to tap as much as $40 billion from the International Monetary Fund will outweigh the stigma associated with turning to the international lender.

Calderon said yesterday that the country will activate a credit line of at least $30 billion from the IMF, after the organization said last month it would relax loan conditions for developing countries that need short-term assistance. Activating the line makes the funds available and doesn’t imply plans to draw on it immediately, a Mexican government official said.

The IMF said last month it would make loans easier to get for developing nations that have low inflation, moderate levels of foreign debt and sound public finances. The move may dispel worries that Mexico could have a balance of payments problem and concerns about a possible fiscal shortfall in 2010, said Jimena Zuniga, a Latin America economist at Barclays Capital.

“It’s more of a prize than a shame,” Zuniga said in a telephone interview from New York. “By gearing this new credit line to economies that meet certain subjective criteria, this new facility doesn’t carry the stigma that using IMF money may have had in the past.”

A 23 percent decline in the peso over the past six months reflects concern about the country’s ability to finance its current account deficit and corporate debt that comes due this year. Investors have also worried that Mexico may have a budget shortfall next year, after the expiration of contracts that guaranteed the government a minimum price for its oil this year...

Mexico’s plan to activate the credit line eased market concerns that the central bank would deplete its reserves with a policy that calls for selling dollars to support the peso, said Gabriel Casillas, an economist at UBS AG in Mexico City. The IMF credit line would increase foreign reserves, unlike a $30 billion swap line offered by the U.S. Federal Reserve, he said.

“This will be positive,” said Guillermo Osses, who helps manage $40 billion of emerging-market debt at Pacific Investment Management Co. in Newport Beach, California. “Helping the economy to recover in a slowdown like the one we are experiencing now is very different from those countries that used IMF lines in the late 1990s to avoid a default.”

Still, Calderon’s announcement may hurt investor confidence in Mexico because borrowing money from the IMF has a stigma attached to it, said Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York. “Does a strong country go to the IMF to borrow money? I say no,” Chandler said in an interview. “It’s perceived to be a sign of weakness that countries go to the IMF.”
Once more, the question begs itself: Is this really a kinder, gentler IMF? We've been told that conditionality burdens were to be eased so many times in the past to no real effect that I am really quite apprehensive.
Read More

'Buy Gun Stocks; Yanks Like Shooting Each Other'

♠ Posted by Emmanuel in at 3/31/2009 03:55:00 PM
The behavior of Americans is a subject of fascination to the rest of the world. Having American relatives, I must admit to being occasionally puzzled by their behavior. In the past, I have done my fair bit of pop anthropology in describing US culture as one based on commerce. However, when an old grad school roommate from Greece had too much to drink, he would tell me a more elaborate version of the American gothic which went something like this: "You know these Americans, Emmanuel. First they eat too much. So, they cannot fit in compact cars and have to buy hulking SUVs. To park these giant SUVs, they must in turn buy huge houses with huge garages. Having little savings, though, they need to borrow trillions from the Chinese."

Whatever you make of my old roommates' caricature, I'm thinking that if I gave him a ring in Athens, he'd add more to the story. Given the bursting of the housing bubble, many Americans have become unemployed, foreclosed, or any other number of undesirables in a highly financialized and commercialized society. Earlier, I posted in jest that Ozzy Osbourne may offer a way out for many overindebted Americans. It's no laughing matter that more seem to have followed this suggestion in a dark application of Americana. The Christian Science Monitor suggests there may be a link to unusually tough times:
Four Oakland, Calif., police officers shot down. An Alabama man strolling a small town with a rifle, looking for victims. Seven elderly people shot dead at a North Carolina nursing home. And on Sunday, six people, including four kids, died in an apparent murder-suicide in an upscale neighborhood in Santa Clara, Calif. The details in all these cases are still emerging. In most, the exact motive has yet to be determined – or may never be fully understood.

On a broader level, however, such incidents may be happening more often because an increasing number of Americans feel desperate pressure from job losses and other economic hardship, criminologists say. "Most of these mass killings are precipitated by some catastrophic loss, and when the economy goes south, there are simply more of these losses," says Jack Levin, a noted criminologist at Northeastern University in Boston.

Direct correlation between economic cycles and homicides is difficult to prove, cautions Shawn Bushway, a criminologist at the University at Albany in New York. But an economic downturn of this breadth and depth hasn't been seen since data began to be collected after World War II, he also points out. "This is not the average situation," Mr. Bushway says.

Still, criminologists do say that certain kinds of violent crimes have risen during specific economic downturns. The recession in the early 1990s "saw a dramatic increase in workplace violence committed by vengeful ex-workers who decided to come back and get even with their boss and their co-workers through the barrel of an AK-47," Mr. Levin says.
Say what you will about American gun culture, but one thing you can count on is it not going away. Accordingly, the rather tasteless post title is not from me but a paraphrase of Reuters columnist Bernd Debusmann's latest missive on how Ruger and Smith & Wesson stocks are up bigtime early in 2009 while nearly all else is, ah, shot:
In the first two months of this year, around 2.5 million Americans bought guns, a 26 percent increase over the same period in 2008. It was great news for gun makers and a sign of a dark mood in the country. Gun sales shot up almost immediately after Barack Obama won the U.S. presidential elections on November 4 and firearm enthusiasts rushed to stores, fearing he would tighten gun controls despite campaign pledges to the contrary.

After the November spike, gun dealers say, a second motive has helped drive sales: fear of social unrest as the ailing economy pushes the newly destitute deeper into misery. Many of the newly poor come from the relentlessly rising ranks of the unemployed. In February alone, an average of 23,000 people a day lost their jobs.

Tent cities for the homeless have expanded outside a string of American cities, from Sacramento and Phoenix to Atlanta and Seattle, for people who are living the American dream in reverse. First they lose their jobs, then their health insurance, then their homes, then their hopes. The encampments are reminiscent of Third World refugee camps.

Often former members of the middle class, tent dwellers’ accounts of their plight to television cameras have a common theme: “I never thought this could happen to me.” Unlike the victims of Katrina, the 2005 hurricane that destroyed much of New Orleans, many of the newly-poor are white.

The FBI says it carried out 1,213,885 criminal background checks on prospective firearms buyers in January and 1,259,078 in February, jumps of 28% and 23.3% respectively. Keen demand turned the stocks of publicly-trade firearms companies like Smith & Wesson (up 80% since November) and Sturm Ruger (up more than 100%) into shining stars on the New York Stock Exchange.
Isn't commerce grand? Just don't forget to, er, pack some heat. In all likelihood, this gun-buying spree is probably motivated by self-protection more than anything else, unfortunately feeding into a cycle of higher gun ownership and a higher probability of gun violence. For better or worse, guns are as American as mom, apple pie, bankruptcy and foreclosure. Obama striking down the Second Amendment is as likely as Americans stopping to borrow money. As my friend would probably add to his commentary: "The trouble started when the Americans could not pay the mortgages on their McMansions as home prices tanked. Rather than face economic reality, they went to the gun store and fed the family...with lead."

There is a real political economy aspect to the right to bear arms. Sometimes, it isn't particularly pretty.

4/6 UPDATE: The bloodbath continues as to become almost unexceptional -
A 22-year-man who shot and killed three Pittsburgh police officers over the weekend had been stockpiling guns and ammunition, buying and selling the weapons online "because he believed that as a result of the economic collapse, the police were no longer able to protect society," according to a court report.

The shootings came during a particularly violent three days across the U.S., with shootings that left 14 dead in Binghamton, N.Y., and six dead in Washington state, where a father shot five of his children, ages 7 to 16, using a rifle, and later, himself. It also follows just two weeks after four police officers were fatally shot in Oakland, Calif., in the deadliest day for U.S. law enforcement since Sept. 11, 2001. Last month, a North Carolina man shot and killed eight people before police shot him and ended the rampage, and a 28-year-old man killed 10 people, including his mother and four other relatives, across two rural Alabama counties before killing himself.
Read More

PRC's Great Currency Game, or Nothing Special?

♠ Posted by Emmanuel in ,,, at 3/30/2009 01:11:00 PM
The story that dollar debasement going forward will occur is a familiar one. TIME even has a photo essay comparing present-day America with Weimar-era Germany. One certainly hopes this comparison isn't apt for a number of reasons, but you certainly cannot rule it out. Life is a cabaret, old chum. Much has been made in recent days of China's proposal to diversify out of dollars which the US has certainly done everything humanly possible to debase; this point is not really under much contention outside of neo-Bushian "strong dollar" comments from Obama administration officials. This new Reuters article notes that the bluster behind China's call for a new reserve currency would amount to little if it weren't for the PRC's other currency ploy which has not attracted that much attention.

Drudge Report readers and other yokels are certainly unaware that China is busy signing swap arrangements with other countries outside the context of the Chiang Mai Initiative with ASEAN+3 countries (which has evolved to being more regional from its origin as a series of bilateral swaps). Reuters sees this process as China being more assertive on the economic diplomacy front. With a real long-term view--think 25, 40, 50 years down the road--the Chinese are playing a great currency game which Americans can't, fixated as they are on a four-year election cycle:
The political intent of Zhou's message [on elevating the status of SDR to true reserve alternative] could not be clearer: as the crisis of capitalism erodes U.S. influence, China is losing faith in the dollar and sees the time ripening for the yuan to assume its rightful role as a major world currency. "It has the potential to lead to one of the most profound reforms of the global monetary system in the coming decades," Jun Ma, Deutsche Bank's chief China economist, said of Zhou's blueprint.

However, with 5,000 years of history behind it, Beijing is ready for a long game. Zhou knew his trial balloon would immediately be shot down, save for backing from Russia. Hence his acknowledgement that creating a new international monetary order would require "extraordinary political vision and courage".

Translation: Beijing realizes that a currency does not lose its global domination overnight. Even after the United States overtook Britain in economic size in the late 19th century, it took two world wars that drained Britain's Treasury and its military might before the dollar supplanted sterling. The American grandmaster will not surrender his title lightly...
And here's the novel part, unbeknown to most except the most informed (like my dear IPE Zone readers; also this brief blurb):
...Zhou's essay takes on a different complexion if read in the context of a flurry of moves by China in the usually dull arena of trade finance.

Since mid-December, China has sealed currency swap accords totaling 650 billion yuan ($95 billion) with the central banks of South Korea, Malaysia, Indonesia, Hong Kong, Belarus and, in a deal announced on Monday, Argentina. These are pawns that are not being moved at random, and financial diplomats say more agreements are in the pipeline.

The proximate purpose is to grease the wheels of trade, which have been gummed up by the global credit crunch. Importers in the six countries will be able to pay for Chinese goods in yuan instead of in dollars, the principal export-import currency. But the potential repercussions for global currency politics are more far-reaching: if Asia got accustomed to the practice, the yuan could evolve into a regional currency, giving Beijing the status and influence that goes with it.

A former senior international monetary official said the pacts were in keeping with what he said was China's greater assertiveness in global forums over the past two years or so. "They want to play a stronger role, and these small steps such as giving bilateral swaps to Indonesia, Malaysia and Korea are a lot more important than the SDR proposal," said the official, who declined to be named as the issues are sensitive.

Getting comfortable with the internationalization of the yuan for trade should, in turn and in time, make Beijing more willing to move toward capital account convertibility -- a precondition for the yuan to become part of a revamped SDR.

Now, there is no sign China wants to speed up the opening of its capital account -- even though the yuan, if it could be bought and sold for non-trade purposes, would be more attractive for central banks as an alternative reserve asset to the dollar. But, as some economists see it, pricing and settling trade in yuan will inevitably lead to greater use of the Chinese currency offshore for financial and investment purposes.

"The swaps should be seen as a political statement with the intention of turning the yuan into a regional reserve currency," said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong.
Already there are pilot efforts in Hong Kong to see if settlement can be performed in yuan on a wider basis:
Take the scheme, due to be launched soon, that will allow trade between Hong Kong and the mainland province of Guangdong to be settled in yuan rather than in U.S. or Hong Kong dollars. The 200 billion yuan swap that Beijing signed with Hong Kong in January will provide an initial pool of Chinese currency needed for paying export and import invoices in yuan.

But imagine if the experiment takes off: banks would eventually need access to the mainland interbank market for funding, according to a financial diplomat in Beijing. And should banks in Hong Kong -- and other centers -- be allowed to adjust their positions with each other? If so, an offshore interbank market in yuan would sprout.

"We must understand that it is an inevitable trend that an overseas yuan investment market will grow after foreign trade settlement in yuan becomes widely accepted," Ye Xiang, a co-founder of VisionGain Capital, a Hong Kong investment management firm, wrote in Caijing magazine.
There are terribly plenty obstacles that China faces if it wants the yuan to be an eventual contender for a dollar replacement including classic functions of money--store of value, medium of exchange, and unit of account. Of course, unlike the dollar, the yuan is not yet freely traded, has no large international capital market, is subject to currency controls, and is not yet accepted by other countries for trade settlement. Indeed, I am still unclear on the mechanics of these swap arrangements as China would effectively have to loan yuan in order for other countries to pay in yuan. China is gradually putting these pieces in place if you believe Reuters, setting the stage for a showdown in a couple of years' time:
Many pieces will need to be moved around the board before China is in a position to force a draw with the dollar, let alone declare checkmate. But Beijing, thinking strategically, is unlikely to be too perturbed if Zhou's gambit founders in London [at the G20 meeting].
Also read this article from Bernama on how Indonesia is keen on seeing China take on a more aggressive role in global economic affairs. Certainly, there is no lost love between the US and many other countries like Indonesia. As I've mentioned many times, Indonesia believes it was hurt by the worst of Washington Consensus-style policies of fiscal austerity and belt-tightening during the Asian financial crisis whereas the US now splurges in troubled times because it can by drawing on the dollar's status as the preeminent reserve currency.

Would a world where the dollar loses its prominent role be a better place? The debate rages on. And I love a cabaret.
Read More

Obama Gives UAW, Organized Labor the Shaft

♠ Posted by Emmanuel in , at 3/30/2009 12:16:00 PM
Say what you will about organized labor's agenda, but it seems to me like it's being given a bum deal. Real liberals have criticized Obama for cozying too much to moneyed interests, and this story will do nothing to allay that particular concern. Democratic presidents of recent vintage have displayed a similar modus operandi: court the votes of organized labor and then largely forget about them when in power. Think of Bill Clinton signing on to NAFTA and allowing those human rights violators China to join the WTO. Why, just a few months ago, Obama was being heralded as the champion of the United Auto Worker's union as he garnered its approval:
"From the streets of Chicago to the state legislature in Springfield, Ill., to the halls of the U.S. Senate, Barack Obama has been a voice for dignity and justice for working people. He has a strong program for a safe and secure America, which will protect our citizens and help our country prosper in a new century.

"On every issue that counts, we can count on Barack Obama to stand with our members, our families and our communities. He has pledged to rebuild America's manufacturing base and to assist the auto industry as we re-tool toward a cleaner, more modern transportation system. Sen. Obama supports free choice in the workplace; he will fight to deliver quality, affordable health care to every American; and he understands the need to change our trade policies so that U.S. workers and U.S. companies can compete fairly in the global economy.

"As president Barack Obama will unite our country – and the active and retired members of the United Auto Workers will be proud to work with him to change our country for the better."
That sounded all very well and good. Now, however, the Obama administration is forcing the UAW to go on a diet as it refuses to throw billions more at those wealth-destroying enterprises par excellence GM and Chrysler. And, get this--the administration is asking investment bankers to assess how much improvement organized labor is making in reducing wages:
The Obama administration refused on Sunday night to give fresh bail-out money to General Motors and Chrysler, telling the carmakers to come up with new plans or risk insolvency. GM has received $13.4bn in government aid and had asked for an additional $16.6bn. Chrysler has received $4bn and had asked for another $5bn. But both companies failed to meet targets on cutting their debt and reducing the cost of benefits paid to workers.

The crisis talks between the companies and the administration’s auto task force cost the job of Rick Wagoner, chief executive of General Motors, who was asked to step down by the White House after 30 years with the carmaker.

Officials said on Sunday night that Chrysler would be given 30 days and GM 60 days to reach agreement with debtholders and unions, with new tougher targets for cost cutting, or they would lose their last chance for a government bailout, almost certainly sending them into bankruptcy. “That’s going to mean a set of sacrifices from all parties involved: management, labour, shareholders, creditors, suppliers, dealers,” President Barack Obama said Sunday on CBS, before the details had been laid out.

“Everybody is going to have to come to the table and say it’s important for us to take serious restructuring steps now in order to preserve a brighter future down the road... They’re not there yet,” Mr Obama said. The task force, whose members include former investment bankers Steve Rattner and Ron Bloom, decided that the companies had failed to prove their viability and would not, therefore, receive the combined $21.6bn of taxpayer money they had asked for [my emphasis].
This is quite brilliant if the objective is fomenting class warfare. To improve matters, I suggest they hire John Thain and Charles Prince to oversee this task force. If Obama is organized labor's "champion," then I'm Jimmy Hoffa.
Read More

G-20 Protests: Let Leftist Profs Be Leftist Profs, Etc.

♠ Posted by Emmanuel in at 3/29/2009 09:50:00 AM
And so the world is awash with protests over the upcoming G-20 meeting. In London just yesterday, they were 35,000 strong--not a bad showing. I will soon post at greater length about the G-20's prospects--more hopeful than you'd probably expect--but for now let us cover the sideshow. A criticism many have had of the so-called anti-globalization movement has been its rather scattershot agenda, throwing together anarcho-syndicalists, deep ecologists, neo-primitivists, rioters, party animals, etc. into the mix. Same here. If you think this world is run pretty poorly by the axis of spending (Barack Obama, Gordon Brown, and someone TBA), you'd be pretty hard-pressed to see an improvement from these guys. As usual, their challenge is lame and unfocused.

Now, as I've learned, academia is certainly an interesting place filled with all sorts of characters you'd be hard-pressed to find elsewhere. Even by American standards, British academia is, well, downright weird. Where else can you find it common for unreconstructed Marxists to teach...in business schools? Pinko Business Management--now there's a course offering for you (full of the inherent contradictions of capitalism, no doubt). As the death place of Herr Marx, Britain has long been teeming with those convinced that the downfall of capitalism is right around the corner. Certainly, the current time is a fruitful one to strike a chord for change especially with the ham-fisted handling of the subprime crisis in the US and the UK.

I found it rather amusing when Professor Chris Knight of the University of East London--formerly a "polytechnic" akin to a community college in the States--got suspended for getting into the anti-globalization spirit. Here are some choice statements that got him into trouble:
"We are going to be hanging a lot of people like Fred the Shred [former RBS Chairman Fred Goodwin] from lampposts on April Fool's Day and I can only say let's hope they are just effigies...To be honest, if he winds us up any more I'm afraid there will be real bankers hanging from lampposts and let's hope that that doesn't actually have to happen.

"They should realise the amount of fury and hatred there is for them and act quickly, because quite honestly if it isn't humour it is going to be anger. I am trying to keep it humorous and let the anger come up in a creative and hopefully productive and peaceful way.

"If the other people don't join in the fun - I'm talking about the bankers and those rather pompous ministers - and come over and surrender their power obviously it's going to get us even more wound up and things could get nasty. Let's hope it doesn't."
Is Professor Knight trying to incite a mob riot? I really think not as he just got caught up in the spirit of the moment. As you'll gather from his website, his PhD thesis was on "Menstruation and the origins of culture. A reconsideration of [Claude] Levi-Strauss's work on symbolism and myth." From what I gather, it has something to do with lunar activity--hence the graphic on his website. Is this chap Carlos the Jackal II? No tampon jokes please, but I doubt it. It's more likely that he's just another timid academic in the ever-popular leftist, Noam Chomsky-wannabe mold.

This op-ed from the Sunday Herald asks the right question: if a million protesting Britain's imminent participation in the Iraq invasion did basically nothing, what more this march or even the larger one planned on April 1? The University of East London certainly has made more of this nonsense than warranted. Last I heard, Professor Knight was wandering around alone. So much for solidarity. If this guy is a troublemaker, then Paul Schaffer really leads the world's most dangerous band. I fear him far, far less than a real public menace like Boy George.
Read More

Bilateral Mania: Antipodes Strike FTA with ASEAN

♠ Posted by Emmanuel in , at 3/29/2009 07:39:00 AM
I almost forgot to mention this news closer to home: A few months ago, I mentioned that the ten-member Association of Southeast Asian Nations (ASEAN) was engaging in several bilateral trade negotiations--with China, Japan, South Korea, India, Australia and New Zealand. There are a number of reasons for this deal frenzy after a long history of ASEAN being little more than a talk shop, including stalled WTO negotiations leaving these countries hungering for more elsewhere and lingering fear of China leaving them far behind economically. Because negotiations seemed more advanced, I expected the ASEAN-India deal to be inked as scheduled in December 2008. For a number of reasons, it's been delayed. This means the rather mouthful ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) came to fruition sooner.

The press blurb on the ASEAN Secretariat's website dating from February 27 of this year is informative, including this nugget on how ASEAN countries are significant trade partners for the Antipodean pairing:
Through the AANZFTA Agreement, ASEAN, Australia and New Zealand effectively create a free trade area of over 600 million people with a combined GDP of US$ 2.3 trillion (based on IMF 2007 figures), which is expected to have reached US$ 2.7 trillion, according to the IMF forecast for 2008. Intra-regional (ASEAN, Australia and New Zealand) trade has been growing an average of about 16 per cent per annum since the start of the FTA negotiations in 2005. The Ministers noted the increase in Australian and New Zealand investments to ASEAN which reached US$ 1.1 billion in 2007. With the liberalization of barriers to trade and investment under the AANZFTA Agreement, the Ministers expressed confidence regarding the further growth and expansion of intra-regional trade and investment. Taken together, Australia and New Zealand comprise ASEAN’s sixth largest trading partner. ASEAN as a group is the second and the third largest trading partner of Australia and New Zealand, respectively.
Unfortunately for Jagdish Bhagwati, regional trade deals certainly look like the wave of the (near) future. Few doubt that ANZ's economic fortunes going forward are tied to Asia. Look east, young man, look east.
Read More

Why Do Aussies Keep Bashing Chinese Investors?

♠ Posted by Emmanuel in , at 3/27/2009 05:54:00 PM
I find this utterly disgraceful. The Chinalco bid for a share in Rio Tinto being "reviewed" for three months has been covered here and elsewhere as a sign of incipient protectionism. There is, however, a lesser profile bid by another Chinese mining concern for a similarly endangered Australian entity. In this case, it's Minmetals for Oz Minerals. Just as Rio Tinto overextended itself with acquisitions at the height of the commodity boom, so did Oz Minerals. As is usually the case for these things, "national security" concerns are being invoked.

The purported catch here is that Oz Minerals' most lucrative mine is located inside one of Australia's weapons testing ranges, the Woomera Prohibited Area. I simply do not think this is an insurmountable difficulty as it is not especially difficult to agree with Chinese investors that transport from the mining site to the main road not veer off track. Getting blown up by munitions testing seems to be a pretty good deterrent against wandering around. Plus, it's fairly easy to monitor activity on flat desert lands from a long distance. Hence, I have no choice but to cry foul. From the Financial Times:
The Australian government has blocked a A$2.6bn (US$1.8bn) recommended bid by China’s Minmetals for Oz Minerals on the grounds that the mining group’s flagship mine is located in a military zone.

Wayne Swan, Australia’s treasurer, said “alternative proposals” would be considered from the Beijing-based metals group but it could not approve the deal if it included Oz’s Prominent Hill copper and gold mine, located in the Woomera Prohibited Area in South Australia. “It is not unusual for governments to restrict access to sensitive areas on national security grounds,” Mr Swan said.

Mr Swan’s surprise decision will fuel speculation Canberra may also block Chinalco’s controversial plan to invest $19.5bn in Rio Tinto, the Anglo-Australian mining group. Australia’s Foreign Investment Review Board is assessing the deal by the Chinese aluminium producer on “national interest” grounds, which includes investments made by state-backed entities.

Blocking the deal also threatens Oz’s survival. The miner, which had already warned it risked bankruptcy without the Minmetals takeover, is locked in talks with bankers owed A$1.3bn to extend debt repayments beyond March 31. The Woomera Prohibited Area includes a weapons testing range that Mr Swan said made a “unique and sensitive contribution to Australia’s national defence...An important part of this [national interest] assessment is whether proposals conform with Australia’s national security interests, in line with principles that apply to foreign government related investments,” he said.
And it's not over yet as there's, geez, a third Sino-Aussie deal endangered along similar grounds:
As well as deliberating on Chinalco-Rio, the regulator is examining Hunan Valin Iron and Steel of China’s planned A$1.2bn investment in Fortescue Metals, Australia’s third biggest iron ore group.
My broader point is this: developed countries keep complaining that China is propping up its currency artificially by buying US Treasuries and other reserve assets. Fine. However, when the PRC then tries to diversify into other things it has clear use for such as ensuring a steady supply of raw materials, countless roadblocks are thrown in its way. It always returns to global economic imbalances: you cannot have it both ways by telling the Chinese "don't buy debentures" and then "don't buy equity stakes" when they try to diversify.

Hey buddy, this is free trade. If you keep running external deficits (like Australia), then you have no choice other than to accept offsetting capital inflows. You can try and be a Robinson Crusoe-style autarky, but North Korea is not a particularly shining model of development. And some people still wonder why the Chinese are upset...
Read More

Seychelles: Rich and Famous to Heavily Indebted

♠ Posted by Emmanuel in , at 3/27/2009 05:45:00 AM
You can easily picture Robin Leach of "Lifestyles of the Rich and Famous" fame yukking it up with the great and the good in Seychelles, the idyllic island playground for the uber-wealthy. The official website purports that is a travel destination for romance, sailing, diving, and fishing--a potent mix for sure. Unfortunately, the current economic crisis has not favored the Seychelles as revenues from tourism and fishing have dried up. This is rather unfortunate as the country has borrowed big in expectation that the good times would continue to roll. This Fortune article suggests "think again," although it's a little too late as they country has already sought IMF emergency financing:
Last year, as tourism and fishing revenue began slowing, the Seychelles defaulted on a $230 million, euro-denominated bond that had been arranged by Lehman Brothers before its own bankruptcy. The IMF came in in November with a two-year, $26 million rescue package, and the country has since taken a series of emergency steps: It laid off 12.5% of government workers (1,800 people), floated its currency (the Seychelles rupee, which has fallen from eight to the U.S. dollar to 16, effectively doubling the prices of imports), lifted foreign exchange controls and agreed to sell state assets.

The IMF has given a thumbs-up to the initial progress, but it warned that the economy would contract 9.5% this year. The government of Australia is sending tax experts to help overhaul the revenue collection system and audit local companies.

Now the Seychelles is negotiating with the governments of Britain, France and other Western countries including the U.S. - the so-called Paris Club - to reschedule $250 million in debt it owes them. It is asking for 50% of it to be forgiven - a rate it hopes its commercial creditors will then apply to its remaining $550 million outstanding. "We borrowed more than we can repay," complains Ralph Volcere, the editor of Le Nouveau Seychelles Weekly and a vocal government critic. "This was wholly irresponsible."
Debt relief from large Western lenders is a usual plea, although these lenders may not look favorably on some of the Seychelles' efforts to generate revenue by talking up its status as a tax haven when those lenders are cracking down on tax havens to increase their own revenue take. Moreover, isn't there something jarring about a champagne-and-caviar destination with oodles of five-star resorts asking for debt relief? Still, its efforts at increasing its UNCLOS waters for fishing may be more plausible:
Seychelles officials have another idea though: to promote the country's longstanding virtue of being an off-shore business haven, with no corporate tax, no minimum capital requirements, only one shareholder or director required, and an annual licensing fee of just $100.

It also hopes to grow revenue from fishing licenses in its territorial waters, and on March 26 it will present a proposal to the United Nations to expand its exclusive rights to the surrounding seabed, potentially increasing prospects of revenue from underwater minerals, oil and gas.
Read More

Trade Down? Use Shipping Containers for Housing

♠ Posted by Emmanuel in , at 3/27/2009 04:10:00 AM
I remember watching an episode of Seinfeld where the character Kramer decided to live in a shipping container to cut down on living expenses. It seemed like a funny idea at the time, but some people are actually ingenious enough to make this idea more plausible and actually desirable. Not only does it make good use of shipping containers as international trade is going to the dogs, but it's also environmentally friendly in the sense of recycling old discarded containers for livable housing. But first, let's get to declines in container trade. We start in the US of A via Portworld:
The top 10 US box ports registered their 19th-straight [year-on-year] decline in monthly box volumes in February, a clear indication of slowing economic growth. The statistics, from the National Retail Federation (NRF) and IHS Global Insight monthly Port Tracker report, cover total box volumes handled at key US box ports in California, Texas, Washington, New York/New Jersey, Virginia, Georgia and South Carolina. The report pegged February throughput at one million twenty-foot equivalent units (TEUs), 17.7% down from throughput for the same month last year.
And if shipping is down at the receiving end, it must also be down at the sending end:
The volume of containers handled in Chinese ports in February fell 17% year-on-year as the country's export sector slowed, reports said. Last month, box volumes amounted to 6.97 million TEUs, representing a 22.5% fall from January's 8.99 million TEUs. Collapsing consumer demand in the US and Europe has hit the Asian export markets.
So if container ports aren't busy, a lot of containers are being left unused. That's where these two recent features come in. By coincidence (or not), both tout twelve innovative designs, although there is some overlap. The earlier one comes care of TreeHugger, and here is a sample conversion of what appears to be a single twenty-foot equivalent unit (TEU):

There are also projects using multiple containers in "Crate Expectations." More recently, Yahoo! has gotten into the act. Here is another installation from Bangkok, Thailand featuring not just one but four containers:

Good stuff--stylish yet environmentally-friendly is the way to go in a time of declining trade. If economic slowdown gives you containers, make container homes ;-)
Read More

Investors to Stimulus Lubber Gordon Brown: Stop It

♠ Posted by Emmanuel in ,, at 3/26/2009 08:25:00 AM

As I've said again and again to the point of grating on blog readers, this is exactly what the rest of the world needs to do to the United States: like Barack "Trillions in Deficits" Obama, British PM Gordon "British Jobs for British Workers" Brown has been throwing good money after bad at stimulus packages without much afterthought. Like the US, the UK thought that its currency's status as a reserve unit could finance unprecedented fiscal expansion. As I've said before, both plan a level of (fiscal) debauchery unseen since the heyday of Sodom and Gemorrah. Well, the UK now finds itself in a bit of a pickle as a gilt auction has just failed (cue "Hey Big Spender" above to up the irony factor):
Wednesday’s failed government bond auction [NOTE: see my explanation below] looks ominous for investors, as auctions rarely fail in the sovereign market. For a government looking to raise a record amount to pay for fiscal stimulus packages and bank bail-outs, a trend of bond auction failures could put serious pressure on the public finances. This would force the Debt Management Office to reconsider how it will raise the £148bn – a record annual amount – it plans to issue in bonds in the 2009-10 financial year. It could even put pressure on the Bank of England to increase interest rates to push up bond yields and make the securities more attractive to investors.
The repercussions are forcing Brown to rethink his free-spending ways:
Gordon Brown last night backed away from plans for a recession-busting spending spree in next month's budget, after City investors delivered a stern message about the health of the public finances by shunning a sale of government debts for the first time since 2002.

In New York to canvass support for a deal at next week's G20 London summit on a worldwide economic rescue package, the prime minister said he had no plans to add to the £20bn fiscal stimulus announced by Alistair Darling last autumn, saying there were other "effective and quicker ways" of kick-starting demand.

Back in London, investors sent shockwaves through financial markets by shunning a £1.75bn auction of government IOUs - gilts - amid mounting fears about the Treasury's ability to pay for its bank bailouts and fill the hole left by collapsing tax revenues. "This is a bit of a shot across the government's bows," said Jonathan Loynes, of Capital Economics.

The prime minister's enthusiasm for an international economic agreement on tackling recession had been widely interpreted as an attempt to win political cover for a renewed spending spree at home, but he played that idea down yesterday. "Nobody is suggesting that people come to the G20 meeting and put on the table the budget that they're going to have for the next year. What we are suggesting is that we have together to look at what we have done so far cumulatively," he said.
I will soon outline a non-wussy plan (as opposed to an Olive Oyl one) to get the US to behave. Yes, it involves flexing LDC muscle as if it were 2009 instead of 1964. Uncle Sam has been a very, very naughty boy indeed. With the notable exception of Britain for reasons you can deduce from reading the articles linked to above, most other countries have shown displeasure at America's plan to run up ten trillion or so dollars in debt over the next decade. A stimulus-addled United States is a danger to itself and the world economy. If market discipline is not enforced, then other ways should be found to make it cut the crap. Go ask Gordon Brown (reprise "Hey Big Spender"). Why should anyone have to put up with this nonsense?
---

The notion of a "failed" auction simply means HM Treasury did not find enough buyers for the entire face value of bonds announced prior to auction (£1.75B) at prices deemed acceptable by the government. Only £1.627B worth of 40 year gilts were awarded as other investors are requiring a higher yield for the risk they perceive in holding British gilts. In other words, the auction's "bid-to-cover ratio"--the ratio of bids received to bids accepted--was less than 1.
Read More