Tuesday, October 28, 2008

Roundup: October 28


The Fed Open Market Committee meets today and tomorrow. The Bank of England has released its Financial Stability Report.

In a sad interview with CNBC this morning, John McCain and Sarah Palin pitched a Home Owners' Loan Corporation and offshore drilling (plus, of course, nucular energy) as solutions to the financial crisis.

The IMF may exhaust its capacity to lend to distressed countries in the near future, says Gordon Brown, raising the possibility it will issue bonds (which it has never done) or Special Drawing Rights, an exotic international currency (1 SDR = $1.48) not issued since the fall of the Soviet Union, in order to fund its operations. The existence of SDRs has always held the possibility out that the IMF might one day replace the Federal Reserve as the globally hegemonic central bank -- but substantial policy-making independence from Washington has never been on the table for the bank, whose operations have always been funded by its members' quotas.

Some Russian businesses have begun refusing credit card payments, and Sberbank ATMs are reportedly refusing debit cards from other banks. Accepting credit card or debit card payments means incurring risk -- payment risk (depending on the solvency of the card-issuing institution, or, in extremis, on the continued functioning of the settlement system) and time risk (exposing the payee to the risk that, in this case, the ruble might be devalued in the period between transaction and settlement). The monetary system is delaminating, so to speak, as ordinarily interchangeable forms of payment -- cash, demand deposits, time deposits, repos -- start to trade separately and sometimes (as in this case) with very different risk premia.

Several Russian metals firms are suspending production at high-cost plants and restricting investment, while Moscow has offered $1bn to bailout Russian airlines. Russia also announced it would spend up to RUB100bn ($3.67bn) buying new apartments, to shore up the construction industry. Oligarch Mikhail Fridman's stake in Vimpelcom has been frozen by a Russian court, as the company finds itself in talks with Deutsche Bank over repayment of $2bn in bonds collateralized by Vimpelcom shares.

German Finance Minister Peer Steinbrueck said that the world has less than a week to prevent crisis in Pakistan, which says it expects a preliminary agreement with the IMF within days. WSJ Asia editorializes that the rumored prescriptions for Pakistan -- cuts in government spending, higher taxes, and currency devaluation -- are the "begger-thy-neighbor" policies that ruined Thailand, South Korea, and Indonesia in 1997. Cuts to key subsidies would hurt the poorest and provoke unrest in a country already facing 25% inflation.

Thailand will barter rice for oil with Iran, as a shortage of forex (and Iran's political interest in doing as little dollar-denominated business as possible) incentivizes direct trade between countries -- the UN FAO says this kind of international trade may again become common as emerging countries' reserves shrink.

Iceland has raised its benchmark interest rate by 6%, to 18%, likely at the behest of the IMF; PM Geir Haarde says he will address calls for the country to join the EU after the country's economic crisis has been dealt with. The Dutch government has invested EUR3bn in insurer Aegon, which canceled its dividend and said it would lose EUR350mn in Q3. Belgium has put EUR3.5bn into KBC -- meaning most Benelux financial institutions are now wholly or partially state-owned. Deutsche Bank may have lost $400mn on derivatives trading. Deutsche Postbank says it will need at least another EUR1bn in capital and will undertake a rights issue rather than going to the government for aid. Ireland has weakened its bank insurance scheme, by dropping a requirement that shortfalls be covered over time by levies on the participating institutions. Swedbank announced a SEK12.4bn ($1.56bn) rights issue -- the Nordic banks face pressure over their Baltic exposure. Wal-Mart said it would cut its capex by about $3bn and has reduced its planned US store openings to 191, from 218 in 2008.

The US October consumer confidence survey was an all-time low in the history of the indicator, with consumers reporting they expect fewer jobs and a worsening economic climate. The Baltic Dry Index is at a six-year low, with nasty rumors surfacing of existing contracts for shipping being broken. Bloomberg reports that rates are approaching the costs of running ships, with capesize day rates running about $7300, and operating expenses about $6000/day -- meaning many ships may soon find themselves idle. The Case-Shiller housing price index for August showed prices off 16.6% YoY over the composite of 20 cities -- but the interurban differences are significant, with houses in Phoenix off more than 35% from their peak and those in Dallas off less than 5%. Calculated Risk discusses the most recent home-ownership data, concluding that prices will remain suppressed for some time. And the Richmond Fed manufacturing index declined in October.

Petrobras may halt construction on 20% of its planned deepwater oil rigs because of the credit crunch and falling oil prices. These rigs are in some of the most difficult and costly fields in the world to exploit, and their slowdown is a sign of how the credit crisis will curtail investment in oil and gas infrastructure. The IEA is concerned about this trend, which could lead to shortages if the economy recovers. In Nigeria, President Yar-Adua is running scared by the spectre of falling oil prices. As oil sales represent some 85% of Nigeria's revenues, the collapse in oil prices threatens the stability of the country. For comparison, Venezuela is about 50% dependent for national revenue on oil.

FT Alphaville reports on an unexpected $970mn balance sheet hit at Barclays, which failed to return collateral on an off-balance-sheet CDO and has had risky assets -- which it cannot afford to retain on balance sheet, thanks to Basel II risk-weighting -- put to it. Meanwhile, Morgan Stanley had to buy about $23bn of assets from its money market funds in order to maintain their value as investors withdrew funds. Barclays has held preliminary discussions with Sberbank and OAO about a capital injection, reports the WSJ, though the FT says talks have not proceeded further -- Barclays declined the offer of state funds from the UK, perhaps finding the terms too onerous.

Econbrowser gives us a breath of fresh air, looking at empirical evidence for the impact of various forms of fiscal stimulus -- that is, at their respective Keynesian multipliers. Lo and behold, food stamps are more than six times as effective at promoting spending than accounting breaks for corporations. Robert Reich discusses some options for stimulus plans after the election, concluding that extending unemployment benefits is the only thing to do.


China and Russia are to sign a long-term oil supply deal today and China is in talks to lend between $20bn and $25bn to Russian companies, Reuters reports. It is hard not to see this as a vehicle for a Chinese financial lifeline to Russia, and a brilliant way to use China's reserves to gather political capital.

Foreign Policy's blog optimistically hails a court decision in Niger which has levied a fine on the government for failing to enforce its 1960 anti-slavery law.
There are likely more slaves today than at any point in human history.

UN peacekeepers have completely failed in the Congo, the site of the world's longest and bloodiest ongoing war. The general-in-charge resigned yesterday after only three weeks in the country with little warning, and the rebels continue to advance.

The WSJ reports that senior Administration and military officials are considering talks with Taliban leaders, said to be an outgrowth of a classified assessment of the situation in Afghanistan. General Petraeus is reported to support the plan; clearly, any action will be delayed until after the election.

Syria Blog aggregates press commentary about yesterday's U.S. strike into Syria.

North Korea threatened to reduce South Korea to rubble, unless South Korea controls groups who are dropping anti-North Korean leaflets across the border.

A putative peace deal in Somalia is unlikely to lead to any real progress, says David Axe, so long as Mogadishu remains a disaster.

Harare is at risk of cholera, reports IRIN, with Zimbabwe's government paralyzed.

Five Chinese oil workers taken hostage in Sudan have been killed by their captors.


Americans drove 5.6% less in August YoY, for 15 billion fewer Vehicle Miles Traveled (VMT), as high gasoline prices (which have now dropped to around $2.50 per gallon, the lowest since '07) and the recession curtailed driving.

GE and Rolls Royce are competing to build the most energy-efficient jet engine, with each boasting of performance improvements of around 25%.

The EPA is rushing to get one of Dick Cheney's favorite rules for allowing power plants to emit more pollution passed before Saturday, the key 60-day threshold after which it will be easier for the incoming administration to revoke the rule. However, it faces intra-agency opposition.

China will invest over $200bn in improving its rail network as part of an infrastructure-focused stimulus plan.

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