Category: Macro


China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings

May 9th, 2011 — 3:06pm

from zero hedge

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week’s announcement by PBoC Governor Zhou (Where’s Waldo) Xiaochuan that the country’s excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the “buy US debt” Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that “end of QE” again?

From Xinhua:

China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

Comment » | Fed Policy, Macro, US denouement, USD

… yet more Portugal

March 25th, 2011 — 10:38am

this time from Bill Bonner in the Daily Reckoning…

Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud — that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak — such as the next generation, which doesn’t get a vote.

Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange — getting more from the feds than they pay in taxes — it’s very hard (maybe impossible) to impose “austerity” measures.

What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…

Comment » | Geo Politics, Macro, PIIGS, Portugal, The Euro

More Portugal…

March 25th, 2011 — 2:41am

from Peter Oborne writing in the Telegraph…

Some European countries are in the habit of going bankrupt

A few hours after George Osborne’s faintly banal Budget speech, José Sócrates, the Portuguese prime minister, resigned. So far as I know, these two events were not in any way connected. Nevertheless, it is a very good bet that this little Iberian drama will have far more effect on British household finances and our national prosperity over the coming year than the Osborne Budget.

The resignation plunges the eurozone into a crisis it cannot survive. Mr Socrates’s failure to force his austerity package through the Portuguese parliament marks a crucial turning point.

It is the moment when the peripheral eurozone countries refuse to take orders any more from the centre. Effectively, Portugal has adopted blackmail as an economic strategy – and very effective it is, too.
The country is ready to be bailed out of its chronic financial mess, but only on its own terms. Otherwise it has a deadly card to play. It has the option of going bankrupt, an act of naked malice which would set in motion a second round of the banking crisis which began in 2007.

The consequences of this would be terrible: the break-up of the euro, mass unemployment, financial collapse, social despair. The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators. The reasons are shaming. One significant factor is the financial and economic illiteracy of political journalists and foreign correspondents. Too many are ill-equipped to look behind the bland statements made by European chancellors or to interpret the deliberately misleading balance sheets of major European banks.

This problem is exacerbated by the fact that almost all leading financial journalists share the moral and emotional commitment the European political class has long felt for the euro. The Financial Times, for example, has been a passionate supporter of the single currency since its inception, a pathology which runs so deep that its chief political columnist recently dedicated a column to making the extraordinary argument that the British economy would have been better off if we had joined the euro when it was first introduced.

But the most important problem is the failure to study history. Here the facts are devastating, and bear repetition. Portugal has defaulted on its national debt five times since 1800, Greece five times, Spain no less than seven times (and 13 times in all since 1500).

By contrast, Anglo-Saxon countries rarely, if ever, default. In this country, we haven’t reneged on our debts in nearly 1,000 years, though there have been close shaves. The same applies to Canada, Australia and the United States.

Many European countries are culturally attuned to bankruptcy. Indeed, Greece has spent approximately half of the 182 years since it achieved independence from the Ottoman Empire in a state of default and therefore denied access to international capital markets – a position it is likely to resume in the very near future.

The importance of these statistics is very great. They show that the widespread assumption by bureaucrats, senior politicians and commentators alike that eurozone countries could never go bankrupt is simply wrong.

In fact, the opposite is the case. The normal and indeed the automatic response of Spain, Portugal, Greece and many other European countries to major financial crises such as the one we are living through today has been to renege on their debts. So it would be extraordinary were they not to do so. History also shows that currency unions such as the eurozone invariably fail: the most relevant case in point is the Latin monetary union formed by France, Belgium, Italy and Switzerland in 1865, with Spain and Greece joining a few years later. Once again, these failures are invariably sparked by grand financial crises of the kind the world faces today.

These historical facts make contemporary European political discourse completely baffling. It is universally assumed by members of the European political class that the single currency cannot possibly fail because the political will to make the venture succeed is so powerful. There is no doubt about the will: French president Nicolas Sarkozy announced this year at the World Economic Forum in Davos that he and Angela Merkel, the German Chancellor, will “never, never… turn our backs on the euro… We will never let the euro go or be destroyed.”

Sarkozy and Merkel are dreaming. They are out of their depth, struggling against forces they cannot control and which will in due course wash them away. It is economic reality, not political speeches, that will determine the success or failure of the single currency, and the facts on the ground are so devastating that it is hard to see a way forward.

The experiment of imposing a single currency and a single monetary policy upon economies as divergent as those of Germany and Greece has gone tragically wrong. Germany, bolstered by an artificially low exchange rate and rock-bottom interest rates, is enjoying a boom. But the economies of Ireland, Portugal, Greece and others are being destroyed – businesses closing, unemployment surging, dependent on bailouts, all self-respect and independence gone.

It cannot be emphasised too strongly that were these countries outside the eurozone, there would be no real problem. The IMF could intervene, reschedule their debts and allow the national currencies to float until they reached a competitive level. In the case of Greece, this level would be well under half where it stands today as a member of the euro.

In the very short term, all is well. Portugal will get its bailout: the European Central Bank and its German paymasters have no choice if they are to avoid catastrophe. But it is now impossible that in the medium term the eurozone can survive intact, and increasingly likely that its collapse will be accompanied by a fresh banking crisis that will throw the entire Continent into another crippling recession, in all likelihood far more devastating than the one from which we have just emerged.

Ten years ago, William Hague, then Tory leader, forecast with astonishing precision the predicament that faces the 17 eurozone states today. He compared membership of the euro to being stuck in a burning building with no exits.

Luckily, we do not find ourselves in that position. But houses are already blazing in the next street, and Britain urgently needs to take steps to protect itself. First, and least important, we must minimise our financial commitments to the eurozone. It now looks certain that Britain will be legally obliged to make a very significant financial contribution when the Portuguese bailout comes. This is as a result of the reckless commitment made by former chancellor Alistair Darling in the dying days of the Brown government. Sadly, there seems no way out of this.

More importantly, however, we can take steps to reduce our national exposure to European sovereign debt, much of which is likely to become valueless. George Osborne controls two banks, RBS and Lloyds TSB, a legacy of the 2007 crisis. He needs to prune their balance sheets. Individuals, too, can play their part. Depositors should be chary of placing more than £50,000, the maximum insured by the state, on deposit with Santander (which owns what used to be the Abbey National and Bradford & Bingley). Santander is Spain’s best-run bank by some distance. But we are entering terrifying times, and there is no need at all to take unnecessary risks.

Comment » | Macro, PIIGS, Portugal, The Euro

Portugal

March 24th, 2011 — 9:25am

Portugal’s prime minister resigned on Wednesday evening after losing a confidence vote on austerity measures in a move that threw Portugal into political crisis and raised the likelihood of it seeking an international bail-out.

Jose Socrates was driven to quit his post after failing to win parliamentary support for the latest austerity package, the fourth and most severe put forward by the minority government in less than a year.

“This crisis occurs in the worst possible moment for Portugal,” Mr Socrates said on the steps of Belem Palace in Lisbon after tendering his resignation to the nation’s president Anibal Cavaco Silva.

“Today every opposition party rejected the measures proposed by the government to prevent Portugal being forced to resort to external aid,” Mr Socrates, who has led a minority government since 2009, said in a televised address.

The main opposition centre-right Social Democratic Party (PSD) had allowed past austerity plans to pass by abstaining from voting. But last minute negotiations failed to garner support and the government was only able to count on the vote of 97 members in the 230-seat parliament.

Despite the government warning that rejection of the austerity package would push Portugal closer to seeking a bail-out the opposition refused to accept further tax increases and cuts to social spending arguing that it hit the most vulnerable members of society.

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said.

“So from now on it is those who provoked it who will be responsible for its consequences,” he added.

The events in Lisbon came on the eve of a two-day EU summit, a meeting aimed at repairing the damage done to the euro by Irish and Greek bailouts last year.

An election in Portugal could not occur before 55 days, according to parliamentary rules, raising additional fears that Mr Socrates – who will head a caretaker administration with limited powers in the interim – will be unable to prevent a full collapse in market confidence.

President Silva said in a statement he will meet with all political parties on Friday to decide the way forward.

Comment » | Macro, PIIGS, Portugal, The Euro

Portugal

March 24th, 2011 — 6:18am

Portugal’s government is on the verge of collapse after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout.

The expected defeat of the minority government’s latest spending plans in a parliamentary vote Wednesday will likely force its resignation and could stall national and European efforts to deal with the continent’s protracted debt crisis.

The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal.

The governing Socialist Party’s parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government’s survival. Prime Minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected.

But opposition parties say the center-left government’s latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.

The leader of the main opposition center-right Social Democratic Party, Pedro Passos Coelho, said late Monday that the political deadlock made an early election “inevitable.”

As in Greece, the austerity policies have prompted numerous strikes, with train engineers set to walk off the job during the morning commute Wednesday.

Portugal’s plight stems from a decade of miserly growth. While growing at the tepid rate of 1 percent a year, it ran up debt to finance its western European lifestyle.
Bloomberg reports Portugal Faces Lawmaker Vote Threatening to Push Toward Election, Bailout

Portuguese Prime Minister Jose Socrates will today face a vote in parliament against his deficit-cutting plan which threatens to push the country toward early elections and the need for a European Union bailout.

Lawmakers will discuss the government’s so-called stability and growth program of austerity measures at 3 p.m. in Lisbon. The opposition Social Democratic and Communist parties both pledged yesterday to table resolutions against the plan.

“If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15. “That would mean a political crisis. In my understanding, the consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention.”

Portugal is going to fail. Wednesday is as good a day to do it as any.

Thus, sooner, rather than later, another bailout is coming. However, it will not be Portugal who is bailed out, but rather German, French, and UK bank that lent money to Portugal.

Eventually Greece, Ireland, and Portugal will default, even though pretending otherwise may continue for a while.

Comment » | Geo Politics, Macro, PIIGS, The Euro

Global Recovery

March 14th, 2011 — 5:06pm

from zero hedge…

<<Does anyone seriously think the global recovery is still intact? Based on what? Does anyone think that stagnant/declining wages, falling real estate values, skyrocketing prices for materials and energy, and belt-tightening by bankrupt States are ideal foundations for higher profits? Anyone who doesn’t realize the quake in Japan is a tragic load dumped on a fragile addict’s quivering back (i.e. the global recovery) will undoubtedly be surprised by how fast the global economy will start unraveling. Anyone who kept their eyes open is only wondering how a debt and propaganda-fueled recovery lasted this long.>>

Comment » | Macro

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