The NYT provides important context to the Swiss vote in favor of a constitutional amendment banning new minarets:
Of 150 mosques or prayer rooms in Switzerland, only 4 have minarets, and only 2 more minarets are planned. None conduct the call to prayer. There are about 400,000 Muslims in a population of some 7.5 million people. Close to 90 percent of Muslims in Switzerland are from Kosovo and Turkey, and most do not adhere to the codes of dress and conduct associated with conservative Muslim countries like Saudi Arabia, said Manon Schick, a spokeswoman for Amnesty International in Switzerland.
The Lede looks at the reaction around Europe.
Monday, 30 November 2009
Dubai World in context
When the judging the systemic implications of Dubai World's default, it is helpful to keep everything in context. FP Passport does just that.
Friday, 27 November 2009
A final thought on Dubai to take you into the weekend
A final thought on Dubai: don't discount the city-state's long-term prospects too much. Service-based economies with weak domestic demand (or in Dubai's case almost no indigenous population) are destined to be pro-cyclical. The vision to become a financial, services, transport and residential hub in a region with limited integrated infrastructure and service capacity, as well as tremendous development potential, seems a sound one. If the new silk road will be paved with microchips, euros and renminbi, Dubai could very well become the great marketplace connecting east and west.
A little optimism to carry into the weekend.
A few quick thoughts on Dubai
It is a holiday week here in the US, so I have been only passively following the developments of the past few days. But as the global reaction to the Dubai Government's request for a six-month restructuring and standstill on Dubai World's, and its subsidiary Nakheel's, debt makes its way to the US markets this morning (the US was closed for the Thanksgiving holiday yesterday), I have been thinking about the implications of the decision over my morning espresso (or 5 to be exact).
Briefly, a few thoughts on the decision:
-Legalese aside, this is a default and the markets are treating it as such. S&P has said that under its default criteria, Dubai World's restructuring may be considered a sovereign default, that is the failure of the sovereign to provide timely financial support to a 'core government-related entity.' The Dubai Ministry of Finance's bogus assertion that they are simply asking creditors to 'wait until May' is ludicrous.
-You can view the risk of contagion from two angles. One perspective would have us shaking in our trading smocks, worried that much like South East Asia in the late nineties, the bursting of a property bubble backed by the sovereign in an opaque legal and financial environment would quickly spread to other, similarly fragile economies. Just look at the spike in borrowing costs over the past 48 hours for not just Dubai, but regional peers like Abu Dhabi, not to mention emerging markets more globally. Compounding this fear is the still fragile state of the international financial system. On the other hand, and this is the perspective I have come to hold over this morning's coffee, Dubai is a unique beast, and its fallout should be fairly small. It is a property-driven bust with no economic muscle to speak of besides construction and services. It was always destined to burst in spectacular fashion amidst the global financial crisis. Its development model fundamentally relied on cheap borrowing costs, conspicuous consumption and financial services. Unlike its regional peers, it holds no natural resource wealth or, to my knowledge, potential, which is why it staked its future on becoming a global financial center. The implicit guarantee that the Dubai government, or even Abu Dhabi, would back Dubai World's obligations was a miscalculation, and now creditors are left uninformed and, until Monday at least, out in the cold. Its regional peers hold massive forex reserves, recovering oil and gas revenue and sovereign wealth funds that back most of their government-owned entities (companies similar to Dubai World.) The prospect of a similar situation developing in Abu Dhabi is highly unlikely. This is why, once markets settle next week, the contagion should be minimal.
-But the prospect of contagion, and current panic over Dubai's position, highlights the critical importance of information to the functioning of financial markets. Dubai World's fragile position has been apparent for months, and as I mention above, the assumption was that it was fully backed by the government. But in an opaque political and financial environment, this assumption was really a matter of faith. It was never clear that the government would fully back Dubai World's debt: that's why, as Willem Buiter points out, private creditors demand and earn higher risk premiums on property developers than they do on sovereign debt. I think this will raise interesting questions about, and perhaps greater scrutiny of, sovereign enterprises and wealth funds worldwide. Limited liability extends to the owners of these firms (that is probably a gross generalization), even if the owner is the state itself. As Buiter says, creditors will have to manage this risk the way they always do: hope for the best. Greater transparency will allow investors to more accurately price this risk. Finally, the current anxiety is compounded by the lack of information coming out of the Ministry of Finance. This is partly a matter of poor timing, with some markets closed for holidays in the Middle East and US. The government of Dubai has essentially told investors to wait until Monday, which to globally interconnected financial markets can be a lifetime. Even in an opaque environment, a timely and transparent response can go a long way towards stabilizing market expectations and limiting the contagion.
Briefly, a few thoughts on the decision:
-Legalese aside, this is a default and the markets are treating it as such. S&P has said that under its default criteria, Dubai World's restructuring may be considered a sovereign default, that is the failure of the sovereign to provide timely financial support to a 'core government-related entity.' The Dubai Ministry of Finance's bogus assertion that they are simply asking creditors to 'wait until May' is ludicrous.
-You can view the risk of contagion from two angles. One perspective would have us shaking in our trading smocks, worried that much like South East Asia in the late nineties, the bursting of a property bubble backed by the sovereign in an opaque legal and financial environment would quickly spread to other, similarly fragile economies. Just look at the spike in borrowing costs over the past 48 hours for not just Dubai, but regional peers like Abu Dhabi, not to mention emerging markets more globally. Compounding this fear is the still fragile state of the international financial system. On the other hand, and this is the perspective I have come to hold over this morning's coffee, Dubai is a unique beast, and its fallout should be fairly small. It is a property-driven bust with no economic muscle to speak of besides construction and services. It was always destined to burst in spectacular fashion amidst the global financial crisis. Its development model fundamentally relied on cheap borrowing costs, conspicuous consumption and financial services. Unlike its regional peers, it holds no natural resource wealth or, to my knowledge, potential, which is why it staked its future on becoming a global financial center. The implicit guarantee that the Dubai government, or even Abu Dhabi, would back Dubai World's obligations was a miscalculation, and now creditors are left uninformed and, until Monday at least, out in the cold. Its regional peers hold massive forex reserves, recovering oil and gas revenue and sovereign wealth funds that back most of their government-owned entities (companies similar to Dubai World.) The prospect of a similar situation developing in Abu Dhabi is highly unlikely. This is why, once markets settle next week, the contagion should be minimal.
-But the prospect of contagion, and current panic over Dubai's position, highlights the critical importance of information to the functioning of financial markets. Dubai World's fragile position has been apparent for months, and as I mention above, the assumption was that it was fully backed by the government. But in an opaque political and financial environment, this assumption was really a matter of faith. It was never clear that the government would fully back Dubai World's debt: that's why, as Willem Buiter points out, private creditors demand and earn higher risk premiums on property developers than they do on sovereign debt. I think this will raise interesting questions about, and perhaps greater scrutiny of, sovereign enterprises and wealth funds worldwide. Limited liability extends to the owners of these firms (that is probably a gross generalization), even if the owner is the state itself. As Buiter says, creditors will have to manage this risk the way they always do: hope for the best. Greater transparency will allow investors to more accurately price this risk. Finally, the current anxiety is compounded by the lack of information coming out of the Ministry of Finance. This is partly a matter of poor timing, with some markets closed for holidays in the Middle East and US. The government of Dubai has essentially told investors to wait until Monday, which to globally interconnected financial markets can be a lifetime. Even in an opaque environment, a timely and transparent response can go a long way towards stabilizing market expectations and limiting the contagion.
I am sure we will have a lot more to say about this next week, but these are just some scattered, initial thoughts on the unfolding drama. See Dave's great piece on sovereign debt below, it provides a very interesting context to what is happening in Dubai, and the potential impact for sovereign borrowers the world over.
Thursday, 26 November 2009
Wednesday, 25 November 2009
My, That Was Quick
Dubai wastes no time in illustrating some of the sovereign debt problems highlighted below.
Trouble Brewing in Sovereign Debt Markets?
On Monday, Gillian Tett wrote an article in the FT speculating on whether the latest asset bubble is sovereign debt. Since the onset of the financial crisis, financial institutions have been flooding to (and indeed have been encouraged to) government bonds because they are 'safe' and 'low-risk' assets. That they are perceived to be safe and low-risk is also reflected in their prices. But as Gillian explains, this sense of safety may be misleading:
Gillian's concerns reflect the main message of a book I am currently reading: This Time is Different, by Carmen Reinhart and Ken Rogoff. With a tag-line reading "Eight centuries of financial folly," the book uses a wealth of data to demonstrate just how frequently countries default on their domestic and external loans. The answer is: often.
One of the trends they identify is that banking crises are usually a precursor to sovereign debt crises. This is particularly true for emerging market economies, regardless of whether the banking crisis occurred in their country/region or the rich world, because of their reliance on funds from external sources. Since the rich world just went through a banking crisis (as part of the wider financial crisis), and levels of global trade have collapsed, this is something to watch out for.
But Gillian isn't talking about emerging markets: she's talking about large, wealthy countries like the US and the UK. Rich countries are very unlikely to default straight up. But there are other ways to partially-default on your loans, like inflation (as noted above). This works particularly well when both your domestic and external debt is denominated in your own currency (as it is in with the US).
The problem boils down to this: financial institutions just spent a lot of time & taxpayer money replacing now-worthless financial products like CDOs and commercial paper with government bonds. Now the value of those government bonds is at risk due to the huge sums of money governments spent bailing out those very same financial institutions. Unless governments (or more specifically, the wider public) are willing to make difficult spending choices to tackle national debt problems, we risk repeating this cycle a few years down the road.
And in case there's any doubt that governments have been loading up on debt, I will again point to the Economist's global debt calculator. Add to this the short-term costs of lost productivity from the financial crisis and the long-term costs of a massive demographic change in Western countries, and it's a sobering picture indeed.
[C]ould this flight to the "safety" of government bonds in itself be creating subtle new dangers? Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain - not least because with yields currently so low there is less pressure on politicians to push through reform.... it is easy to imagine that some countries will end up eroding the value of their bonds by debasing their currencies in the coming years, printing money and stoking inflation.
Gillian's concerns reflect the main message of a book I am currently reading: This Time is Different, by Carmen Reinhart and Ken Rogoff. With a tag-line reading "Eight centuries of financial folly," the book uses a wealth of data to demonstrate just how frequently countries default on their domestic and external loans. The answer is: often.
One of the trends they identify is that banking crises are usually a precursor to sovereign debt crises. This is particularly true for emerging market economies, regardless of whether the banking crisis occurred in their country/region or the rich world, because of their reliance on funds from external sources. Since the rich world just went through a banking crisis (as part of the wider financial crisis), and levels of global trade have collapsed, this is something to watch out for.
But Gillian isn't talking about emerging markets: she's talking about large, wealthy countries like the US and the UK. Rich countries are very unlikely to default straight up. But there are other ways to partially-default on your loans, like inflation (as noted above). This works particularly well when both your domestic and external debt is denominated in your own currency (as it is in with the US).
The problem boils down to this: financial institutions just spent a lot of time & taxpayer money replacing now-worthless financial products like CDOs and commercial paper with government bonds. Now the value of those government bonds is at risk due to the huge sums of money governments spent bailing out those very same financial institutions. Unless governments (or more specifically, the wider public) are willing to make difficult spending choices to tackle national debt problems, we risk repeating this cycle a few years down the road.
And in case there's any doubt that governments have been loading up on debt, I will again point to the Economist's global debt calculator. Add to this the short-term costs of lost productivity from the financial crisis and the long-term costs of a massive demographic change in Western countries, and it's a sobering picture indeed.
Tuesday, 24 November 2009
SNL Tackles Macroeconomic Imbalances
Last Friday I posted a clip from a video in which Warren Buffet explains the nature of economic relationship between China and the United States. Well... move over, Warren, because the folks at Saturday Night Live have done a much better (and funnier) job.
Dan Drezner analyzes.
Dan Drezner analyzes.
Monday, 23 November 2009
Sunday, 22 November 2009
The Wonga Coup Revisited
As I catch up on some reading this weekend, a little story out of a tiny west African nation has caught my attention again.
Earlier this month, Simon Mann, an 'Eton-educated former SAS officer' and, as of late, British mercenary, had his 34 year sentence pardoned in Equatorial Guinea. Mann was arrested en Zimbabwe in 2004 along with a shady band of mercenaries in route to Equatorial Guinea. After three years in a Zimbabwe prison, he was extradited to the west African nation and convicted in 2008 of attempting to overthrow the government of President Teodoro Obiang. Why Equatorial Guinea? Because there be oil in them waters.
I won't get into the details of the plot, because its Sunday and I have a very good account to recommend, but lets just say it involves a curious cast of characters, including the son of a former British prime minister, the governments of Spain and South Africa, a Lebanese financier, battle-hardened mercenaries and intelligence agencies from London to Washington. What makes the story even more remarkable is that the coup's development was an open secret in Europe and America, so much so that conference panels would discuss what would happen 'IF' Obiang fell.
The Wonga Coup is a fascinating story full of international intrigue and I highly recommend Adam Roberts' account in The Wonga Coup. You can read it on Google books here, but I suggest buying it. Stay tuned: Mann has all but guaranteed this story isn't over.
Earlier this month, Simon Mann, an 'Eton-educated former SAS officer' and, as of late, British mercenary, had his 34 year sentence pardoned in Equatorial Guinea. Mann was arrested en Zimbabwe in 2004 along with a shady band of mercenaries in route to Equatorial Guinea. After three years in a Zimbabwe prison, he was extradited to the west African nation and convicted in 2008 of attempting to overthrow the government of President Teodoro Obiang. Why Equatorial Guinea? Because there be oil in them waters.
I won't get into the details of the plot, because its Sunday and I have a very good account to recommend, but lets just say it involves a curious cast of characters, including the son of a former British prime minister, the governments of Spain and South Africa, a Lebanese financier, battle-hardened mercenaries and intelligence agencies from London to Washington. What makes the story even more remarkable is that the coup's development was an open secret in Europe and America, so much so that conference panels would discuss what would happen 'IF' Obiang fell.
The Wonga Coup is a fascinating story full of international intrigue and I highly recommend Adam Roberts' account in The Wonga Coup. You can read it on Google books here, but I suggest buying it. Stay tuned: Mann has all but guaranteed this story isn't over.
Friday, 20 November 2009
Video of the Day: Squandersville v. Thriftville
Warren Buffet explains the very basics of the financial and trade imbalances between the United States and China, complete with funky animations:
This is an excerpt from the film I.O.U.S.A. (via The Browser)
This is an excerpt from the film I.O.U.S.A. (via The Browser)
Thursday, 19 November 2009
Europe Decides
Europe has decided who will staff the two most powerful positions to come out of the Lisbon Treaty: Belgian PM Herman van Rompuy is the first permanent President of the European Council, and the EU Trade Commissioner, Britain's Baroness Catherine Ashton, is the High Representative for Foreign Affairs and Security.
A few brief thoughts:
-As expected, the centre-right got the presidency while the centre-left filled the high representative position. I always found this bargain a bit odd, seeing that the centre-right is far more popular (based upon the last elections), and the high representative is judged by most to be the more powerful/globally significant position.
-van Rompuy's position on Turkey (anti-EU accession) no doubt endeared him to both Merkel and Sarkozy, whose consensus all but guaranteed his appointment. Consider Turkish accession dead for now. Also, his reputation as a consensus builder fits the technocratic preference Europe has long held for its bureaucrats.
-The low international profile of both candidates has disappointed many and furthered concerns that the new EU positions will fail to 'stop traffic' in Washington or Beijing. But I suspect this was a calculation of both Merkel and Sarkozy. Neither wanted a European head with more clout or name-recognition than they (this undoubtedly played a role in Tony Blair's failed candidacy for the presidency). van Rompuy's press conference remarks surely pleased France and Germany when he said he would remain 'discreet', as he had 'throughout his political career.'
-Baroness Ashton's notable lack of international experience makes her a curious choice. In the post-meeting press conference, she said she would put forth a 'quite diplomacy.' I would argue Europe needs a more robust global presence.
-It will be perhaps a year before we can fully understand the significance and power of the new positions, but it seems certain that national leaders (Sarkozy, Merkel, Brown/Cameron) will continue to wield the most power in Europe and drive its agenda, both home and abroad.
A few brief thoughts:
-As expected, the centre-right got the presidency while the centre-left filled the high representative position. I always found this bargain a bit odd, seeing that the centre-right is far more popular (based upon the last elections), and the high representative is judged by most to be the more powerful/globally significant position.
-van Rompuy's position on Turkey (anti-EU accession) no doubt endeared him to both Merkel and Sarkozy, whose consensus all but guaranteed his appointment. Consider Turkish accession dead for now. Also, his reputation as a consensus builder fits the technocratic preference Europe has long held for its bureaucrats.
-The low international profile of both candidates has disappointed many and furthered concerns that the new EU positions will fail to 'stop traffic' in Washington or Beijing. But I suspect this was a calculation of both Merkel and Sarkozy. Neither wanted a European head with more clout or name-recognition than they (this undoubtedly played a role in Tony Blair's failed candidacy for the presidency). van Rompuy's press conference remarks surely pleased France and Germany when he said he would remain 'discreet', as he had 'throughout his political career.'
-Baroness Ashton's notable lack of international experience makes her a curious choice. In the post-meeting press conference, she said she would put forth a 'quite diplomacy.' I would argue Europe needs a more robust global presence.
-It will be perhaps a year before we can fully understand the significance and power of the new positions, but it seems certain that national leaders (Sarkozy, Merkel, Brown/Cameron) will continue to wield the most power in Europe and drive its agenda, both home and abroad.
Colbert on the Frozen Waffle Crisis
Dave has brought to our attention a truly frightening development in the world of frozen breakfast goods: the waffle crisis. Akin to peak oil, it threatens the very fabric of western civilization. I am hard at work on a bunker and have stockpiled enough pop-tarts to get me through the winter. God help us.
Stephen Colbert, host of The Colbert Report and all-around American hero, calls on US President Barack Obama to open the nation's strategic waffle reserves.
| The Colbert Report | Mon - Thurs 11:30pm / 10:30c | |||
| Eggo Waffles Shortage Alert | ||||
| ||||
The Impact of Climate Change on Frozen Waffles
You read that correctly: there will be a shortage of Eggo breakfast waffles in the United States as the result of flooding in Georgia, the site of Kellogg's main factory.
We can likely expect a "waffle-run" on grocery stores across the country as desperate citizens attempt to stock up on this toastable breakfast item. I can only pray that no one is injured.
More seriously, Free Exchange uses this case to segue into a discussion of the disruption that global warming will cause to the world food supply - so check that out.
We can likely expect a "waffle-run" on grocery stores across the country as desperate citizens attempt to stock up on this toastable breakfast item. I can only pray that no one is injured.
More seriously, Free Exchange uses this case to segue into a discussion of the disruption that global warming will cause to the world food supply - so check that out.
A big day for Europe
European leaders are gathering in Brussels to appoint their first permanent president and foreign affairs high representative under the Lisbon Treaty.
Belgian PM Herman van Rompuy is the favorite for the presidency, and the presumed German preference. A German-Franco consensus would all but decide the post.
The foreign affairs post is wide open, after British foreign minister David Miliband, the consensus favorite, ruled himself out.
Updates and implications to come...
Belgian PM Herman van Rompuy is the favorite for the presidency, and the presumed German preference. A German-Franco consensus would all but decide the post.
The foreign affairs post is wide open, after British foreign minister David Miliband, the consensus favorite, ruled himself out.
Updates and implications to come...
Wednesday, 18 November 2009
FSI 2009
Rory's post on the corruption perceptions index below has prompted me to follow up with another global country ranking: the financial secrecy index.
The list is produced by a group called the Tax Justice Network, an independent organization set up by the British Parliament that is unaffiliated with any political party. The list is not as comprehensive as the Corruption Perceptions Index (it only includes 60 countries), but it nevertheless provides an interesting comparison.
Take, for example, the top 15 countries on each list. Countries like Switzerland, Hong Kong, the Netherlands, Luxembourg and Singapore rank among both the least corrupt and the most secretive. At one level this makes perfect sense: why would you entrust your hard-earned, tax-avoiding millions to a country with a reputation for corruption? You want your funds to have both privacy and security.
On the other hand, although lack of corruption is generally a good thing, these countries should not be perceived to be bathing in the light of the Heavens when it comes to financial matters. To the extent that high levels of financial secrecy are facilitating huge sums of money to be transferred away from countries that might actually need them, these financial havens are merely the other half of an equation that permits corruption to rob growing economies of valuable resources.
Another thing which is worth noting on this list is entry #1 and entry #5.
Entry #5 is only interesting because the UK actually receives a good rating on financial secrecy overall. However, because the City of London deals with such huge sums of money, the risks are necessarily higher and the country gets pushed up the list. Sort of put things in perspective.
Now for entry #1: crowning off the financial secrecy index is none other than the United States of America, or more specifically: Delaware.
Apparently, Delaware is such a popular destination for foreign investment because it doesn't tax profits earned outside of the state (and how much money can you make in a state of roughly 800,000 people anyway?) and it does not require companies to be physically present in the state.
Best of all, the state doesn't establish the beneficial ownership information (i.e. the people who actually own the thing) when incorporating the company. The defense offered in the article I link to above is that no other U.S. state establishes beneficial ownership, so why should Delaware? Well when one of the people setting up shell companies in your state is a Russian who happens to be one of the world's largest arms dealers, you may consider adopting this fundamental banking practice. Idiots.
So next time you hear Sarkozy, Brown, or any other Western leader foaming at the mouth as they rant and rave about tax havens prior to a G20 summit, keep this list in mind.
The list is produced by a group called the Tax Justice Network, an independent organization set up by the British Parliament that is unaffiliated with any political party. The list is not as comprehensive as the Corruption Perceptions Index (it only includes 60 countries), but it nevertheless provides an interesting comparison.
Take, for example, the top 15 countries on each list. Countries like Switzerland, Hong Kong, the Netherlands, Luxembourg and Singapore rank among both the least corrupt and the most secretive. At one level this makes perfect sense: why would you entrust your hard-earned, tax-avoiding millions to a country with a reputation for corruption? You want your funds to have both privacy and security.
On the other hand, although lack of corruption is generally a good thing, these countries should not be perceived to be bathing in the light of the Heavens when it comes to financial matters. To the extent that high levels of financial secrecy are facilitating huge sums of money to be transferred away from countries that might actually need them, these financial havens are merely the other half of an equation that permits corruption to rob growing economies of valuable resources.
Another thing which is worth noting on this list is entry #1 and entry #5.
Entry #5 is only interesting because the UK actually receives a good rating on financial secrecy overall. However, because the City of London deals with such huge sums of money, the risks are necessarily higher and the country gets pushed up the list. Sort of put things in perspective.
Now for entry #1: crowning off the financial secrecy index is none other than the United States of America, or more specifically: Delaware.
Apparently, Delaware is such a popular destination for foreign investment because it doesn't tax profits earned outside of the state (and how much money can you make in a state of roughly 800,000 people anyway?) and it does not require companies to be physically present in the state.
Best of all, the state doesn't establish the beneficial ownership information (i.e. the people who actually own the thing) when incorporating the company. The defense offered in the article I link to above is that no other U.S. state establishes beneficial ownership, so why should Delaware? Well when one of the people setting up shell companies in your state is a Russian who happens to be one of the world's largest arms dealers, you may consider adopting this fundamental banking practice. Idiots.
So next time you hear Sarkozy, Brown, or any other Western leader foaming at the mouth as they rant and rave about tax havens prior to a G20 summit, keep this list in mind.
CPI 2009
Transparency International has released its Corruption Perceptions Index 2009 (CPI), which measures the perceived level of public sector corruption in 180 countries around the world. It has become something of a gold standard for measuring corruption, as it is both independent, and reflects the sentiments of actual economic and political actors.
Huguette Labelle, Chair, introduces this year's CPI below:
Huguette Labelle, Chair, introduces this year's CPI below:
Tuesday, 17 November 2009
Tuesday Readables
- Holy Hell: the curious economic effects of religion. (This idea probably deserves a post of its own - stay tuned)
- Immigration is very good economics for the United States
- The thinking economically about electric cars
- Gold as the next bubble (see also Buiter on gold as the world's only 6,000 year-old bubble - very smart analysis of gold as a fiat-commodity)
- Global macroimbalances are shrinking at a rapid rate (good). But only because international trade has collapsed (bad). The underlying problems remain.
- Immigration is very good economics for the United States
- The thinking economically about electric cars
- Gold as the next bubble (see also Buiter on gold as the world's only 6,000 year-old bubble - very smart analysis of gold as a fiat-commodity)
- Global macroimbalances are shrinking at a rapid rate (good). But only because international trade has collapsed (bad). The underlying problems remain.
Sunday, 15 November 2009
Is Copenhagen the new Doha?
With no major breakthrough coming out of the APEC summit, the leaders who were in attendance, including US President Obama, Chinese President Hu Jintao and Danish PM Rasmussen (Denmark's Pacific coast is supposed to be beautiful this time of year), have declared a legally-binding deal on climate change in Copenhagen impossible. Negotiators will instead focus on forging a 'politically-binding' agreement as step one in a two-step process (with step two being the legal agreement.)
I plan on moving all my money into boat stocks tomorrow morning.
I plan on moving all my money into boat stocks tomorrow morning.
Friday, 13 November 2009
Friday Fun: MC Putin
Yesterday, I talked about Russian President Medvedev's vision for reform and the challenges this presents for both he and Prime Minister Putin. If Medvedev follows through on his agenda, you can easily foresee a confrontation with his mentor ahead of the 2012 elections. Putin is a shrewd, some might say ruthless, operator, who no doubt understands the need to quickly counter his protege's challenge by setting out his own manifesto.
So how did Putin respond? With a vigorous defense of his economic record and authoritarian consolidation? Nope. A shirtless romp through Siberia? Closer. Attending a hip-hop awards show and schooling the youth on the proper b-boy lifestyle? Yep. Above anything else, we all know Putin is straight-up gangsta (literally?). From Reuters:
So how did Putin respond? With a vigorous defense of his economic record and authoritarian consolidation? Nope. A shirtless romp through Siberia? Closer. Attending a hip-hop awards show and schooling the youth on the proper b-boy lifestyle? Yep. Above anything else, we all know Putin is straight-up gangsta (literally?). From Reuters:
"I do not think that 'top-rock' or 'down-rock' breakdance technique is compatible with alcohol or drugs," Putin told cheering hip-hoppers who responded with chants of "Respect, Vladimir Vladimirovich."
Respect, indeed.
Editor's note: I cannot get the image of Putin, in his 'go-to' casual look i.e. leather jacket over turtle-kneck, standing in a crowd of Russia's hip-hop youth out of my head. Someone please get me a picture of this.
Quote of the day: Siegfried and Vlad
From the same Reuters article:
Putin's carefully orchestrated image also include bare-chested photos on fishing trips in Siberia, appearances with rare animals such as Siberian tigers, leopards and beluga whales and encounters with fringe social groups like bikers.
Is Putin secretly headlining a Vegas stage-show we aren't aware of?
Putin's carefully orchestrated image also include bare-chested photos on fishing trips in Siberia, appearances with rare animals such as Siberian tigers, leopards and beluga whales and encounters with fringe social groups like bikers.
Is Putin secretly headlining a Vegas stage-show we aren't aware of?
Thursday, 12 November 2009
Modernize or Die
Russian President Dmitry Medvedev used his state of the state address to call for a sweeping modernization of the Russian economy, rejection of the corrupt oligarchy and diversification away from the nationalized oil and gas sector. Speaking to an audience that included Prime Minister Vladimir Putin, chief architect of the system Medvedev wishes to reform, the president rhetorically stepped outside of his mentor's shadow and set a vision for his legacy.
He might also have just ruled himself out of a reelection bid.
A liberal by nature, Medvedev has failed to deliver the economic and institutional reform many hoped for. This is unsurprising as real power has been consolidated firmly in the PM's office, and the silvoki now pervade Russian society from the commanding heights to regional governorships. These vested interests are backed by the PM himself, and therefore unlikely to encounter any serious challenge their grip on Russian power and wealth. Nonetheless, Medvedev's rhetorical liberalism, often in direct contrast to Putin on economic matters and the glorification of the Soviet past, has sustained a slimmer of hope that after building his own power center he would set out on a reform agenda and confront the rotting Russian core. Few doubt his sincerity.
But confidence in the president to deliver on this vision cannot be high within Russia. Medvedev has thus far been long on words and short on actions, and opposition to any liberalization of strategic sectors, either through ownership or management, will undoubtedly be fierce. One can easily foresee a scenario where Putin simply brushes Medvedev aside in 2012 to return to the Kremlin. But if he can begin to produce tangible reforms, such as electoral reform in the regions, and achieve some high-profile break-ups of state-owned companies, he just might build some momentum among a population clearly dissatisfied with Russia's ability to cope with the financial crisis. At the very least, this could stimulate a fundamental debate within Russian society as to the direction of the country and the best mechanisms to get it there. That would be downright revolutionary in the Putin era.
Medvedev has it right: Russia must modernize or die. Its massive FX reserves carried it through the worst of the global financial crisis, but exposed the economy's vulnerability to oil and gas price volatility. The lack of alternate sources of revenue is a serious crutch to the country's future prospects. With its oil and gas sector declining at an alarming rate, and woefully mismanaged by firms like Gazprom, Russia's FX reserves could increasingly be needed to finance the budget and subsidize state-owned behemoths in sectors from aviation to agriculture. The planned return to international debt markets shows the government is aware of impending, possibly chronic, shortfalls. The writing is on the wall, but can the PM read it?
Medvedev could yet convince Putin of the future's peril, but this seems unlikely. A confrontation seems more probable, and unfortunately for the Russian people, Putin is a strong favorite to emerge victorious. I mean, have you seen them guns?
He might also have just ruled himself out of a reelection bid.
A liberal by nature, Medvedev has failed to deliver the economic and institutional reform many hoped for. This is unsurprising as real power has been consolidated firmly in the PM's office, and the silvoki now pervade Russian society from the commanding heights to regional governorships. These vested interests are backed by the PM himself, and therefore unlikely to encounter any serious challenge their grip on Russian power and wealth. Nonetheless, Medvedev's rhetorical liberalism, often in direct contrast to Putin on economic matters and the glorification of the Soviet past, has sustained a slimmer of hope that after building his own power center he would set out on a reform agenda and confront the rotting Russian core. Few doubt his sincerity.
But confidence in the president to deliver on this vision cannot be high within Russia. Medvedev has thus far been long on words and short on actions, and opposition to any liberalization of strategic sectors, either through ownership or management, will undoubtedly be fierce. One can easily foresee a scenario where Putin simply brushes Medvedev aside in 2012 to return to the Kremlin. But if he can begin to produce tangible reforms, such as electoral reform in the regions, and achieve some high-profile break-ups of state-owned companies, he just might build some momentum among a population clearly dissatisfied with Russia's ability to cope with the financial crisis. At the very least, this could stimulate a fundamental debate within Russian society as to the direction of the country and the best mechanisms to get it there. That would be downright revolutionary in the Putin era.
Medvedev has it right: Russia must modernize or die. Its massive FX reserves carried it through the worst of the global financial crisis, but exposed the economy's vulnerability to oil and gas price volatility. The lack of alternate sources of revenue is a serious crutch to the country's future prospects. With its oil and gas sector declining at an alarming rate, and woefully mismanaged by firms like Gazprom, Russia's FX reserves could increasingly be needed to finance the budget and subsidize state-owned behemoths in sectors from aviation to agriculture. The planned return to international debt markets shows the government is aware of impending, possibly chronic, shortfalls. The writing is on the wall, but can the PM read it?
Medvedev could yet convince Putin of the future's peril, but this seems unlikely. A confrontation seems more probable, and unfortunately for the Russian people, Putin is a strong favorite to emerge victorious. I mean, have you seen them guns?
Wednesday, 11 November 2009
'A revolution without a revolution'
Even looking back after 20 years at the collapse of the Berlin Wall - and by extension, the collapse of Soviet communism - it's hard to wrap your mind around the enormity of the change that swept through Eastern Europe.
I've seen plenty of articles recently that attempt to put things in perspective, but this piece by Der Spiegel strikes me as being particularly good. I'm about half-way through, but it drives home how the real revolution took place not in Berlin, but elsewhere in Poland, Hungary and Moscow.
It's not short, but definitely worth a read.
(Image from Europa.eu)
I've seen plenty of articles recently that attempt to put things in perspective, but this piece by Der Spiegel strikes me as being particularly good. I'm about half-way through, but it drives home how the real revolution took place not in Berlin, but elsewhere in Poland, Hungary and Moscow.
It's not short, but definitely worth a read.
(Image from Europa.eu)
Tuesday, 10 November 2009
Party like its 2005, Wake up in a ditch
Last week I highlighted so-called 'CoCo bonds', and worried aloud that they are a sign of lessons lost from the financial crisis.
Well, apparently, things are a lot worse than I thought: mortgage-backed securities are rising from the dead.
I barf.
Securitization is not inherently bad, or systemically risky, and its financial utility can be quite large. But these particular instruments, the actual trigger of the financial crisis, are ticking timebombs that propagated the perverse incentives and speculation that boosted the housing bubble and sunk financial institutions around the globe. Their resurrection is an ominous sign that 'business as usual' is returning to the market, and the regulatory response thus far has failed to address the very issues that got us to this point.
And remember, banks never shed these assets, they instead sit as worthless weight on the balance sheets of the biggest recipients of taxpayer bailouts around the globe. When new mortgage-backed products enter the marketplace, and spur new lending within the housing market, the value of the old assets will rise, bringing with them a potentially massive windfall for banks and investors. This will be a tremendous boost to the market for these products, and reinforce the incentives to create them.
That's a problem.
Well, apparently, things are a lot worse than I thought: mortgage-backed securities are rising from the dead.
I barf.
Securitization is not inherently bad, or systemically risky, and its financial utility can be quite large. But these particular instruments, the actual trigger of the financial crisis, are ticking timebombs that propagated the perverse incentives and speculation that boosted the housing bubble and sunk financial institutions around the globe. Their resurrection is an ominous sign that 'business as usual' is returning to the market, and the regulatory response thus far has failed to address the very issues that got us to this point.
And remember, banks never shed these assets, they instead sit as worthless weight on the balance sheets of the biggest recipients of taxpayer bailouts around the globe. When new mortgage-backed products enter the marketplace, and spur new lending within the housing market, the value of the old assets will rise, bringing with them a potentially massive windfall for banks and investors. This will be a tremendous boost to the market for these products, and reinforce the incentives to create them.
That's a problem.
G20 and the Gordon Brown self-destruction show
For once, Gordon Brown has managed to up-stage his cross-channel compatriot, Nicholas Sarkozy, at a G20 event. This might have had something to do with the fact that neither Brown nor Sarkozy really belonged at a meeting for Finance Ministers and Central Bank Governors, so the Frenchman had understandably stayed at home. But that technical detail was not enough to stop Gordon Brown, oh no.
In case you missed it, Gordon Brown gate-crashed the G20 meeting in St. Andrews by backing a proposal for a transition tax. (For a backgrounder on the transition tax, see here). This continues the trend of the Prime Minister attempting to use home-turf advantage to blatantly hijack G20 meetings to advance his electoral prospects.
The trouble is, it's not working very well. Remember that $1 trillion dollar figure that emerged from the chaos of the London G20 summit? The one which Berlusconi is said to have described as "the most expensive election campaign ever?" No? Well neither is the British electorate come voting time next year.
At least after the London summit, Gordon Brown managed to temporarily project the image of international statesmanship. With his latest PR stunt, the PM just comes across as desperate. He clearly hadn't bothered to build a coalition for the idea, instead trying to catch his colleagues off-guard. The effect was predictable: representatives from Russia, Canada, the IMF, the ECB and, most singificantly, the United States immediately rejected the proposal. Without the US, the idea goes nowhere.
So Brown backtracked from his position by the end of the weekend, looking very much unlike an international statesman.
Here's the thing: I believe that Brown is sincere in his arguments for a new social contract in which taxpayers do not provide costless insurance for large financial institutions. But the way he has gone about promoting this view smacks of political manipulation and panic. His headline-grabbing attempt over the weekend was yet another episode in the Gordon Brown self-destruction show.
The rest:
The big disappointment for me in the G20 communique from St. Andrews was its deafening silence on the issue of macroeconomic imbalances. The Pittsburgh G20 communique from September impressed me in that it actually included a commitment to address the issue head-on (and somehow China agreed!). The real test for G20 commitments, however, is that they continue to appear is subsequent communiques. So far, this one isn't looking good.
In case you missed it, Gordon Brown gate-crashed the G20 meeting in St. Andrews by backing a proposal for a transition tax. (For a backgrounder on the transition tax, see here). This continues the trend of the Prime Minister attempting to use home-turf advantage to blatantly hijack G20 meetings to advance his electoral prospects.
The trouble is, it's not working very well. Remember that $1 trillion dollar figure that emerged from the chaos of the London G20 summit? The one which Berlusconi is said to have described as "the most expensive election campaign ever?" No? Well neither is the British electorate come voting time next year.
At least after the London summit, Gordon Brown managed to temporarily project the image of international statesmanship. With his latest PR stunt, the PM just comes across as desperate. He clearly hadn't bothered to build a coalition for the idea, instead trying to catch his colleagues off-guard. The effect was predictable: representatives from Russia, Canada, the IMF, the ECB and, most singificantly, the United States immediately rejected the proposal. Without the US, the idea goes nowhere.
So Brown backtracked from his position by the end of the weekend, looking very much unlike an international statesman.
Here's the thing: I believe that Brown is sincere in his arguments for a new social contract in which taxpayers do not provide costless insurance for large financial institutions. But the way he has gone about promoting this view smacks of political manipulation and panic. His headline-grabbing attempt over the weekend was yet another episode in the Gordon Brown self-destruction show.
The rest:
The big disappointment for me in the G20 communique from St. Andrews was its deafening silence on the issue of macroeconomic imbalances. The Pittsburgh G20 communique from September impressed me in that it actually included a commitment to address the issue head-on (and somehow China agreed!). The real test for G20 commitments, however, is that they continue to appear is subsequent communiques. So far, this one isn't looking good.
Thursday, 5 November 2009
Coo-Coo for CoCo bonds
One day, we might look back at this article as an ominous sign that all lessons were lost, regulatory reforms insufficient and incentives misaligned following the crunch.
The banking industry looks coo-coo for CoCo bonds. Sophisticated debt instruments are back.
The banking industry looks coo-coo for CoCo bonds. Sophisticated debt instruments are back.
Quote of the day: Euro blues
“The Americans get the toys, the Chinese get the Treasuries and we get screwed.”
That is a quote from an EU official to Alan Beattie in his November 2nd article in the FT entitled, 'Renminbi at heart of trade imbalances.' The sentiment echoes my observation that the Europeans are turning out to be the big losers in the US-China currency dance.
The old adage that the USD is 'our currency, but your problem' is as relevant as ever, at least to Europe.
That is a quote from an EU official to Alan Beattie in his November 2nd article in the FT entitled, 'Renminbi at heart of trade imbalances.' The sentiment echoes my observation that the Europeans are turning out to be the big losers in the US-China currency dance.
The old adage that the USD is 'our currency, but your problem' is as relevant as ever, at least to Europe.
Monday, 2 November 2009
Quick hits and pink picks: FX-heavy
-Should the IMF embrace Brazil's imposition of (selective) capital controls? These two think so. Also, FT Alphaville had a good analysis of the decision (I realize we are a bit late on this.)
-Nouriel Roubini takes aim at the 'mother of all carry-trades.'
-Is the democratization of FX trading a good thing? Or is it really just another hustle?
-Nouriel Roubini takes aim at the 'mother of all carry-trades.'
-Is the democratization of FX trading a good thing? Or is it really just another hustle?
-Will a weak dollar hamper Europe's recovery?
-Speaking of Europe, France had quite an expensive EU presidency last year.
-Is this Obama's 'Vietnam moment?'
-Finally, if Russia considered NATO exercises in its 'near-abroad' hostile, how should NATO interpret the simulated nuking of Poland?
-Speaking of Europe, France had quite an expensive EU presidency last year.
-Is this Obama's 'Vietnam moment?'
-Finally, if Russia considered NATO exercises in its 'near-abroad' hostile, how should NATO interpret the simulated nuking of Poland?
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