BRIC+ News & comments

[joepistole]

Europeans refused to give Greece an extension. It looks pretty dire. Tsipras's attempt to play the Russia and Chinese cards went over with a dull thud. Tsipras's latest stunt, the call for a referendum on July 5, was the straw that broke the camel's back. Europe wasn't impressed with Greek threats and as a result Greece has now been excluded from the Eurogroup of finance ministers. Can the European Central Bank (ECB) be far behind?

It sounds like a full-scale run on Greek banks is now in process. Greeks are waiting in long lines to withdraw their money and ATMs are running out of cash. The question now is will Greek banks be able to open on Monday? And as I wrote previously, I don't think Greek leaders have a Plan B. So if they plan to exit the Euro and if the European Central Bank cuts them off, they had better get one real quick. Greece will need to implement capital controls in order to keep its banks open.

http://www.reuters.com/article/2015/06/27/us-eurozone-greece-idUSKBN0P40EO20150627

http://www.wsj.com/articles/greeks-...m-announcement-1435410126?mod=trending_now_10

http://www.nbcnews.com/news/world/g...form-atms-pm-seeks-referendum-bailout-n383006

http://uk.reuters.com/article/2015/06/27/uk-eurozone-greece-idUKKBN0P40FR20150627

 

[joepistole]

ECB has capped its emergency funding of Greek banks. Greek banks may not be able to open tomorrow. Greeks thought it was bad before, they will now see how bad things can get when their banks stop working.

 

[joepistole]

Reuters and others are now reporting Greek banks and the Greek stock exchange will not open Monday.

http://www.reuters.com/article/2015/06/28/us-eurozone-greece-idUSKBN0P40EO20150628

 

[joepistole]

Well Greek banks and the Greek stock exchange will not open this week, and maybe not even next week or the weeks that follow. Greece simply doesn't have enough cash. Retirees have been repeatedly promised their pension money and have been repeatedly denied their pension money. I suspect the $67 daily withdrawal limit is more generous than can be afforded by the Greek state and is on the longer term (meaning more than a few weeks) sustainable. Greece is running out of money.

Banks don't have the money they need to give depositors, much less make loans. So banks are not lending. Payrolls are not being paid. Businesses are closing because people are not buying. Tourism (almost 20% of Greek GDP) is beginning to dry up. And there are commodity shortages, people are waiting in line not only for cash but for gasoline as well. All of this will get worse in the coming weeks no matter what Greece does or doesn't do. Can soup lines be far behind? Even if a new government is elected, it will take time for a government to form and settle with the Eurogroup. It will take a long time to restore the confidence in the Greek government which is necessary for economic development. Greece is hosed, no matter what happens. The only question now is for how long. What Greece does in the coming week will answer that question.

If Greece decides go bring back its own currency, who besides locals, will take it? Greece is heavily dependent on foreign goods. Oil accounts for 30% of its imports. If Greece has no foreign currency, it cannot buy the foreign goods it needs (e.g. oil). Who will loan Greece money, Russia, China? I think anyone would be a fool, other than the Eurogroup, to loan Greece money at this point. No matter what happens Greece is screwed. It's only a question now of how bad and for how long.

The best course is to reconcile its differences with the Eurogroup. I think the Greek government has legitimate grievances. However, the manner it has gone about expressing those grievances and remedying its situation has been just flat-out stupid. Tsipras (Greek Prime Minister) is a stupid arrogant fool, and the people of Greece will pay the price for his arrogance and stupidity. That is unfortunate. On the other hand, it could be this is exactly what Tsipras wants. Perhaps he wanted to create a fascist state, perhaps that is and has been his end state goal all along? The economic and social chaos created by a devastated economy would render it much easier to create a fascist state. That seems to be the route Tsipras is taking.

 

[Billy T]

I'm in USA for some weeks. Not active much now; but note, this thread does not include Greece's problems and there are at least two threads focused on Greece.

 

[Billy T]

The BRICS group of five major emerging economies vowed to forge a closer economic partnership on Thursday by adopting a milestone blueprint for cooperation as they concluded an annual summit amid slowing growth in developed and emerging markets. ... Observers said the landmark meeting has elevated the group's level of cooperation to a new high as the leaders mapped out a detailed road map and agreed on concrete plans.

The Shanghai-based bank, with an initial authorized capital of $100 billion, plans to raise money both on local markets and internationally, and to issue its first loans in April next year, said its president, India's K.V. Kamath. Russian President Vladimir Putin said the bank will focus on handling loans for large-scale joint projects in the transportation* and energy sectors as well as in industrial development. The bank will bring great benefits and support specific projects in various areas including industrial cooperation.

IMF data show that the BRICS countries contributed half of the world's economic growth in the past decade, and their growth is expected to exceed that of the developed countries and other emerging economies by 2030. ... The BRICS countries have all launched new reforms and prioritized the expansion of domestic demand to tap growth potential, the expert added.

* Quite probably a rail line from coastal Brazil to the Pacific Ocean, lowering the cost and delay of China/Brazil trade.

The Russian city of Ufa {Location of annual meeting discussed above} witnessed the launch of the New Development Bank on Thursday, a joint initiative by Brazil, Russia, India, China and South Africa, and part of China's efforts to build a multinational financial network.
So far China has joined, or proposed to establish, at least four new international financial institutions - the bank of the BRICS bloc; the $40 billion Silk Road Fund; the Asian Infrastructure Investment Bank, AIIB; and a proposed Development Bank of the Shanghai Cooperation Organisation.

Also quite likely in late October's every decade review, the IMF will make, the Chinese RMB, part of the "Special Drawing" funds. China is the world's greatest exporter, world's greatest importer, and by PPP measures the world's greatest economy. The IMF can no longer avoid doing this, despite US's control of it.

 

[Billy T]

 

[joepistole]

* Quite probably a rail line from coastal Brazil to the Pacific Ocean, lowering the cost and delay of China/Brazil trade.
Also quite likely in late October's every decade review, the IMF will make, the Chinese RMB, part of the "Special Drawing" funds. China is the world's greatest exporter, world's greatest importer, and by PPP measures the world's greatest economy. The IMF can no longer avoid doing this, despite US's control of it.

Well just because China wants to have its currency become a special drawing rights currency, it doesn't mean it will happen and as previously noted PPP is a fictionalized GDP based on hypothetical trades and assumptions whereas GDP is based on real data and real trades.

http://www.bloomberg.com/news/artic...s-yuan-to-be-the-world-s-5th-reserve-currency

Two, this issue is subject to a vote by member nations and the US doesn't have a majority of the vote. But the US certainly does have significant influence over the IMF. Contrary to your assertion, the IMF can most certainly choose to not include the Renminbi in the SDR breadbasket and it may very well do so.

The "freely traded" requirement remains an issue for China and will likely be one of the reasons the IMF may use to not include it in the SDR breadbasket. So the inclusion of the Renminbi in the IMF SDR breadbasket is far from certain. Personally, I think it would be a boneheaded move to do so for a variety of reasons.

http://www.reuters.com/article/2015/01/26/imf-yuan-idUSL6N0V239720150126

 

[CptBork]

Just having a low value currency in and of itself isn't an unfair trade advantage. But when a country manipulates its currency in order to devalue its currency, that constitutes an unfair trade advantage.

I wouldn't call it a trade advantage, given that it means Chinese consumers are forced to pay an artificially high price for imported goods, and their exporters are forced to accept artificially low prices. I see it more as China shooting themselves in the foot and causing problematic distortions for everyone else's economy in the process. The real trade advantage, if any, is that China's trade partners don't hold it to the same labour and environmental standards as they do with their own domestic industries, and again the average Chinese citizen suffers more than anyone else from such policies.

Now, as I've been saying for many years, China is maxing out the US market for unreliable low-quality slave-made trash, and its recent economic slowdown and stock market crash are both symptoms of an economic model built on corruption, oppression and a whole lot of fail.

http://www.reuters.com/article/2015/07/28/us-china-markets-idUSKCN0Q207920150728

China's decade of 10% growth rates was a "miracle" engineered in the stock rooms of Walmart, Nike, and counterfeit Gucci producers, not the opium room on Mao Zedong's "People's Luxury Yacht".

I feel sorry for all those presently invested in the Chinese stock markets, especially ordinary Chinese investors who were coerced into buying in by their own government. Government efforts to prop up their markets are failing miserably, and can only possibly succeed if they're willing to accept catastrophic public debt instead. Hardly anyone should want to invest in a fascist dictatorship where the government cares more about the number on some index rather than the underlying wellbeing of the nation, just because said government knows this number is key to bamboozling the general population, so authorities can continue sending their chubby kids to fancy British schools originally built for European royals.

All the same, now would be as ideal a time as ever for the US and its allies to inform China's government that they can either begin democratic reforms, stop hacking the US and respect their neighbours' borders, or else they can f--- right off with their slave labour and go sell their crap goods somewhere else.

 

[joepistole]

I wouldn't call it a trade advantage, given that it means Chinese consumers are forced to pay an artificially high price for imported goods, and their exporters are forced to accept artificially low prices. I see it more as China shooting themselves in the foot and causing problematic distortions for everyone else's economy in the process. The real trade advantage, if any, is that China's trade partners don't hold it to the same labour and environmental standards as they do with their own domestic industries, and again the average Chinese citizen suffers more than anyone else from such policies.

Now, as I've been saying for many years, China is maxing out the US market for unreliable low-quality slave-made trash, and its recent economic slowdown and stock market crash are both symptoms of an economic model built on corruption, oppression and a whole lot of fail.

http://www.reuters.com/article/2015/07/28/us-china-markets-idUSKCN0Q207920150728

China's decade of 10% growth rates was a "miracle" engineered in the stock rooms of Walmart, Nike, and counterfeit Gucci producers, not the opium room on Mao Zedong's "People's Luxury Yacht".

I feel sorry for all those presently invested in the Chinese stock markets, especially ordinary Chinese investors who were coerced into buying in by their own government. Government efforts to prop up their markets are failing miserably, and can only possibly succeed if they're willing to accept catastrophic public debt instead. Hardly anyone should want to invest in a fascist dictatorship where the government cares more about the number on some index rather than the underlying wellbeing of the nation, just because said government knows this number is key to bamboozling the general population, so authorities can continue sending their chubby kids to fancy British schools originally built for European royals.

All the same, now would be as ideal a time as ever for the US and its allies to inform China's government that they can either begin democratic reforms, stop hacking the US and respect their neighbours' borders, or else they can f--- right off with their slave labour and go sell their crap goods somewhere else.

True enough, but seen through the eyes of outsiders, it is an unfair trade advantage but it certainly has costs associated with it for the Chinese consumer including inflation. China has and has had for some years now some very significant problems domestically. That's why I resisted the herd and not invested in China. China lacks transparency and that makes me nervous. I cannot abide by China's lack of transparency and penchant for corruption. I think folks are gambling rather than investing in China.

 

[Billy T]

The internationalization of Chinese currency yuan, or renminbi, along with a more open capital account, will rebalance the global economy for more sustainable growth, said the report published on Monday. The report, entitled "Renminbi Ascending: How China's Currency Impacts Global Markets, Foreign Policy and Transatlantic Financial Regulation", was developed by Atlantic Council's C. Boyden Gray Fellow on Global Finance and Growth, Chris Brummer, and sponsored jointly by the City of London Corporation, Standard Chartered and Thomson Reuters.

"Renminbi internationalisation is an unprecedented financial event that is irrevocably changing the global market, and presenting an enormous opportunity for both Chinese and the world's business to trade and invest," said Mark Boleat, Policy Chairman at the City of London Corporation.
David Craig, President of Financial & Risk of Thomson Reuters, said: "China is growing -- and internationalizing -- with exhilarating speed. Last year alone, Thomson Reuters saw a 350 percent increase in renminbi trading across our foreign exchange platforms.

The IMF will decide in late October whether or not to include the RMB as part of the special drawing rights, SDR. Thus one could discount all of the above, if it had a Chinese origin, but the report came out of London.

 

[joepistole]

The IMF will decide in late October whether or not to include the RMB as part of the special drawing rights, SDR. Thus one could discount all of the above, if it had a Chinese origin, but the report came out of London.

China has lobbied long and hard for inclusion. There is no doubt China wants its currency included, and wants it desperately. However, given China's economy is imploding and China is resorting to and using some very autocratic heavy handed measures to prop up its collapsing markets and it has had limited success at best, I seriously doubt it will happen.

http://mobile.reuters.com/article/idUSL2N0ZT16D20150713

 

[Billy T]

What has stunned Brazilians isn’t the novelty of this fraud but its epic scale. The first of many national gasps was emitted in December when a former Petrobras employee named Pedro Barusco pledged to give back every cent of his ill-gotten gains — all $100 million. Mr. Barusco told authorities in February that the ruling Workers Party had pocketed up to $200 million over the years ...

To date, 117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies. Petrobras officials have pegged the total of all bribes at nearly $3 billion

Brazilians have a saying when the rich and powerful are arrested: “It always ends with a pizza party.” The words, invariably uttered with disgust and resignation, are meant to suggest that the justice system is rigged in favor of the elites. The accused avoid prison and then celebrate by ordering pizza. If any good has come from the Petrobras debacle it is the flickering sense that this time could be different.

Part of the reason is the work of Judge Sérgio Moro, who is overseeing the investigation, officially known as Operação Lava Jato {car wash, in English}. In Brazil, judges have wide latitude to define both the direction and scope of criminal inquiries, and Judge Moro’s willingness to pursue even the eminent and influential has made him a folk hero. The courthouse where he presides in Curitiba, has ribbons of yellow and green, the national colors tied around trees, quiet expressions of solidarity and support.

Another source of public optimism can be found on the eighth floor of an office building a few miles away. This is home to the team of nine prosecutors working on Lava Jato, as everyone here calls it. The lead prosecutor, Deltan Dallagnol, is 35 and has a degree from Harvard Law School. A prodigy of sorts, he became a prosecutor at 22, and joined Brazil’s anticorruption task force three years later.

“You needed a lot of improbable factors aligned for this case to begin,” said Mr. Dallagnol. “It was like the gods giving us a window of opportunity.” In 2012, the federal police were conducting a money-laundering investigation, which included surveillance of the owner of the Tower Gas Station. (The building once housed a carwash, Lava Jato) An officer on a wiretapped conversation realized that he was listening to Alberto Youssef. (“Youssef had long been a pilot and the cop was once an air traffic controller)”

The cop, he said to himself, ‘I know this guy.’ Pretty soon, they were tapping Youssef’s cellphone.” ... After earning his license to fly, Mr. Youssef smuggled expensive electronics into Brazil from Paraguay, where taxes were much lower. He graduated to the higher-margin business of money laundering. In late 2006, he became part of the Petrobras bribery scheme.

The big break in the Petrobras case came when surveillance discovered an email from Mr. Youssef describing a Range Rover purchased for a Petrobras executive named Paulo Roberto Costa. From 2004 to 2012, Mr. Costa was Petrobras’s director of supply, a job that put him in the ideal position to approve major contracts. The four-wheeled gift led to a warrant to search Mr. Costa’s office and to his arrest. He became the first Lava Jato insider to talk. Soon afterwards, Mr. Youssef decided to turn state’s evidence. With two cooperators, prosecutors realized, as Mr. Dallagnol put it, “we had a case 100 times bigger” than their original investigation.

But about a decade ago the main companies supplying stopped competing and started to collaborate. They formed a cartel and decided, in advance, which of them would win a particular deal. The cartel called itself “the club.” It had 16 members by 2006, including blue-chip behemoths like Odebrecht and Camargo Corrêa. They often met in the offices of a São Paulo-based engineering company called UTC Engenharia.

Club members were soon landing all major Petrobras contracts, with an assist from Petrobras insiders like Mr. Costa and Jorge Zelada, the director of the company’s international division, who was arrested in July. From 1 to 5 percent of the value of a given contract was diverted to those on the receiving end of the scheme, a group that included 50 politicians from six parties, according to prosecutors.

Rafael Lopez, was the money mule. He took hundreds of trips, according to his lawyer, André Pontarolli, with portable fortunes cinched under his clothing. (“Five hundred thousand euros was his record,” Mr. Pontarolli said.) Mr. Youssef became a public face of Lava Jato, helping move $444 million to foreign bank accounts in more than 3,500 transactions from 2011 to 2014 alone. This yielded enough cash for Mr. Youssef to acquire luxury cars, homes and a number of hotels.

The land near Itaboraí, an hour’s drive northeast of Rio de Janeiro, became a boomtown when Petrobras broke ground on an immense refinery and petrochemical plant called Comperj six years ago. Today, Itaboraí looks as if it was hit with the magic wand of prosperity by a wizard who had second thoughts. New office buildings and high-end hotels sit empty and covered in dirt. There’s a field where a federal technical school was supposed to open.

More at the link, including the hardships more than 20,000 job seekers endured after moving to Itaboraí, and damage done to Brazil's credit rating, and the probably enduring recession, this world's largest (~3 billion dollars in bribes involving only Petrobras) corruption scheme has caused.

In addition other large companies, played the same corrupt game. Quoting from the NYT article:
"another bribery boondoggle, this one involving Eletrobras, the country’s largest power utility company, has recently emerged. Once again, prosecutors are charging that insiders took cash to award padded construction contracts, this time to build a $4.4 billion nuclear power plant."

Fortunately Brazil seems to be changing. Already quite a few of the guilty are "eating their pizza" in jail. Watch the news from Brazil on late 16 or 17 August. - After about 30 million Brazilians march in the streets to demand impeachment of Dilma, now the president and high officer in Pertobras when these payments were made. (As of yet, not proven to have known but only to have misused corporate "election contributions" - strongest legal grounds for her impeachment.) Dilma's approval rating is only 8% now, yet she won a fair election less than two years ago prior to this corruption being widely known.

 

[Billy T]

China devalued its tightly controlled currency Tuesday following a slump in trade, allowing the yuan's biggest one-day decline in a decade. The central bank said it was trying to make the state-controlled exchange rate more market-oriented. In recent months, the yuan has strengthened along with the dollar, making Chinese exports more expensive and raising the risk of politically dangerous job losses in industries that employ tens of millions of workers.

The People's Bank of China set a center point for Tuesday's trading that was 1.9 percent below Monday's level, and the biggest one-day change in a decade. The bank said that was part of reforms in its rate-setting system aimed at giving a bigger role to market forces. The bank said that starting Tuesday, its daily fixing of the center point for trading will take into account supply and demand as well as the previous day's exchange rate.

Tuesday's decline of less than 2 percent against the U.S. dollar is modest compared with the swings in other major currencies. But every bit of relief from price pressures helps Chinese exporters, whose profit margins are paper-thin. The central bank said Tuesday's change was a one-time event. But its promise to give market forces a bigger role in setting exchange rates in future raised the possibility of further declines, which would relieve still more price pressure on exporters.

IMO, this is just one more step to help get the RMB as part of the IMF's SDR in late October 2015.

 

[joepistole]

If you think things are bad for Brazil now, just wait until the US begins raising interest rates. When the US begins raising interest rates that sucking sound you hear will be capital fleeing BRIC countries for the US. For many years now BRIC countries and under developed countries have benefited from cheap US interest rates. Lagarde (managing IMF director) has cautioned Fed Chairman Yellen about the adverse impact a US rate increase will have on BRIC and smaller countries.

 

[joepistole]

IMO, this is just one more step to help get the RMB as part of the IMF's SDR in late October 2015.

China has been jumping through all kinds of hoops to avoid a currency devaluation, because it would jeopardize its chances of becoming a SDR currency. This devaluation trounces the aura of stability China has been desperately trying to create around its currency. Given just a few days ago the IMF issued a report recommending inclusion of the China's Yuan be delayed a year, I don't share your opinion. While European states would love to begin trading China's Yuan, inclusion just doesn't make sense and it brings significant risks should it be included in the SDR currency breadbasket. China still suffers from transparency issues, not to mention stability issues, and its currency is still not freely traded. China's move to devalue its currency is a mixed bag. This is a huge currency devaluation. It shatters the aura of stability China has attempted to create and foster in order to gain acceptance of its currency. So I think inclusion remains very much in doubt. Japan and the US do not favor inclusion and they alone account for almost a quarter of the IMF voting power and there is no other country with more voting power, not Germany, not France, or the UK.

http://www.cnbc.com/2015/08/04/

 

[Billy T]

China has been jumping through all kinds of hoops to avoid a currency devaluation, because it would jeopardize its chances of becoming a SDR currency. This devaluation trounces the aura of stability China has been desperately trying to create around its currency. Given just a few days ago the IMF issued a report recommending inclusion of the China's Yuan be delayed a year, I don't share your opinion. While European states would love to begin trading China's Yuan, inclusion just doesn't make sense and it brings significant risks should it be included in the SDR currency breadbasket. China still suffers from transparency issues, not to mention stability issues, and its currency is still not freely traded. China's move to devalue its currency is a mixed bag. This is a huge currency devaluation. It shatters the aura of stability China has attempted to create and foster in order to gain acceptance of its currency. So I think inclusion remains very much in doubt. Japan and the US do not favor inclusion and they alone account for almost a quarter of the IMF voting power and there is no other country with more voting power, not Germany, not France, or the UK. ...

This < 2% devaluation, the greatest in more than a decade, is less than the one day changes in ALL the currency values you named (or the US) in the prior decade.

Why do those larger devaluation not also "shatters their aura of stability" ? Investing in yuan five or so years ago when more than 8 were required to buy a dollar, would have been a smart move as now only about 6 are required to buy a dollar. IE on a multi-year time scale the Yuan has been APPRECIATING. Thus a <2% devaluation is not even a significant correction of the long term appreciation.

This small correcion had to come as even before it did China's annual global trade was 4.2 trillion dollars - largest of all nations. Now Chinese will not be able to import as much (and will export more) so not much change in their total trade. The main effect will be Chinese "buying more Chinese made" as the CCP strives to get to more of a domestic consumption driven economy. That is also why the CCP has allowed real (purchasing power) salaries to grow by double digits annually for several years now. In contrast the real salaries of most "Joe Americans" have been stagnate or shrinking during the last decade or so as part-time or Big Mac jobs replaced factory jobs.

 

[joepistole]

This < 2% devaluation, the greatest in more than a decade, is less than the one day changes in ALL the currency values you named (or the US) in the prior decade.

Unfortunately BillyT for sinophile like you, a 2% one day devaluation is huge in the currency market. Currencies just don't trade that way. Daily changes are usually small fractions of a percent.

Why do those larger devaluation not also "shatters their aura of stability" ? Investing in yuan five or so years ago when more than 8 were required to buy a dollar, would have been a smart move as now only about 6 are required to buy a dollar. IE on a multi-year time scale the Yuan has been APPRECIATING. Thus a <2% devaluation is not even a significant correction of the long term appreciation.

If you think China is stable, you haven't been paying attention.

Additionally, you cannot rationally compare a currency whose value is fixed by government fiat with one which is not. The fact that China has by fiat increased the value of its currency isn't really relevant.

 

[joepistole]

And China as devalued its currency again today, that's 4% in two days. That is huge!

"On Wednesday, the People's Bank of China (PBOC) set the yuan's midpoint rate CNY=SAEC lower than Tuesday's closing market rate, resulting in nearly a 4.0 percent devaluation of the yuan in two days against the U.S. dollar." http://www.reuters.com/article/2015/08/12/us-markets-global-idUSKCN0QH01P20150812

 

[Billy T]

And China has devalued its currency again today, that's 4% in two days. That is huge! ...

And there may be more to come because, China has changed the way it sets the center of the + or - 2% wide variation band of the exchange rate.

For years China's exchange rate was the most stable of all, as the CCP just set the center point of the 2% wide trading band and all over the world, including the IMF, there was a demand (or a wish) for China to let the market, not the CCP set the exchange rate.
Well they got their wish now. "Be careful what you wish for - you might get it" - That applies now in spades.

As I understand it the next day's center of the 2% band will move down, if the prior day's exchange was below the center of the that day's band. (The max it could be below the center is 1%.) I.e. more devaluation (or appreciation) will occur AS THE MARKET PLACE WISHES ! But China does not want wild changes (nor should anyone), so the max one day will be 2%
(1% down from where exchange closed the prior day, which itself could be 1% below the center of that prior day, as 1 + 1 = 2)

For example if the exchange rate at end of day is at the down limit of 1% then the center of the band for tomorrow will be 1% lower than it was today.
Likewise if the exchange rate at end of day is at the up the limit of 1% then the center of the band for tomorrow will be 1% higher than it was today.

IE: The IMF, Joepistole, and most every body else got their wish granted, but only a max of 1% change (in either direction, as determined by THE MARKET PLACE)