Kiron Sarkar
September 11, 2011
Chinese inflation declined to +6.2% YoY, though food prices remain a
serious problem. However, whilst inflation may spike in the next month
or so, it appears to be declining. The PBOC is likely to be less
hawkish, particularly given the slowdown in the global economy;
The Chinese August trade surplus shrank to US$17.8bn, from US$31.5bn
in July. Exports rose by +24.5% YoY, higher than the +20.4% increase
in July. However imports rose even faster - by +30.2% YoY, much higher
than forecasts for an increase of +21%, mainly due to restocking by
Chinese companies of raw materials. There have been many calls that
the Chinese trade surplus will shrink and may even become a deficit.
However, a lot of the products, exported by the Chinese, simply cannot
be sourced through other countries, certainly at present, even if
prices are increased - suggests to me that Chinese trade surpluses are
here for longer;
Chinese lending rose by Yuan 548.5bn (US$85.9bn) in August, above
forecasts for an increase of Yuan500bn. M2 rose +13.5% YoY, lower than
estimates of +14.2%;
There have been endless rumours that Reliance, one of India's largest
companies, has had a far too cosy relationship with the Indian
Government. Reports released by the Comptroller and Auditor General
("CAG") state that the capex cost of gas production by Reliance
Industries (controlled by India's richest man, Mr Mukesh Ambani) were
US$8.8bn, much higher than the US$2.4bn estimate. OK, that's a problem
for the company, you say. Well, not exactly. Most of the funds were
paid by the Indian Government. In addition, Reliance was allowed to
retain a number of acreages which they should have given up, according
to the CAG report. BP has now agreed to take a stake in Reliance
Industries - given BP's unerring talent to (well lets be polite) get
it somewhat wrong, well......Whatever, increased focus on corruption
in India will have a major impact on the performance of a number of
Indian companies;
Christine Lagarde has been beaten up by European Finance Ministers for
a report, produced by the IMF, which suggested that European banks
needed some E200bn and Governments should force mandatory
recapitalisation's of the relevant banks. Silly girl. The reality is
that European banks will need far, far more, though the Euro Zone is,
as usual, in total denial. This plan to deny (effectively lie) is
getting very tedious indeed. Don't they know that markets are not that
stupid;
Bloomberg reports that the ECB is to dilute its attempts to wean
European banks off emergency funding (using higher interest rates).
Essentially, the ECB will ask financial institutions (together with
the relevant national Central Bank) as to how they intend to repay the
funds. Well, that's a great plan. Does that suggest that they did not
do even the most cursory of credit checks before they provided
emergency funding !!!!. The reality is that the collateral received by
the ECB is effectively toilet paper - certainly in respect of Greece,
and they will face significant losses. How will they cope, given their
extremely limited capital - well they could ask Euro Zone Governments
to make up the loss (embarrassing), or they could print money.
The amounts involved are huge. Irish banks borrowed E97.9bn in August,
Portuguese E46bn and (off course) the Greeks a staggering E103bn, as
at the end of June - the latest data available and likely to have
increased since then. However, Mr Trichet is exiting at the end of
October this year and it will be Mr Draghi's problem thereafter. Now
that's a real plan and very much in the Trichet style. I still cant
forget his recent press conference where he stated that the ECB's
performance had been "impeccable". When the inevitable chickens come
home to roost, I wonder whether someone will replay that;
The Greek PM vowed that the country would meet its fiscal targets and
to press ahead with structural reforms, involving, inter alia, the
sacking of some 20,000 civil servants. There were violent protests at
the speech. Greece cannot and will not deliver and the rest of the
Euro Zone does not believe that they will. A default is a certainty
and relatively soon;
Recent reports suggest that US money market funds have been reluctant
to provide short term financing to European banks - no great surprise.
Analysts suggest that European banks face a US$500bn dollar funding
gap. The problem is that the cost to swap Euros into US$ has jumped
fivefold (to 103bps for 3 month loans, from just 20bps in June). This
extra cost is extremely serious for a number of European financial
institutions. In addition, recent data also suggests that there has
been a withdrawal of deposits by Europeans from European banks and the
proceeds deposited with US banks (source FT). Just to add to the
pressure, there are reports that the credit agencies (Moody's) will
downgrade French banks imminently - BNP, Soc Gen and Credit Agricole
were placed on review for a possible downgrade in June;
The impact of the recent ruling by the German Constitutional Court is
likely to have a far more serious impact on the Euro Zone than
suggested by the initial headlines. Essentially, it prohibits the
German Government from accepting permanent rescue mechanisms if they
a) involve a permanent liability to other countries b) if these
liabilities are large or incalculable and c) if foreign governments
can trigger payments under guarantees, as a result of their actions.
If this is the right interpretation, the EFSF is OK (however it ceases
in 2013), but its replacement, the ESM (which is a permanent
mechanism) is not. Furthermore, it also suggests that an Euro bond
will fall foul of the ruling as they are permanent and will be large.
In a previous ruling, the German Constitutional Court stated that any
transfer of fiscal responsibility to Brussels would require approval
through a referendum. In the current climate, the Germans will not
vote in favour of such a possibility.
This ruling is the killer for the Greeks and, virtually certainly for
the Portuguese, as well. They will have to default and restructure
their debts. The Irish - well its touch and go, but if the global
economy continues to weaken, it looks like they are in trouble too.
The ruling also means that the ECB will remain the only player in town
and they are extremely reluctant participants. In addition, European
banks will need a lot more capital to meet losses on their holdings of
sovereign bonds.
I suppose you could have a constantly rolling "temporary" mechanism,
but that seems likely to be challenged. Another alternative could be
unsterilised QE by the ECB, but that is an anathema to the Central
bank. I will need to re check this carefully (given the extremely
serious implications) but, on the face of it, it looks like being a
real problem. The stakes have been raised sky high.
There are further reports that the IMF is raising funding. Normally a
bad sign, as it suggests that they see a need (ie a Sovereign rescue?)
for the funds;
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