Brazil Being Dragged into Debt Abyss

Brazil could help euro zone through IMF

October 28, 2011

Brazil’s government could help euro zone nations mired in a debt crisis but would likely limit its aid to a bilateral agreement with the International Monetary Fund, a local newspaper reported on Friday.

Latin America’s largest economy does not intend to directly help boost the European Financial Stability Facility to 1 trillion euros, newspaper Valor Economico reported on Friday, without citing a source.

The government of President Dilma Rousseff is waiting for more details of the European agreement to make a decision, Valor added. Brazil would only use a slice of its international reserves if the euro zone plan is solid and effective, Valor said.

Newspaper O Estado de S. Paulo also reported that the European Union plans to send a mission to Brazil to ask the country for help in the rescue plan, which boosted global markets sharply on Thursday as investors saw the euro zone avoiding a disastrous collapse.

No date has been set for the trip, Estado said.

However the European Financial Stability Facility, through a spokesman, denied the trip was imminent and said the report was not true.

Attempts to reach Brazil’s Finance Ministry and the presidency for comment were not immediately successful.

Euro zone leaders struck a deal on Thursday to contain the currency bloc’s two-year-old debt crisis. However, they are now under pressure to finalize the details of their plan to slash Greece’s debt burden and strengthen their rescue fund.

After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to cut Athens’ debt load to sustainable levels.

Brazilian officials in recent days have tiptoed around the issue of financing a European bailout. While the move would cement Brazil’s growing role as a global economic power, the country faces limitations on using its reserves to buy high-risk debt.

Earlier this year, Brazil floated a plan to buy European debt along with members of the powerhouse BRICS group of emerging markets, comprising also Russia, China, India and South Africa, but backed away after a tepid response from the group.

€ 1 Trillion of Taxpayer Money to ‘save’ the Eurozone

A capitalist’s worst nightmare is in the works as China prepares to back up the derivative bubble created by the banks.

October 26, 2011

Euro zone leaders intend to scale up their emergency fund, the European Financial Stability Facility, to around 1.0 trillion euros, EU sources said on Wednesday.

The sources said the 440 billion euros ($611.4 billion) fund, set up last year, would have about 250-275 billion euros available after amounts are set aside for aid to Greece, Ireland and Portugal and for the recapitalizing the region’s banks.

That amount would be scaled up around four times, arriving at a headline figure of around 1.0 trillion.

“The ratio of the leverage will be of at least 4 times,” one source said, while another said the spare capacity available to be leveraged was 250 billion to 275 billion.

The exact amount of capital available will only be known once negotiations over a second bailout package for Greece are agreed. Part of the problem is agreeing on credit enhancements for the private sector. More credit enhancement will reduce the amount of funds in the EFSF for leveraging.

Meanwhile, reports also surfaced Wednesday night that French President Nicolas Sarkozy will speak with Chinese President Hu Jintao on Thursday about boosting the EFSF. Reuters and the Wall Street Journal both cited unnamed European Union sources.

Klaus Regling, chief executive of the EFSF, is flying to Beijing Thursday as well.

The EFSF is one of the key areas of focus for a euro summit ongoing in Brussels, Belgium that hopes to devise a concrete plan for attacking Europe’s debt problems, especially in member state Greece.

According to a draft statement to be issued on Wednesday, the euro zone aims to boost its bailout fund “several fold,” but finance ministers will only agree to the details of how that will be done in November.

The statement, obtained by Reuters, says two options are being considered to boosting the fund, one involving it issuing risk insurance and the other built around it taking part in a special purpose investment vehicle. Both models could be deployed simultaneously, the draft statement said.

The Eurogroup of finance ministers will be asked to finalize the terms and conditions for how the EFSF will operate under the leverage schemes in November, the statement said.

In addition, it said the EFSF’s resources could be further enhanced, possibly via cooperation with the International Monetary Fund.

The draft statement also called on Spain to do more to bring its budget into line, while praising it for the steps taken so far. A paragraph on Italy, which is under pressure to do more on pension and other reforms, was left blank but is expected to be added later.

U.S. stocks added to gain on the report, with the S&P 500 climbing to session highs, though some analysts were skeptical about the effect a stronger EFSF would have on the market.

“It’s moving in the right direction but it is going to disappoint the market, particularly given the emphasis policy makers put on this meeting,” said Jessica Hoverson, foreign exchange analyst at MF Global.

Greece must default, dump euro

by Peter Morici
September 13, 2011

European efforts at economic integration haven’t delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, these have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states that exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treaty, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it didn’t moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others aren’t able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states and this frustrates the EU single market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe.

Affluent Germany, unburdened by an obligation to share tax revenues with poorer EU states, provides generous pensions, gold-plated employment security and jobless benefits and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up and borrowed extensively from banks in Germany and France and other rich countries to keep up.

Now unable borrow anymore in private markets, Greece and other poorer governments are forced to seek emergency loans and concessions from richer states and private creditors. They are being compelled by Germany and others to slash government spending and social benefits, dramatically raise taxes and sell off public assets.

None of this will work, because the private sectors of these economies are so dependent on government spending to maintain employment that austerity will only cause more layoffs among both private businesses and public agencies, thrust their economies into deep recessions and significantly reduce, rather than enhance, their governments’ capacity to tax and pay interest on their debts.

Moreover, to service their restructured debts, poorer governments must pay richer governments and foreign creditors in euros and this will require their economies to accomplish significant trade surpluses by developing new export industries. This would require Germany and the rich countries to let manufacturing activities and jobs migrate south that they heretofore have blocked from moving to lower-wage economies.

With a single currency, building new export industries would require rather substantial cuts in Greek and other poorer country wages and for the Germans and others to relinquish subtle forms of protection that guarantee them higher wages and favorable trade balances.

It is doubtful Greeks are willing to let their economy sink to Third World status to perpetuate the myth of European unity. As important, the Germans too much like lecturing the world about the virtues of Teutonic thrift and efficiency to let go of mercantilism, and to let debtor nations accomplish trade surpluses and obtain the euro needed to repay their debts.

If Greece had its own currency, it would still have had to reduce government spending, increase taxes and cut wages but not by nearly as much as richer EU states and the ECB now demand because Greece could also devalue its currency against those of richer EU economies to make its exports more competitive, accelerate growth and increase debt servicing capacity.

In the end, necessity will trump pan-Europeanism. The Greeks will default on their debt and, if they are smart, eventually dump the euro.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.

Brazil Depends on China to Avoid Economic Shake Down

August 14, 2011

As Brazil watches much of the so-called rich world struggle with debt crises, it can take some solace in the likelihood that its growing ties with China should shield it from the worst aftershocks.

The most vulnerable front for Brazil could be its currency, which could firm further — creating even bigger headaches for exporters — if U.S. interest rates stay ultra low due to continued slow economic growth or a possible downgrade by ratings agencies.

Yet Brazil’s China connection should keep the worst at bay, insulating the country on two levels.

On a microeconomic level, Brazilian companies are less vulnerable to a downturn among their U.S. counterparts. On the macro-economic side, it means Brazil has another source of investment and trade flows.

“The effects on emerging markets will depend a lot on China’s reaction to the international climate,” said Zeina Latif, an economist with RBS in Sao Paulo. “If China turns out OK and they have a soft landing, that’s great for Brazil.”

The United States averted default on Tuesday mere hours before a deadline.

But a deficit-cutting package and the chance of a sovereign downgrade left investors nervous, with global markets sinking on Wednesday in response. European officials have yet to put worries about a sovereign debt crisis there to bed, with Italy the latest country to come under investor scrutiny.

Brazil has plenty of its own problems, too, from above-target inflation to a tight labor market that has pushed wages, and thus consumer prices, higher. Those inflation fears, in fact, have been a major cause behind the underperformance of Brazilian stocks so far this year.

Yet the country’s economy is still expected to grow about 4 percent as millions of people keep moving from poverty into the middle class. Employers are hiring in droves, many Brazilians are taking their first-ever plane rides and malls are packed.

China — which leapfrogged the United States to become Brazil’s biggest trade partner in 2009 — should grow even more, around 9.6 percent this year. Even better, analysts say that country is showing signs of balancing inflation and expansion, avoiding a so-called hard landing.

“China might be a more important driver for corporate ratings in general for the southern part of Latin America,” including Brazil, Peru, Chile and Argentina, said Filippe Goossens of Moody’s Investors Service.

Take Vale (VALE5.SA), a major weight in the benchmark Bovespa index .BVSP. The company is the world’s biggest producer of iron ore, and China its single biggest customer as it builds and urbanizes across a vast landscape.

“One of the areas within the Brazilian equity market that we like the most is materials, with a focus on iron ore, and that’s because we do not foresee a hard landing in China,” said Jason Press, a Latin America equity strategist at Citigroup in New York. However. he expressed caution on volatility ahead.


Vale is hardly alone. Two years ago China agreed to lend state-controlled oil giant Petrobras (PETR4.SA), another Bovespa heavyweight, $10 billion in return for guaranteed oil supply over the next decade. That money will help Petrobras tap into massive offshore oil reserves that are expected to catapult Brazil up the list of oil exporters.

China could also become the top market for Brazilian sugar exports, thanks to an increasingly urban population opting for fast food and soft drinks.

The Asian nation, in fact, bought $20 billion of Brazilian exports in the first half of 2011 — almost 50 percent more than in same period of 2010.

China is doing more than just buying Brazilian products; it is also buying into Brazilian growth. Carmaker JAC Motors announced this week plans for a $600 million factory in Brazil to open in 2014, the latest of billions of dollars in pledged investments.

In fact, Citigroup’s Press noted, equity markets could see more effects from macroeconomic channels.

Those ripples could hit Brazil’s currency, the real, said Mauricio Rosal, chief Brazil economist for Raymond James.

With the budget savings promised in the U.S. debt deal, Washington would not be able to ramp up spending to try to stimulate the economy. Instead, that job could be left to monetary policy — in other words, super low interest rates to try to boost growth among consumers and industry.

But near-zero U.S. interest rates give investors a source of cheaply borrowed money with which to chase Brazil’s juicy yields, and interest rates here are already at 12.50 percent.

That so-called carry trade has already helped take the real to 12-year highs against the U.S. dollar, with the government announcing last week new measures to try to brake the currency’s gains.

“This discussion around U.S. fiscal policy reinforces an outlook for global liquidity,” Rosal said. Mitigating inflows into Brazil “will be a great challenge that will continue for awhile yet.”

But Moody’s Goossens cautioned that there is still much uncertainty around long-term results of the U.S. debt debate, including the effects, direct and indirect, on other economies around the world. As a result, any attempts to forecast what could happen in other countries are fraught with uncertainty.

“These are truly uncharted waters,” he said.

Emerging World buys $10 billion in gold as West wobbles

By Amanda Cooper
August 3, 2011

Central banks of emerging market countries such as Korea and Thailand have added more than $10 billion (6 billion pounds) of gold to their reserves this year in a sign of waning faith in the West’s benchmark bonds and currencies like the dollar and the euro.

International Monetary Fund data for June Wednesday showed Thailand bought gold for the second time this year, raising its reserves by nearly 19 tonnes to over 127 tonnes, while Russia bought another 5.85 tonnes, bringing its reserves to 836.7 tonnes, the world’s eighth largest official stash of the metal.

So far in 2011, emerging market central banks have bought nearly 180 tonnes of gold, more than double the roughly 73 tonnes purchased by central banks globally in the whole of 2010.

The spot price of gold has risen by more than 17 percent this year to a record $1,672.65 an ounce, driven chiefly by investor concerns over the impact on the developed world’s economy of its debt burdens and sluggish growth.

Mexico has been the largest buyer of gold in the year to date, with $5.3 billion worth of purchases, or 98 tonnes of gold, followed by Russia, which has bought 48 tonnes, worth $2.6 billion at current prices.

Earlier this week, Korea confirmed it had bought 25 tonnes of gold in June and July.

“Central banks evidently do not regard the price level as too high and are diversifying their currency reserves. This was the first purchase of gold for the Korean central bank in over ten years,” said Commerzbank metals analyst Daniel Briesemann.

“Gold’s high-altitude flight still appears to be supported by many factors and an end to the boom soon is not in sight.”

In the euro zone, smaller economies such as Greece, Portugal and Ireland have already sought emergency funding, while concern is mounting over the finances of some of the region’s larger members such as Spain and Italy, driving the euro to record lows against the safe-haven Swiss franc.

The United States averted an unprecedented debt default on Tuesday after lawmakers reached an eleventh-hour deal to raise the country’s borrowing limit, although severe doubts remain about the economic outlook, stripping 6 percent off the value of the dollar this year.


The U.S. economy is also likely to lose its top-notch credit rating as ratings agencies are increasingly discomfited by the weight of the twin trade and budget deficits and the country’s patchy growth.

A downgrade will almost certainly push up yields on U.S. Treasury notes as their value falls, which could prove unwelcome to the major investors in U.S. debt such as the Chinese government, which holds nearly $900 billion in Treasuries.

The trend among central banks, particularly those with large foreign exchange holdings, to diversify some of their portfolios into gold from currencies has been well established over the last couple of years.

“The market generally expects central banks with growing reserves and small gold holdings to buy gold,” said Jesper Dannesboe, senior commodity strategist at Societe Generale.”

“So I don’t think that is particular surprising, but it does support the bullish story (for gold),” he said.

Central banks are expected to remain net buyers of gold this year and the most likely buyers will be those with the biggest reserves and relatively small bullion holdings, such as China.

The Chinese central bank is the sixth largest official owner of gold, yet its holdings account for just 1.6 percent of its $2.5 trillion total reserves.

The IMF data showed Russia, Kazakhstan, Greece, Ukraine and Tajikistan also added to their reserves two months ago and feature among some of the bigger bullion buyers this year.

Kazakhstan’s reserves rose for the third time this year, by 3.11 tonnes in June to 70.434 tonnes, Taijikistan’s reserves rose 0.04 tonnes to 3.036 tonnes and Greece and Ukraine added 0.03 tonnes each, bringing their official holdings of gold to 111.506 tonnes and 27.744 tonnes, respectively.

Russia has added to its gold reserves every month for the past five years, according to the IMF’s data.

Related Links:









Partner Links