Currency war get Real

Brazil in ‘currency war’ alert


By Jonathan Wheatley in São Paulo and Peter Garnham in London

Published: September 27 2010 16:30



An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.

Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.


A weaker exchange rate makes a country’s exports cheaper, potentially boosting a key source of growth for economies battling to find growth as they emerge from the global downturn.

The proliferation of countries trying to manage their exchange rates down is also making it difficult to co-ordinate the issue in global economic forums.

South Korea, the host of the upcoming G20 meeting in November, is reluctant to highlight the issue on the gathering’s agenda, also partly out of fear of offending China, its neighbour and main trading partner.

The US dollar has fallen by about 25 per cent against the Brazilian real since the beginning of last year, making the real one of the strongest performing currencies in the world, according to Bloomberg.

In spite of Mr Mantega’s recent aggressive public statements, however, Brazil has so far held back from taking any action other than intervening in the local currency spot market.

The central bank bought as much as $1bn a day for much of the past two weeks – about 10 times its daily average in recent months – but this was largely to absorb money entering the country to take part in last week’s $67bn share issue by Petrobras, the national oil company.

“There’s a real gap between the rhetoric and the action,” said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York.

Copyright The Financial Times Limited 2010. You may share using our article tools.

RBI to hold down interest rate on small savings.

Newspapers reported yesterday that Indian bankers are putting up a "stiff resistance" to RBI's plan to free the interest rate on savings bank accounts.

Thanks to a cosy arrangement, sponsored by the RBI, bankers are getting handsomely paid by bank account holders to keep their money for them. The current interest rate paid on savings bank accounts is 3.5%, while inflation currently runs at anywhere between 8% &10%.

The spread bankers earn from lending this money to business, home-buyers or car-purchasers is scandalous.

Obviously, bankers would like to protect this low-cost source of funds. Responding to bankers' pleas that it is "premature to deregulate the savings bank rate", the RBI has said that a working group would be set up to look into the matter of deregulation.

Kick the can down the road, and the small depositor up the ass.

European debt, currencies and gold

Blogging on ftalphaville, El-Erian echoes my take on currency intervention and gold, against the backdrop of debt concerns:

Guest post: El-Erian on an interesting week ahead

Posted by Guest writer on Sep 19 10:37.

Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, argues that this week will show Europe’s debt crisis and the global configuration of currencies returning to the fore.

________

This coming week will be an interesting one. I am not just thinking of Tuesday’s FOMC meeting in Washington that will shed light on whether the Federal Reserve revises down its economic growth projections (it should and, I suspect, will) and expands non-conventional policies (it will, but probably not at this meeting).

I am also thinking of two other issues which were left to simmer quietly over the last few months when most of the focus was on America’s “recovery summer” — or, to be more exact, the lack thereof.

The first pertains to Europe. Solvency concerns are again on the rise there.

Last week’s catalyst was Ireland where banking issues are a serious worry. But the underlying problems are deeper and more complex.

Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels… despite exceptional support from the ECB, EU and IMF, and despite the implementation of adjustment measures on the part of some.

The failure to reduce risk spreads means that the public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.

This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.

The second issue is even more complex. It pertains to the global configuration of currencies.

Last week, Japan intervened massively to stop its currency from appreciating. It did so in a unilateral fashion and, immediately, faced criticisms from Europe and the US.

Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the US should have already labeled China a currency manipulator. And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great “flexibility” back in June — this is proving insufficient to counter growing currency tensions.

These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate. They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.

This week will shed light on whether policymakers can do anything to deal with these two issues. If they continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.

________

Competitive Devaluation and gold

On Sep 15th., shortly after a new government was installed, Japan began buying yen massively, to protect its exporters against the unremitting strengthening of the yen. This was the first time in 6 years that the BOJ has intervened. From media accounts, it would appear that the intervention was unilateral.


“The bottom line is that it was very silly thing for Japan to do. It almost gives everyone else the right to intervene unilaterally and trigger a competitive devaluation process,” said Noriko Hama, of Japan’s Doshisha University (quoted in FT of 16th Sep.)

When I began buying gold in September of 2007, exactly 3 years ago, it was in anticipation of just such a development. There were two stages to this thought:

1. That there would be a severe financial crisis in the US, the inevitable result of too much credit, too cheap, and for far too long.

2. In trying to effect a recovery, national economic administrations would try to:

i. Create even more liquidity.

ii Export their way out of trouble. In order to this, we would see competitive devaluation of currencies.

Step 1, of course, happened a long time ago. Step 2.i, has been under way for two years now, and has restored the pre-crash situation in financial markets - high correlation between all asset classes: since June this year, equities, commodities and US Treasuries have been buoyant. Not to mention real estate in India.

Step 2.ii has been building up for a while, with the US trying to shout China into allowing the yuan to appreciate. While making the occasional token gesture on this front, China has gradually stopped using its export surplus to buy Treasury bonds - which could have driven the dollar up further. Instead, it began buying Japanese bonds. Of course, this drove the yen up, to a level which made Japanese exporters a worried lot.

But this week, dollar buying by Japan has put a whole new spin on export competitiveness. Wilful currency depreciation has begun. In itself, it is both dangerous and unpredictable, as national politics can lead to strange dynamics.

Large investors (call them speculators if you wish), can react by taking bets on government moves, which will amplify such moves. The other likely development is that many will decide that such unpredictability makes currency investments hazardous, and precious metals a lot less hazardous. This is a development which could put a strong trend line under gold and silver.

Corruption has social acceptance

This is what the recently retired CVC has to say about corruption in India:

(The full txt is here:http://www.livemint.com/2010/09/06234313/Corruption-has-social-acceptan.html

Two things bother me greatly. One is the social attitude towards corruption. In India, the most unfortunate part is that the society is no longer seriously concerned about corruption and there is social acceptance. When we were growing up I remember if somebody was corrupt, they were generally looked down upon. There was at least some social stigma attached to it. That is gone. So there is greater social acceptance. This is a kind of paradox. On one side, civil society has become more active in exposing corruption; people are filing PILs (public interest litigations) and various other ways of highlighting corruption, trying to do something about it. On the other hand, in society, there is a general acceptance of corruption. If somebody has a lot of money, he is respectable. Nobody questions by what means he has got the money. Second, the final punishment is becoming increasingly difficult. I am not saying that everything is right with CBI, but there are times they are blamed for things for which they are not responsible.

Look at an average case in the special judge’s court, which is the first court where a chargesheet of CBI is filed—(it) is taking 10 years. We got a survey done for a small pocket of CBI in one of their zones; only 4% people out of all those who were finally convicted actually went to jail. On some ground or the other they went in appeal. One appeal after another, on one ground after another. Same is happening with the departmental proceedings… they take years and hardly any punishment is given. Let me make it more mathematical for you. There would be 20% people in India even today who would be honest, regardless of the temptations, because this is how they are. They have a conscience, they would not be corrupt. There would be around 30% who would be utterly corrupt. But the rest are the people who are on the borderline.

Cops or Robbers

Delhi Traffic Police are on Facebook (as DTP).

They use the site to deliver updates on the traffic situation across the city. The most substantial traffic on the site comes from citizens' photographs of errant drivers - crashing red lights, using tinted glasses, or parked in No Parking zones.

If you upload such a photograph on to the site, DTP will issue a challan based on the evidence. A good idea, except that - as DTP point out - today, Rs. 100 is not much of a deterrent to doing exactly as you please. Higher fines had been set a couple of years ago, but the High Court knocked them down. Someone had told them that breaking the law should be cheaper than watching a movie.

I used the site to report a Hit and Run to which I was witness. In the real world, I had picked the victim off the road, and brought him to the pavement, got him water, and called 100. A patrol car arrived, and ferried him to the Trauma Center at Safdarjung Hospital; mercifully, he was not too badly hurt. On Facebook, though, my report was not acknowledged. The next morning, I posted the details again, asking to be told whether the driver had been arrested. Again, no response.

A few days later, I posted a photograph of a car parked under a No Parking sign. Boom! Within a couple of hours, there was an acknowledgement.

So, obviously, the Facebook system works. Why not for the Hit and Run? One of the bystanders at the incident said, "Police ki acchi kamaai ho jaigi - driver ko pakkad lengey - rupai mal lengey" (Pay day for the cops - they'll catch the driver and get some cash of him). If they have to be responsive to my complaint, they will have to officially prosecute the driver, rather than doing a quid pro quo with him.

Is it any consolation that he didn't get off scot free?  Not sure - by giving the cops the driver's number, I seem to have helped them make some illegal gratification.

Liberalism under threat

Ram Guha delivered the Tarkunde Memorial Lecture at IIC yesterday. He said Indian liberalism was under threat from the RIght, the Left, and the Center!

From the Right, while competitive fundamentalism characterises most religions in India today, the Hindutva Right is most threatening because of the relative size of adherents of the Hindu faith.

From the Left, the Maoist threat, while over-stated by simplistic statistics such as "220 districts are Maoist-threatened", is highly noxious, and we must never forget that these are violent, totalitarian people.

(At the launch of Sudeep Chakraverti's book, Red Sun, Dilip Simeon had made the same point - and he spoke from the experience of having joined the first wave of Naxalites, in the late 60s. He said that a conversation such as the one we were having about Maoists would not be possible in Maoist territory)

Ram Guha recalled a visit to Dantewada, along with BG Verghese, who was also in the audience, when a villager told him, the Maoists do not have the guts to come into our village without arms.

In the Center, as defined by mainstream political parties, undemocratic, family enterprises.

In Indian politics today, he said, people go either with the Right, because of paranoia or fear; with the Center, because of weariness (there is no alternative) or opportunism; or with the Left, because of upper-middle class guilt
and foolishness.

True liberals must work outside the party system, expecially in the current system.