Japan Is the Next Greece

27. Feb. 2010

We've seen headlines all over asking who is the next Greece? Will Greece take the rest of the PIGS (Spain, Portugal, and Ireland) with it? This may very well happen, but if we are talking about sovereign risk, one should definitely keep an eye out for Japan.

ContrarianEdge has an interesting research piece on Japan. The Japanse budget deficit is growin;

As we know, governments issue debt to fill the budget gaps. Japan's government debt has tripled since the mid-90s and nearly doubled in the last decade:

Since the bubble burst in Japan's stock and real estate markets, Japan's GDP has been stagnant for almost two decades. To spur growth, the Japanese central bank has kept rates low, cut taxes, increased spending and issued debt. This strategy has not been effective to date, as GDP has not reached its previous high. The graph below is clearly "pre-crisis" as Japanese GDP fell over -4% in 2008 and around -1% in 2009.

Japan's debt-to-GDP ratio is the highest among major economies at ~190%. It is fair to note that unlike countries such as Greece and even the United States, only around 10% of Japanese government bonds are held by foreign investors. This should provide some cushion from the events that we have seen in Greece and the eurozone in recent weeks, right? However, the savings rates in Japan have been trending downward. Demographically, Japan is aging and projections have the population shrinking. This is not good for savings or for financing government deficits.

In the past, Japan has been able to contain its debt picture because the interest payments and supply/demand of debt was sustainable. Now Japan faces a future in which this is definitely in question. Government debt sustainability is on course for decline due to demographic factors, which includes secular deterioration in the domestic savings/investment balance. Debt levels continue to rise substantially at the same time that demand for debt in Japan will fall. That is not a good or sustainable formula.

Japan seems to be at the beginning of a debt trap. As its government debt sustainability declines, Japan will be forced to sell its debt load to outside investors, thus requiring it to compete with rates in international markets which are higher. This will drive up rates which will drive up interest expense, which of course further deteriorates sustainability. As expense climbs, the printing press revs up, depreciating the currency. Another option is for the Bank of Japan to intensify a QE program, balloon its balance sheet by purchasing debt.

Either option signals long term weakness in the yen. Frankly put, the yen is toast.
[Seeking Alpha]

Japan's ME Oil Imports in Jan 2010 Announced

27. Feb. 2010

Japanese government said that Kuwait’s crude oil exports to Japan fell 24.9% in January 2010 from a year earlier to 7.74 million barrels, or 250,000 bpd, for the second consecutive monthly drop.

Kuwait supplied 6.1% of nation’s crude oil in January 2010, compared with 8.8% in January 2009 and 7.7% in December 2009, the Japanese Natural Resources and Energy Agency, a unit of the Ministry of Economy, Trade and Industry, said in a preliminary report.

Japan is Kuwait’s largest oil buyer with accounting for 20% of its total crude exports.

Japan’s overall imports of crude oil in the reporting month rose 7.6% year-on-year to 126.60 million barrels (4.08 million bpd) for the first gain in 16 month.

Shipments from the Middle East increased 7.4% to 112.13 million barrels (3.62 million bpd), and accounted for 88.6% of the total, down 0.1% points from a year before.

Saudi Arabia remained Japan’s biggest oil supplier, with imports from the kingdom rising 6.2% from a year earlier to 37.36 million barrels (1.21 million bpd), followed by the United Arab Emirates with 23.86 million barrels (770,000 bpd), down 2.5%.

Qatar ranked third, with shipments jumping 24.4% to 15.47 million barrels (499,000 bpd). Iran was fourth with 12.80 million barrels (413,000 bpd), down 19.2%.

Resource-poor Japan is the world’s third-largest oil consumer after the US and China, and it relies on crude oil imports for about 50% of its energy needs. Shipments of direct-deal, which prices are based on the average spot price of Dubai crude, the benchmark for Asia, account for about 80% of Japan’s crude imports.
[BEDigest]

Greece must act on fiscal plans

25. Feb. 2010

TOKYO - Moody's Investors Service said on Thursday any changes in its ratings on Greece would depend on whether Athens was smoothly enacting its fiscal reform plans as promised.

Pierre Cailleteau, the head of Moody's global sovereign ratings, told Reuters in an interview that Moody's would follow the situation in Greece and see what was happening on the ground.

"We have to look at the facts and whether the government of Greece is going to do what it has promised to do," he said.

Rival ratings agency Standard and Poor's said on Wednesday it may downgrade Greece's BBB+ rating by one or two notches within a month, citing downside risks to growth that could hinder the country's deficit-cutting plan.

Cailleteau said that if in the next couple of months Moody's sees that Athens is implementing its plan as promised, it could keep the rating where it is or stabilize the outlook.

"Or if we see, based on evidence, that there is a deviation from the plan, we will change our rating accordingly. So a small deviation would lead to a small downgrade and a large deviation -- which we think is unlikely -- would lead to a large downgrade," Cailleteau said.

Moody's said earlier this month that debt-stricken Greece could face the risk of a multi-notch rating cut if its public finances remained unsustainable.

Moody's currently has Greece's long-term debt rating at A2 with a negative outlook.

"We want to evaluate the rating quickly but at the same time we are reasonable people. You can't expect a government to turn around a fiscal position in a few weeks," Cailleteau said.

Asked if Greece was in imminent need of support, he said Moody's did not think so.

"All the evidence we have so far is that Greece has been able to raise funds," he said.

European Union finance ministers earlier this month set Greece a deadline of May 15 to take urgent measures to rein in its budget deficit in addition to a mid-March deadline for a review of its progress so far.

Fears over Greek debt have hit the euro and lifted Greek bond yields this year. Investors are looking closely at how Europe tackles the problem.

The euro tumbled to its lowest in a year against the yen on Thursday and dipped within sight of a recent nine-month low against the dollar, below $1.3500.

JAPAN NEEDS TO WORK ON FISCAL PLANS

Moody's said it didn't think the problems in the euro zone would spread to countries such as Australia, New Zealand, China or Japan.

Tom Byrne, senior vice president and Asia regional credit officer at Moody's, said China still had a strong fiscal position.

"There could be contingent liabilities in the banking sector from the credit surge. But we think the Chinese economy has strong medium term growth prospects at least," Byrne said in an interview with Reuters Insider television.

"We don't see any exogenous threats to China."

But Japan's sovereign debt rating could come under pressure if its economy performed poorly and the government failed to draw up convincing fiscal plans, he said.

"The question that we're asking ourselves is ... can Japan get back on course, the course it was on before the (global) crisis?" Byrne said.

"For that to happen we have to see improved confidence in the economy, certainly improved confidence by the corporate sector, and also we have to see a bit more clear cut fiscal policies."

Last May, Moody's raised Japan's domestic debt rating to Aa2 from Aa3, saying the domestic market was able to absorb new borrowing from the most indebted government in the industrial world.

At the same time, it downgraded the foreign currency rating to Aa2 from AAA.

"The issue is if the deficit cannot be reduced over years beyond 2010, that would be credit negative," he later told a news conference.

In January, rival ratings agency Standard & Poor's threatened to cut Japan's credit rating unless it produces a credible plan to rein in its soaring debt and lift growth in an economy plagued by persistent deflation.

Japan's public debt now stands around 200 percent of gross domestic product, the highest among developed economies.

In Thailand, world's top finance minister stands tall

22. Feb. 2010

BANGKOK - At 1.93 meters (6 ft 3 in) in height, Thailand's finance minister often stands above the crowd. That's even more the case after winning "Global Finance Minister of the Year" honors from The Financial Times' Banker magazine.

But as British-born, Oxford-educated Korn Chatikavanij accepts the award at a Bangkok ballroom on Monday, he knows he has a tough job ahead in reforming Thailand's convalescing economy and helping it expand at a time of political tension and rising anti-government protests.

Thailand has one of Asia's slowest projected growth rates this year, although data just released for the end of 2009 was stronger than expected and Korn says that momentum carried over into this year.

Of immediate concern is whether a Supreme Court ruling due on Friday on ousted former premier Thaksin Shinawatra's $2.3 billion in family assets will trigger a reprise of riots last April that might further alienate investors.

"Some key reforms are needed. Some of these do require a better political environment than we have today in order to ensure success," said the 46-year-old former chairman of JPMorgan Chase & Co's Thai unit.

But bridging the political divide isn't easy. Anti-government protesters fume that they have been disenfranchised by the elite in Bangkok -- and Korn is an easy target.

His grandfather was a privy councilor to King Prajadhipok, his uncle founded the Electricity Generating Authority of Thailand, a state monopoly, and his father was commissioner of the Revenue Department and director of the Fiscal Policy Office.

Korn himself made his mark quickly. In 1987, at 23, he founded J.F. Thanakom Securities to become the youngest chief of a major Thai investment bank after working three years for SG Warburg in London, which he joined from Oxford University.

He spent almost all of the following years in banking before joining the Democrat Party in 2004. He won a seat in parliament a year later and was appointed finance minister in 2008 in the cabinet of long-time friend and fellow Oxford alumnus Abhisit Vejjajiva, Thailand's prime minister.

"We always felt one day I would come into his fold as it were -- the realm of politics -- but I took my time, almost 19 years," he said in a recent interview with Reuters at parliament. "For me, this is the right thing for the right time."

The Banker agrees, praising Korn for navigating Thailand's trade-reliant economy through the financial crisis, with fiscal stimulus measures it put at more than $61.2 billion while boosting long-term government spending on infrastructure.

"(Korn) has introduced an active and extensive reform program that has succeeded in putting Thailand's economic policy back on track after several years of economic paralysis and frequent government changes," the magazine said.

ENVIRONMENTAL CONCERN

The stimulus, however, hit some rough patches, which even Korn concedes. The health minister and his deputy resigned after allegations of corruption linked to how the money was spent in their ministry. Disbursement has been slower than expected.

The government has also faced criticism over a court-ordered suspension of 64 projects worth up to $12 billion at the world's eighth-biggest petrochemicals hub in eastern Thailand, which raised questions over the stability of investment in Thailand.

A local environmental group had lobbied to clean up Map Ta Phut since 1996, claiming pollution from the plants had caused at least 2,000 cancer-related deaths. The group has threatened to target another 181 projects if they, too, fail to comply.

Korn comes down firmly on the side of the environmentalists, saying the case could mark a positive turning-point and help Thailand retool its economy to rely less on manufacturing.

"The Map Ta Phut court ruling could prove beneficial for Thailand in the very long term," he said.

"What we would like to see is a much bigger share of the service sector compared to manufacturing. What's notable over the past 10 years is that with the economic growth that Thailand has seen, the service sector share has actually shrunk a little bit. That's unusual."

"Some investors may not like it. But we have to protect our own environment and the future living conditions of our own citizens," he added.

He also disagrees with manufacturers and shippers pressing Thailand to build a deep seaport on its western shore to allow exporters to ship directly to the Middle East, Europe and Africa.

Such a project would jeopardize one of Thailand's biggest assets, he said -- tourism in the southern Phuket region, home to some of the world's most coveted beaches. He would like to see tourism expand, helping to build up the service sector.

"We shouldn't sacrifice a very robust tourism sector in the south and put that at risk through the development of major industrial projects that would go along with that port," he said.
[Reuters]

Oil prices up 11 per cent in 2 weeks

21. February. 2010

Oil prices continued to rise as a refinery strike in France and worries over Iran's nuclear program suggested petroleum supplies may tighten in the future.

Benchmark crude added 32 cents to USD 79.38 a barrel on the New York Mercantile Exchange. Oil prices have increased more than 11 per cent in the past two weeks.

Energy prices dipped overnight after the Federal Reserve announced that it will bump up the so-called ‘discount’ lending rate. That sent the dollar to its highest level since May.

Crude, which is priced in US currency, tends to fall in price as the dollar rises and makes oil barrels tougher to buy for investors holding foreign money.

A Labour Department report today morning though said consumer prices excluding food and energy fell in January for the first time since December 1982. That tempered concerns of future inflation, analyst Phil Flynn said.
[IndianExpress]

Signs of hope for Japan recovery

17. February. 2010

Strong export performance and a rebound in domestic demand have helped boost Japan's economy, with gross domestic product growing 1.1 per cent in the October to December quarter, latest figures have shown.

Taken at an annualised rate, Japan's GDP grew at 4.6 per cent the government said, well above market expectations.

However, for the whole of 2009 Japan's economy contracted by 5.0 per cent as the country battled its worst recession since the Second World War.

The global downturn saw Japanese exports and factory output plunge.

Presenting the latest figures, officials said they were encouraged by the signs of recovery shown towards the end of 2009, particularly since it was the first time in seven quarters that domestic demand has helped to push GDP higher.

Consumer spending, which accounts for about 60 per cent of the economy, rose 0.7 per cent from the previous quarter.

Monday's results indicate that the world's number two economy is continuing to benefit from government stimulus measures around the world, bolstering global trade and persuading Japanese households to increase spending on durable goods.

Exports rise

Japan's Kyodo news agency quoted cabinet official Keisuke Tsumura as saying the data indicates the Japanese economy may now be strong enough to avoid falling back into recession.

Exports in December rose for the first time since last December [EPA]

Robust overseas demand, particularly from neighbouring Asian nations, has also helped lift the Japanese economy.

Exports in December rose for the first time since the collapse of investment bank Lehman Brothers in late 2008, raising Japanese industrial production by 2.2 per cent from the previous month.

The domestic economy, however, remains fragile and could weigh on growth in the coming months as the impact of government stimulus incentives wane.

Rattled by deepening deflation and falling wages, surveys show Japanese businesses remain cautious about spending and hiring.

Other major world economies also face uncertainty ahead.

Latest figures show the US economy expanded at an annual rate of 5.7 per cent in the fourth quarter, but many analysts predict a slowdown this quarter as high numbers of jobless hold back consumer spending.
[Aljazeera]

Problem Neighbors: China's Expansion Efforts Starting to Irk India

17. February. 2010

There are continued signs of stress between the 2 developing Asian powers, and this is not the first sign that China's new heavyweight status is causing consternation. [Dec 15, 2009: China's Economic Power Unsettles Neighbors] [Jun 13, 2009: Australia in Perfect Position Aside China, but at a Cost?] China appears to be following the same strategy in South Asia that it has taken in Africa.

Via The New York Times:

For years, ships from other countries, laden with oil, machinery, clothes and cargo, sped past this small town (Hambanato, Sri Lanka) near India as part of the world’s brisk trade with China. Now, China is investing millions to turn this fishing hamlet into a booming new port, furthering an ambitious trading strategy in South Asia that is reshaping the region and forcing India to rethink relations with its neighbors.

China’s Export-Import Bank is financing 85% of the cost of the $1 billion project, and China Harbour Engineering, which is part of a state-owned company, is building it. Similar arrangements have been struck for an international airport being built nearby.

Mr. Rajapaksa has said he offered the Hambantota port project first to India, but officials there turned it down. In an interview, Jaliya Wickramasuriya, Sri Lanka’s ambassador to the United States, said the country looked for investors in America and around the world, but China offered the best terms. Still, Sri Lankan officials have refused to disclose information that would allow analysts to compare China’s proposals with those submitted by other bidders. The country has also kept private details about other projects that are being financed and built by China, including a power plant, an arts center and a special economic zone.

The Sunday Times, a Sri Lankan newspaper, recently estimated that China was involved in projects totaling $6 billion — more than any other country, including India and Japan, which have historically been big donors and investors in Sri Lanka.

Harsha de Silva, a prominent economist in Colombo and an adviser to the country’s main opposition party, said the Sri Lankan government appeared to prefer awarding projects to China because it did not impose “conditions for reform, transparency and competitive bidding” that would be part of contracts with countries like India and the United States or organizations like the World Bank.

As trade in the region grows more lucrative, China has been developing port facilities in Pakistan, Bangladesh and Myanmar, and it is planning to build railroad lines in Nepal. These projects, analysts say, are part of a concerted effort by Chinese leaders and companies to open and expand markets for their goods and services in a part of Asia that has lagged behind the rest of the continent in trade and economic development.

But these initiatives are irking India, whose government worries that China is expanding its sphere of regional influence by surrounding India with a “string of pearls” that could eventually undermine India’s pre-eminence and potentially rise to an economic and security threat.

“There is a method in the madness in terms of where they are locating their ports and staging points,” Kanwal Sibal, a former Indian foreign secretary who is now a member of the government’s National Security Advisory Board, said of China. “This kind of effort is aimed at counterbalancing and undermining India’s natural influence in these areas.”

India and China, the world’s two fastest-growing economies, have a history of tense relations. But the two countries also do an increasingly booming business with each other. China recently became India’s largest trading partner, and both have worked together to advance similar positions in global trade and climate change negotiations.

As recently as the 1990s, China’s and India’s trade with four South Asian nations — Sri Lanka, Bangladesh, Nepal and Pakistan — was roughly equal. But over the last decade, China has outpaced India in deepening ties.

For China, these countries provide both new markets and alternative routes to the Indian Ocean, which its ships now reach through a narrow channel between Indonesia and Malaysia known as the Strait of Malacca. India, for its part, needs to improve economic ties with its neighbors to broaden its growth and to help foster peace in the region. Some of the shift in trade toward China comes from heightened tensions between India and Pakistan, which has hampered trade between the two countries. But China has also made inroads in nations that have been more friendly with India, including Sri Lanka, Bangladesh and Nepal.

Moreover, protectionist sentiments have marred India’s relationships with its neighbors. South Asia has a free-trade agreement, but countries that are part of the pact get few benefits, economists say, because India and its neighbors refuse to lower tariffs on many goods and services to protect their own businesses. By contrast, the countries of Southeast Asia have minimal or no duties on most goods and services that they import from one another.
[Seeking Alpha, by: TraderMark]

India food, fuel prices increase

12. February. 2010

NEW DELHI: India’s annual food inflation rose for the third straight week, threatening to drive up the headline inflation into double-digits and putting more pressure on the central bank to raise interest rates.

Soaring food prices also raise prospects of more street protests and political pressure on the Congress-led government.

A Reserve Bank of India deputy governor on Thursday played down, however, expectations of any central bank action ahead of its April policy review. “Don’t expect any action between now and the next announcement unless there is a completely unanticipated, unwarranted event,” Subir Gokarn told reporters in New Delhi.

Food prices rose 17.9 percent in the 12 months to Jan. 30, higher than an annual rise of 17.6 percent in the previous week, data released on Thursday showed.

Fuel prices rose an annual 10.4 percent in the same week, following an upswing in world crude prices amid signs of a global recovery, further stretching household budgets.

The yield on India’s 10-year benchmark bond yield rose 3 basis points after the data, reflecting speculation that the central bank may tighten its policy ahead of its scheduled meeting. The yield briefly revisited its 15-month high of 7.84 percent before edging down to 7.83 percent, up from Wednesday’s close of 7.78 percent.

Analysts expect high food prices, due to a poor harvest after the worst monsoon in 37 years, to push up the wholesale price index into double digits by March from 7.3 percent in December, above the central bank’s revised forecast of 8.5 percent.

Prime Minister Manmohan Singh last week said India’s farm output in 2009/10 would exceed initial estimates, raising prospects that food inflation would soon be controlled.

The government also decided to form a panel to recommend long-term measures to raise agricultural production and reduce the gap between farm gate and retail prices.

While rising food inflation is seen pressurizing the central bank to take sterner measures such as raising interest rates ahead of its April policy review to prevent it from spilling over, it may also distract the government from pushing economic reforms.
[Reuters]

The Giant Dragon, a Future Refined Oil Exporter

11. February. 2010

China's refining capacity has been expanding rapidly since 2005, and this expansion era will not conclude until 2013. It is estimated that a total number of 3.7 million barrels per day new capacity will come on stream during 2009-2013. Take Sinopec for instance -- it plans to process 205 million tonnes of crude oil in 2010, or 4.4 million barrels per day..

Meanwhile, China's demand for refined oil will remain stable during the period. The annual growth of Chinese refined oil demand was only 4.5% from 2006 to 2010, much smaller than the 100 million tonnes additional capacities. Export therefore becomes a must for Chinese oil producers. This dramatic change will have a butterfly effect on the Asia-Pacific oil market, and even the international market.

The topic of China as a future refined oil exporter will be discussed in the 11th China Oil Traders' Conference (COTC), an annual oil event and the 'APPEC' in China, which will be held by CBI in March 2010. Acknowledged as a serial conference with the largest scale, highest level and the most practical content, COTC has attracted over 400 participants every year in the past ten years.
[PR Newswire]

Sweden beats U.S. to top tech usage ranking

11. February. 2010

Sweden took the number one spot from the United States to top the annual rankings on the usage of telecommunications technologies such as networks, cellphones and computers, a report released on Thursday shows.

The Connectivity Scorecard, created by London Business School professor Leonard Waverman in 2008, measured 50 countries on dozens of indicators, including technological skills and usage of communications technology.

"Sweden not only has the best current mix of attributes, but it also shows few signs of losing its lead," said Waverman.

"By contrast, there is the beginning of a gap in what was once the essence of U.S. leadership in most industrial and service sectors - education and skills."

Sweden was second in the last survey behind the United States. Norway placed third, up from fifth spot last year.

Researchers say the new indicator -- commissioned by telecom gear maker Nokia Siemens Networks -- is already used by several countries in developing innovation strategies.

"Economic recovery and government stimulus packages aimed at boosting broadband deployment and ICT development should provide room for optimism in the coming years," Waverman said.

Countries in eastern and southern Europe -- including Italy, Spain, Greece and Poland -- took the last spots on the list of 25 developed countries.

Malaysia, helped by good co-operation between the public and private sectors, continued to top the list for developing countries, while South Africa rose to second spot, helped by strong corporate spending on IT hardware, software and services.

Following are the ratings for top 10 "innovation driven economies" measured in the study, scale 1-10, with last year ranking in the brackets:

1 Sweden 7.95

2 United States 7.77

3 Norway 7.74

4 Denmark 7.54

5 Netherlands 7.52

6 Finland 7.26

7 Australia 7.04

8 United Kingdom 7.03

9 Canada 7.02

10 Japan 6.73

Following are indexes for top 10 "efficiency and resource driven economies," scale 1-10, but not comparable with indexes for innovation-driven economies, with last year ranking in the brackets:

1 Malaysia 7.14

2 South Africa 6.18

3 Chile 6.06

4 Argentina 5.90

5 Russia 5.82

6 Brazil 5.32

7 Turkey 5.09

8 Mexico 5.00

9 Colombia 4.76

10 Ukraine 4.67
[Reuters]

Big banks lined up for 10$ billion AIA IPO

11. February. 2010
Reuters

American International Group has lined up all the major investment banks to underwrite the public listing of its Asian life insurance unit, in what may be Hong Kong's biggest IPO since 2006, banking sources said.

AIG, bailed out by the U.S. government during the global financial crisis, has chosen Citigroup, Credit Suisse, Goldman Sachs, BofA Merrill Lynch, UBS, CCB International and ICBC International to underwrite the IPO of American International Assurance (AIA), which sources say could raise more than $10 billion.

AIG had already chosen Deutsche Bank and Morgan Stanley as joint global coordinators for the offering.

Investment bankers in Hong Kong have been anxiously awaiting the choice of underwriters as a $10 billion IPO, at a standard 3 percent charge, could generate around $300 million in fees.

The wide selection ensures that everyone gets a piece of that fee pie, but some may grumble as the pie will be spread more thinly.

The selection of underwriters is a signal, too, that the IPO is moving forward after months of silence. It could potentially be Hong Kong's largest since Industrial and Commercial Bank of China raised $14 billion in 2006.

AIA, which AIG's former CEO Maurice Hank Greenberg once described as the group's 'crown jewel', has a long history in Asia, particularly in China, and has dominant market share in several, fast-growing countries.

An AIA spokeswoman declined to comment.

News of AIA's underwriters coincided with news of two other large Asian financial sector IPOs.

Mid-sized Chinese broker Huatai Securities priced its IPO to raise $2.3 billion in mainland China's biggest offering this year.

Korea Life Insurance, the country's No.2 life insurer, said it would raise up to $2 billion through an IPO next month.

AIA will hold an analysts' presentation to its bookrunners on Friday and is eyeing an end-March listing hearing from the Hong Kong Stock Exchange. The IPO roadshow is expected to start in mid-April, one of the sources said.

None of the sources, who have direct knowledge of the deal, wanted to be identified as they were not authorized to speak publicly about the IPO.

TIMING IS KEY

Timing is particularly key for AIA's offering, as Hong Kong's IPO market has lost some steam after a blistering 2009, and several new issues have dropped on their debut this year.

Russia's UC RUSAL and Canada-listed SouthGobi are both down by double digits from their IPO price.

In neighboring Shanghai, IPO fever has cooled with investor interest waning as the stock market sags and Chinese authorities keep up a steady stream of new share approvals in a bid to head off potential asset bubbles.

Still, one source close to the AIA deal expects the insurer to raise $10-$15 billion, and others said it could even go as high as $20 billion, depending on how much of the company is sold.

The sources said the deal size was expected to be finalized in the next couple of days.

JP Morgan is advising AIG through its restructuring process along with Blackstone Group.

(US$1=HK$7.75)

Billionaires make more from ideas than bubbles

10. February. 2010
ArabianBusiness (by: William Pesek)

All the buzz about losers if Google Inc leaves China ignores a potential winner: India.

In any China-versus-India contest, 2009 belonged to China. Its 10.7 percent growth in the fourth quarter blew the doors off the 6.5 percent India may have experienced. It was the toast of the town in Davos, Switzerland, last week at the annual meeting of the World Economic Forum.

China's "old economy" is clearly booming, and investors haven't made a lot of money betting against it. Why, then, would China's leaders imperil their future prospects as 2010 gets under way? That's what they may do by letting Google, the Information Age's biggest name, walk away.
 
"I would look going forward for new investment increasingly to go somewhere else - probably India, Brazil and other big markets," William Reinsch, president of the National Foreign Trade Council in Washington, said last month.

Google's announcement last month that it is considering leaving China amid misgivings about censoring the internet won't change everything on its own. China's top-down economy is thriving, while India's is bureaucratic, inefficient and notoriously corrupt.

Yet India has a track record of innovation and a stable of internationally competitive companies that China doesn't. India also has far superior laws on intellectual property and corporate governance. And China's willingness to blow off Google plays to India's relative advantage in these areas.

China should be concerned about the most influential internet tool bypassing its $4.3 trillion economy and 1.3 billion people - and the specter of other Silicon Valley giants following suit. Executives at multinational companies who dragged their feet on diversifying investments away from China may now expedite the process.

At issue is the next phase of China's development. Too much attention is on ideas of the last century: keeping labour cheap, holding down the currency, picking and subsidising national champions and favouring exports for growth. China's spat with Google underlines how the Communist Party relies on the strategies of yesterday, not tomorrow. It's really a proxy for how the past and future are colliding.

Who knows, perhaps China's mix of free-market policies and limits on free speech is a viable new model. It's possible that China can thrive while censoring cyberspace and the media. Perhaps China will prove that it can leapfrog over years of domestic company building - as with Lenovo Group Ltd's purchase of International Business Machines Corp's personal computer business. China does, after all, have $2.4 trillion of currency reserves to deploy around the globe.

The odds don't favour it, though. Letting Google leave may dull the long-term benefits of the trillions of yuan that China is throwing at the economy. It limits the participation of entrepreneurs in an age where ideas and impulses mean more than sweat on factory floors. It also makes it less likely that massive stimulus efforts lead to the kind of self-sustaining, indigenous economy that China needs.

The question is where China wants to be in five or ten years. The world is now driven by knowledge flows, making it vital to stay attuned to the latest developments in any field. Only then can innovators ride the latest waves in international business and finance and create the hundreds of millions of jobs needed to raise living standards.

Here, my thoughts are with India's billionaires. They must be rubbing their hands together in glee as China's leaders make an expensive miscalculation. According to a 2008 Forbes magazine poll, India may have the most billionaires by 2017.

China's ultra-wealthy are growing in numbers. It's better, though, for one's billions to come from new ideas than from bubbles in the Chinese stock market, which rose 80 percent last year. What China lacks is a growing roster of homegrown knowledge-based and technology outfits creating jobs, pushing the country up the value chain and inspiring young people to become the next Bill Gates.

Nandan Nilekani, the co-founder of Bangalore-based Infosys Technologies Ltd, is often called India's answer to Microsoft Corp's co-founder. When asked about the secret of India's success in technology, Nilekani points to a free press and a rabid embrace of information flows. In other words, if India censored cyberspace, companies such as Infosys or Wipro Ltd wouldn't be what they are today.

India's challenges are overwhelming. It scores low on global efficiency scales, infrastructure is dodgy and bottlenecks to investment are many. India lags far behind China in reducing poverty. That's where billionaires such as Nilekani re-enter our story.

Millions of rural poor people claim that corrupt officials steal their paltry wages, withdrawing money from post-office accounts without providing proof of identity. India turned to Infosys to devise a fraud-proof deterrent.

A year from now, Nilekani will roll out the world's biggest biometric database to enable India's 1.2 billion people, half of whom lack access to financial services, to open an ICICI Bank Ltd account or sign up for a Vodafone Group Plc mobile phone.

It's not the Three Gorges Dam or the Shanghai skyline, yet India's technology billionaires are helping the government devise new strategies and spread the benefits of growth. China, for all its advantages, could use more of that dynamic. Waving goodbye to Google won't help.

Buy the Euro, Sell the Yen?

10. February. 2010
Seeking Alpha (by: Ralph Shell)

The new year has brought some surprises for yen traders.

The Financial Ministry leaned on the Bank of Japan, convinced them that deflation and a tepid recovery were the big problems, and low rates and expanded money supply were the answer. What could be a more ideal set up for the yen to be the lending currency for the carry trade? Well planned trades often give way to changing world events. The markets concern about the size of the Greek debt, and the ability to service this debt grew, and fear of the sovereign debt in Spain Portugal and Ireland emerged. Speculators even began to question the sanctity of the Euro, annoying European Bank President Jean-Claude Trichet.

The movement to the safe haven currencies like the dollar and the yen have resulted in the yen appreciating a surprising 8.5% against the euro in 2010. After trading at a high of 134.35 on Jan. 11 2010, the euro plunged to a low of 120.65 on Feb. 5. It has since recovered to near the 124 handle.

It is not only the carry traders that have been slammed in the emergence of the strong pound. Japanese exporters are severely hurt by the strong yen, as the yen has strengthened above levels that were forecast by the big exporters. Have no doubt that the export trade will be bending the ears at the Ministry of Finance, trying to get the government to weaken the yen.

There have been some big time bears on the yen based upon the massive amount of debt issued to the government. The Financial Times pointed out that these fears may be exaggerated. Most of the debt is owned by Japanese, not foreign investors, and the rate on a 10 year note is only 1.3% compared to 3.6% in the US. This means that the cost to service their debt with the low interest is only 1.3% of the GDP, compared to 1.8% in the US and 2.3% in the UK. Also noteworthy is a report in The Japan Times Online, that:

"Foreign-exchange reserves at the end of January rose $ 3.67 billion from a month earlier to $ 1.053 trillion, up for the first time in two months to hit the third-highest level on record, the government said Friday." This implies, of course, that the super bears on the yen are probably wrong, but this does not exclude the possibility of a pull back.

Since the arrival of the Greek debt problem on the front page of the world financial papers, it is estimated this concern has resulted in over $4T in losses in global equities markets. Today rumors abound that the Euro Central Bankers have a plan to bail out the Greek government and address their debt issues. Equity markets have applauded this news with solid global gains. The USD has weakened against the euro today, but against the yen the trade in indecisive. If indeed the Euro Bankers are going to loosen the purse strings and come to the rescue of their spend thrift southern neighbors, this would help the euro and remove the need for the yen as a safe haven currency. Try to buy the Euro versus the yen in the 1.23 area with an appropriate money management stop. If the Bankers get the job done we may see a move back to the 126/27 level.

Price of Oil: A Significant Sovereign Risk Factor

10. February. 2010
Seeking Alpha (By: Dian L. Chu)

European and U.S. stock markets have taken a hit recently, as spooked investors from Shanghai to Sao Paolo were fleeing risky assets.

This flight took place amid concern that the financial crisis in Portugal and Greece could spread through the eurozone, with vast implications for the fate of the fragile global economic recovery. (Fig. 1)

Liquidate & Buy Dollar

A steep drop in crude-oil prices triggered declines across the commodities spectrum, as investors nervous about the pace of the economic recovery gravitated back to the dollar. Crude oil tumbled to a seven-week low of $71.19 a barrel last Friday, down 14% since the 2010 high of $83.18 reached on Jan. 6.

Investors’ flight to safety drove the U.S. dollar near a nine-month high against the euro. Emerging market currencies also weakened in Asia, while U.S. stocks fell a fourth straight week, the longest streak since July.

A Shift of Sovereign Risk

According to EPFR Global, risk aversion has prompted a withdrawal of $1.6 billion from emerging market equity funds during the week ending Feb. 3, the biggest outflow in 24 weeks, and $516 million has left Asian equities outside of Japan.

The charts from CDR (Credit Derivatives Research) tell the story of this investor's perception.

According to CDR, there has been a dramatic shift of risk in developed nations relative to emerging and less-developed nations when comparing three sovereign risk indexes, SovV, EM and CEEMEA. (Fig. 2)

In SovX, the GIPSI (H/T Zero Hedge) - Greece, Italy, Portugal, Spain and Ireland, represent around 65% of the index risk. In EM, Venezuela accounts for 26%, Turkey, Brazil, and Argentina represent 12% respectively of the EM risk. In CEEMEA, Turkey and Russia represent 49% of the index risk (followed by Hungary and Ukraine each at over 8%).

In addition, CDR finds that the sovereign risks of the emerging economies appear to be closely tied to the price of oil:

“It would appear that the CEEMEA and EM sovereign risk indices are threatened more by commodity price pressures than credit risk currently - and given the 'relatively' high price of oil/gas, their risk remains less of a concern than developed nations where the Ponzi appears to be in question.”

Oil Price - A Key Risk Factor

Emerging market countries, such as Brazil, China or India, are evolving since the early 90s. During this period, the issuance of bonds by these countries has increased significantly, reflecting their needs for substantial long term and infrastructure investment.

Among the many determinants of risk bonds, the price of oil is a key factor as it plays a significant role in economic growth, inflation, production costs, trade balances and currency. Nine of the ten economic recessions in the United States since the end of World War II were preceded by a dramatic increase in the price of oil.

A Sensitivity Issue

Oil prices nowadays are extremely volatile, and sharp fluctuations in oil prices contribute to macroeconomic volatility all over the globe. The impact of this volatility on economy varies according to a country’s relative dependence on oil production and exports.

For oil-exporting countries like Russia and Saudi Arabia, a rise in oil prices caused a perception of risk reduction relative to its obligations. Conversely, an oil-importing country sees its risk index increase due to a barrel price shock.

Financial Crisis 2.0?

Last week's wild commodity price swings underscore how investors aren't totally convinced that the world economy is on an upward trajectory. Investors are worried that multi-governments' debt problems will spread globally, similar to the subprime crisis in 2008.

In addition to concerns about GIPSI sovereign debt defaults in the 16-nation eurozone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.

Some analysts expect global commodity prices will eventually firm up, reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.

But there are others who see the current “correction” as caused by factors very similar to those that brought on the “financial crisis of 2007-2010” and warned this could signal “a new crisis in development.”

Seeking Negative Beta

In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector-wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.

Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices.

An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and eurozone. (Fig. 3)

This competitive edge probably partly explains how investors still see the U.S. dollar as a safe haven, and Mr. Geithner's optimism that more debt won't hurt U.S. credit rating, in spite of the fiscal and economic challenges quite similar to what the eurozone is facing.

BRIC minus R

In addition to the United States, GDP growth in Brazil, China and India could get a boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and Chindia are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospects. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shock on net basis.

The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to its strong growth rate, and less energy efficient. From that perspective, Chindia, though good prospects, could be more of a roller-coaster ride for investors.

Among the emerging economies, lower crude oil prices will be a big dampener for the Russian economy. Russia's two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia’s two oil wealth funds, is expected to run out by the end of 2010.

Bank reform clouds Davos summit

8. February
Aljazeera

The world economy is recovering but remains fragile and dogged by huge deficits, officials have said at the end of a Davos summit clouded by divisions over banking reform.

Asia is leading the resurgence after the worst crisis for decades with China returning to double-digit growth, however, the United States and Europe remain dogged by unemployment and the crisis over Greece.

"The situation is better, but fragile," Dominique Strauss-Kahn, the International Monetary Fund (IMF) chief, said on Saturday.

"We have to go ahead strongly in the financial sector reform, much more rapidly than has been done until now.

Bank regulation

"The fiscal sustainability problem is going to be one of the biggest problem. We'll have to deal with this for five, six or seven years, depending on the country," he said.

Criticism over US plans to curb risk-taking by banks again took centre stage on the last day of the World Economic Forum.
 
The meeting brought together British and French finance ministers Alistair Darling and Christine Lagarde, European Central Bank chief Jean-Claude Trichet and the heads of private banks.

"There's going to be regulation, they [the bankers] understand that," Barney Frank, the US congressman, said.

"The political leadership certainly in the United States is going to go ahead with tough, sensible regulation."

The banking issue has clouded the four-day Davos meeting, following French President Nicolas Sarkozy's opening address in which he supported US President Barack Obama's bank reform plans.

At the same time there has been cautious optimism about the outlook for global recovery after the financial crisis of the last 18 months.

Asian growth

Chinese and Indian officials have announced their country's growth rates of nearly nine and seven per cent respectively, and the US hailed Friday's unexpected 5.7 per cent gross domestic product (GDP) growth figure.

But unemployment remains a problem in the US and Europe, which both have a jobless rate of around 10 per cent, despite a return to overall growth.
 
"What we're seeing in the United States is a statistical recovery and a human recession," Larry Summers, Obama's chief economic advisor, said.

Warnings of a "double dip" recession, where recovery fades back into a new slowdown, have arisen in Davos as leaders mull exit strategies from stimulus packages agreed to prevent a full-blown depression last year.

Christine Lagarde, the French economy minister, told the AFP news agency she followed a "three Rs" principle: recovery, reform, and restoring public finances.

But she said timing was crucial.

China's yuan peg?

"Balancing between the recovery process that has to continue, the reform that needs to be maintained and the restoring of public finances is a tough line to draw," she said.

A senior Chinese banker meanwhile said that Beijing could move on the issue of its currency's exchange rate once other countries start to withdraw their stimulus packages.

China has been under fire for keeping the renminbi [Chinese yuan] weak against the dollar, a strategy which critics say is aimed at keeping Chinese exports competitive.

"If global [partners are] ready to do exit strategy, China is ready," Zhu Min, the deputy head of China's central bank, told the Davos forum.

Largest wind market in the world

7. February. 2010
GWEC

The Global Wind Energy Council today announced that the world’s wind power capacity grew by 31% in 2009, adding 37.5 GW to bring total installations up to 157.9 GW. A third of these additions were made in China, which experienced yet another year of over 100% growth.

“The continued rapid growth of wind power despite the financial crisis and economic downturn is testament to the inherent attractiveness of the technology, which is clean, reliable and quick to install. Wind power has become the power technology of choice a growing number of countries around the world,” said Steve Sawyer, GWEC’s Secretary General. “Copenhagen didn’t bring us any closer to a global price on carbon, but wind energy continued to grow due to national energy policy in our main markets and also because many governments in prioritised renewable energy development in their economic recovery plans,” he said.

Wind energy is now an important player in the world’s energy markets. The global wind market for turbine installations in 2009 was worth about 45 bn EUR or 63 bn US$. GWEC estimates that around half a million people are now employed by the wind industry around the world.

The main markets driving this significant growth continue to be Asia, North America and Europe, each of which installed more than 10 GW of new wind capacity in 2009.

China was the world’s largest market in 2009, nearly doubling its wind generation capacity from 12.1 GW in 2008 to 25.1 GW at the end of 2009 with new capacity additions of 13 GW.

“The Chinese government is taking very seriously its responsibility to limit CO2 emissions while providing energy for its growing economy. China is putting strong efforts into developing the country’s tremendous wind resource. Given the current growth rates, it can be expected that the even the unofficial target of 150 GW will be met well ahead of 2020,” said Li Junfeng, Secretary General of the Chinese Renewable Energy Industries Association.

Newly added capacity of 1,270 MW in India and some smaller additions in Japan, South Korea and Taiwan make Asia the biggest regional market for wind energy in 2009, with more than 14 GW of new capacity.

However, the US continues to have a comfortable lead in terms of total installed capacity. Against all expectations, the US wind energy market installed nearly 10 GW in 2009, increasing the country’s installed capacity by 39% and bringing the total installed, grid-connected capacity to 35 GW. In early 2009, some analysts had foreseen a drop in wind power development of as much as 50%, but the implementation of the US Recovery Act with its strong focus on wind energy development in the summer reversed this trend.

“The U.S. wind energy industry shattered all installation records in 2009, chalking up the Recovery Act as a historic success in creating jobs, avoiding carbon, and protecting consumers,” said AWEA CEO Denise Bode. “But U.S. wind turbine manufacturing is down compared to last year’s levels, and needs long-term policy certainty and market pull in order to grow.”

Europe, which has traditionally been the world’s largest market for wind energy development, continued to see strong growth, also exceeding expectations. In 2009, 10.5 GW were installed in Europe, led by Spain (2.5GW) and Germany (1.9 GW). Italy, France and the UK all added more than 1 GW of new wind capacity each.

“It is a remarkable result in a difficult year” said Christian Kjaer, CEO of the European Wind Energy Association. “The figures, once again, confirm that wind power, together with other renewable energy technologies and a shift from coal to gas, are delivering massive European carbon reductions, while creating much needed economic activity and new jobs for Europe’s citizens.”

“Wind energy is already making a significant contribution to saving CO2 emissions. The 158GW of global wind capacity in place at the end of 2009 will produce 340 TWh of clean electricity and save 204 million tons of CO2 every year,” concluded Sawyer. “As we see in Europe and the US, wind power is now often the most attractive option for new power generation, both in economic and environmental terms, and for improved supply security.”

Inflation in India– Can’t Ignore It Anymore

5. February. 2010
Seeking Alpha (Indian Analyst)

When a consulting firm starts talking inflation, you know a big issue is at hand. The chart below is from a recent Mckinsey note. It makes an interesting point, which investors often miss.

In inflationay times, companies will often tell analysts, "We will be able to pass on costs, so there is no reason to worry about inflation." Mckinsey points out, "Maintaining reported net profits is not enough. You need to maintain cash flow stream, and that will likely mean that RoE needs to go up. Or roughly speaking, the gap between inflation and RoE needs to be maintained."

So ask yourself this question – Inflation has shot up by say 1000 basis points, or 10% in India (never mind official WPI data). So have corporate RoEs gone up by the same amount?

This almost never happens, as Mckinsey’s chart for US points out. Corporate RoEs dont swing by that much, and certainly not at times of high inflation. No amount of belt tightening can generate that response for entire listed corporate sector

So at least some, or quite a few companies will suffer. The US markets were flat for much of the decade of ’70s and early ’80s when inflation was high.

A note from Nomura (NMR) points out how Indian markets tend to fall sharply whenever WPI has crossed 8% in the last decade. It says – only a matter of time, and ‘when’ not ‘if’ – the markets will react to inflation. They already are reacting, but at least another 10-15% further down from here is needed as a decent response to high inflation.

The graph below shows inflation versus market performance:

Countries Short-Sellers Are Abusing

5. February. 2010
Seeking Alpha (The business Insider)

Sovereign debt concerns have exploded this year, and the chart below makes this fact very clear.

It shows short-selling interest for the sovereign debt of different nations, as calculated by short-interest firm Dataexplorers in a February report.

Dataexplorers presents Short interest as an alternative to using credit default swap data alone: "CDS data on these markets is well publicized, but what does short selling data tell us about the current market attitude to developing country government bonds?"

The degree of recent short selling is indicated by the blue bars, while that of one year ago is in red. Longer bars implies far more traders betting against a nation's debt.

What is particularly striking about the data is that while some of the infamous European sovereign-default-risk PIIGS (Portugal, Italy, Ireland, Greece, and Spain) rank highly on this list of troubled nations, many Eastern European nations look far worse in terms of short interest. Note some PIIGS aren't in the table, they might not have been included in Dataexplorer's screen.

If the shorts are right, Eastern Europe may actually be the spark that sets off the rest of Europe's financial crisis. Note Abu Dhabi shot up this year as well, no doubt due to Dubai's crisis.