Reports are emerging that Iran and Russia are in talks about a potential $1.5 billion oil-for-goods swap that could boost Iranian oil exports, prompting harsh responses from Washington, which says such a deal could trigger new US sanctions.
So far, talks are progressing to the point that Russia could purchase up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods, according to Reuters.
“We are concerned about these reports and Secretary (of State John) Kerry directly expressed this concern with (Russian) Foreign Minister (Sergei) Lavrov… If the reports are true, such a deal would raise serious concerns as it would be inconsistent with the terms of the P5+1 agreement with Iran and could potentially trigger US sanctions,” Caitlin Hayden, spokeswoman for the White House National Security Council, told Reuters.
Russian purchases of 500,000 bpd of Iranian crude would lift Iran’s oil exports by 50% and infuse the struggling economy with some $1.5 billion a month, some sources say.
Since sanctions were slapped on Iran in July 2012, exports have fallen by half and Iran is losing up to $5 billion per moth is revenues.
In the meantime, a nuclear agreement reached in November with Iran and world powers is in the process of being finalized, and the news of the potential Russian-Iranian oil swap deal plays to the hands of Iran hawks in Washington who are keen to seen the November agreement collapse.
The November agreement is a six-month deal to lift some trade sanctions if Tehran curtailed its nuclear program. Technical talks on the agreement began last week.
Under the terms of the tentative November nuclear agreement, Iran will be allowed to export only 1 million barrels of oil per day.
In mid-December, Iranian oil officials indicated that they hoped to resume previous production and export levels and would hold talks with international companies to that end.
This announcement sparked an immediate reaction from US Congress, which has threatened oil companies with “severe financial penalties” if they resume business with Iran “prematurely” following the six-month agreement reached in Geneva.
There are plenty of figures in Congress—Republican and Democratic alike—who are opposed to the deal. The key “Iran hawk” in US Congress, South Carolina Republican Lindsey Graham, has described the deal as “so far away from what the end game should look like”, which should be to “stop enrichment”.
The opposition in this case believes any talk between Tehran and Western oil companies is premature because they are convinced that we won’t see a comprehensive resolution after the six-month period, and that sanctions will be laid on stronger than ever before.
Yet again, it would seem, Iran is another proxy pissing match between the US and Russia… and remember, nothing lasts forever...
A study published in the Elsevier journal Anthropocene late last year has revealed that many of the rivers, streams and other waterways located throughout coastal Japan have inadvertently become delivery systems for transporting radioactive waste directly from the stricken Fukushima Daiichi nuclear power facility into the Pacific Ocean.
Researchers from both France and Japan discovered this after conducting a thorough sediment and soil erosion analysis, which revealed the presence of cesium-137, cesium-134 and even radioactive silver in the runoff from coastal rivers. A total of 2,200 soil samples were collected as part of the study, which was originally designed to look at the normal biogeochemical cycles and dispersion of contaminants via rivers and waterways.
Since it is already known that rivers play a functional role in cleansing the natural environment of toxins, a team of scientists from the Laboratory for Climate Sciences and the Environment in France and the Center for Research in Isotopes and Environmental Dynamics in Japan decided to look at how this process works with respect to radiation distribution.
With Fukushima radiation as the source indicator, the team looked for the presence of radioactive isotopes in soil samples collected all along the coastal regions of Japan. By tracking radiation in this way, the team was able to monitor from where the soil and sediment came to gain a better understanding of the transport patterns of particulate matter — and what they found is telling.
Based on the behaviors of the catchments observed, as well as their relation to the rivers that connect them to nearby mountain ranges, the team determined that many coastal rivers in Japan are a constant source of Fukushima radiation that ends up flowing directly into the Pacific Ocean. Early speculation that radioactive isotopes were probably concentrating in the upper layer of nearby soils also proved to be true.
“Our findings show that [the] Fukushima accident produced original tracers to monitor particle-borne transfers across the affected area shortly after the catastrophe,” wrote the authors of the study in their abstract. “We thereby suggest that coastal rivers have become a perennial supply of contaminated sediment to the Pacific Ocean.”
Contaminated rivers also sending deadly radiation into lakes, water reservoirs
But it is not just the Pacific Ocean that is suffering as a result of constant contamination from Fukushima. A similar study published earlier in the year in the Journal of Environmental Radioactivity found that irrigation waters, paddy fields and lakes are all being poisoned by the runoff from Fukushima.
After collecting soil samples from two small rivers located in the mountainous region of Fukushima Prefecture, scientists from the Japan-based Institute for Environmental Sciences learned that aerial deposits of nuclear contamination are occurring all across the region, and especially in the top layers of soil found in catchments.
“Our results are extremely important to quantitative assessment of the migration of radiocesium and decontamination of radiocesium in the watersheds impacted by fallout from the accident,” concluded the authors about their findings.
Accumulation of radioactive cesium has also been identified in over 20 woody plant species tested in Abiko, which is located some 125 miles southwest of Fukushima and just to the northeast of Tokyo. Researchers from the Central Research Institute of Electric Power Industry, or CRIEPI, found that the leaves of both coniferous and deciduous tree species had become contaminated as a result of radioactive rainfall.
“Further and continuous investigations are necessary to determine how long and how much radiocesium accumulates in the canopy and under the woody plants,” the researchers wrote.
As we know, it has been a suspect week with a variety of earnings misses. Although I have been constructive on risk asset markets generally, equities anecdotally, as figured year end push for alpha desires could let it run into year end. New year and ball game can change quickly. Just wondering if a larger rotation is in order.
There is an overall considerable theme of what you may find when a liquidity tide recedes as most major crises or risk pullbacks have been precipitated by either combination of tighter monetary or fiscal policy. Some with a considerable lag like a year after Greenspan departed from Fed helm, or many other examples. I’m not suggesting NOW is a time for a compression in risk but am aware of the possibility, especially when Fed Chairs take victory laps, Bernanke this week. Symbolic if nothing more. Cover of TIME magazine?
I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints. First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more. This is a healthy departure from YEARS of artificiality. Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to tightening financial conditions, adverse expectations of economic activity, and the great rollover….of both financial and non-financial debt financing. Boy, what a week in the IG issuance space with over $100 billion month to date, maybe $35 billion on the week. Debt rollover on steroids.
Beneath the veneer of market aesthetics, I already see fundamental (and technical) relevance. This could be construed as an optimist pursuit or reality that markets are incrementally transcending reliance and/or dependence on the wings of central bank policy prerogatives. The market bird is trying to fly on its own with inklings of a return to FUNDAMENTAL analysis. A good thing, conceptually, and gradualist development of passing the valuation baton back to market runners. A likely major pillar objective of policy despite more than a few critics worried about seemingly dormant lurking imbalances created by immeasurable policy and monetary and fundamentally skewed risk asset relationships globally.
This exercise of summarization of ebb and flow and comings and goings of markets and policy naturally funnels a discussion to what stature of central bank policy currently or accurately exists? Current events. What is the accurate stage of policy?
I actually think this is a more delicate nuance than I perceive viewed in overall market sentiment. Granted, we have taken a major step for mankind, which is the topical engagement of some level of scope or reduction of liquidity provisioning,” not tightening.” Tip of the iceberg communique with markets to INTRODUCE the concept of stepping off the gas but not hitting the break. Reeks of fragility to me but narrative headed in right direction to stop medicating the patient, the global economy.
Some markets have logically responded in kind. The highest beta markets as either beneficiaries or vulnerable to monetary policy changes, the emerging markets, have reflected at least the optics of change with policy. More auditory than optics in hearing a PROSPECTIVE change in garbled Fedspeak. The high flyer currencies which capture the nominal flighty hot money flows globally affirmed the Fed message.
In literally the simplest of terms, the G7 industrialized, not peripheral; interest rate complex has simply moved the needle in form of +110 basis point higher moves in nominal sovereign interest rates. And there are a bevy of other expressions which played nicely and rightly conformed to the messages coming out of the central bank sandbox. But there are ALSO notable dichotomies, which send a different or even the opposite message.
I perceive a deviation in perception of message as some markets or market participants appear to be betting on taper or a return to normalcy in global growth or U.S. growth outcomes??? OR no taper, or conversely QE4 or whatever. Sovereign spreads have moved materially tighter vs. industrial and supposed risk free rates (Tsys, Gilts, Bunds) both last year and in the first three weeks of 2014. Something a new leg of QE would represent, not a taper. A different year!!!
There have been VERY reliable risk asset market beta correlations over the last 5 years and sovereign or peripheral spreads have been AS volatile and correlated as any asset class. These things trade like dancing with a rattle-snake. Greece, Spain, France etc. They can bite you with fangs. They have been meaningfully more correlated to high yield spreads and yields and to central bank balance sheet expansion as nearly any asset class. So, the infusion of central bank liquidity into markets has seen “relief” rallies in peripherals and one would think the converse would be true as well. The valuations have represented the flavor and direction of risk on/risk off or liquidity on/liquidity off reliably for many months/years.
But I THOUGHT markets were deliberating tapering views and expressions as validated by some good soldier markets BUT that is not necessarily what the rally in riskiest of sovereign “credits” is suggesting. The complex seems to be decoupling with Fed balance sheet correlation and message. Some are OVER 100 standard deviations from the mean! They are rich and could/should be sold. Especially if one was to follow the obvious correlation with the direction of central bank as stated.
But look to other arena’s like TIPS breakevens which also have been correlated with liquidity and risk on/off and central bank balance sheet expansion. Correlated to NASDAQ, HY, peripherals and the like. BUT this complex COUNTERS what peripherals are doing. They haven’t shown up to the punch bowl party yet. Not invited. This is a departure of markets that have largely and generally been in synch from a liquidity and performance correlation view.
Like gold and silver which got tattooed vis a vis down 35%+ performance last year MOSTLY, but not exclusively, due to perceptions of winds of central bank change. BUT even within a contrary, the fact that rallies in Spain, France, Greece, and Italy reflect more of central bank easing notions, the opposite of taper. In essence, the complex has gone batty uber-appreciation this year. Sure, many eyeball the Launchpad physical metals marginal stabilization no longer falling on a knife but the miner bonds and the mining stocks are string like bull with significant appreciation. This decidedly isn’t the stuff of taper which had the bond daddy’s romancing notions of 3% 10yr breaks, 40 basis point Green Eurodollar sell-offs, emerging market rinse, and upticks in volatility amongst other things.
Equity bourses appear to be changing hands between investors with oscillating rotations which mark the first prospective 3 week consecutive sell-off in a while. New year. This is taper light. Somewhere in between and further blurs the correlation metrics.
So, which is it? Are we tapering or not and why are merely a few global asset classed pointed out here, why are they deviating or arguably pricing in different central bank prospects or scenarios or outcomes?
I’m not afraid but I am intrigued as to the fact that there may some strong opinions within markets and I perceive a widely received comfortability with taper or tightening notions, negative leanings on interest rate forecasts, a complacency of Fed call if you will. And all of these hingings occur without intimate knowledge of the most critical variable of all, what Janet Yellen thinks? She has been awfully quiet as of late and there are many foregone conclusions or assumptions in market psyche without having heard a peep from the new MAESTRO.
Moreover, looking in the REAR view mirror within a week where multiple (two) Fed Governor proclamations, communicated and implicated notions which arguably would be considered radical in ANY other policy period of a hundred years. How to conduct “monetary policy at a ZERO lower bound (Williams) ” and “doing something as surprising and drastic as cutting interest on excess reserves BELOW zero (Kocherlakota).”
This doesn’t sound like no stinking taper? A tale of two markets. To be or not to be. To taper or not to taper. Two roads diverged and I took the one less traveled by, and that has made all the difference. Robert Frost.
Which is it? Different markets pricing different things. Right or wrong, the market always has a message; listen critically.
Fracking protesters in Balcombe last summer. Photograph: Rod Harbinson/Demotix/Corbis
The French energy company Total will become the first major international oil company to join the exploration for UK shale gas when it announces an investment package on Monday.
Total is to join a shale gas exploration project in Gainsborough Trough in Lincolnshire currently operated by Ecorp of the US, according to the Financial Times. The other partners in the project are Dart Energy and UK-listed Igas and Egdon Resources.
The coalition government has made the exploitation of Britain’s unconventional gas reserves a priority, offering tax breaks to shale developers and promising big benefits. This is in contrast to France where hydraulic fracturing, or fracking, the process by which shale gas is released, is banned.
George Osborne, the chancellor, has argued that shale has the potential to reduce Britain’s reliance on increasing expensive gas imports and create thousands of jobs.
Exploration for shale gas and other unconventional hydrocarbons is taking place or is planned in Wales, Scotland, the south of England and the Midlands and the north.
Opposition from environmentalists has hindered the work. Protesters say the fracking process – injecting water, sand and chemicals underground at high pressure into shale rock to release the oil and gas trapped inside – can contaminate groundwater and cause earthquakes. The operation of rigs and attendant noise and truck movements can disrupt the local area.
Last summer Cuadrilla Resources faced protests in the Sussex village of Balcombe, and protesters are currently camped outside a drilling pad at Barton Moss in Salford where Igas plans to drill an exploratory well.
Geologists estimate there could be as much as 1,300tn cubic feet of shale gas lying under parts of the north and Midlands. One-tenth of that would equal around 51 years’ gas supply for the UK.
Perhaps the most amusing and curious aspect of this entertaining summary of the Mississippi Bubble of 1720, the resulting European debt crisis (the first of many), how bubble frenzies are as old as paper money, the man behind both – convicted murderer and millionaire gambler, John Law, what happens when paper money’s linkage to gold is broken, and how everyone loses their wealth and hyperinflation breaks out, is who the source is. The New York Fed. Perhaps the Fed-employed authors fail to grasp just what their institution does, or have a truly demonic sense of humor. In either case, the following “crisis chronicle” highlighting how banking worked then, how it works now, and how it will always “work”, is a must read by all.
Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicleswe meet the South Sea’s lesser-known cousin, the Mississippi Bubble.
Who Wants to Be a Millionaire?
John Law was an interesting figure with a colorful past. He was convicted of murder in London but, with the help of friends, escaped to the continent, where he became a millionaire through his skill at gambling. Like South Sea Company Director John Blunt in England, Law believed that a trading company could be leveraged to exchange the monopoly rights of trade for the ability to make low-interest-rate loans to the government. And like Blunt, in 1719 Law formed a trading company—the Mississippi Company—to exploit trade in the Louisiana territory. But unlike Blunt or the South Sea Company, the Mississippi Company made an earnest effort to grow trade with the Louisiana territory.
In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.
Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.
By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.
The Trickle Becomes a Flood
Reminiscent of a handful of florists failing to reinvest in tulip bulbs as we described in a previous post on Tulip Mania, in early 1720 some depositors at Banque Generale began to exchange Mississippi Company shares for gold coin. In response, Law passed edicts in early 1720 to limit the use of coin. Around the same time, to help support the Mississippi Company share price, Law agreed to buy back Mississippi Company stock with banknotes at a premium to market price and, to his surprise, more shareholders than anticipated queued up to do so—a surprise we’ll see repeated at the apex of the Panic of 1907. To support the stock redemptions, Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.
The spillover to the economy was immediate and most notable in food prices. By May 21, Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.
To make matters worse, there was an outbreak of the plague in September 1720, which further restricted economic activity—in particular, trade with the rest of Europe. By the end of 1720, Law was dismissed as Controller General and he ultimately fled France.
Balancing Dispersed Debt Issuance against Central Monetary Policy
One might argue that Law suffered a self-inflicted loss of control over monetary policy once the link between paper money issuance and the underlying value of gold holdings was broken—a lesson that monetary authorities have learned over time. (ZH: they have? where?) But what if you don’t have direct sovereign authority over banknote issuance or, in more modern times, monetary policy? A challenge that’s perhaps most visible in the Eurozone is how best to balance dispersed, country-specific debt issuance against more centralized authority over monetary policy. In an upcoming post on the Continental Currency Crisis, we’ll see why a united fiscal policy was needed along with the united currency and monetary policies. Could the same be true of Europe? And if so, would a united fiscal policy include Eurozone debt as well as centralized fiscal transfers, or perhaps even collection of taxes? Tell us what you think.
The start of Greece’s six-month European Union presidency reinforced the isolation of German chancellor Angela Merkel. Photograph: Alkis Konstantinidis/EPA
Greece kicked off six months in charge of the European Union on Wednesday declaring that the imposition of austerity, spending cuts and fiscal policy by Berlin and Brussels could no longer be tolerated.
Coinciding with a growing backlash across the EU against the austerity policies mainly scripted in Berlin, the start of Greece’s EU presidency reinforced the isolation of German chancellor Angela Merkel, who has dominated the policy response to the EU crisis for the past four years.
Following four years at the sharpest end of Europe‘s debt and currency crisis and €250bn in bailout funds, the Greek government declared enough was enough.
“Greece does not want to have any more fiscal conditionality,” the finance minister, Yannis Stournaras, said on Wednesday. “It is out of the question because it is already too tough.”
The cry of exhaustion from a country that went broke, sank into years of slump and mass unemployment, slashed labour costs, and saw incomes collapse by more than a third is finding an echo not only across southern Europe but in the prosperous north, too, as leaders fear for their career prospects.
They have had enough of austerity, leaving Merkel, the main architect of spending cuts as the cure to Europe’s malaise, isolated as seldom before in what is becoming less of a financial crisis and more of a political battle for Europe’s future direction.
“The acute phase of the financial crisis is now over,” the US financier, George Soros, said last week. “Future crises will be political in origin.” He foresaw a bleak period of Japanese-style stagnation worsened by constant bickering between EU national leaders.
“What was meant to be a voluntary association of equal states has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.”
The political frictions are visible, with leaders using vivid language to try to sway one another and win the argument. Merkel recently likened the situation to that of 1914, complaining of complacency and speaking of sleepwalking European leaders who led the continent into the first world war. She also evoked parallels with growing up under communism in East Germany, a rare public reference to her childhood experiences.
Describing the mood among most EU national leaders, a senior policymaker in Brussels said: “The worst of the crisis is over. So the pressure to take tough measures is off. We’ve had enough of discipline, enough of sanctions, we’re sufficiently unpopular already. The worst is over, so let’s stop now.”
Merkel, whose steering of the euro crisis propelled her to soaring popularity at home and a third term, has become increasingly resented among elites in other EU capitals, underlining the differences between Germany and the rest.
“The problem in Europe is that there is a government headed by one person,” a west European ambassador said in reference to Merkel. “That’s the issue and how to deal with it. All decisions are taken by one leader. This is what is happening now.”
If that has been a big part of the narrative for the past few years, however, the story went into reverse just before Christmas in the first week of Merkel’s new term. She went to a Brussels EU summit determined to push a new policy of compelling structural reforms on the economies of the eurozone. But she found herself supported by not one single other national leader, opposed not only by her foes, but also her friends such as the Dutch, Austrians and Finns.
“It was really a strange discussion,” said the policymaker, “difficult from the start, full of prejudice, ideology and fear.” Merkel was said to be disappointed. That much is clear from her private remarks to fellow leaders at the summit. A transcript of the exchange, obtained by Le Monde, highlighted her frustration.
She said: “Sooner or later the currency will explode without the necessary cohesion. If everyone behaves as they could under communism, then we are lost.”
Merkel’s plan was to empower the European commission in Brussels to police structural reforms in eurozone countries and to sweeten the pain of the changes by partially subsidising them. She denied that she was dictating anything, but said it was better to spend €3bn on the changes now than €10bn later.
She was supported by three European presidents, José Manuel Barroso of the commission, Herman Van Rompuy chairing the summit and Mario Draghi at the European Central Bank. None of the trio have to face the voter. All the other elected leaders were against and the plan was shelved.
One prime minister warned that the years of austerity had given rise to increasing populism. In Athens on Wednesday, the deputy Greek prime minister, Evangelos Venizelos, spoke of the growing appeal of neo-Nazis, racists and xenophobes. “In most of the EU we see a new wave of euro-scepticism.”
Soros went so far as to blame the German chancellor for this. “Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.”
The strength of the new anti-European movements on the far right and the hard left will be tested in the elections for the European parliament in May when they are expected to make gains at the expense of the centre and possibly win the poll outright in countries such as Britain, France, the Netherlands and Greece.
Fear of the impact of more extreme politics helps to explain the current aversion in most of Europe to the crisis solutions scripted in Berlin.
About 10,000 people are seeking shelter at the airport near the capital Bangui. [Reuters]
UN officials are warning the Security Council that Central African Republic is on the brink of a catastrophe, with half the population made homeless since ethnic warfare broke out.
UN political affairs chief Jeffrey Feltman told the council on Monday that about 2.2 million people throughout the country need assistance, about half the total population.
About half the people of Bangui have been driven from their homes, a total of about 513,000, he said. An estimated 100,000 people are seeking shelter at a makeshift camp at the airport near the capital.
The Central African Republic has been plunged into chaos as the country’s Christian majority seeks revenge against the Muslim rebels, who seized power in a coup in March. Fighting between Christian and Muslim militias intensified in December.
An attack on Bangui by the Christian militia calling itself the anti-Balaka on December 5 triggered heavy unrest in the capitol, Feltman said.
A report in late December by Secretary General Ban Ki-moon reported 600 deaths in Bangui in those attacks, and Feltman put the current total at “750 casualties” in the capital.
“The death toll outside Bangui is likely to be substantial,” he said. “Killings in Bangui and the rest of the country continue every day, and the population remains divided along religious affiliation,” Feltman said.
The UN Children’s Fund warned at the end of December, that children are being recruited into the militias, and verified the killings of at least 16 children since December 5, two of whom were beheaded.
In December the Security Council authorised a multinational African peacekeeping force, which is expected to increase its troop strength from about 2,500 to 3,500, to keep a lid on the violence. France sent in about 1,600 troops on December 9 to back them up.
The world’s biggest economies will need to refinance $7.43 trillion of sovereign debt in 2014 as bond yields begin to climb from record lows, threatening to raise borrowing costs while nations struggle to bring down elevated budget deficits.
The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, Russia, India and China is little changed from 2013 after dropping from $7.6 trillion in 2012, according to data compiled by Bloomberg. At $3.1 trillion, representing a 6 percent increase, the U.S. faces the largest tab. Russia, Japan and Germany will see refinancing needs drop, while those of Italy, France, Britain, China and India increase.
While budget deficits in developed nations have fallen to 4.1 percent of their economies from a peak of 7.8 percent in 2009, they remain about double the average in the decade before the credit crisis began. The cost for governments to borrow may rise further after average yields last year rose the most since 2006, as the global economy shows signs of improving and the Federal Reserve pares its unprecedented bond buying.
“Refinancing needs remain elevated in many developed nations, particularly the U.S.,” Luca Jellinek, the London-based head of European rates strategy at Credit Agricole SA, said in a Dec. 30 telephone interview. “The key here is demand rather than supply. If demand drops as growth picks up, and we expect it will, that could put pressure on borrowing costs.”
Debt as a proportion of the economies of the 34 members of the Organization for Economic Cooperation and Development will rise to 72.6 percent this year from 70.9 percent last year and 39 percent in 2007, according to the group’s forecasts.
The amount of government debt obligations contained in a benchmark Bank of America Merrill Lynch index has more than doubled to $25.8 trillion since the end of 2007 as countries from the U.S. to Japan financed increased spending to counter the worst economic crisis since the Great Depression.
After interest-rate cuts around the world and the Fed’s bond purchases pushed down average yields on government notes to an all-time low of 1.29 percent in May, borrowing costs have since jumped, according to the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.
Yields climbed to 1.84 percent by the end of December, making the 0.41 percentage point increase in 2013 the biggest in seven years, the data show. That represents an extra $4.1 billion in annual interest on every $1 trillion borrowed.
Bond buyers are demanding more compensation as the Fed plans to scale back its own monthly debt purchases in January to $75 billion from $85 billion and the U.S.-led recovery prompts investors to seek assets with higher returns such as equities.
Government debt lost an average 0.36 percent worldwide last year, the first decline since 1999.
Based on 41 economists surveyed by Bloomberg on Dec. 19, the Fed will reduce its buying by $10 billion in each of the next seven meetings before ending its stimulus in December.
The U.S., the world’s largest economy, will expand 2.6 percent this year after 1.7 percent growth in 2013 and accelerate 3 percent in 2015, which would be the fastest in a decade, according to economists surveyed by Bloomberg. With Europe and Japan also forecast to grow, the three economies will all expand for the first time since 2010.
“With the Fed pulling back on bond purchases and growth picking up, bond investors will demand higher yields to justify investment,” Mohit Kumar, a money manager at GLG Partners, a hedge-fund unit of Man Group Plc, said by telephone from London. “We need to price in higher risk premium in an environment where rates and market volatility are likely to increase.”
Even as faster growth helps increase tax revenue, higher refinancing costs may squeeze governments that are still contending with fiscal deficits. Spending will outstrip revenue in the world’s largest economies by 3.3 percent of their gross domestic product this year, versus an average of 1.75 percent in the 10 years through 2007, data compiled by Bloomberg show.
In the U.S., the world’s largest debtor nation with $11.8 trillion of marketable debt obligations, the amount due this year will increase by about $187 billion, data compiled by Bloomberg show. France, faced with an economy that has barely grown in two years, will see the amount of debt securities due this year rise by 15 percent to $410 billion.
China will lead emerging-market economies with the amount of maturing bonds increasing by 12 percent to $143 billion.
Japan will have $2.38 trillion of bonds and bills to refinance this year, 9 percent less than in 2013, while the amount of German debt maturing this year will decrease by about 5.3 percent to $268 billion.
Including interest payments, the amount of debt that needs to be refinanced by the G-7 countries plus the BRIC nations this year increases by about $712 billion to $8.1 trillion, according to data compiled by Bloomberg.
“There has been a shift of a significant amount of debt” into the public sector during the crisis, saidNicholas Gartside, London-based international chief investment officer for fixed-income at J.P. Morgan Asset Management, which oversees $1.5 trillion. “Despite some improvement on the debt front, there is still a lot of deleveraging to go. The process is still ongoing and will continue for many years.”
Forecasters are overestimating the likelihood government debt costs will increase because the global economic recovery remains fragile and disinflation is starting to emerge, according toSteven Major, head of global fixed-income research at HSBC Holdings Plc, Europe’s largest bank.
The world economy will to expand 2.83 percent this year, according to forecasts compiled by Bloomberg, slower than the average 3.43 percent during the five-year span between the end of the dot-com bust in 2002 and the start of the credit crisis.
Slowing inflation also preserves the purchasing power of fixed-rate interest payments, which may support demand for bonds. Consumer prices in the U.S. will rise less than 2 percent in 2014 for a second straight year, which has only happened one other time in the last half century, data compiled by Bloomberg and the Bureau of Labor Statistics show.
In the 18 nations that share the euro, the inflation rate will be 1.2 percent, the lowest in five years.
“Growth may have picked up but it’s still pretty weak compared to previous cycles,” Major said in a telephone interview on Dec. 31. “Inflation is falling in many developed countries. Central banks should be worried about disinflation rather than inflation. It’s hard for me to imagine that bond yields will rise much against this backdrop.”
Some nations are starting to rein in spending, which may help contain borrowing costs. Government bond sales in the euro area, excluding issuance used to refinance maturing debt, will decline to 215 billion euros ($293 billion), the least since 2009, Morgan Stanley predicted.
Germany said in December that it plans to curb bond and bill sales this year by 17 percent to 205 billion euros as tax revenue rises and Chancellor Angela Merkel seeks to end net new borrowing by 2015. In the U.S., the budget deficit will drop to to 3.4 percent of the economy this year, versus 10 percent five years ago, economist forecasts compiled by Bloomberg show.
Demand at U.S. government debt auctions remained stronger than before the financial crisis as investors bid for 2.87 times the amount sold last year, the fourth-highest ratio on record and surpassed only in the the prior three years.
Buying of Japanese debt was underpinned by the Bank of Japan’s commitment to buy 7 trillion yen ($71 billion) a month of bonds, a pace that would equal more than 50 percent of the 155 trillion yen in notes that Japan plans to sell this year.
“Investors should not and will not be concerned about the supply picture,” said Major, who predicts that yields on the benchmark U.S. 10-year note will decrease to 2.1 percent by year-end from 2.99 percent last week.
His estimate conflicts with the majority of forecasters in a Bloomberg survey who say U.S. borrowing costs will increase. They anticipate yields on the 10-year notes, which rose 1.27 percentage points last year to 3.03 percent, the highest since 2011, will climb to 3.38 percent on average. No one in the survey projected yields falling below 2.5 percent. The yield was at 2.98 percent as of 9:56 a.m. London time.
Borrowing costs in all the G-7 nations are all poised to increase in 2014, based on the estimates. Yields on German bunds will increase to 2.28 percent by year-end, while those for similar-maturity U.K. gilts will end the year at 3.36 percent. That would be the highest for both nations since 2011.
Among the BRIC nations, only bond yields in India and China are poised to drop, the data show.
With global growth picking up, investors such as Standard Life Investments predict government bonds will underperform this year and are holding a greater proportion of equities than their benchmarks used to measure performance.
“We are not enthusiastic about government bonds,” Frances Hudson, a strategist at Standard Life in Edinburgh, which oversees $294 billion, said in an telephone interview on Jan. 2. “It’s reasonable to expect bond yields to rise from record lows as recovery gains momentum.”
Following is a table of projected bond and bill redemptions and interest payments in dollars for 2014 for the Group of Seven countries, Brazil, China, India and Russia using data compiled by Bloomberg as of Dec. 30:
2013 was a year in which lots of imbalances built up but none blew up. The US and Japan continued to monetize their debt, in the process cheapening the dollar and sending the yen to five-year lows versus the euro. China allowed its debt to soar with only the hint of a (quickly-addressed) credit crunch at year-end. The big banks got even bigger, while reporting record profits and paying record fines for the crimes that produced those profits. And asset markets ranging from equities to high-end real estate to rare art took off into the stratosphere.
Virtually all of this felt great for the participants and led many to conclude that the world’s problems were being solved. Instead, 2014 is likely to be a year in which at least some – and maybe all – of the above trends hit a wall. It’s hard to know which will hit first, but a pretty good bet is that the strong euro (the flip side of a weakening dollar and yen) sends mismanaged countries like France and Italy back into crisis. So let’s start there.
The basic premise of the currency war theme is that when a country takes on too much debt it eventually realizes that the only way out of its dilemma is to cheapen its currency to gain a trade advantage and make its debts less burdensome. This works for a while but since the cheap-currency benefits come at the expense of trading partners, the latter eventually retaliate with inflation of their own, putting the first country back in its original box.
In 2013 the US and especially Japan cheapened their currencies versus the euro, which was supported by the European Central Bank’s relative reluctance to monetize the eurozone’s debt. The following chart shows the euro over the past six months:
The dollar was broadly weaker against European currencies, including sterling and the Swiss franc. Thin liquidity likely helped exaggerate market moves.
The European Central Bank will take a snapshot of the capital positions of the region’s banks at the end of 2013 for an asset-quality review (AQR) next year to work out which of them will need fresh funds. The upcoming review has created some demand for euros to help shore up banks’ balance sheets, traders said.
“There’s a lot of attention on the AQR, and there’s some positioning ahead of the end of the calendar year,” said John Hardy, FX strategist at Danske Bank in Copenhagen.
Comments from Jens Weidmann, the Bundesbank chief and a member of the European Central Bank Governing Council, also helped the euro. He warned that although the euro zone’s current low interest rate is justified, weak inflation does not give a license for “arbitrary monetary easing.
The euro rose as high as $1.3892, according to Reuters data, the highest since October 2011. It was last up 0.3 percent at $1.3738.
The currency has risen more than 10 cents from a low hit in July below $1.28, as the euro zone economy came out of a recession triggered by its debt crisis.
Unlike the U.S. and Japanese central banks, the European Central Bank has not been actively expanding its balance sheet, giving an additional boost to the euro.
Here’s what a stronger euro means for France, the second-largest and arguably worst-managed eurozone country:
French Economy Contracts 0.1% In Third Quarter
The final estimate of France’s gross domestic product, or GDP, in the third quarter remained unchanged at the previous estimation of a contraction of 0.1 percent, indicating that the euro zone’s second-largest economy is struggling to sustain the rebound it witnessed in the second quarter with a growth of 0.6 percent.
The third-quarter GDP growth was in line with analysts’ estimates. According to data released on Tuesday by the National Institute of Statistics and Economic Studies, the deficit in foreign-trade balance contributed (-0.6 points) to the contraction in the third quarter, compared to the positive (0.1 percent) contribution made in the preceding quarter.
At the beginning of 2013, most of the eurozone was either still in recession or just barely climbing out. Then the euro started rising, making European products more expensive and therefore harder to sell, which depressed those countries’ export sectors and made debts more burdensome. So now, under the forced austerity of an appreciating currency, countries like France that were barely growing are back in contraction. And countries likeGreece that were flat on their back are now flirting with dissolution.
Recessions – especially never-ending recessions – are fatal for incumbent politicians, so pressure is building for a European version of Japan’s “Abenomics,” in which the European Central Bank is bullied into setting explicit inflation targets and monetizing as much debt as necessary to get there. The question is, will it happen before the downward momentum spawns political chaos that spreads to the rest of the world. See Italian President Warns of Violent Unrest in 2014.
Anyone who thinks it is a fantasy that government will simply just confiscate 10% of everyone’s accounts in Europe better have another look at the fool they see in the mirror staring back at them. This IMF solution is traditionally French and is really coming because the people in charge are effectively Marxists and this idea came from the IMF under the control of French ideology. They willexpropriate these funds to save a banking system that they screwed up and will never reform anything because they are incapable of admitting any mistake.
These European government officials really are playing a dangerous game that is inviting total chaos, civil unrest, and may set themselves up for invasion. Instead of Napoleon invading Russia (1812.479), it may be the other way around when they smell weakness.
Let me make this very clear. I have many French friends and they know the people in charge are just Marxists. Adam Smith wrote Wealth of Nations because he visited France to investigate Physiocracy that argued agriculture was the only real wealth. Karl Marx did not come up with Communism himself. He was more of a socialist. He did not advocate confiscating all property. It was the French movement of a commune at the time that convinced him their way was better. It was Engels who steered Marx into Communism. These ideas have emerged from France and this is why we have some of the most insane ideas still emerging from this country. There is a core philosophy among some that this socialism is correct.
The IMF proposal to expropriate everyone’s accounts in Europe will happen. The consequences could be absolutely the collapse in confidence that will be off the charts. Why should people trust government ever again or any bank for that matter?
My advise to Europe – move as much as you can… – Hollande will come up with that one you can bet. He will weaken Europe and destroy the future of generations yet to come.
When they took the funds in Cyprus, the EU did not distinguish between European, American, or Russian accounts.