August 23, 2013 7:59 pm

Lagarde calls for more crisis ‘lines of defence’
The world needs to buildfurther lines of defence” against a possible emerging markets crisis but the International Monetary Fund stands ready to provide financial support if needed, its managing director Christine Lagarde declared on Friday.
Ms Lagarde’s remarks to the Kansas City Fed’s annual gathering in Jackson Hole, Wyoming, are a sign of growing concern among international policy makers about market turmoil in countries such as Brazil, India and Indonesia.
“Even with the best of efforts, the dam might leak,” Ms Lagarde was due to tell the central bankers gathered for the conference according to a text of her speech released by the IMF. “So we need further lines of defence lines of defence that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy.
“For the Fund’s part, we stand ready to provide policy advice and financial support, including on a precautionary basis through our various instruments,” she said.
The Fund has a range of precautionary tools that will fund governments if they lose the ability to borrow from markets, such as standby arrangements and flexible credit lines. Setting them up in advance of a crisis is intended to stop a crisis happening.
Ms Lagarde did not mention any specific country, suggesting that no action is imminent. But her reference to the Fund’s tools suggests that she thinks they may be needed if problems in emerging markets get worse.
The potential tapering of Fed asset purchases from $85bn-a-month has pushed up US interest rates and led to falling currencies in emerging markets as capital flows back to the developed world.
The Indian rupee, the Brazilian real, the Turkish lira, the South African rand and Indonesia’s rupiah have all weakened substantially since May, prompting a variety of responses from governments and central banks. In the most decisive yet, Brazil unveiled a $60bn currency intervention programme on Thursday.
In the absence of Fed chairman Ben Bernanke, emerging market wobbles are becoming one of the main themes of the Fed’s annual symposium in Jackson Hole.
Agustín Carstens, governor of the Bank of Mexico, called on developed countries to implement a more predictable exit from easy monetary policy and to co-ordinate as much as possible in order to make life easier for emerging markets.
Reversals have happened and they could become much larger in the future,” said Mr Carstens. He said that the volatility of capital flows to emerging markets had been a problem since the crisis and affected by unconventional monetary policy.
The Fed’s talk about tapering led to a big shift in capital flows and emerging market yield curves, Mr Carstens said. Countries with relatively weaker fundamentals have been affected the most.”
Exchange rate flexibility will help, but not at all cost,” said Ms Lagarde.Some market intervention may help moderate exchange rate volatility or short-term liquidity pressures.”
She also called for the use of macroprudential policies to halt frothy credit growth in emerging markets. “In some circumstances, capital flow management measures have been useful,” she said.
“There is scope for international policy co-ordination and co-operation to improve global outcomes. No country is an island,” said Ms Lagarde.
“As I said at the outset, in today’s interconnected world, the spillovers from domestic policy may well feed back to where they began. Looking at the wider effect is in your own self-interest. It is in all of our interests.”
These outflows, coupled with falling confidence in emerging market growth, has taken its toll on currencies. Those with weaker underlying fiscal and economic fundamentals, such as Indonesia, India, Turkey and Brazil, are introducing various measures to stem those declines, as the currency falls lead to higher import costs and domestic inflation.
Stock markets were already under pressure from the beginning of the year as evidence of slowing Chinese growth increased, with commodity exporting countries particularly hit.
But the situation could worsen further if foreign direct investment declines significantly, underscoring the importance for emerging markets to undertake difficult structural reforms that would encourage more inflows.
These outflows, coupled with falling confidence in emerging market growth, has taken its toll on currencies. Those with weaker underlying fiscal and economic fundamentals, such as Indonesia, India, Turkey and Brazil, are introducing various measures to stem those declines, as the currency falls lead to higher import costs and domestic inflation.

It is those countries that are suffering current account deficits that are the most vulnerable, and further currency declines and capital outflows threaten to exacerbate the problem.

However, those countries with stellar currency reserves – such as Russia and Brazil – have less to worry about. But many, such as Turkey, are using them to intervene in the forex markets to shore up their currencies. Central banks in the developing world have lost $81bn of emergency reserves since early May, according to Morgan Stanley.

As the reserves dwindle, worries emerge over how many months of imports their foreign reserves will cover.

The cost of servicing external government debt increases as local currencies decline. This weakens governments’ fiscal health, causing investors to demand higher returns.

It is not just governments with the external debt, companies and some households also face increased costs.

Weaker currencies help make exporters more competitive, which would help stabilise current accounts. But with a lack of solid global growth, it cannot be singularly relied on for economic expansion.

Emerging markets are still expected to grow at a faster pace than developed peers, but many economists argue they could grow much faster if governments in the developing world bit the bullet and undertook the serious structural reforms, such as liberalising certain sectors, that are acutely needed.

Copyright The Financial Times Limited 2013

domingo, agosto 25, 2013



Commodities Corner


Double Trouble in Brazil


A weak currency and poor fundamentals hammer prices of sugar and coffee.


Arabica coffee and sugar prices have dropped to multiyear lows, a result of tepid demand growth and robust supplies. Now a tumbling currency in Brazil is creating a triple threat to both commodities.

Brazil is the biggest producer of both sugar and coffee, accounting for one-fifth and one-third of the world's supplies, respectively. But lackluster economic growth and double-digit inflation have driven the real to its lowest point against the U.S. dollar in more than four years. On Friday, it was trading at about 2.38 per greenback. "I think the currency has weakened much faster than anyone had anticipated," says Michael Cordonnier, an agronomist and president of Soybean and Corn Advisor, a Hinsdale, Ill., agricultural consulting firm.

The weaker real means that exporters receive more of them when they sell the commodities abroad in U.S. dollars. This encourages them to send their products onto the world market even as prices sag, adding to swelling supplies. "Most important is not the price, but how much you're going to make," notes Alex Oliveira, an analyst at the Brazil desk of New York–based brokerage Newedge.


The real has depreciated more than 5% over the past two months and 15% this year, as forecasts—including the government's—for the country's economic growth this year have dimmed. A weaker currency can add to Brazil's woes, making imports more expensive and driving up already-high inflation.

THE BRAZILIAN CENTRAL BANK is trying to prop up the currency by auctioning swap contracts and dollar credit lines. These efforts have helped the real make some gains, but the underlying problems remain. "It looks like it's on its way to 2.60" against the dollar, predicts Sterling Smith, a futures specialist at Citigroup. "There's not a lot of reason to come in here and buy this currency."

The Brazilian government is also trying to shore up coffee prices, offering to buy as many as five million 60-kilogram (about 132-pound) bags of arabica beans from producers, a measure used for the first time in four years. Arabica coffee, prized for its mild taste, is used in gourmet blends.

The measures, announced in early August, gave the market a boost, but the buzz soon wore off. Futures of arabica beans on the ICE Futures U.S. exchange fell to a four-week low last week, ending on Friday at $1.1705 a pound.

The Brazilian government hasn't intervened in a similar way in the sugar market, because sugar mills have another tool at their disposal in times of low prices: increased ethanol production. Since April, when the sugar-harvest season began, through July, the mills used 57.1% of the 268.8 million tons of cane harvested from the main growing region to make ethanol, and the rest to make sugar, according to the Brazilian Sugarcane Industry Association, a trade group. That's up from the 51.9% they dedicated to ethanol, which is used as a vehicle fuel, at the corresponding point in the harvest last year. Raw-sugar futures settled on Friday at 16.47 cents a pound, down 2.8% on the week.

In the near term, the weak real and poor supply-and-demand fundamentals are likely to keep coffee and sugar prices moving lower; Smith warns they face "a much bigger problem than a simple head wind." However, in the longer term, hope is in sight for coffee. The government's purchases could absorb up to about 10% of the country's projected output this season, and demand usually heats up in the Northern Hemisphere's autumn months.

LESLIE JOSEPHS covers coffee, sugar, and other commodities for The Wall Street Journal.
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved

08/23/2013 05:24 PM

Stepping Up

US Experts Want More Leadership from Germany

By Emily Schultheis

The US expects Germany to take a bigger leadership role in global issues after the election.

 The US expects Germany to take a bigger leadership role in global issues after the election.

Germans aren't the only ones with interests at stake in next month's election. The US is watching too -- and Washington is hoping that, once the campaign is history, Germany will show more leadership on global issues.

Germans seem to have already made up their mind. With just under a month to go before the general election, Angela Merkel's conservatives are well ahead in the polls and the chancellor herself likewise remains extremely popular. Change, even should she be re-elected for a third term, isn't likely to be forthcoming, pundits say.

But Germans aren't the only ones with interests at stake. Across the Atlantic, the United States is watching too -- and Washington is hoping that, once the campaign is history, Germany will take on a greater global leadership role on issues like trade, the euro crisis and international security.

Daniel Hamilton, director of the Center for Transatlantic Relations at Johns Hopkins University, calls it the "expectation gap." "I think the assumption Americans have is that Germany should always step up and take responsibility commensurate with its weight in the world," he says. Americans, he suggests, always expect slightly more from Germany than Germany is willing to give.

For the moment, of course, demands from Washington are few and muted. Because it is election season in Germany, US experts say there are a host of issues which have been put on the back burner until after September 22. But once the election is over and a new government is formed, the US will expect Germany to tackle those issues with renewed effort.

"Clearly there are a lot of pent-up issues that will require the attention of the new German government," says Heather Conley, director of the Europe Program at the Center for Strategic and International Studies.

A Hope for German Leadership

Those issues, from Washington's perspective, tend to boil down to a consistent message: The US wants Germany to increase its involvement and leadership when it comes to global affairs. As Europe's strongest economy and its largest country, the US believes there's more Germany could do to pull its weight.

"Certainly people admire Chancellor Merkel, but I do think that people in Washington wish that Germany could take a bigger role in world politics and also in stabilizing the global economy," says Sudha David-Wilp, a senior program officer for the German Marshall Fund of the United States.

Germany's role on the international stage is something President Barack Obama alluded to in his speech at the Brandenburg Gate in June. Germany, he said, like the US, needs to see itself as "part of something bigger."

"For we are not only citizens of America or Germany -- we are also citizens of the world. And our fates and fortunes are linked like never before," he said. "I say all this here, in the heart of Europe, because our shared past shows that none of these challenges can be met unless we see ourselves as part of something bigger than our own experience."

Eurozone, Trade and Foreign Policy

Perhaps the biggest area where US trans-Atlantic experts hope to see movement is on economic issues and the ongoing euro crisis. They say Germany could do more to stabilize the European economy and soften its stance on austerity measures to ensure more growth.

"When you have much of the world still teetering and not really on a clear growth trajectory, and Europe really flailing, the German economy is key to the European economy," Hamilton says.

Fran Burwell, vice president of the Atlantic Council, says that even though it's not a politically easy position to take in Germany, the new government should adopt "a more flexible role in terms of debt."

When it comes to economic issues, however, the Transatlantic Trade and Investment Partnership (TTIP) may have priority. Both the US and Germany would like to see the establishment of the free-trade agreement and Washington sees Berlin's efforts to help promote the negotiations and bring other European countries on board as being key.

"The TTIP thing is big on the agenda over here (in Washington), and I think Germany has a big investment in that," says Jackson Janes, president of the American Institute for Contemporary German Studies. "We would expect Germany to continue to take a lead on making sure that goes somewhere, and doesn't break down over certain issues like culture or food."

Coalition Math

That particular hope seems realistic, given Merkel's own support for a trade deal with the US. But when it comes to foreign policy, some observers in Washington say that, more than anything else, the US wants clarity. Berlin's abstention from the United Nations Security Council vote in 2011 authorizing intervention in Libya remains fresh in many minds, and Germany's approach to the upheavals in North Africa and Syria has been inconsistent at best.

Conley, from the Center for Strategic and International Studies, says there is some "uncertainty" in Washington about how strong a partner Germany is on military and security issues in the Middle East. She says she would like to see the new government "articulate its foreign and national security views and strategies" following the election.

But first, she notes, the votes must be cast and counted. Even as the polls show that Merkel will likely remain in power, it is unclear who her junior coalition partner might be. "We are … closely following the coalition math," Conley says.

"What would be most disruptive is a long period of coalition negotiations with a government emerging that is unclear on what their basic policy lines would be," Burwell adds.