Dollar’s Surge Pummels Companies in Emerging Markets

From Brazil to Thailand, Firms That Sold Bonds in Dollars Now Face Steep, Even Staggering Costs

ByIan Talley and Anjani Trivedi

The stronger dollar also pushes the cost of new borrowing higher. Prices for bonds issued by Russia’s OAO TMK, one of the world’s largest pipe makers, that are due in 2018 are down by more than 30% since late October. Bond prices move in the opposite direction from borrowing costs.

In the U.S., the stronger dollar hurts exporters by increasing their production costs compared with foreign rivals and shrinking their non-U.S. profits when converted into dollars. The dollar’s rise makes imports more attractive to American consumers.

Top officials at the International Monetary Fund and the Bank for International Settlements, two of the world’s leading financial institutions, have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. Some analysts expect the IMF to lower its five-year growth forecast for emerging markets.

Brazilian sugar producer Virgolino de Oliveira SA is struggling with its debts as sugar prices fall.

Ratings firm Fitch Ratings, a unit of Hearst Corp. and Fimalac SA, warned this month that the Brazilian company will likely default in the coming months on debt that includes dollar-denominated notes. The company didn’t respond to requests for comment.

Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd., or Petronas, said in its third-quarter results that the dollar’s rise against the ringgit was partly to blame for lower quarterly revenues. About 70% of the company’s debt is in U.S. dollars, and its bond yields spiked as the ringgit fell nearly 9% in the past six months.

The financial hit was bad for Malaysia’s government, which collects major revenue from oil and gas sales.

Shweta Singh, a senior economist at research firm Lombard Street Research, expects the dollar to keep climbing as the U.S. economy strengthens and emerging markets keep struggling to rev up economic growth. As a result, “the debt burdens of emerging markets will intensify,” she says.

If problems deepen, they could bruise investors who poured money into emerging markets and are still holding on to those investments. The bond-sale boom was fueled by investors who roamed the world seeking higher returns after the financial crisis, including from dollar-denominated bonds.

But overall investments in emerging markets by outsiders have grown so huge that it would be hard during a jolt for investors to sell without pushing those markets sharply lower, many analysts say.

—Nicole Hong contributed to this article.

Q3 GDP Jumps 5%; Ha! The Crap Behind the Numbers

Tony Sagami

December 30, 2014

I was raised on a farm and I’ve shoveled more than my share of manure. I didn’t like manure back then, and I like the brand of manure that comes out of Washington, DC, and Wall Street even less.

A stinky pile of economic manure came out of Washington, DC, last week and instead of the economic nirvana that it was touted to be, it was a smokescreen of half-truths and financial prestidigitation.

According to the newest version of the Bureau of Economic Analysis (BEA), the US economy is smoking hot. The BEA reported that GDP grew at an astonishing 5.0% annualized rate in the third quarter.

5% is BIG number.

The New York Times couldn’t gush enough, given a rare chance to give President Obama an economic pat on the back. “The American economy grew last quarter at its fastest rate in over a decade, providing the strongest evidence to date that the recovery is finally gaining sustained power more than five years after it began.”

Moreover, this is the second revision to the third quarter GDP—1.1 percentage points higher than the first revision—and the strongest rate since the third quarter of 2003.

However, that 5% growth rate isn’t as impressive if you peek below the headline number.

Fun with Numbers #1: The biggest improvement was in the Net Exports category, which increased by 112 basis points. How did they manage that?  There was a downturn in Imports.

Fun with Numbers #2: Of the 5% GDP growth, 0.80% was from government spending, most of which was on national defense. I’m a big believer in a strong national defense, but building bombs, tanks, and jet fighters is not as productive to our economy as bridges, roads, and schools.

Fun with Numbers #3: Almost half of the gain came from Personal Consumption Expenditures (PCE) and deserves extra scrutiny. Of that 221 bps of PCE spending:
  • Services spending accounts for 115 bps. Of that 115, 15 bps was from nonprofits such as religious groups and charities. The other 100 bps was for household spending on “services.”
  • Of that 100 bps, the two largest categories were Healthcare spending (52 bps) and Financial Services/Insurance (35 bps).

The end result is that 85% of the contribution to GDP from Household Spending on Services came from healthcare and insurance! In short… those are code words for Obamacare!

While the experts on Pennsylvania Avenue and Wall Street were overjoyed, I see just another pile of white-collar manure and nothing to shout about.

Fun with Numbers #4: Lastly, the spending on Goods—the backbone of a health, growing economy—declined by 27 bps.

In a related news, the November durable goods report showed a -0.7% drop in spending, quite the opposite of the positive number that Wall Street was expecting.

Of course, Wall Street doesn’t want little things like facts to get in the way of their year-end bonus. As we close out 2014, the stock market marched higher and ignored things like:
  • The reaction of the bond market to the 5% number. Bonds should have softened in the face of such strong economic numbers, but the “adults” (the bond traders) on Wall Street saw the same manure that I did.
  • If the economy was as healthy as the BEA wants us to believe, the “patience” and “considerable time” promise of the FOMC should soon be broken… right?

I spend most of the year in Asia, including China, and I am seeing the same level of numbers massaging by our government as China’s. In China, the government leaders establish statistical goals and the government bean counters find creative ways to tweak the data to achieve those goals.

Zero interest rates.

24/7 central bank printing.

See-no-evil analysts.

Financial smoke and mirrors.

That’s the financially dangerous world we live in, and I hope that you have some type of strategy in place to deal with the bursting of what’s becoming a very big, debt-fueled bubble.

Obama’s Passage to India

Martin Feldstein

DEC 29, 2014

Obama Modi


CAMBRIDGE – Indian Prime Minister Narendra Modi’s vigorous foreign policy in the seven months since he took office has surprised observers. After inviting the leaders of Pakistan and other neighboring countries to his inauguration, he embarked on trips to China, Australia, and the United States. More recently, he welcomed Russian President Vladimir Putin to New Delhi and signed a large number of trade deals and orders to import Russian nuclear reactors. India, Modi is telling his fellow citizens, is strong and well regarded around the world.
Next month, US President Barack Obama will travel to New Delhi as Modi’s special guest at events commemorating Republic Day, India’s national holiday – just three months after the two leaders held substantive talks in Washington, DC. The visit should thus be regarded as a clear signal of Obama’s desire, no less than Modi’s, to strengthen US-India relations.
So what is likely to be on Obama’s mind when he meets his Indian counterpart again, and what does he think can be done to cement bilateral ties? Three issues stand out – beginning with trade, which is as important politically as it is economically.
Obama hopes that the Trans-Pacific Partnership will be concluded in 2015 and ratified by the US Senate. The TPP will not be as powerful a free-trade agreement as originally intended, owing to exclusions and a very long phase-in period. But it will tie the US and 11 other Pacific Rim countries (including Japan but excluding China) together in a new economic bloc. Obama should be eager to stress that India’s exclusion from the TPP is a matter solely of geography – India does not abut the Pacific – and that the US wants to increase bilateral trade and direct investment by American firms.
The second issue is terrorism. The US authorities are worried that American citizens who have been fighting with the Islamic State and Al Qaeda in the Middle East will return home to commit terrorist acts. India has experienced horrific acts of terrorism on its own territory. Continued cooperation between the US and Indian intelligence agencies can help both countries prevent future incidents.
Terrorism includes not just physical violence, but also assaults in cyberspace. China, Russia, and Iran have been the source of frequent cyber attacks on banks, companies, and government agencies; North Korea, the US alleges, was behind the recent breach of Sony Pictures’ computers. Though Obama presented evidence to Chinese President Xi Jinping of technology theft by hackers based in China, the Chinese authorities continue to deny it. More recently, Russia and others have been planting malware in the control systems of the US power grid and other sensitive networks.
Looking ahead, the US worries about cyber attacks by non-state actors like the Islamic State and Al Qaeda. Although these groups’ members may lack the sophistication to commit such acts, they may try to hire individuals with the necessary skills. India has a large number of talented computer engineers, including some who might be sympathetic to the Islamist cause.
The US and India could both benefit from cooperating to prevent and disrupt such recruitment efforts.
The third issue on Obama’s mind is bound to be China’s asserted goal of dominating Asia and excluding the US from the region. Chinese hegemonic ambition runs counter to India’s strategic interests as well – reason enough for Modi’s eagerness to strengthen his country’s relations with its neighbors as well as with the US. Obama has already made it clear that the US understands that Modi’s willingness to cooperate with Russia, despite Western sanctions imposed on the country, stems from India’s desire to discourage a Sino-Russian alliance against it.
Modi won a landslide victory in an election that reflected the Indian public’s disappointment with the policies and performance of the previous government, led by the Indian National Congress. Though India had experienced annual real GDP growth of more than 8% for several years, growth has slowed since 2010, to less than 5% in 2013, owing to a populist shift in policies dictated by Congress party leader Sonia Gandhi.
By contrast, the Modi government plans to pursue a pro-growth agenda that includes reducing bureaucratic delays, increasing infrastructure investment, stimulating manufacturing activity, and shifting to a simpler unified tax system. Modi’s agenda also evidently includes an active foreign policy – as it should.
Cultivating India as a reliable partner in the global economy and in international affairs is a high priority for the US as well. Obama’s visit to India can help to realize that relationship’s potential.

The Cartel: How BP Got Insider Tips Through a Secret Chat Room

Halfway down a muddy, secluded road on marshland in suburban Essex sits Wharf Pool, a lake stocked with some of the biggest freshwater fish you will ever see.

A white sign with red lettering reads: “Private Syndicate: Strictly Members Only.” A metal gate, a barbed-wire fence and two CCTV cameras bar the way. Anglers hoping to spend time on the lake’s carefully tended banks must join a waiting list. Those who make it to the top pay a membership fee that buys them the chance to catch a carp that weighs more than a Jack Russell. There are hundreds of them swimming beneath the surface. It’s close to shooting fish in a barrel.

An hour away by train, in London’s financial district, the lake’s owners ply their trade. Wharf Pool was purchased for about 250,000 pounds ($388,000) in 2012 by Richard Usher, the former JPMorgan Chase & Co. (JPM) trader at the center of a global investigation into corruption in the foreign-exchange market, and Andrew White, a currency trader at oil company BP Plc. (BP/)

With revenue of almost $400 billion last year and operations in about 80 countries, BP trades large quantities of currency each day. Traders at the company regularly received valuable information from counterparts at some of the world’s biggest banks -- including tips about forthcoming trades, details of confidential client business and discussions of stop-losses, the trigger points for a flurry of buying or selling -- according to four traders with direct knowledge of the practice.

Chat Room

Copies of messages sent to BP traders over the course of a year were provided to Bloomberg News by a person with access to the online conversations. The person, who redacted the names of banks sending the messages and dates of conversations, said they came from firms whose senior foreign-exchange traders belonged to a chat room called “The Cartel” that was set up by Usher and included dealers at JPMorgan, Citigroup Inc. (C), Barclays Plc and UBS Group AG. (UBSN)

The information offered an insight into currency moves minutes, sometimes hours before they happened. The messages could drag the U.K.’s biggest energy company into a scandal that has enveloped 11 banks and led to more than 30 traders from London to Singapore losing or being suspended from their jobs. Last month six banks were fined $4.3 billion for passing along information about their clients and working together to rig foreign-exchange markets.

While there’s no evidence that any BP traders were members of the Cartel, Usher participated in at least one chat room with White, according to a person who has examined conversations that included both men. It couldn’t be determined from the messages reviewed by Bloomberg News who sent the information to BP or whether BP employees acted on any of the tips.

‘Wild West’

In the clubby, lightly regulated world of foreign exchange, traders passed around tips to their circle of trusted contacts like candy. The victims: mutual-fund investors, pensioners and day traders who took the other side of a transaction at a lower price than they would have if they had the same information.

“The authorities have made it clear in the enforcement notices accompanying the recent fines that irrespective of whether specific markets are regulated, banks cannot have pockets of business where traders behave as if they’re dealing in the Wild West,” said Janine Alexander, a partner at law firm Collyer Bristow LLP in London who specializes in financial-services litigation. “Banks have a responsibility to preserve market integrity, and traders must consider the effect of their behavior on clients and the market as a whole.”

‘Robust Framework’

Traders at BP haven’t been accused of any wrongdoing. Last year, within hours of regulators announcing probes, the chats between BP and the banks were shut down, people with knowledge of the matter said. Soon after, a compliance officer was placed on the desk for the first time, one of them said.

BP said in a statement that it conducted an internal review after regulators began probing currency markets.

“BP’s FX desk has relationships as a customer with 26 relationship banks, including JPMorgan, Citibank and Barclays (BARC),” the London-based company said. “BP has a robust framework of compliance requirements and internal controls which are constantly reviewed, and maintains an open dialogue with the appropriate regulators.”

The firm, the third-largest publicly traded company in the U.K., hasn’t been investigated by regulators looking into currency manipulation, according to a person with knowledge of the matter. Chris Hamilton, a spokesman for the U.K. Financial Conduct Authority, declined to comment, as did representatives of JPMorgan, Barclays, Citigroup and UBS.

Canary Wharf

Usher declined to comment through his lawyer. White directed calls to BP’s press office.
“BP’s Code of Conduct includes mandatory requirements for employees to disclose potential conflicts of interests internally,” the company said in response to a question about the commercial relationship between Usher and White through the fishing lake. “Following such disclosure, steps are taken to manage and monitor these appropriately. It is our policy not to comment on individuals.”

The two dozen traders in BP’s treasury trading unit are housed above a Porsche showroom on the second and third floors of the company’s office in Canary Wharf, an area of reclaimed docklands three miles east of the City of London, the historic financial district. The building, two blocks from JPMorgan’s, was completed in 2003 on the cusp of an oil boom. Lights in meeting rooms flick from green to white when someone enters, in keeping with the company’s corporate colors.

Managing Risk
As a company with global operations, BP is a major user of the $5.3-trillion-a-day foreign-exchange market. Dollars earned from the sale of crude oil are converted into local currencies to pay the salaries of employees and fund infrastructure projects from Azerbaijan to Trinidad. Refined products such as liquefied natural gas and kerosene are sold for yuan and reais.

The trading unit’s primary role is to manage the firm’s exposure to financial risks, including fluctuations in interest rates and foreign exchange, according to the company’s website. Unlike at most corporations, it also is run as a profit center, which means that in addition to hedging risks, traders can place their own bets on the direction of markets. The company doesn’t break out how much money the treasury unit makes.

White, who’s known in the market as Tubby, is one of half a dozen spot currency traders working for BP in London. He and his colleagues, most of them ex-bankers, decide which firms will carry out their foreign-exchange transactions. That makes them prized clients for banks seeking a slice of the business and a glimpse into potentially market-moving trades. Passing on information was a way to curry favor, according to the four traders, who asked not to be identified because they still work in the business.

Dollars, Yen

In an undated message seen by Bloomberg News, a trader at a bank told BP he would be buying U.S. dollars against Australian dollars at the WM/Reuters fix at 4 p.m. in London, the one-minute window during which traders around the world exchange billions of dollars of currency on behalf of pension funds and asset managers. The message was received at BP about 30 minutes before the fix. By tipping his hand, the sender was telling BP about a potential fall in the Australian currency.

At about 3 p.m. in London on a different afternoon, BP traders were informed that banks were selling dollars against the yen at 4 p.m. In a third message, this one arriving as the oil company’s traders drank their first coffee of the morning, a trader at a bank said he had just sold a quantity of an emerging-market currency, to whom and the price he received.

The four banks in the Cartel controlled about 45 percent of the global spot-currency market, according to a survey by Euromoney Institutional Investor Plc, so information about their plans was valuable. Some days they worked together to push around the 4 p.m. fix, settlements with the banks show.

Feston, Fossil

The Cartel chat room was started by Usher as early as 2009, according to a person with knowledge of the matter. Usher had risen quickly to the top of his profession. After joining HBOS Plc in 2001, he was hired by Royal Bank of Scotland Group Plc in 2003 and a year later collected an industry award on his employer’s behalf. He joined JPMorgan as head of spot foreign exchange in 2010, where he became a member of the now-defunct Bank of England’s Chief Dealers Sub Group, a collection of about a dozen currency traders and central bank officials who met at restaurants and bank offices to discuss industry developments.

The four members of the chat room ribbed each other like high school buddies. Usher was referred to as Feston because he resembled an overweight version of British chef Heston Blumenthal, according to people who have seen the chats. Matt Gardiner, a UBS trader based in Zurich, was called Fossil because he was a few years older than the others. Rohan Ramchandani, Citigroup’s cricket-loving head of spot trading, was called Ruggy, while Chris Ashton, the last one to join, was dubbed Robocop.

Lawyers for Ramchandani, Gardiner and Ashton declined to comment.


The settlements the banks reached with regulators reveal that in the minutes before 4 p.m. the traders would meet on chat rooms to discuss their positions and how they planned to execute them.

Sometimes they also agreed to work together to push exchange rates around to boost their profits –- something they called “double-teaming.”

The collateral damage of their actions and those of other traders was the $30 trillion held in investment funds around the world whose daily value is calculated based on the 4 p.m. WM/Reuters benchmark. Passive funds managing $3 trillion transact at the fix, so their investors lost or gained depending on how much the rates were manipulated.

The party came to an end in October 2013, when regulators around the world announced they were investigating allegations of abuses in the currency market. The four members of the Cartel have left their firms, and JPMorgan, Citigroup and UBS were among banks fined in November. Individuals could face criminal charges when the U.S. Department of Justice and the U.K.’s Serious Fraud Office conclude their own investigations.