The de-dollarization in China


April 10, 2018

The de-dollarization in China

 

The US dollar is so important in today’s economy for three main reasons: the huge amount of petrodollars; the use of the dollar as the world’s reserve currency and the decision taken by US President Nixon in 1971 to end the dollar convertibility into gold.

The US currency is still a large part of the Special Drawing Rights (SDR), the IMF’s “paper money”. A share ranging between 41% and 46% depending on the periods.

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Petrodollars emerged when Henry Kissinger dealt with King Fahd of Saudi Arabia, after “Black September” in Jordan.

The agreement was simple. Saudi Arabia had to accept only dollars as payments for the oil it sold, but was forced to invest that huge amount of US currency only in the US financial channels while, in return, the United States placed Saudi Arabia and the other OPEC neighbouring countries under its own military protection.

Hence the turning of the dollar into a world currency, considering the importance and extent of the oil market. Not to mention that this large amount of dollars circulating in the world definitely marginalized gold and later convinced the FED that the demand for dollars in the world was huge and unstoppable.

An unlimited amount of liquidity that kept various US industrial sectors alive but, above all, guaranteed huge financial markets such as the derivatives – markets based on the structural surplus of US liquidity.

After the Soviet Union’s collapse, the United States always thought about world’s hegemony and, above all, imagined to oppose the already active Eurasian union between China, Iran and Russia – the worst nightmare for US decision-makers – both at military and financial levels.

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As early as those years, following Brzezinsky’s policy line, the US analysts warned against the unification of Eurasia – to be absolutely prevented – and against the subsequent reunification of Eurasia with the Eurasian peninsula, to be avoided even with a war.

At that time, the three aforementioned States still conducted their business in dollars: China wanted to keep on becoming the “world factory”; Russia had run out of steam and was near breaking point; Iran had to inevitably adapt to the rest of Sunni OPEC.

With Putin’s rise to power, Russia’s de-dollarization began immediately. The share of dollar reserves declined year after year, while Putin proposed new oil contracts. Since last year, for example, dollars cannot be used in ports.

In the case of Iran, the sanction regime – in particular – has favoured the discovery of means other than the dollar for international settlements. The operations and signs of the de-dollarization continued.

The war in Iraq against Saddam Hussein was also a fight against the Rais who wanted to start selling his oil barrels in euros, while the war in Afghanistan was viewed by China as part of the ongoing overall encirclement of its territory.

Hence the importance of the Belt and Road Initiative. Also the war in Afghanistan was an attempt to stop the Eurasian project of economic and commercial (as well as political) union between Russia, Iran and China.

As further sanction, the United States has removed Iran from the SWIFT network, the well-known world interbank transfer system, which is also a private company.

Iran, however, has immediately joined the Chinese CIPS, a recent network, similar to SWIFT, with which it is already fully connected.

Basically China’s idea is to create an international currency based on the IMF’s Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid “the dangerous fluctuations stemming from the US currency and the uncertainties on its real value “- just to quote the Governor of the Chinese central bank, Zhou Xiao Chuan, who will soon be replaced by Yi Gang.

In the meantime, Russia and China are acquiring significant amounts of gold. In recent years China has bought gold to the tune of at least 1842.6 tons, but the international index could be distorted, as many transactions on the Shanghai Gold Exchange are Over the Counter (OTC) and hence are not reported.

Again according to official data, so far Russia is supposed to have reached 1857.7 tons. Both countries have so far bought 10% of the gold available in the world.

Meanwhile, Saudi Arabia has already accepted payments in yuan for the oil sold to China, which is its largest customer. This is a turning point. If Saudi Arabia gives in, sooner or later all OPEC countries will follow suit.

In many cases, India and Russia have already traded with Iran by accepting oil in exchange for primary goods and commodities.

China has also opened a credit line with Iran amounting to as many as 10 billion euros, with a view to getting around sanctions. It is also assumed that North Korea uses cryptocurrencies to buy oil from China.

As devastated as its economy is, Venezuela no longer sells its oil in dollars – and it is worth recalling it can boast the largest world reserves known to date.

Image result for china one belt

 

Furthermore, China will buy gas and oil from Russia in yuan, with Russia being able to convert yuan into gold directly on the Shanghai International Energy Exchange.

Keynes’ “tribal residue” takes its revenge. So far the agreements for trade in their respective currencies were signed between China and Kazakhstan (on December 14, 2014),between China and South Africa (on April 10, 2015) and between Russia and India (on May 26, 2015) while, at the end of November 2015, the Russian central bank included the yuan into the list of currencies that can be accepted as reserves.

On November 3, 2016 an agreement was signed between Turkey and Russia for the exchange of their currencies and in October 2017 a similar agreement was reached between Turkey and Iran.

Image result for President Xi worldview

 

 

For financial institutions, the de-dollarization continued with the establishment of the BRICS Fund worth 100 billion dollars (on July 16, 2014) and with the establishment – on January 16, 2016 – of the Asian Infrastructure Investment Bank (AIIB), made up of 57 member countries, including Italy, which automatically caused the US anger.

In May 2015 the Russian-Chinese Investment Bank was created, followed in July 2015 by the opening of the new bank for the development of BRICS, based in Shanghai. In November 2015, however, Iran approved the establishment of a bank together with Russia.

It is worth underlining that in April 2015 the Russian national credit card system was opened, dealing also with small currency transfers.

It is also worth recalling the Duma law on de-offshorization of November 18, 2014, i.e. the legislation obliging the Russian companies resident abroad to pay taxes directly to the Russian Treasury.

Image result for President Putin

 

The above mentioned Chinese CIPS started operating in October 2015, while in March 2017 Russia implemented a system similar to SWIFT (interacting with the Chinese one).

The issue is complex because with fracking, the United States has become the first oil producer – hence there is less need to keep the huge amount of petrodollars. This happens while a natural oil and gas shale deposit has just been discovered, off the coast of Bahrain, with reserves of 80 billion oil barrels and 4 trillion cubic meters of gas.

The United States does no longer buy oil and gas because it does not need them, but China is increasingly the best global buyer.

Apart from the stability of gas and oil prices, which should be guaranteed in the coming years, China and its allies should be ever more able to select between the supply and, certainly, between the countries which accept the non-oil bilateral exchange with China and payments in yuan or gold.

Still today, the US GDP accounts for 22% of world’s GDP, while 80% of international payments are made in dollars.

Hence the United States receives goods from abroad always at comparatively very low prices, while the massive demand for dollars from the rest of the world allows to refinance the US public debt at very low costs. This is the economic and political core of the issue.

In fact, the Russian government held a specific meeting on de-dollarization in spring 2014.

This is another fact to be highlighted. It is a political operation that appears to be a financial one, often in contrast with the “volatility” of current markets, but its core is strategic and geopolitical.

In theory, the de-dollarization regards three specific issues: payments, the real economy issue and ultimately the financial issue, namely the financial contracts denominated in dollars.

In the first case, China will tend to eliminate every transaction denominated in US dollars by third countries and to remove settlement mechanisms involving the dollar and operating in its neighbouring areas.

In the second case, the dollar transactions will be – and are already – largely prohibited for individuals.

In the third case, the share of foreign contracts denominated in yuan is now equal to 40% and strong acceleration will be recorded in 2018.

The oil futures denominated in yuan are now booming. The first attempt was made in 1993, when China opened its stock exchanges in Beijing and Shanghai.

China itself closed operations two years later, due to market instability and to the yuan weakness. Two other things have changed since then: in 2016 the yuan was admitted as a currency making up the IMF Special Drawing Rights and in 2017 China overtook the United States as the world’s largest oil importer.

Hence, thanks to the oil futures denominated in yuan, China is reducing its dependence on the dollar and, in the meantime, it is supporting its oil imports, as well as promoting the use of the yuan globally and expanding its presence in the world. Russia has done the same.

Therefore the United States is about to be ousted as world’s currency due to its continuous series of wars and military failures (former President Cossiga always told me: “The United States is always on the warpath and up in arms, but then it is not able to get out of it”) and, like everyone else, it shall pay for its public debt, which is huge and will be ever more its problem, not ours.

Image result for john connally with Nixon

Here it is worth recalling what the US Treasury Secretary, John Connally, said to his European counterparts during a meeting in 1971: “The dollar is our currency, but your problem”.

Obviously, in relation to all these issues which also concern primarily the euro, the European Union is silent and sleepy.

IMF Article IV Consultations with Malaysia


March 11, 2018

IMF Article IV Consultations with Malaysia

The Economic News is not bad for Malaysia.  But the politics is something we as Malaysians must worry about. The regime in power is playing with race and religion to keep Malay votes and retain power. As a result, Malaysia is today a divided nation. Corruption is also at an all time high. Understandably the IMF scrupulously avoids commenting on  the state of politics –Din Merican

A New Landmark  under construction in Kuala Lumpur

The IMF Executive Board has recently concluded the Annual Article IV consultations with Malaysia. The Fund has issued a number of documents relating to the consultations. These highly nuanced documents are in a sense a report card on the performance of the Malaysian economy. They also highlight areas in which policy reforms are recommended. In the current round, there were a few issues on which there was no convergence of views.

Author/Editor:

International Monetary Fund. Asia and Pacific Dept

Publication Date: March 7, 2018

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

The full report and related documents can be downloaded from the above site.  Additional documents are listed below:

IMF MEDIA STATEMENT

MF Executive Board Concludes 2018 Article IV Consultation with Malaysia

March 7, 2018

On February 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Malaysia.

 The Malaysian economy has shown resilience in recent years despite external shocks and has continued to perform well. Progress was made toward achieving high income status and improving inclusion. Median household income has risen further and the already-low national poverty ratio declined. Real GDP growth has surprised on the upside in 2017, and is estimated at 5.8 percent for the year, driven by domestic demand and robust exports. While headline consumer price inflation went up to 3.8 percent in 2017 due to higher oil prices, core inflation and credit growth are contained. On the external side, the current account surplus is estimated to increase to 2.8 percent of GDP, helped by strong exports.

Growth is projected to start to decelerate from its 2017 peak, remaining above potential at 5.3 percent in 2018, and converging to its potential rate of close to 5 percent in the medium term. In 2018, headline inflation is expected to moderate to 3.2 percent, as the response of core inflation to a positive output gap is partly offset by lower contribution from oil prices. The current account surplus is expected to soften to 2.4 percent of GDP in 2018, as export growth normalizes.

Risks to the growth outlook are balanced. On the external side, downside risks include a global retreat from cross-border integration, structurally weak growth in advanced economies, and a significant China slowdown, while a speedy approval and implementation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and possibly lingering strong global demand for electronics are upside risks. Domestically, the confidence effects related to the cyclical upturn could be stronger than anticipated, while exposures in the real estate sector pose a downside risk.

Executive Board Assessment[2]

Executive Directors commended the authorities for the strong and resilient performance of the Malaysian economy, underpinned by accommodative monetary policy and gradual fiscal consolidation. While growth will likely remain above potential in 2018, inflationary pressures appear contained, and risks to the outlook are balanced. Going forward, Directors emphasized the importance of supporting economic growth while maintaining stability, as well as raising productivity through structural reform.

Directors agreed with the planned pace of fiscal consolidation in 2018, noting that it will help build buffers while maintaining financial market confidence. Going forward, they supported a gradual consolidation path consistent with the authorities’ fiscal anchor, which would help build additional fiscal space. Directors advised that fiscal consolidation should prioritize higher revenue, to facilitate the adoption of fiscal measures to support external rebalancing. They encouraged further progress on the fiscal structural agenda, including efforts to strengthen fiscal transparency and risk management.

Directors supported the January increase in the monetary policy rate, and agreed that the current policy stance is appropriately biased toward less accommodation while remaining supportive of demand. Noting that Bank Negara Malaysia’s monetary policy framework has served the country well, Directors recommended that monetary policy and exchange rate flexibility remain the first line of defense against shocks.

Directors welcomed improvements in the depth and liquidity of onshore financial markets during 2017 following the Financial Markets Committee (FMC) measures that liberalized and increased the flexibility of onshore hedging instruments, as well as a general rebound of capital inflows to emerging markets. They supported the consultative and inclusive approach adopted by the FMC in developing these measures, and encouraged the authorities to build on these successes to address any further gaps in financial market development. Some Directors urged the authorities to phase out—in a manner that preserves financial stability—the measures assessed by staff as capital flow management measures. A few other Directors, however, were of the view that there should be a greater openness to other approaches to promoting the authorities’ development objectives. Directors urged the authorities to continue a constructive dialogue with staff on these issues.

Directors agreed that financial sector risks appear contained, with sound bank profitability and liquidity, and low nonperforming loans. Nonetheless, they noted that vulnerabilities in household mortgages and the property development sector require vigilance, and recommended taking any necessary steps to mitigate risks. They encouraged the development of a rental real estate market. Directors welcomed the authorities’ commitment to take further actions to address deficiencies in Malaysia’s AML/CFT framework.

Directors commended the authorities’ emphasis on raising productivity and investment and encouraged further labor market reforms. Priority should be given to measures that encourage female labor force participation, improve the quality of education, reduce skills mismatches, and bolster public infrastructure and the regulatory framework to further encourage private investment.

How is the economy doing?

Image result for Malaysia: Selected Economic and Financial Indicators

Malaysia’s economy is showing resilience and is performing strongly. Growth is running above potential, driven by strong global demand for electronics and improved terms of trade for commodities, such as oil and gas. On the domestic front, Malaysia’s strong employment is boosting private consumption, and investment is also helping to drive growth.

 

Martin Khor looks back at the East Asian Financial Crisis 1997


July 5, 2017

Martin Khor looks back at the East Asian Financial Crisis 1997

http://www.thestar.com.my

It is useful to reflect on whether lessons have been learnt and if the countries are vulnerable to new crises.

IT’S been 20 years since the Asian financial crisis struck in July 1997. Since then, there has been an even bigger global financial crisis, starting in 2008. Will there be another crisis?

The Asian crisis began when speculators brought down the Thai baht. Within months, the currencies of Indonesia, South Korea and Malaysia were also affected. The East Asian Miracle turned into an Asian Financial Nightmare.

https://upload.wikimedia.org/wikipedia/commons/1/14/Suharto_resigns.jpg

Despite the affected countries receiving only praise before the crisis, weaknesses had built up, including current account deficits, low foreign reserves and high external debt.

In particular, the countries had recently liberalised their financial system in line with international advice. This enabled local private companies to freely borrow from abroad, mainly in US dollars. Companies and banks in Korea, Indonesia and Thailand had in each country rapidly accumulated over a hundred billion dollars of external loans. This was the Achilles heel that led their countries to crisis.

These weaknesses made the countries ripe for speculators to bet against their currencies. When the governments used up their reserves in a vain attempt to stem the currency fall, three of the countries ran out of foreign exchange.

They went to the International Monetary Fund (IMF) for bailout loans that carried draconian conditions that worsened their economic situation. Malaysia was fortunate. It did not seek IMF loans. The foreign reserves had become dangerously low but were just about adequate. If the ringgit had fallen a bit further, the danger line would have been breached.

Image result for Mahathir and The East Asian Financial Crisis 1997
Prime Minister Dr. Mahathir Mohamed and Finance Minister Daim Zainuddin introduced selective capital controls and pegged the Ringgit at RM3.80 to USD1.00.

 

After a year of self-imposed austerity measures, Malaysia dramatically switched course and introduced a set of unorthodox policies.These included pegging the ringgit to the dollar, selective capital controls to prevent short-term funds from exiting, lowering interest rates, increasing government spending and rescuing failing companies and banks.

This was the opposite of orthodoxy and the IMF policies (The Washington Consensus). The global establishment predicted the sure collapse of the Malaysian economy. But surprisingly, the economy recovered even faster and with fewer losses than the other countries. Today, the Malaysian measures are often cited as a successful anti-crisis strategy.

The IMF itself has changed a little. It now includes some capital controls as part of legitimate policy measures.

Image result for Korea and The East Asian Financial Crisis 1997

The Asian countries, vowing never to go to the IMF again, built up strong current account surpluses and foreign reserves to protect against bad years and keep off speculators. The economies recovered, but never back to the spectacular 7% to 10% pre-crisis growth rates.

Then in 2008, the global financial crisis erupted with the United States as its epicentre. The tip of the iceberg was the collapse of Lehman Brothers and the massive loans given out to non-credit-worthy house-buyers.

The underlying cause was the deregulation of US finance and the freedom with which financial institutions could devise all kinds of manipulative schemes and “financial products” to draw in unsuspecting customers. They made billions of dollars but the house of cards came tumbling down.

To fight the crisis, the US, under President Barack Obama, embarked first on expanding government spending and then on financial policies of near-zero interest rates and “quantitative easing”, with the Federal Reserve pumping trillions of dollars into the US banks.

It was hoped the cheap credit would get consumers and businesses to spend and lift the economy. But instead, a significant portion of the trillions went via investors into speculative activities, including abroad to emerging economies.

Europe, on the verge of recession, followed the US with near zero interest rates and large quantitative easing, with limited results.

The US-Europe financial crisis affected Asian countries in a limited way through declines in export growth and commodity prices. The large foreign reserves built up after the Asian crisis, plus the current account surplus situation, acted as buffers against external debt problems and kept speculators at bay.

Just as important, hundreds of billions of funds from the US and Europe poured into Asia yearly in search of higher yields. These massive capital inflows helped to boost Asian countries’ growth, but could cause their own problems.

First, they led to asset bubbles or rapid price increases of houses and the stock markets, and the bubbles may burst when they are over-ripe.

Second, many of the portfolio investors are short-term funds looking for quick profit, and they can be expected to leave when conditions change.

Third, the countries receiving capital inflows become vulnerable to financial volatility and economic instability.

If and when investors pull some or a lot of their money out, there may be price declines, inadequate replenishment of bonds, and a fall in the levels of currency and foreign reserves.

A few countries may face a new financial crisis. A new vulnerability in many emerging economies is the rapid build-up of external debt in the form of bonds denominated in the local currency.

The Asian crisis two decades ago taught that over-borrowing in foreign currency can create difficulties in debt repayment should the local currency level fall.

To avoid this, many countries sold bonds denominated in the local currency to foreign investors. However, if the bonds held by foreigners are large in value, the country will still be vulnerable to the effects of a withdrawal.

As an example, almost half of Malaysian government securities, denominated in ringgit, are held by foreigners.

Though the country does not face the risk of having to pay more in ringgit if there is a fall in the local currency, it may have other difficulties if foreigners withdraw their bonds.

What is the state of the world economy, what are the chances of a new financial crisis, and how would the Asian countries like Malaysia fare? These are big and relevant questions to ponder 20 years after the start of the Asian crisis and nine years after the global crisis.

 

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.
Read more at http://www.thestar.com.my/opinion/columnists/global-trends/2017/07/03/the-asian-financial-crisis-20-years-later-it-is-useful-to-reflect-on-whether-lessons-have-been-lear/#EEkW3MiZXu87cFZM.99

The Yuan joins the SDR


December 6, 2015

The Yuan joins the SDR

Maiden voyage

http://www.economist.com/news/business-and-finance/21679341-its-new-status-might-make-weaker-yuan-chinese-renminbi-joins-imfs

Reserve-currency status might make for a weaker yuan

PASSING through the Suez Canal became easier earlier this year, thanks to an expansion completed in August. Now it is about to become a little bit more complicated. Transit fees for the canal are denominated in Special Drawing Rights, a basket of currencies used by the International Monetary Fund (IMF) as its unit of account. This week the IMF decided to include the yuan in the basket from next year, joining the dollar, the euro, the pound and the yen.

If lots of things were priced in SDRs, the IMF’s decision would have forced companies around the world to buy yuan-denominated assets as soon as possible, to hedge their exposure. That would have prompted China’s currency to strengthen dramatically. But few goods or services are priced in SDRs. Instead, admission to the currency club is significant mainly for its symbolism: the IMF is lending its imprimatur to the yuan as a reserve currency—a safe, liquid asset in which governments can park their wealth. Indeed, far from setting off a groundswell of demand for the yuan, the IMF’s decision may pave the way for its depreciation.

The reason is that the People’s Bank of China (PBOC) will now find itself under more pressure to manage the yuan as central banks in most rich economies do their currencies—by letting market forces determine their value. In bringing the yuan into the SDR, the IMF had to determine that it is “freely usable”. Before coming to this decision, the IMF asked China to make changes to its currency regime.

Most importantly, China has now tied the yuan’s exchange rate at the start of daily trading to the previous day’s close; in the past the starting quote was in effect set at the whim of the PBOC, often creating a big gap with the value at which it last traded. It was the elimination of this gap that lay behind the yuan’s 2% devaluation in August, a move that rattled global markets. Though the yuan is still far from being a free-floating currency—the central bank has intervened since August to prop it up—the cost of such intervention is now higher. The PBOC must spend real money during the trading day to guide the yuan to its desired level.

Inclusion in the SDR will only deepen the expectations that China will let market forces decide the yuan’s exchange rate. The point of the SDR is to weave disparate currencies together into a single, diversified unit; some have suggested, for example, that commodities be quoted in SDRs to reduce the volatility of pricing them in dollars. But if China maintains its de facto peg to the dollar, the result of adding the yuan to the SDR will be to boost the dollar’s weight in the basket, defeating the point.

What would happen if China really did give the market the last word on the yuan? For some time it has been under downward pressure. The simplest yardstick is the decline in China’s foreign-exchange reserves, from a peak of nearly $4 trillion last year to just over $3.5 trillion now—a reflection, in part, of the PBOC’s selling of dollars to support the yuan. Were it not for tighter capital controls since the summer, outflows might have been even bigger.

And the yuan does look overvalued. Despite China’s slowing economy, its continued link to the surging dollar has put it near an all-time high in trade-weighted terms, up by more than 13% in the past 18 months (see chart). With the Federal Reserve gearing up to start raising interest rates at the same time as China is loosening its monetary policy, the yuan looks likely to come under more downward pressure, at least against the dollar.

It would be foolhardy to predict that China will suddenly give the market free rein. That would go against its deep-seated preference for gradual reform. But while basking in the glow of its SDR status, China must also be aware of the responsibility to minimise intervention that comes with it. A weaker yuan may well be the result.

 

Malaysia Scandal Wreaks Havoc on Economy


August 26, 2015

http://www.asiasentinel.com/politics/malaysia-scandal-havoc-economy/

Malaysia: Scandal Wreaks Havoc on Economy

by John Berthelsen@www.asiasentinel.com

Zeti

Malaysia’s central bank (Bank Negara Malaysia) is clearly losing the battle to defend its national currency, the Ringgit, which fell to RM4.2275 to US$1 on August 24 before recovering slightly on the bank’s buying, with the pace accelerating as the international financial community continues to lose confidence in the country’s  deteriorating economic position and its massive twin financial scandals.

Events over the weekend did little to inspire confidence, with the Police arresting 29 protesters before they could even start a rally and charging them with Section 124 of the Penal Code, a nebulously worded amendment that deals with “activities detrimental to parliamentary democracy” and carries penalties up to 20 years in prison.

The electoral-reform group Bersih has called for mass street protests in Kuala Lumpur, Kuching and Kota Kinabalu on August 29 and 30. Police have vowed to stop the rally and jail its organizers.  The harsh penalties leveled at the protesters over the past weekend may have been aimed at frightening next week’s participants.

Union Bank of Switzerland (UBS) issues currency alert

The Swiss bank UBS last Friday, Aug. 21, issued an alert saying the magnitude and speed of the currency’s decline “exceeded our bearish expectations,” falling 24 percent against the US dollar over the past year and bringing the rate to a 17-year low.  But although UBS set a short-term target of 4.35, privately UBS bankers are saying the currency could go to RM5.0:US$1 just this week. It shot through the psychologically important barrier of 4:1 last week without a hitch.

With international reserves having fallen to US$94.5 billion as of August. 15, Bank Negara has few tools to stop the slide. Bank Negara Governor, Zeti Akhtar Aziz last week ruled out currency controls, leaving her only the weapon of raising interest rates, which would play havoc with the economy, given high household and government debt.  With crude oil and other commodity prices sliding, GDP growth fell to a still-respectable 4.9 percent for the second quarter.

The Kuala Lumpur stock market has headed for collapse as well, falling by 12.7 percent since August 3 and 2.17 percent today alone.  Although all Asian markets have been descending in line with China’s crashing bourses, the KLSE is the worst-performing market in Asia and looks set to get worse.  Foreigners have been bailing out of the market, the currency and foreign direct investment, with FDI plummeting by 41.8% to RM21.3 billion in the first half of 2015, although officials said the sharp fall was due to a high base year in the first half of 2014.

Throw it away

Prime Minister Najib Razak is seemingly willing to wreck almost every government institution in his bid to stay in power in the face of a widespread effort by the opposition and members of his own party to oust him over two massive scandals, one a US$681 million “donation” from unnamed Middle Eastern interests into his personal account, supposedly in gratitude for fighting ISIS. However, US$650 million was spirited back out of the account in 2013 to another Najib personal account in Singapore – then disappeared out of that account to somewhere else, raising more questions than it answered. 

The second is his stewardship of 1Malaysia Development Bhd., a state-backed investment fund which, according to critics, has US$6.6 billion worth of unfunded liabilities that a revolving door of chief executive officers and accounting firms have been unable to explain. The Sarawak Report, edited from the UK by Clare Rewcastle Brown, alleged that hundreds of millions of dollars have been diverted to accounts in Singapore and elsewhere held by the young Penang-born tycoon Jho Taek Low, who was instrumental in persuading Najib to establish the fund.

Unity Coalition Seeking No Confidence vote?

However, despite desperate attempts to contain the scandals by sacking or neutralizing a long list of officials involved in investigating them, there are indications that they are escaping into the wider global financial sphere. On August 26, Switzerland’s financial regulator FINMA announced that it is investigating the extent of any involvement which its banks may have had in any of the alleged ‘dubious’ transactions linked to 1MDB. At least half a dozen banks including Falcon Private Bank, BSI of Lugano, JP Morgan and Coutts & Co have been named elsewhere as involved.   Singapore authorities have also said they are investigating accounts connected to 1MDB.

Over the weekend, it appeared that the opposition  Pakatan Rakyat coalition’s three component parties might be willing to at least discuss the possibility of teaming up with former Prime Minister Mahathir Mohamad, Najib’s severest domestic critic, to seek a vote of no confidence in the Parliament.  Mahathir is insisting that the ruling Barisan Nasional lead any unity government. Lim Kit Siang, the Democratic Action Party parliamentary leader, said that the idea might be worth discussing. 

For Mahathir to team up with Lim would be a surprise. But earlier this month he agreed to meet with longtime foe Tengku Razaleigh Hamzah, who tried to oust him in the 1980s and failed, nearly destroying UMNO in the process. A vote of confidence would first have to get by the parliamentary speaker, who is a close ally of the Prime Minister’s.

Mahathir and Najib in the same UMNO pod

Perhaps anticipating such a challenge, over the weekend Najib set out to play the race card, telling a United Malays National Organization assembly that Malays and Muslims would be ‘bastardized’ if UMNO is ousted from ruling the government as a part of the Barisan Nasional coalition. The leaders of the challenge against him are almost all ethnic Malays, including Mahathir, Razaleigh, fired deputy prime minister Muhyiddin Yassin and others.

Fear tactics by Najib

“Some people say that the Malays will be defeated, beaten or fall flat on the ground but I choose the word ‘bastardize,’ Najib was quoted in local media as saying – a veiled reference to the possibility that ethnic Chinese would dominate the political process as well as the economy.

He and other officials have also charged that unnamed foreigners are also out to wreck Malaysia’s parliamentary democracy.  The United States’ two leading newspapers, the Wall Street Journal and the New York Times, have both carried extensive, deeply detailed stories describing both the 1MDB shenanigans and the Najib family’s personal wealth including expensive properties in New York and California. Najib has threatened to sue the Wall Street Journal for its reports, but has stalled on actually issuing a demand for retraction. His counsel’s latest ploy was to say he would seek advice from “other countries” on the feasibility of suing. That has been met with derision.

The Sarawak Report has been a particular source of irritation, with a constant drumbeat of entries describing family and governmental misdoings. The government has charged Rewcastle Brown with sedition and sought to have her extradited from the UK, which is regarded as nonsensical grandstanding for a domestic audience.

 

More on Greece’s Financial Debacle


July 21, 2015

Why Greece should QUIT the Eurozone

Shrey’s Finance Blog

A 15 year old’s thoughts about finance, economics and growing up as a trader!

http://shreysfinanceblog.com/

Goldman's current CEO, Lloyd Blankfein.Taking Advantage of Greece

The debate over Greece leaving the Eurozone has been raging for a matter of years now. Some believe that Greece staying in the Eurozone is axiomatic, in that a Greek exit from the Euro would ravage the economy, perhaps causing hyperinflation. Others argue to look at the other side of the coin, and propagate the idea that a Greece exit would attenuate the suffering of the Greek people, as they might only have to suffer for the next 10 years, rather than the next 50. Personally, it is my firm belief; my avowal, if you will, that Greece should leave the eurozone, and start a new era, having ended the old era of economic pain.

Almost at the very command of Angela Merkel, the Greek Prime Minister Alexis Tsipras was forced to impose harsher austerity members than the previous weekend’s “No” vote had suggested. This paves the way for increased value added tax, increased privatisation of organisations previously owned by the state, and an increase in the retirement age, making the years that people have to work longer. The harsh austerity measures outlined in the plan forced on Tsipras make the deterioration of the economy an inevitability, which forces the Greeks to sell public assets. We can all agree on the fact that this is a malfeasance in itself, and that the Greek people should not be subjected to having the public assets sold in the interests of paying down Greece’s loans.

It can be clearly seen that Greece is in the midst of an economic depression. The latest measures imposed on Greece by Merkel will only make this worse, with the economy getting worse by the day. If Greece, however, exits the Euro and returns to the Drachma, they will have a substantially weaker currency on their hands, which will be a massive influence in helping Greece get themselves out of their deflation and debt. If Greece does get out of this negative spiral of deflation, they will be alleviated from the economic stagnation and high unemployment that currently pervades the country. This can only be a good thing, as more people can sustain a living due to an increase in jobs.

Moreover, it is arguable that the Greek economy will find it very hard to recover within the Eurozone. Greece needs a complete devaluation of its currency through a flexible exchange rate in order to make economic growth a likely scenario again. It is clear as a bell that the short term consequences would be quite damning for the Greek people, however this is a far better alternative than the other scenario, in which the people are suffering from hardship and poverty for the next half a century, potentially. This whole saga with Greece has affected other economies as well, which has led to fears of an Italian, or even a Spanish exit. If one of these two countries exits the eurozone, the ramifications of this would be irreversible for the euro and it would likely never bounce back.

Finally, it is a definite fact that this whole drama has caused deep political instability and rifts within the Eurozone, which means that the tension between the people in the Eurozone has never been higher. It was revealed earlier that a majority of German citizens want Greece to exit the Eurozone, and if this is the case, then there will be gargantuan pressure on Angela Merkel to force this to happen (some would argue that she is already exhibiting this). In order to put this tension within the Eurozone to rest, Greece needs to exit so we can have some semblance of peace in the Eurozone. All these factors combined show that it is in the best interests of all the countries involved that Greece does exit the Eurozone, and although this may have significant short-term impacts, it is definitely the best thing to do to secure long term economic prosperity for all involved.

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Is Greece insolvent, and what would that mean for the euro?

http://www.biznews.com/global-investing/2015/02/03/greece-insolvent-mean-euro

Greece financial crisisAs the new Greek government tries to fumble its way through the business of running a struggling country, more and more questions are being asked about the future of Greece and of the Eurozone. As this column asks, we need to know if Greece is, actually insolvent, and if so, how that can be reconciled with its position within the Eurozone. – FD

By James Saft

Feb 3 (Reuters) – Much hangs on the interpretation of a word, and in the case of Greece and the euro zone that word is: insolvent.

New Greek Finance Minister Yanis Varoufakis has been unusually frank, likening his country’s case to that of a jobless person being advised to take out advances on her credit card to pay the mortgage.

“Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?” Varoufakis said days after taking office under the new Syriza-party-led coalition.

“This is the trouble over the last five years with Greece. Our European partners and the previous Greek government have been extending and pretending.”

Keeping up the pretense that one can honor one’s debts if only given room to maneuver and time is an old if not glorious tradition among the deeply indebted. Coming straight out and coping to insolvency, on the other hand, is not.

That’s because certain things tend to follow from an admission of insolvency. Creditors decline new advances, existing loans, where possible, are called and the debts of the insolvent, Greece, are no longer acceptable as collateral.

Guntram Wolff, Director of the Bruegel think tank, argues that Varoufakis has set a rapid clock ticking, making its debts theoretically beyond the pale for the European Central Bank and creating a pressing need for a new deal.

“When a Finance Minister declares the insolvency of his country, then the quality of all the debt he has issued should fall below the relevant thresholds for Emergency Liquidity Assistance as well as standard monetary policy operations. While I do not believe the ECB will be so consequential as to do this immediately, I also cannot believe that it will just continue lending for a long time,” Wolff wrote in a Bruegel piece.

“By talking about insolvency, he has raised the funding needs for Greece’s banking system and made government fund-raising on capital markets impossible,” Wolff said.

Insolvency is a state,  Default is an event

Important to remember that extend and pretend as a strategy, while obviously unfair to many participants, can sometimes work as a means of keeping an entity ticking over. Many leading U.S. banks were very likely insolvent during the crisis.

Like all relationships, good and bad, extend and pretend requires the participation of two partners, the creditor and debtor. All true, but these things are never simple, and far less when, as in Greece, the insolvency includes a euro member state.

While Greece’s liabilities may shortly exceed its ability to repay, its creditors and partners maintain that with current low interest rates and a very long repayment schedule its ongoing debt maintenance burden is not out of line with that of France, for example.

Varoufakis sees the situation as a debt deflation spiral, in which the conditions imposed on Greece stifle demand, pushing prices and output lower and making the debt ultimately impossible to repay without ruin. There is some justice in this position.

Varoufakis’ slapping down of the insolvency card is best seen as a gambit to bring the other side more rapidly to the table and to extract better concessions.

As for the ECB, it seems to be standing on ceremony, maintaining its hands will be tied as for extending Greek banks more credit when the Greek program extension expires at the end of February.

“We (ECB) have our own legislation and we will act according to that,” ECB council member Erkki Liikanen said.

That angle, that the ECB will have to follow its rules and that Greek debt and its banks will be high and dry, is heavily overplayed, argues Karl Whelan, an economics professor at University College Dublin.

Whelan believes that even in March Greek access to ECB enabled credit will be based on discretionary decisions rather than mechanical outcomes. Greece and its negotiating partners can conceivably limp along together because both the ‘rules’ and the meaning of insolvency are such woolly concepts, offering insulation if not clarity.

Thus we have two sides, both seeking to pressure the other by creating what could be a false urgency to negotiate, and both hoping the other crumples and gives way. Meanwhile, capital, sensibly, flees Greece and the chance rises that an overplayed hand by either side leads to a bank run.