Print section Print Rubric: Why a cheaper currency can sometimes dampen economic growth Print Headline: A losing battle Print Fly Title: Foreign exchange UK Only Article: standard article Issue: The lessons from Aleppo’s tragic fate Fly Title: A losing battle IN SEPTEMBER 2010 Brazil’s then-finance minister, Guido Mantega, gave warning that an “international currency war” had broken out. His beef was that in places where it was difficult to drum up domestic spending, the authorities had instead sought to weaken their currencies to make their exports cheaper and imports dearer. The dollar had recently fallen, for instance, because the Federal Reserve was expected to begin a second round of quantitative easing. The losers in this battle were those emerging markets, like Brazil, whose currencies had soared. Its currency, the real, was then trading at around 1.7 to the dollar. These days a dollar buys 3.4 reais, but no one in Brazil ...
One year ago, Dilma Rousseff was Brazil’s president; Guido Mantega was finance minister; Eduardo Paes was Mayor of Rio and held majority support; Eduardo Cunha was speaker of the House; and Renan Calheiros chaired the Senate. Today, Rousseff has been impeached; Mr. Mantega arrested and investigated in connection with Operation Car [...]
SAO PAULO (Reuters) - Brazilian police arrested former Finance Minister Guido Mantega on Thursday as a sweeping corruption investigation struck further at the heart of the Workers Party (PT) that ran the country for 13 years.
В минувший четверг в красную зону поехала изрядная часть мировых рынков товаров и валют. Просела на 4% нефть, кроме того, вниз ушел рубль, ушел на юг российский фондовый рынок, китайские власти снизили курс юаня, который достиг минимумов начала года. О вполне обыденной причине этих событий размышляет экономист и автор «БИЗНЕС Online» Александр Виноградов.
Brazil’s federal police on Monday detained former finance minister Guido Mantega for questioning in connection with a continuing investigation into suspected tax fraud, according to a person familiar with the matter.
SAO PAULO (Reuters) - Former Brazilian finance minister Guido Mantega has been detained by police for questioning in an investigation into tax fraud and payment of bribes to influence legislation favorable to business sectors, a police source said on Monday.
Валютные войны известны с ХХ века: после подписания Версальского мирного договора, во время «Великой депрессии», когда доллар отвязали от золота. Сегодня валютная война вошла в новую стадию, в которой Штаты постепенно теряют свои позиции. И отрицать этот факт глупо.
I recently gave a talk in Honolulu hosted by the Korean Institute of Economic Policy, and this was a heated topic of discussion. Koreas was criticized in the Treasury's semi-annual report on currency manipulation (though not formally identified a a...
Nelson Barbosa, Brazil's new finance minister, center, is congratulated by attendees during his inauguration in Brasilia, Brazil, on Monday, Dec. 21, 2015. Financial markets sankon the news. He is expected to be another Guido Mantega, one of Brazil's most unpopular FinMin's.(Photo by Lula Marques/Bloomberg) Following the worst Christmas for retail in [...]
Barbosa will be more like Guido Mantega, using temporary measures to spur growth and alleviate inflation pressures even if it means missing fiscal targets.
THE term "currency wars" has sparked a vigorous debate within the economics commentariat. The term was coined by Brazil's then finance minister, Guido Mantega, in 2010 when the real was moving sharply higher, a nice irony given the real's recent falls to record lows. Some saw it as a negative development, talking of beggar-thy-neighbour devaluations designed to grab a bigger share of world trade; eventually, this was a zero sum game since all currencies cannot devalue. The counter-argument was that, on the contrary, this was positive for the world economy. Countries were easing monetary policy, either by cutting interest rates or adopting quantitative easing, and the aggregate effect would be to boost global demand. Parallels were drawn with the 1930s when developed countries abandoned the gold standard and those that devalued first, recovered most quickly.A new (privately circulated, so no link) note from Stephen King, the senior economic adviser at HSBC, argues that the 1930s parallel is incorrect and that, currentlyattempts by individual central banks to boost growth and inflation via currency depreciation have been collectively self-defeatingThe key difference, in Mr King's view is thatIn the 1930s, currency declines weren’t just simple devaluations. They represented, instead, a seismic change in monetary regimes. The gold standard was abandoned. The anchor that had ...
Tracking the Implosion of Brazil; Be Careful of What You Wish; Perfect Storm; Email from Brazil; More Intervention Madness
Perfect StormReader Lucas from Brazil writes about the "perfect storm". Hello Mish Brazilian interest rates are skyrocketing. Rates went up more than 2 percentage points in a month. Bond trading was suspended due to the quick devaluation. Nobody is talking much about it, but energy corporation Petrobras is down 95% from the peak (in dollars). They have a high dollar exposure, and some estimates say that since June, Real devaluation alone was responsible for a +R$100B increase in debt. Brazil's majors oil investments are in (really) deep water drilling, and they may be not worthy anymore. Petrobras debt is now equivalent to 8% of the whole country GDP. And while. our president doesn't have support to do anything.It's a perfect storm here. Lucas PetrobrasIn classic bubble action, shares of Petrobas went from $4 to $77 back to $4. Executives no doubt, cashed out at every opportunity.Brazil RealThe Brazilian Real went from 1.6 to the US dollar to 4.1 to the US dollar. That's a decline of about 54% .Brazil 1-Year Government BondsSince 2007, the yield on 1-year Brazil government bonds went from just over 7% to over 16%.Flashback March 2012Please note the inserts on the second two charts. I highlighted the March 2012 candle because that's when Brazil Declared New Currency War on US and Europe. “When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” said Guido Mantega, the finance minister who was the first to use the controversial term "currency war" in 2010.President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries’ policies from causing the “cannibalisation” of emerging markets.The move comes as Brazil’s central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real’s near 9 per cent surge against the US dollar this year.Be Careful of What You WishIt was just a few short years ago that Brazil was bitching about the strength of the Real. Brazil got its wish.More Intervention Madness On Thursday, we learned Brazil Real Mounts Biggest Rally in 7 Years on Intervention Suggestions The Brazilian Real rallied nearly five percent Thursday following statements by the country’s central bank president, which stated that he will explore the use of foreign exchange (FX) reserves to defend the currency against persistent declines versus the US Dollar. Brazil Central Bank (BCB) President Alexandre Tombini mentioned that different options will be used to stabilize the currency. Options that may be employed include swap contracts and dollar repurchase agreements.What If Intervention Fails?One day proves nothing.I have a simple question for Brazil: What if intervention fails?If Brazil blows all of its reserves defending a pseudo-peg that cannot be maintained, it will find itself in very dire straits. Untenable currency prop jobs are the way to ruin.Ask Argentina; Ask Russia; Ask China who recently tried and failed to prop up its stock market. Heck ask Switzerland who recently had to abandon its peg to the euro.The only thing that will stabilize the Real is sound economic policy and a stable government.Until then, there is no question. Intervention "will" fail.Mike "Mish" ShedlockMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
Although the thermometer is forecast to reach 92 degrees Fahrenheit today (33 Celsius), the passage of the Labor Day holiday represents the unofficial end of summer so it's once more unto the breach, dear friends. Accounting for revisions, the unemployment rate, and wages, last Friday's employment number was very solid indeed, even if it's just a distant memory now.The odds for a September hike are roughly identical to what they were immediately before the number- to wit, a 1/3 chance, more or less the lowest of the year. This in turn raises an interesting question, partially posed by the Fed itself: is it appropriate to hike rates if the market is not priced for it?As readers are no doubt very much aware, the Yellen Fed has gone through extraordinary pains to reassure markets that the lift-off and subsequent cycle will be transparent and as painless as possible; if the whole QE/ZIRP policies have been monetary heroin, it seems as if the Fed wishes lift-off to be monetary methadone. As such, to engage in lift-off at a meeting in which the market is not fully priced would appear to endanger the Fed's intention to make it as painless as possible; after all, this is supposed to be a removal of an emergency policy, not a legit monetary tightening.However, there is a downside to letting the inmates run the asylum. If the market throws a tantrum every time that it senses that lift-off is imminent, normalization can and will be delayed unnecessarily if the Fed slams on the brakes when it sees the toys flying out of the pram. Moreover, market pricing is also a captive of conditional probability.The market is currently pricing in a 75% chance that the Fed will go by the end of the year. Using the logic of "meeting market expectations", that should naturally imply that they will indeed raise rates by the December meeting. However, if (or perhaps when?) the Fed stands pat this month, some portion of that 75% will vanish into the ether- that represented by the chance of a September tightening. Perhaps the market will then price December as a 50/50 proposition. From that point, it would only take a little more stock market indigestion, coupled with apparent hand-wringing from the usual sources, to nudge that percentage lower again, and then voila! The market will be priced at a 1/3 shot again, "too risky" for lift-off to commence.Lather, rinse, repeat.Of course, drilling down to the normative "what should they do" rather than the predictive "what will they do" is fun, but generally not profitable- particularly when there is a wedge between the two. From Macro Man's perspective, he's made a bit from the timely sale of January Fed funds the other week; he'll probably look to close that out over the next few days before he, too, becomes a victim of conditional probability.Over the weekend, a reader asked an excellent series of questions about EM and the chances of a massive blow up. Such a question is obviously an important one and merits its own post (or series of posts) to address. The sexy answer is, of course, to say yes and start lobbing Molotov cocktails at the now-sodden BRICs.The reality is unsurprisingly much more nuanced than that. One of the major problems with China is the quality of the data available to us for analysis. Simply put, no one has a properly complete picture of the state of the financial system in China- not even the Chinese, in all probability. So to some extent, any view on the topic is at risk of "garbage in, garbage out", and should be risk-weighted accordingly.That having been said, we do know that the currency has depreciated recently, bowing to pressure from the capital account. At the same time, FX reserves peaked a few quarters ago and have trended lower since- and that doesn't even account for the big defense of the RMB since the devaluation.One must be a little careful in interpreting the decline in reserves, however. Note that the reserve pool is denominated in dollars, and the decline has been contemporaneous with a surge in the value of the dollar. As such, the vast, vast majority of the decline witnessed to date in the official data simply represents the fall in the USD value of non USD currencies in the portfolio.That having been said, the money spent in defense of the RMB over the past month is real, and obviously not sustainable on an ad infinitum basis. Selling USD/RMB drains money from the system, which is not what an economy teetering on the edge of a dangerous slowdown needs. However, one large mitigating factor is the continued ability of the PBOC to sterilize the intervention via its ability to generate further cuts in the RRR. No, this will not drop packets of money into the hands of every man, woman, and child in China...but it will allow the PBOC to counter further depreciation pressure on the RMB as forcefully as it sees fit. And given that a disorderly depreciation of the RMB is seen as a major tail risk for all sorts of assets, that should provide some comfort. Even after the RRR cuts delivered this year, the reserve requirement ratio remains above the high seen immediately before the crisis- when China had an inflation problem, was accruing FX reserves like mad, and needed to drain money from the system.Moreover, while the capital account is of paramount importance in dictating short-term FX flows, the current account does provide a useful anchor. Macro Man has seen some suggestions that the RMB is as much as 20% over-valued. That seems very, very difficult to square with record trade surpluses recently.Edit: Since this piece was written last night (but somehow delayed publishing until this morning NY time), data was released showing both a near-record trade surplus and a record decline in FX reserves. However, the numbers for the latter- $93.9 billion- were much smaller than some of the figures bandied about a week or two ago, no doubt thanks to the mitigating circumstance of the $60.2 billion trade surplus. In this, China does serve as a useful contrast to a country like Brazil, which has steadily seen its external account deteriorate during Dilma's (mal)administration. Remember when Brazil was moaning about QE, the weaker dollar, and "currency wars?" Be careful what you wish for, because you just might get it.However, even there, the situation does not look particularly dire on an aggregate basis. Interest rates are extraordinarily high by global standards, but not by those of Brazil's own history. External hard currency debt- including that of corporates- is actually relatively low by the standards of Brazil's own history and several other emerging markets. (China extraordinarily well on this metric.)Of course, that doesn't mean that there won't be winners and losers. For those corporates with large USD debt profiles, the two options are bankruptcy and bailout- and its hard to see the political will for the latter. It is perhaps not a coincidence, therefore, that Brazil propped up the table on the global equity scorecard unveiled last week.None of this is to say that EM will be all pony rides and lemonade from here on out. It won't, and many firms in these countries will likely fall into the abyss. But sovereign defaults look pretty unlikely at this juncture, as far as Macro Man sees it- even if that's not a sexy story.From a normative perspective, he reckons that the Fed shouldn't over-react every time a developing country says "OH NOES!", any more than they withheld from more QE when Guido Mantega moaned about currency wars.From a predictive perspective, if and as he sees babies getting chucked out with bathwater in a Fed-related tantrum, he wants to have his buying list ready, because there should be some nice set-ups for attractive long-term entry points. In some cases, we may be there already...
Today we are fortunate to present a guest contribution written by Marcos Chamon, Senior Economist in the Research Department of the International Monetary Fund, and Márcio Garcia, Associate Professor of Economics at PUC-Rio. The views expressed in this blog are solely those of the authors and do not necessarily represent the views of the IMF, […]
File this story in the category of "be careful what you wish for, you just may get it".I am talking about Brazil, more specifically, Brazil's currency, the Real. Let's also investigate comments made by former finance minister Guido Mantega about the Real.BRL vs. US Dollarclick on any chart for sharper imageFlashback March 2012I highlighted the March 2012 candle because that's when Brazil Declared New Currency War on US and Europe.“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” said Guido Mantega, the finance minister who was the first to use the controversial term "currency war" in 2010.My comment at the time was "Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result."Flashback July 2011In July of 2011, in Credit Crisis in Brazil: Consumer Loan Rates Hit 47%, Defaults Soar, Debt Service Tops 50% of Disposable Income I posted an email from Otavio. He is from Brazil.Otavio wrote ... Hello MishOtavio here, a Brazilian follower of your blog. Today I want to express my satisfaction as I read you latest post entitled Preposterous Statements - Jim Rogers: "No Food at Any Price"; Barton Biggs: " U.S. Needs Massive Infrastructure Program".When I hear statements like these, it feels like the move up in commodity prices might be near the end. I cannot stress more the fact that high prices fueled by zero interest rates in developed and many emerging markets (for many years now) are a fruit of rampant speculation.We have our own credit bubble here, which in my opinion has a good chance of busting sooner rather than later ....For the record, I will say that in my opinion, Brazilian real estate, many local stocks, and our currency (the Real), are extremely overvalued as well.CheersOtavioAt that time Brazil's Finance Minister, Guido Mantega announced "The government will continue to take measures to contain the over-valuation of the exchange rate."I commented "I am inclined to agree with Otavio who says the Real is extremely overvalued"."Winning" the Currency WarToday, I declare victory on behalf of Mantega!Mantega "won" his currency war. The Real was worth $0.65 in June of 2011. It is now worth about $0.32. That's a decline of slightly over 50%, and a clear "victory" over US forces allegedly conspiring to drive the Real higher.Surely this is good for the Brazil stock market. Right?In search of more victories let's take a look.EWZ - Brazilian iSharesThe above chart does include currency depreciation. Straight up, the chart looks better.$BVSP - Brazilian Stock MarketWhat about interest rates?Brazil 10-Year YieldBrazil 1-Year YieldToo Much SuccessTo shore up the currency, Brazil has now had to hike rates.But note the yield curve inversion. Brazil 1-year bonds yield more than 10-year bonds, a clear recession signal.This is what's known as "too much success".It's also too bad that Mantega is no longer around to receive my celebratory victory call.Brazilian president Dilma Rousseff Shuffled Mantega out the Door in November of 2014. Former treasury head Joaquim Levy took over as finance minister in one of many shifts announced by Rousseff.Success Hard to Stop Please note that it's hard to stop success once it gets rolling.At the time of the appointments, a Real was worth about $0.40. Now it's worth about $0.32. That's an additional 20% success in just over three months.Moreover, recent success comes in spite of three straight rates hikes by the central bank, the last one was a 50 basis point hike on March 4th to 12.75%.Recession is a given.Brazilians Voice AngerOn the political side, Dilma Rousseff campaigned with an anti-austerity message last year. She barely won reelection and her first move was to launch a series of budget cuts.Her speech last Sunday explaining the campaign lie was not well received: Brazilians Voice their Anger as Currency and Economy Continue their Collapse. President Dilma Rousseff went on national television on Sunday to ask for patience and understanding and was greeted by spontaneous protests in the country’s major cities, Brazilian media reported, describing citizens shouting “Dilma out” from their windows, banging pans, turning lights on and off and sounding car horns. Nothing succeeds like success!Addendum - Petrobras ScandalOne person suggested the Petrobras scandal explains the currency decline. That's not quite accurate, although it certainly adds to the misery. A slowdown in China hurt all commodity exporters. That set off a round of capital flight. Excellent grain harvests further hurt commodity exporters.One look at the currency charts of Australia, Canada, and Russia will also show the commodity exporter tie-in. Clearly Russia has other problems as well including sanctions and Ukraine.Nonetheless, the scandal is major news. 54 politicians are accused of taking bribes. Those politicians include a former president and the speakers of both chambers of Congress.The BBC reports Brazil Petrobras Scandal: Top Politicians AccusedPresident Dilma Rousseff has been completely cleared of any involvement in the scheme. She chaired the board of Petrobras for seven years when much of the corruption is believed to have taken place. Brazil's Attorney General Rodrigo Janot has accused many senior politicians of taking bribes. The list includes Senate President Renan Calheiros, President of the Chamber of Deputies Eduardo Cunha, former Energy Minister Edison Lobao and former President Fernando Collor de Mello. Analysts say because Petrobras has not yet been able to say exactly how much money it has lost to corruption, no-one knows for sure how much its assets are really worth. In December, prosecutors charged executives from six of the country's largest construction firms for allegedly channelling kickbacks into a Petrobras scheme to pay politicians. In Brazilian law, politicians and cabinet officials are tried by the Supreme Court.The Financial Times adds Petrobras scandal threatens to scupper Brazil austerity drive. Petrobras, the country’s largest company with a virtual monopoly over oil exploration in Brazil, is reeling from allegations that senior Petrobras executives accepted bribes from many of Brazil’s biggest construction companies in exchange for contracts. Much of the money was allegedly passed on to politicians, mostly in the ruling coalition. The scandal is complicating an already difficult political and economic scenario for Ms Rousseff, who won elections last October by the narrowest margin in recent history. The PT’s main coalition partner, the PMDB, is now the largest party in congress and is trying to force Ms Rousseff to share more power. At the same time, Ms Rousseff’s new finance minister, Joaquim Levy, is trying to set Brazil’s public finances back on track to avoid a sovereign credit rating downgrade after years of fiscal largesse. Tension has focused on her appointment of Mr Levy, a University of Chicago-trained orthodox economist. His fiscal austerity programme, which includes trimming benefits and raising taxes and interest rates, is straining relations with more leftist elements in the party.The Real's decline from $0.64 to $0.44 is not related to the scandal. Most of the decline from $0.44 to $0.32 is related to the scandal. Where it ends, I don't know. Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
THE term "currency wars" has been bandied about ever since Guido Mantega, the Brazilian finance minister, used it in 2010. He was complaining that quantitative easing (QE) by the US was weakening the dollar, and prompting a response from other countries that did not want to lose export competitiveness. This time round, the dollar is strengthening, but the term is being used again.Currency volatility is on the rise, albeit from a low base. And David Woo of BofAML thinks this is a bad thing. In a research note, he argues thatFor many countries facing zero interest rates and binding fiscal constraints, the only policy tool left at their disposal to stimulate growth is aweaker exchange rate.So the ECB and the Bank of Japan's QE programmes are designed, he thinks, to weaken their currencies; after all, bond yields are already so low that it is hard to see borrowing costs as a constraint for the corporate sector. (Incredibly, the yield on Nestle bonds turned negative yesterday.)Clearly, all currencies cannot decline, so it might be tempting to think this is a zero-sum game. But it is possible to argue that it is actually a win-win for the global economy; in attempting to depreciate their currencies, central banks reduce real interest rates and these lower real rates stimulate demand and investment.But Mr Woo argues instead that currency wars are a lose-lose. He writes thatHigher ...