Archive for December 18th, 2008

ECB (and others) can take some lessons from India

December 18, 2008

FT points:

Lucas Papdemos, ECB vice-president, revealed this week that the central bank could set up a central clearing house for interbank lending in a bid to get money flowing again in the system and reduce costs to end borrowers.

The dearth of interbank lending, which is often put down to a lack of trust between banks, has made cuts in the main interest rates by the ECB and other central banks less effective because they are not directly reducing interbank lending rates, which govern the cost of ordinary borrowing.

Money Markets are frozen in many economies and am sure they would be looking to the ECB solution. In that case, ECB (and others) could take some lessons from India. India has set up CCIL:

The Clearing Corporation of India Ltd. (CCIL) was set up in April, 2001 for providing exclusive clearing and settlement for transactions in Money, GSecs and Foreign Exchange. The prime objective has been to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the money, debt and forex markets in the country.

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OPEC cuts production for the third time since Sep 2008

December 18, 2008

It is just amazing to see the reversal of fortune for OPEC countries. From an all time high oil prices of nearly USD 150 per barrel in July 2008 to currently USD 40-45  per barrel. This is posing severe strains on these economies as they depend heavily on oil revenues. Till July there were pressures on OPEC to increase production to calm rising prices and now they are cutting production to protect falling prices.

On 17 Dec 2008, OPEC cut production for the third time since Sep 2008 by 2.2 million barrels per day. This makes it a total cut of 4.2 mbpd since Sep 2008.

 

Date

Cuts production by million barrels per day

Sept. 10 2008

0.5

Oct. 24 2008

1.5

Dec 17 2008

2.2

Total

4.2

OPEC raises concerns:

Having reviewed the oil market outlook, including overall demand/supply projections for the year 2009, in particular the first and second quarters, the Conference observed that crude volumes entering the market remain well in excess of actual demand: this is clearly demonstrated by the fact that crude stocks in OECD countries are well above their five-year average and are expected to continue to rise.

Moreover, the impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices, which have fallen by more than US $90 a barrel since early July 2008. Indeed, the Conference noted that, if unchecked, prices could fall to levels which would place at jeopardy the investments required to guarantee adequate energy supplies in the medium-to-long term.

Like almost all variables in economics and finance, I haven’t managed to understand the movement in oil prices. In a paper on the oil market, I thought it to be a pretty much a high demand – low supply story leading to rise in oil prices. At that time I thought oil prices are here to stay despite recession impacting severely.

Why? Because the increase in demand was coming from emerging economies and mainly from China. Though Chinese economy is expected to slow down severely, I thought existing demand levels should persist or decrease marginally. Even at existing demand levels, the oil prices shouldn’t have fallen so severely as supply-demand gap would have been still there. However, what is being seen is a huge fall and it looks as if people have stopped consuming oil in a large manner.

Looking at these recent developments, it is amazing to see the role expectations play in shaping economic and financial varaibles. We usually focus on expectations from an inflation perspective but not much research is done on how it influences investment, oil prices etc etc. Managing expectation is surely the key.

Assorted Links

December 18, 2008

1. TTR on the Satyam fallout and the promise it offers

2. MR points to a paper on Nazi’s fiscal policy

3. Krugman points to basic ideas to get rid of liquidity traps. He also points to some discussion on great depression

4. WSJ Blog pointstourism worst since 9/11. WSJ Blog points to new research on credit crunch which says

The common assumption that the credit crunch is the result of banks being short of cash to lend is not accurate, the researchers found. Instead, there is a complex mix of lower demand, higher standards and poor credit quality at play in pushing down loan volumes.

5. Macroblog on the employment numbers

6. Mankiw on crisis and increase in government budget

7. Roth points recession at yale

8. CTB on Ukraine’s crisis. CTB points to four stages of policy interventions in the crisis


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