Archive for March 25th, 2019

Move over Greenspan/Bernanke/Powell Put, time to look at Das Put?

March 25, 2019

Mint op-ed piece today:

A $5-billion, three-year dollar-rupee swap by the central bank with commercial banks to primarily increase “durable” liquidity in the system is bound to have multiple ripple effects. The first obvious outcome will be a definite increase in liquidity when RBI buys dollars and releases rupees in the market. Second, the surge of liquidity, combined with a downward pressure on premiums for near-term forward contracts, will influence interest rates in the economy. Third, RBI has often expressed its concern over rupee-dollar trades moving to the non-deliverable forward markets of Singapore, Dubai and London. This swap might draw some of that activity back to local markets. Fourth, the appreciation of the rupee since the forex swap announcement on 13 March—over 1% till 22 March—seems to indicate that India’s central bank now has a higher tolerance level for its rise against the dollar.

Despite these certain outcomes, the governor’s actions can be viewed through different lenses. In some ways, his adoption of this curious liquidity tool to increase systemic liquidity can also be seen as his way of ensuring that Indian markets do not search for new bottoms.

Till market closing on 22 March, the BSE Sensex had gained 1.7% since the swap was declared. Comparisons are being made with a market strategy adopted when Alan Greenspan was chairman of the US Federal Reserve, which came to be known as the “Greenspan put”; in simple words, players expected the Fed to intervene by easing its monetary policy every time markets hit a speed-breaker. This pretty much continued till the financial crisis erupted and forced a rethink of the Fed’s dominant tenets.

Scheduled this week, RBI’s swap will have one obvious outcome: higher dollar inflows as lower hedging costs encourage Indian companies to borrow more overseas and foreign portfolio investors find rising returns from rupee assets.

Too early to say whether there is Das Put or not. But then central bankers have pretty much boxed themselves into these put options. One is always pressurised to do something when financial markets begin to decline significantly….

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Italy joins China’s Belt and Road Initiative – here’s how it exposes cracks in Europe and the G7

March 25, 2019

Winnie King, Teaching Fellow at University of Bristol explains:

While the current Italian government has not been fully unified toward China, a severe economic downturn has made the world’s second largest economy look more appealing to it. Alberto Bradanini, Italy’s former ambassador to China, has stressed that Europe’s own indecision and inability to tackle trade deficits with China (of which Italy contributed approximately €176m, or an eighth of the EU’s total trade deficit) is a key motivator behind this decision.

Italy wants to enhance its “Made in Italy” brand through increasing trade – especially in the form of exports – to China. The BRI is seen as a vehicle to achieve this. Italy offers goods (in particular luxury goods and foodstuffs) that are attractive to China’s growing middle class and increasingly affluent population.

China is also interested in investing in Italian firms. More significant, however, are Italy’s key infrastructure assets. This would enhance the transport and trading network of the BRI, giving it strategic access to Europe. Less than 2% of Italy’s sea imports come from China so there are substantial prospects for growth in that area.

A deal between Genoa’s port authority and shipping firm China Communications Construction Company (CCCC) has already been approved by the Italian government. And the port city of Trieste hopes for something similar. This would offer China and the BRI a more direct route to move goods onto the European continent and an ideal hub for accessing new rail lines and transport networks to Germany, Austria, Slovenia and other regional economies. By giving China access to its ports, Italy is hoping for infrastructure investment from China’s Asian Infrastructure Investment Bank (AIIB) – something the Italian government is trying to link to its role in the BRI.

Interesting! The game of power ensures there are no permanent allies and enemies.

Italy’s status as a G7 country is a coup for the Chinese leadership and the legitimacy of the BRI. While the prospect of Italy’s participation underscores growing fault lines in the EU’s joint approach to China, China has also been effective at dividing and conquering EU member states by targeting them individually.

So Italy’s decision to join the BRI is significant. But four years ago we saw Italy, France and Germany join China’s AIIB, contrary to US wishes. Therefore, Italy is neither the first, nor will it be the last European economy that will “go rogue” and follow its own national interest with regard to China.

 

Bretton Woods at 75: History and current relevance

March 25, 2019

In July 2019, BW will mark its 75th anniversary.

Arminio Fraga, a former president of the Central Bank of Brazil (1999-2002) has a piece on its history and current relevance:

So, what can we say about Bretton Woods in a world in transition?

First, with the US less dominant and less willing to provide global economic and financial leadership, systemic instability is likely to increase. As the American economic historian Charles Kindleberger famously warned, this typically occurs in transitional moments when a global hegemon is absent. Some signs of this are already visible in trade and regional tensions, growing leverage, and rising nationalism.

Second, “Bretton Woods” should now be seen to include not only the original institutions, but also more recently established global forums and regional arrangements. These mechanisms of cooperation constitute a realistic practical response to current challenges.

Third, one must ask whether developing countries will continue trying to converge with more advanced economies, and whether the expanded Bretton Woods family of institutions can remain meaningful stewards of global progress. My answers tend toward yes to both, if one takes a long-term view. Developing countries will aim to emulate the earlier successes of the Asian Tigers and Eastern Europe. And countries will prefer dialogue and cooperation to the failures of those such as Venezuela and North Korea that opted out of the global system.

Lastly, this hopeful vision may now be under threat from the disturbing shift toward illiberal and populist political regimes around the world. But history shows that liberal politics and economic policies have undoubtedly delivered more progress and peace than any other system.

Seventy-five years ago, economic policymakers gathered at Bretton Woods to create a new financial order for the postwar world. Today, their successors can still draw on some of these achievements in designing a global economic governance system for the twenty-first century.

Hmm..

Reliving and retracing Francis Buchanan’s 200 year old journey to figure Southern India..

March 25, 2019

This is as good a project as any to understand economic and social history in Southern India. The lessons can obviously be applied elsewhere as well:

With the fall of Tipu Sultan in 1799, the East India Company consolidated their control over erstwhile Mysore. As part of the process, they appointed Francis Buchanan, a Scottish physician and geographer, to survey parts of southern India, for which he traversed through lengths and breadths of southern India collating information, statistics, oral-histories on a range of physical, political, cultural, social and economic subjects.

Buchanan did this journey from 24-Apr-1800 to 5-Jul-1801 with his team. They travelled a distance of some 4000 km with 20-25 kms everyday. They halted at some 300 locations. Later he prepared a 3 volume based on his journeys whose title says it all:

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