Tag Archives: monetary policy

Monetary Defeat and Political Suicide-Zimbabwe

Zimbabwean dollars image from wikipedia

Zimbabwe: Deflation has taken root as consumer demand shrinks and the economy struggles with a shortage of dollars. Once bustling factories in Harare are now rusty shells, devastated by the 1999-2008 recession that cut GDP by about half.  In addition, the mines are reeling from the fall in commodity prices and a drought has left 16% of the population needing food aid. Formal unemployment stands at more than 80% and power shortages are getting worse…

A year ago, Mugabe, the President of Zimbabwe,  turned to “old friend” China, but behind the official warmth Beijing made clear the days of blank cheques were over, forcing Zimbabwe to make repayments on $1 billion of loans made over the previous five years….

Zimbabwe has also opened talks on fresh loans from the World Bank, IMF and African Development Bank for the first time since 2009, when it started defaulting on its foreign debt, which now stands at $10.4 billion or 74% of GDP….

In the past, Mugabe parcelled out land seized from white commercial farmers, raised wages for state workers and printed money to finance government spending to shore up his support. Now he has little room to manoeuvre after the adoption of the US dollar in 2009. The government can no longer devalue the currency, print money to stimulate the economy or influence interest rates…

But new international loans will require reforms, including selling some loss-making state firms, which are a constant drain on the public purse, analysts said.Harare would need to plug leaks in its finances, increase transparency in mining revenue, redistribute idle farms to competent farmers and ease black economic empowerment laws requiring foreign-owned firms to sell majority shares to locals.  “By far the biggest reform is that of the civil service. The government needs to cut spending on salaries, which the authorities are conscious of,” said a Western diplomat who has helped Harare in discussions with foreign creditors.  Wages take up 83% of Zimbabwe’s $4 billion annual budget. Finance Minister Patrick Chinamasa has said the bill should be cut in half, but there is no consensus within cabinet on how to do it.  The government is now the biggest employer with 550,000 workers of the total 800,000 formal jobs. Most Zimbabweans earn a living in the informal sector and on the streets.

Excerpts from Zimbabwe’s Mugabe warms to the West as economy wobbles, Reuters, Oct. 22, 2015

United States Treasuries, Russia and Brussels Finance Center


Russia has offloaded a fifth of its holdings of US Treasury debt in March 2014 at a time of heightened speculation that its assets would be frozen as part of sanctions over the crisis in Ukraine.  It was the largest seller during the month while Belgium extended its big buying streak, according to US Treasury International Capital (TIC) data released on Thursday.  A decline of $25.8bn in Russia’s Treasury holdings to $100.4bn involved the selling of short-term bills.  But the large drop in Russia’s holdings does not explain a record weekly $105bn drop in US government debt held at the US Federal Reserve on behalf of official foreign institutions back in March 2014.  At the time, many in the bond market thought Russia may have shifted to a new custodian rather than run the risk of having its assets in the US frozen due to sanctions over Ukraine.  “The TIC data suggests it wasn’t entirely a Russian story,” said Ian Lyngen, a strategist at CRT Capital.  He said the selling by Russia “provides some support to the argument that the shift in holdings has been driven by geopolitical concerns versus economics and valuation”.

Russia’s Treasury holdings have declined over the past five months from $149.9bn. In contrast, Treasury holdings for Belgium continued to expand sharply.  The country added a further $40.2bn during march and its holdings have more than doubled in the past year to $381.4bn, making Belgium the third largest foreign holder of US government debt after China and Japan.  The move is seen reflecting secret buying of top-rated sovereign debt by other countries using Brussels as a financial centre.  “This is consistent with the recent trends and continues to suggest another country is running their purchases through a Belgium-based custodian,” said Mr Lyngen.  He added that Belgium has purchased Treasury bills over the past five months while it has sold a net $6.82bn of notes and bonds.

The US Treasury has sought in recent years to improve how its official data are collected as some countries purchase government bonds through intermediaries in major financial centres, such as London or Hong Kong.  This means financial centres are temporarily highlighted as large buyers, rather than the countries that are really adding to their Treasury holdings.  Some traders believe the hefty buying by Belgium could also stem from investors utilising the clearing and securities lending services of Euroclear, the bank-owned central securities depository and custody service headquartered in Brussels.

Overall foreign purchases of Treasury notes and bonds, known as coupon debt, during March was $25.9bn, down from the $92.5bn that was bought in February.  China remained the largest foreign holder of Treasuries, with its portfolio steady at $1.27tn in March while, at number two, Japan trimmed its inventory down to $1.2tn. Oil exporters and Caribbean banking centres, which are a proxy for hedge funds, and Switzerland were modest buyers in March 2014.

Michael Mackenzie, Russia dumps a fifth of its US Treasuries, Financial Times, May 15, 2014

Monetary Implications of Geopolitics: Russia, United States, Ukraine

EE_Savings_Bond The record drop in U.S. government securities held in custody at the Federal Reserve is fueling speculation that Russia may have shifted its holdings out of the U.S. as Western nations threaten sanctions.  Treasuries held by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, 2014 according to Fed data as the turmoil in Ukraine intensified. As of December, Russia held $138.6 billion of Treasuries, making it the ninth largest country holder. Russia’s holdings are about 1 percent of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg.  “The timing of the drop in custody holdings makes Russia a more likely suspect,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. in a telephone interview. “If Russia did it, then they may have transferred the holdings to another bank outside of the U.S.”  Crimea is preparing for a March 16 referendum on splitting from Ukraine after Russia seized the peninsula. Secretary of State John Kerry warned Russia that the U.S. and Europe could take serious action after the referendum should there be no sign of a resolution to the Ukraine crisis.” The decrease in custody holdings at the Fed spurred speculation Russia may have moved to raise funds to defend its currency as the turmoil worsens. The ruble has declined 10.3 percent against the dollar this year and reached a record low 36.9 per dollar on March 3. It declined 0.2 percent today to 36.6.  “If they were selling to defend the currency, the market would have felt the impact on yields more substantially,” said David Keeble, the New York-based head of fixed-income strategy at Credit Agricole SA. Central banks at the end of last year may have been adding to their holdings in Europe, such as Belgium’s central bank. Belgium custodial holdings of Treasuries rose by 28 percent in December to $256.8 billion, according to Bloomberg data.  “A lot of people are looking at Belgium,” Keeble said, referring to shifts in foreign reserves. Foreign holdings of Treasuries totaled a record $5.79 trillion at the end of last year (2013), according to Treasury data released in February. Fed holdings for its own account were $2.2 trillion. The U.S. central bank has begun tapering its monthly purchases of Treasuries to $35 billion as it winds down monetary stimulus that was designed to help foster economic growth.  China, the biggest foreign U.S. creditor, held $1.27 trillion of U.S. government bonds as of December. Japan is the second-largest holder at $1.18 trillion. Susanne Walker , Fed Custody Holdings Record Decline Fuels Russia Speculation, Bloomberg, Mar 14, 2014

The Pantie Protesters and the Kazakh Dream

kazakh tenge

A few protesters brandishing lacy underwear may not look like a threat to the stability of the state. But the authorities of oil-rich Kazakhstan took no chances on February 16th when a group of demonstrators waving their knickers appeared on the streets of the financial capital, Almaty. The “pantie protesters” were rounded up and led away.  Their demonstration was ostensibly prompted by a rule regulating synthetic underwear due to come into force this summer under a new customs union between Kazakhstan, Russia and Belarus…  [But the real] source of anger was the devaluation of the Kazakh currency, the tenge, on February 11th. It plunged by 19%, causing fears of a spike in inflation and a dip in living standards in a country that imports many consumer goods….

The protests are small but they hint that Mr Nazarbayev’s unspoken social contract—in which citizens trade political freedoms for relative prosperity and social stability—is becoming fragile. Tensions surfaced in 2011, when 15 people were shot dead as striking oil workers clashed with police in Zhanaozhen in the west of the country. Now the devaluation has reminded many ordinary people—maxed out on credit and exasperated by the growing rich-poor divide—that they are not living the “Kazakh dream”.

Kazakhstan’s economy: Tenge fever, Economist,  Feb. 22, 2014, at 35


Bitcoins and Ripples: digital currency

bitcoin logo

In January a unit of Bitcoin, a digital currency, cost around $15 (Bitcoins can be broken down to eight decimal places for small transactions). By the time  On  April 11th, it had settled at $179, taking the value of all Bitcoins in circulation to $2 billion. Bitcoin has become one of the world’s hottest investments, a bubble inflated by social media, loose capital in search of the newest new thing and perhaps even by bank depositors unnerved by recent events in Cyprus…

What makes Bitcoin different is that, unlike other online (and offline) currencies, it is neither created nor administered by a single authority such as a central bank.Instead, “monetary policy” is determined by clever algorithms. New Bitcoins have to be “mined”, meaning users can acquire them by having their computers compete to solve complex mathematical problems (the winners get the virtual cash). The coins themselves are simply strings of numbers. They are thus a completely decentralised currency: a sort of digital gold.

Bitcoin’s inventor, Satoshi Nakamoto, is a mysterious hacker (or a group of hackers) who created it in 2009 and disappeared from the internet some time in 2010. The currency’s early adopters have tended to be tech-loving libertarians and gold bugs, determined to break free of government control. The most infamous place where Bitcoin is used is Silk Road, a marketplace hidden in an anonymised part of the web called Tor. Users order goods—typically illegal drugs—and pay with Bitcoins.

Some legal businesses have started to accept Bitcoins. Among them are Reddit, a social-media site, and WordPress, which provides web hosting and software for bloggers. The appeal for merchants is strong. Firms such as BitPay offer spot-price conversion into dollars. Fees are typically far less than those charged by credit-card companies or banks, particularly for orders from abroad. And Bitcoin transactions cannot be reversed, so frauds cannot leave retailers out of pocket.

Yet for Bitcoins to go mainstream much has to happen, says Fred Ehrsam, the co-developer of Coinbase, a Californian Bitcoin exchange and “wallet service”, where users can store their digital fortune. Getting hold of Bitcoins for the first time is difficult. Using them is fiddly. They can be stolen by hackers or just lost, like dollar bills in a washing machine. Several Bitcoin exchanges have suffered thefts and crashes over the past two years.

As a result, the Bitcoin business has consolidated. The leading exchange is Mt.Gox. Based in Tokyo and run by two Frenchmen, it processes around 80% of Bitcoin-dollar trades. If such a business failed, the currency would be cut off at the knees. In fact, the price hiccup on April 10th was sparked by a software breakdown at Mt.Gox, which panicked many Bitcoin users. The currency’s legal status is unclear, too. On March 18th the Financial Crimes Enforcement Network, an American government agency, proposed to regulate Bitcoin exchanges; this suggests that the agency is unlikely to shut them down.

Technical problems will also have to be overcome, says Mike Hearn, a Bitcoin expert.

But the real threat is competition. Bitcoin-boosters like to point out that, unlike fiat money, new Bitcoins cannot be created at whim. That is true, but a new digital currency can be. Alternatives are already in development. Litecoin, a Bitcoin clone, is one. So far it is only used by a tiny hard-core of geeks, but it too has shot up in price of late. Rumour has it that Litecoin will be tradable on Mt.Gox soon.  A less nerdy alternative is Ripple. It will be much easier to use than Bitcoin, says Chris Larsen, a serial entrepreneur from Silicon Valley and co-founder of OpenCoin, the start-up behind Ripple. Transactions are approved (or not) in a few seconds, compared with the ten minutes a typical Bitcoin trade takes to be confirmed. There is no mystery about the origins of Ripple nor (yet) any association with criminal or other dubious activities.  OpenCoin is expected to start handing out Ripples to the public in May. It has created 100 billion, a number it promises never to increase. To give the new currency momentum, OpenCoin plans eventually to give away 75% of the supply. Existing Bitcoin users can already claim free Ripples and eventually anyone opening an OpenCoin account will also receive some.

Excerpts: Virtual currencies: Mining digital gold, Economist, Apr. 13, 2013, at 69