Brazil is getting hot. Too hot, too fast

If there is one thing proven beyond doubt during this crisis is that government interventionism in the free market is nefarious.  Developing countries are again and again the victims of globalist inspired management.  Argentina was one notorious case, Iceland and Greece have followed; and now Brazil, a fairly prosperous country in the last decade, is on the way to becoming another victim of artificial implosion.

Financial Times

Brazil’s central bank raised its policy interest rate by three quarters of a percentage point on Wednesday evening in another sign thatBrazil getting too hot the country’s breakneck pace of growth is causing concern over rising prices.

Brazil’s economy expanded by 2.7 per cent in the first quarter over the previous quarter and by 9 per cent over the first quarter of 2009, the national statistics office said on Tuesday. That is much faster than what many economists consider to be the potential, or non-inflationary, rate of about 4.5 to 5 per cent.

“This shows there has been no change in the bank’s position since its previous increase in April,” said Silvio Campos Neto of Banco Schahin in São Paulo. “It is clear from all the indicators that the economy is heating up and inflation is still above target. This is worrying and demands further increases in rates.”

The bank raised its target overnight Selic rate to 10.25 per cent a year, the second three-quarter-point increase at the last two six-weekly meetings of its monetary policy committee.

Consumer price inflation ballooned from a low of 4.17 per cent a year last October to 5.22 per cent in the 12 months to May. Many economists expect inflation to reach 6 per cent by the end of this year, well above the government’s target of 4.5 per cent. Economic growth is expected to be about 6.6 per cent this year.

Mr Campos said he expected the bank to raise the Selic rate to 11.75 per cent by the end of this year.

He said successive interest rate increases would help bring growth back to sustainable levels and predicted the economy would grow by about 4.3 per cent in 2011.

Brazil’s domestic market has recovered quickly from a brief recession during the global crisis, spurred on by a rising consumer class that has benefited from more than a decade of economic stability and low inflation, and from low-cost but effective income transfer programmes.

But the fast pace of growth has exposed bottlenecks such as the poor quality of Brazil’s infrastructure and its heavy tax burden. The rate of investment has risen in recent years but is still short of what is needed to deliver fast, sustainable growth.

Background: Fears of overheating

Brazil’s economy was among the fastest growing in the world during the first quarter, according to figures released on Tuesday that add to fears the economy is overheating and to expectations that the central bank will raise rates again on Wednesday.

The economy grew at a faster-than-expected annual rate of 9 per cent in the three months to March and by 2.7 per cent compared with the previous quarter, according to the IBGE, the national statistics office.

Part of the reason for the growth was an increase in investment, with the rate of investment rising to 18 per cent from 16.3 per cent a year earlier, spurred by gross fixed capital formation, which leapt by 26 per cent year on year, the fastest rate since the IBGE’s current series began in 1995.

“This confirms that the economy is very heated,” said Rafael Bacciotti, economist at Tendências, a consultancy in São Paulo. “The stand-out sectors were industry and services. Employment and wages are also growing strongly and we expect this to continue throughout the year.”

The manufacturing industry grew by 17.2 per cent year on year and the retail sector by 15.2 per cent. Imports also set a record, surging by 39.5 per cent year on year.

The central bank’s most recent weekly survey of market economists showed expectations of overall growth this year rising to 6.6 per cent, the 12th consecutive week of climbing expectations.

But many believe the economy cannot grow at more than 4.5 or 5 per cent a year without provoking an increase in inflation.

The central bank has been forced to act by steadily rising inflation expectations over recent months. Since October, Brazil’s consumer inflation rate has surged from an annual rate of 4.17 per cent to 5.26 per cent in April. However, the central bank’s most recent survey showed a slight drop in forecasts for inflation during 2010, with the average falling to 5.64 per cent from 5.67 per cent a week earlier.

Most economists expect the central bank to announce a second consecutive three-quarter percentage point rise in its policy interest rate, the Selic, at the end of its monetary policy committee’s regular two-day meeting tomorrow.

The committee meets every six weeks to decide whether to change the Selic rate in pursuit of the government’s annual consumer price inflation target, currently 4.5 per cent a year.

If expectations are confirmed, the Selic will rise to 10.25 per cent a year, up from 8.75 per cent when the current tightening cycle began in April.

Let’s talk European Double Dip

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RT

The US and Russia are gaining traction on an economic rebound, with China posting rudely healthy 1Q 2010 GDP growth. But its timeEurope double dip for Europe to get ready for Recession – the sequel.

Jean Claude Trichet is an urbane, intelligent and eminently reasonable man, and the ECB he leads has, as he rightly pointed out during Thursday’s Lisbon press gathering to announce a non rate movement, done a sterling job in defending the Eurozone against inflationary pressures for the better part of a generation.

Surrealism

But there was an air of surrealism that the late Luis Bunuel would have enjoyed. There were the press representatives all revved up for quick and punchy responses to the emerging contagion and what the ECB could offer. What they go was the ECB President languidly going on about Eurozone growth and inflationary pressures, and keeping the Eurozone budgetary house in order. He offered nary a word of substance about the fire which has broken out in its Greek kitchen, and even less in recognition of the potential for the curtains in its Mediterranean sunrooms to become part of the conflagration. It was sort of like a man reading out a weather report involving light breeze, some cloudy patches and fine and mild conditions in general – whilst on fire, and in heavily French accented English.

The truth be told, nothing more should be expected of him. His job is, as head of the ECB, to keep inflation rates at or about 2% first and foremost, issue warning about potential deviations from the inflationary comfort zone, and bend ECB monetary policy to maintaining or seeking it. He shouldn’t be expected to don red underpants and cape and try to be superman.

What he did say was that default wasn’t an option as far as he was concerned for Greece, but he also couched that by noting it was up to Greece, the nations lending to it, and the IMF to come to an arrangement to head that off. When asked directly about whether inflation or the Euro was the prime focus for the ECB, he was emphatic about the former.

Somewhere in the back of his mind however he must surely be countenancing the possibility of a further return to recession in Europe, and the likelihood that in the medium term he will need to cut rates once again in order to head off deflation rather than inflation, and to try again to get the Eurozone some traction on an economic recovery.

Borrowing costs heading north

For the simple matter is that the Greek debt, and the Eurozone response to it, is already starting to lift borrowing costs, and they could indeed jump considerably higher if the contagion he didn’t want to speak about yesterday were to, as appears increasingly possible, take hold in Spain, Portugal and Italy in particular.

This week already sees overnight and 3 month dollar LIBOR up, along with the LIBOR-OIS spread, as ‘Club Med’ CDS have widened sharply, and Greek Portuguese and Spanish government bond yields have pushed higher – to record levels for the latter two against the 10 Year German Bunds. A couple of screens away one can observe Greek three year bonds rising from 11-17% in a week, and other 3 year bonds from Spain and Portugal up a percent. Whilst it isn’t Lehman Brothers panic mode, there is still some way to go, and there is a faint whiff of counterparty risk coming from somewhere.

Lots of Eurozone debt

The reason for this is quite simple. A lot of Europe has far too much debt, and most nations have structural budget deficits adding to it. Greece might be out in front, but Portugal, Spain and Ireland are in the pack not far behind it, and the Italians are at best a half length behind them. The exposure of European banks to these nations is well over 2 trillion dollars. 2 trillion is also the total European debt rollover requirement of this year, with more than a trillion of that belonging to the Club Med watching their yield and CDS needs start to get pointy. Spain alone is mulling more than $550 billion.

Now at this point the first thought is that the Germans are the first logical place to look in terms of bailing all of this out and making sure that the liquidity keeps flowing. Notwithstanding the quite reasonable concerns of German taxpayers about bailing out what they see is profligate sun drenched laggards, and the pragmatic thought that German banks are amongst those where the money will end up, which is essentially socializing potential losses for them, with those same taxpayers picking up the tab, there is another fly in the ointment. Last year Germany passed a law limiting its federal government budget deficit to 0.35% of GDP from 2016. That means that opening the sluices now to help anyone too much could pressure that need.

This leaves – without wanting to point fingers of blame at anyone – a dysfunctional Eurozone large in any consideration of the future. And that counterparty risk starts to take a more overt shape.

Euro Banks bracing for a hit

Any possibility that Greece, and then possibly other nations, may either default, or restructure in some other way, is going to see the lenders – the banks – get less in the Euro than they are currently exposed for. That means potentially large writedowns. From there the next logical step for the banks is that they lend a lot less, and presumably jack up interest rates on what they have already lent. In the case of European banks there is an added issue in terms of their underlying capital base, which is in many cases less than their US counterparts. So that leaves the prospect of either a financial sector tightening due to higher borrowing costs for the state and major lenders, if not a financial sector tightening due to capital flight, a financial sector tightening due to banks having holes blown in their balance sheets, writedowns, or in the worst case, financial sector tightening due to banking collapses and corporate or state insolvencies.

With the increasing likelihood that Eurozone banks are likely to take a hit one way or the other, there isn’t a great deal the ECB can look to do. It could look to monetize debt by printing money, but that would let the inflation dog out of the bag and involve a lengthy negotiation process with a number of politicians from across the EU to get agreement on. It could look to buy any debt from banks and try and get banks in turn to buy sovereign debt, which would be the first step in taking over whole national banking systems and presumably would require a lot more lengthy political discussion – and Trichet did note at Thursdays press conference that the move to help Greece out this way announced last weekend had been arrived at as a one off. If the process of getting a game plan together for the Greeks together is any indication then any political approval process is likely to take time.

More…

A Financial Conflagration of Immense Proportions

Fiat money buckling, an inflationary depression, years of reckless spending, Greek debt unpayable, Euro zone in jeopardy, a loss of integrity in US markets, criminal charges for Goldman Sachs, side pockets a new hedge fun trick, Banks on subprime offensive, Fed works the printing presses overtime…

International Forecaster

America and the world face a financial conflagration of immense proportions. The world of fiat money and massive credit is bucklingfinancial crisis under the pressure of unpayable debt. Each day the safe haven of gold and silver related assets become more attractive. We ask where else do you go for safety? A conflagration is a fire out of control and that is exactly the conditions the world faces today. The inflationary depression has smoldered for 14 months and it will soon accelerate.
For the last 15 years the world has lived far beyond its means especially the US, UK and Europe and as we all know that cannot continue indefinitely. The federal government continues to hire when it should be firing. Having lost 80% of our industrial base we struggle in a service economy that cannot service 300 million plus people, never mind supply exports to offset the cost of imports that we no longer manufacture. We now supply indefinite unemployment benefits, which in reality cannot go on forever. The fiscal debt spirals ever higher and the Fed creates money and credit with no end in sight, which devalues the dollar. Taxation on individuals and businesses continues relentlessly higher. This is the way of corporatist fascism. This is now the way of America.
Officially the destruction of America began on August 15, 1971 when the US abandoned the gold standard. The Council on Foreign Relations said years ago, that 2012 would be the year for the implementation of world government.
In Europe we see the manifestations of years of reckless spending in Greece., a nation that will have to be bailed out by the IMF and other European countries, especially by Germany that holds much of the worthless bonds issued by Greece. Greek bonds are now yielding 17%. Such a premium will not save the economy. The debt service is unpayable. Greece should leave the euro zone; reissue the drachma and default, now. Their position is untenable. We said this on Athens International, French International, BBC worldwide and Deutsch Welle radio a few weeks ago. The Greeks certainly are not blameless, but 80% of the blame lies with the bankers. The outcome is Inevitable, whether it’s now or 1-1/2 years from now. These problems affect all euro zone nations and all will suffer accordingly. For the time being most of the damage to the euro is over, but in time the euro will break up, probably in the next two years. As a result official EU unemployment will hit 14%.
We do not believe the powers that be want Greece to bite the dust just yet, as we pointed out previously. We believe they envision a simultaneous collapse of many nations and multilateral devaluation and debt default. This is their style. This way they believe they can control things and cover up one of the biggest transfers of wealth and power in history. The elitists expect to then usher in world government, as they create another world war.
Those who recognize what the elitist plays are can safeguard their assets and perhaps become very wealthy in that process. Those who ignore the signs and warnings are doomed to lose most everything. Political solutions won’t work now and they won’t work later.
The life of the euro zone and the EU, which consistently have been wrong, at least for now, are trying to make us believe all is well. All is not well. We are told over and over again the crisis won’t spread and it will spread and is spreading. Borrowing costs are already rising in Portugal, Spain, and Germany and throughout Europe.
The euro zone is in jeopardy as Greek contagion affects Portugal and Spain. Sovereign debt is the new subprime paper. We could perhaps see a domino effect as bond yields use in the weaker countries and eventually spread to the stronger European countries, and to the UK and US. The problem will eventually affect the entire world if it rolls out that way. Such a situation could cause a crisis of confidence, which would most certainly drive gold and silver prices higher. Bond markets would already have been affected and world stock markets would be falling. We are perhaps seeing that already with a topping in the US and European equities suffering their largest losses this year. In Europe, Greek bond losses are onerous. A bailout of Greece will probably come and their debt rescheduled. If the bailout doesn’t come watch out. The fallout of a Greek default, the exit from the euro, and the reintroduction of the drachma could force the other 18 nations in trouble to the edge if not into insolvency. These ideas are what we expressed this week in an interview with Greece’s largest newspaper. In addition we could see the dumping of PIIGS bonds and stocks. This could cause major losses and freeze markets. It could also lead to the demise of the euro zone and deeply damage the EU. Another unexpected outcome could be the withdrawal of Britain from the EU followed by the imposition of tariffs on goods and services by the UK, which would be followed by the US.
Another aspect to the Greek problem is that rating cuts are going to force Greek banks to post more collateral, which would force them into a liquidity trap and that could spread the contagion through the global financial system. If more collateral is not forthcoming the banks’ bonds would be downgraded. This also could cause Greek banks to sell assets, putting more pressure on an already weak system. Is it no wonder that gold and silver prices are rising?
In spite of all this the euro zone has the fiscal capacity to backstop banks within the region and to support the PIIGS. The question is will they? Germany seems to be in no hurry to do so. Greece needs loans or to float bonds in the amount of $350 billion over the next five years, which is a tall order. The present approach is to solve this year’s problems of some $80 billion, but bondholders are looking out five years. They are saying to themselves what is going to happen next year and up to five years from now. One good thing is if the Greeks stay in the euro zone they cannot monetize debt away and ruin bond values. Seventy percent of Greeks oppose dealing with the IMF, or accepting loans from the EU. We ask then what do they propose? This is why many investors are throwing their hands in the air and opting to buy gold throughout Europe. No matter which way Greece takes gold is really the only good hedge against a devaluing euro. Gold is not only a hedge against the euro, but also against commodity inflation. A recovery, if it did take place in Europe, would cause higher inflation as well. Causing conflict on the inflation issue is the ECB’s opinion that there is no inflation, when even officially there is. Germany had best not press Greece too hard, because if Greece leaves the euro it would rock global markets. We believe a deal will be done and that will temporarily solve the problem, perhaps for 1 or 1-1/2 years. That is when all the financial derelicts will be taken down together.
We in switching gears must look at the sovereign debt problems of many nations, the US as well. We see a fierce loss of integrity in US markets, due to the play unfolding in the US House and Senate via inquiry and actions by the SEC against Goldman Sachs and others. The US is not Greece, but it has many similar problems. These terrible events unfolding have to eventually reflect lower dollar values as well as a lower market, higher interest rates and higher gold and silver prices. It is apparent and transparent that Goldman has been charged civilly by the SEC in order to protect the firm and its employees from criminal charges, to divert attention away from the passage of a new financial regulatory bill that would make the Fed a despotic power and to make the administration and the Democrats look good going into the November election. Then there is the ongoing mortgage fallout and all the Fed and Treasury giveaways. Making matters worse is the refusal to answer important questions by the Fed for spurious reasons. Then worse yet the SEC told Goldman they were going to be charged two weeks before the announcement was made.  Sixty percent of the toxic waste was sold in Europe, mostly to Germans and they are not happy about that. We cannot understand why the Germans did not sue 2-1/2 years ago, and still haven’t.   More…