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GLOBAL ECONOMY 

$ 8 billion deal to buy Euronext by IntercontinentalExchange 

(Reuters)  Dec. 20, 2012:  IntercontinentalExchange agreed an $8 billion deal to buy New York Stock Exchange owner NYSE Euronext on Thursday, propelling the commodities player into European financial futures and helping it to take on arch rival CME Group.

Atlanta-based ICE will look at selling Euronext, NYSE's European stock market businesses, in an initial public offering after the deal closes in the second half of next year.

The deal gives a 12-year old start-up ownership of the New York Stock Exchange, an iconic symbol of U.S. capitalism for over 200 years which has been hit by new technology and the rise of private trading venues run by Wall Street banks and brokers.

"Our transaction is responsive to the evolution of market infrastructure today and offers a range of growth opportunities," ICE Chairman and CEO Jeff Sprecher, who will be chairman and ceo of the combined group, said in a statement.

Under the terms of the deal, ICE will pay $33.12 per NYSE share, a 28 percent premium to their closing price on Wednesday. The $8.2 billion deal will be paid one third in cash with the remainder in ICE shares.

NYSE Euronext stock rose nearly 32 percent after the deal was announced, while ICE's shares fell four percent before clawing back some of the losses to trade down 1.7 percent at 10:10 a.m. ET.

"The Board of NYSE Euronext carefully considered a range of strategic alternatives and concluded that ICE is the ideal partner for NYSE Euronext in an evolving market landscape," said Jan-Michiel Hessels, chairman of NYSE Euronext.

Analysts said the deal will give ICE a strategic boost with control of Liffe, Europe's second-largest derivatives market, helping it compete against U.S.-based CME Group Inc, owner of the Chicago Board of Trade.

"ICE is after Liffe, that is the crown jewel of NYSE Euronext," said Peter Lenardos, analyst at RBC Capital Markets. NYSE bought Euronext, including Liffe, for 8 billion euros in 2007.

"Strategically it makes sense for ICE to enter the European derivatives space in a meaningful way."

Sprecher said the deal had been "well received" by regulators after he and NYSE CEO Duncan Niederaur completed a "whirlwind tour" in the United States and Europe ahead of Thursday's announcement.

SWEET FOR SUGAR

ICE, founded in 2000, has its roots in electronic commodity trading and a tie-up with Liffe will boost trade in soft commodities such as sugar, buoying its profits.

"I would imagine that, having the softs contracts under one roof, would provide for easier arbitrage, financing and development of trading opportunities behind the contracts, via swaps and options," said Jonathan Kingsman, a sugar trade veteran who heads agriculture at information provider Platts.

"If you have clearing membership of ICE, you could trade London contracts under the same membership."

An ICE-NYSE Euronext tie-up would leap-frog Deutsche Boerse to become the world's third-largest exchange group with a combined market value of $15.2 billion. CME Group, ICE's largest U.S.-based rival, has a market value of $17.5 billion, Thomson Reuters data shows.

President Obama termed Sandy as a major disaster during a White House press briefing 

 Sandy punches big holes into US economy, politics

Shahid Islam

(October 30, 2012)

The ‘Superstorm Sandy’ could not have come at a worse time. It has hit areas which are not used to withstanding the kind of devastation wrought in by the worst storm in recorded history. It has also punched big holes in US economy and politics.

According to Craig Fugate, head of the Federal Emergency Management Agency (FEMA), “we are anticipating that, based on the storm, there could be impacts that would linger into next week and have impacts on the federal election.”

Declared as a “major disaster” by President Barack Obama, Sandy has already disrupted early voting in several states, including Virginia; one of eight key battleground states in the presidential race.

Stretched over 900 miles, the Frankenstein storm is the largest tropical storm ever recorded in the Atlantic Ocean. Its damage multiplied due to it slamming ashore in the most densely populated areas of the 10 East Coast states. Over 100 people have been found dead so far and more bodies are being recovered.

The 12 states in Sandy’s path account for about 23 percent of the US’s GDP, totaling about $13 trillion a day in economic output. Economists fear that short term blow to the economy could result in a staggering $50 billion loss and could subtract about 0.6 percentage point from the October-December quarter growth.

Combined with the losses incurred in damaged property, lost business and infrastructural damages, the final figure could surpass $100 bn.

As a rule of thumb, losses in natural disasters are assessed by doubling the cost of insured losses, presuming half of the losses will be covered by insurance compensation. As private insurers do not cover flood damage, public fund is the hope for millions of other victims. The FEMA-run National Flood Insurance program may have to disburse billions of dollars in compensation to the individual flood victims in coming weeks.

And, amidst expected surge in post-storm import and reduction in export, the FEMA-sourced compensation will increase budget deficit further. The 2012 budget gap is already over $1 trillion.

Besides, lost business from Sandy is expected to amount to as much as 40% to 45% of the property damage figure, says expert. The calculated loss does not, however, include losses from employment, hours spent in preparing for storm damage control, etc.

Add to it the cost of more than 15,000 cancelled flights across the Northeast with destinations all across the globe.

Another real impact of the storm remains hidden in other unaccounted damages. Sandy has cut power to about 9 million homes, shut down 70 percent of East Coast oil refineries and inflicted unforeseen damage in the New York metro area which accounts for about 10 percent of U.S’s economic output.

The arithmetic also conceals many other damages. For instance, although hurricane damage to homes, businesses and roads reduces national wealth, it doesn’t subtract from the quantum of economic activity.  Post-disaster rebuilding and increased business activities rather add to the GDP.

In 2005, Hurricane Ivan devastated the Florida panhandle, causing $14bn worth of damage. In following years, retail sales increased by 25-35% and GDP inflated commensurably.

Despite such expected value addition to the GDP, Sandy’s damage may equal to the $108 bn damage caused by hurricane Katrina in 2005. It too is a disaster of epic magnitude; no less painful that Katrina. (casualty figure added on November 4, 2012).

 Greece goes to polls again

Prolonged EU crisis hampers global economic recovery

(Global Review Report)

May 15, 2012

The impact of a prolonged turmoil in the European Union, which imports almost $2 trillion worth of merchandize from non-EU countries, needs little elaborations. The 27- nation- conglomerate has little oil reserve. Amidst lingering turmoil and slumped demand, EU nations can ill afford to sustain the label of oil import.  

After a second Greek election was called for on Tuesday once the attempts to form a government failed, oil price slipped to a  five-month low and the euro tumbled.  Crude oil for June delivery decreased 80 cents to $93.98 a barrel on Tuesday, the lowest since Dec. 19. The euro dropped as much as 0.8 percent to $1.2722 against the US dollar, the lowest since Jan. 17.

Since the election on May 6, Greece has been without a government, igniting concern that the debt-drowned nation will renege on pledges to cut spending, as is required by the terms of the two bailout deals negotiated since May 2010. That also has spurred speculation that Greece may ultimately leave the European Currency Union (ECU).

Another major impact has been stalled growth. The EU’s economic expansion failed to accelerate in the third quarter as Germany and France failed to pull the recession-induced region from a debilitating debt crisis. German Chancellor Angela Merkel and  the new French President Francois Hollande agreed on Tuesday to spend the coming weeks discussing proposals for generating economic growth, with little positive impact on the market.

As the two leaders met, the EU’s statistics office in Luxembourg said that the region’s combined GDP increased only 0.2 percent from the previous three months.

That was expected. The lingering crisis has already stymied regional and global trading and the share of UK exports to the EU dropped to over 45%, its lowest level since modern records began in 1988. And, for the first time in recorded history, in the 12 months leading up to March, $227.6 billion of U.S. merchandise exports to Asia’s emerging economies surpassed the $223.7 billion exports to the EU.

During this period, U.S. merchandise exports to emerging Asian economies — China, India, Hong Kong, Taiwan, Korea and a handful of smaller nations — rose by 3.7% while shipments to the EU dropped by 13.9%.

Meanwhile, growing worries about new elections in Greece and the country’s probable exit from the eurozone pulled European shares down while banks are preparing for a return of the Greek drachma. European stocks and banks crashed at the opening on Monday, with shares in the Stoxx Europe 600 falling 2% and other major indices dipping by more than 2%. 

Fears intensified further when Greece's membership of the eurozone became uncertain after a botched last-ditch attempt to form a unity government. The five leaders of the nation’s main political parties not only failed to form a government, they’d acrimoniously blamed each other for the debacle. A second general election must now be held to decide the country’s future and that of the eurozone. 

That too may do precious little to stem the rot. Earlier, the head of the Democratic Left party, Fotis Kouvelis, said no unity government would be formed as the radical leftist Syriza party, which came second in the May 6 election, completely rejected the EU-IMF bailout deal and had refused to join a coalition.

It’s a pandemonium of an epic proportion. The US rating agency Moody’s has warned that new elections in Greece increase the risk that the country will default and leave the eurozone, which would heavily hit already troubled Greek banks. “Greece’s exit from the eurozone would result in a shift in responsibility for bank funding and recapitalization to Greek monetary institutions from European institutions, impairing the banks' capacity to extend credit and support growth for a sustained period,” the Moody’s said in a statement.

Another credit rating agency, Fitch, had threatened to put all euro area ratings on negative watch with a risk of a downgrade if Athens were to leave the currency union and return to the drachma.

The crisis is a contagious one. “Where the crisis heads will depend not on whether Greece leaves the union, but on how the situation in the region affects debt-troubled Italy and Spain,“ said Aleksey Bachurin, a Russian analyst. 

 Eurasian resurgence to usher in Gold Standard’s return

M. Shahid Islam

(Dec.27, 2011)

The global economic landscape is changing faster than one would have expected. Brazil has replaced the UK as the sixth largest global economy while, following the Russian footstep - which signed an agreement with China in June to trade in local currencies - Japan has inked a similar agreement with China on December 25 to trade in their respective currencies.

The coming together of these Eurasian giants, in a unified move to trade in their respective currencies, carries serious implications for the global economy.

Especially the Sino-Japanese deal is more alarming for the US dollar not only because the deal brings together the world’s second and the third largest economies, Japan also accounts for about 9% of the global GDP and the Japanese imports and exports constitute, respectively, 5.7% and 6.1% of the total world trading.

Eurasian resurgence

The landmark financial cooperation agreement was signed during Japanese Prime Minister Yoshihiko Noda's visit to China last week, and it is designed to enable Japanese government-backed entity to sell yuan-denominated bonds in China and facilitate conversion of currency without going through the hassle of using the US dollar.

Japan has also begun to be more militaristic. It had brought amendments to its post-War constitution to resume selling armaments; procured the Lockheed Martin’s coveted F-35 stealth fighter to bolster its aging air force; and even set up a naval base in the strategic Gulf of Aden (Djibouti) to protect energy supplies.

The economic and political consequences of these moves are profound- occurring at a time when the demand for US dollar is constantly on decline amidst reduced global trading; the Euro is in a virtual coma; and the geographic proximity of Japan, China and Russia implying that the moves are choreographed to have a transforming impact on the race for global economic and political leadership.  

The West may be choking and gasping, but the Russian economy is performing well and China and Japan hold over 65% of total US dollar reserve — China about $3.2 trillion and Japan about $1.3 trillion. China also runs a trade surplus with the world’s three major economic blocks — the USA, EU and Japan.

As the US embroiled in a series of military adventures since 2001, its annual trade deficit with China reached $201 billion by 2005 and showed no sign of abating. In August, US’s monthly trade deficit with China reached a record high of $29 billion.

South Asia left behind

Either for ignorance or idiosyncrasy, South Asian nations are left out of this Eurasian resurgence. China-India bilateral trade being worth $60 billion in 2010, Bangladesh, India and other South Asian nations should consider signing similar agreements with China, Japan and Russia to boost regional trade.

Russia’s bilateral trade with China reached $60 billion in 2010 and is expected to reach $100 billion within five years and, to $200 billion by 2020. Much of Russian exports to China being commodities - with oil supplies constituting approximately 50 percent of the total exports to China - the move away from US dollar is already having an easing impact on global energy prices and bilateral investments.

In April 2009, China and Russia signed an agreement to supply China with 15 million tons of oil per annum for 20 years in exchange for $25 billion Chinese investment-denominated loans to the Russian state-run Rosneft and pipeline monopoly Transneft.

South Asian export to the USA and the EU countries having begun to reduce drastically, cash-rich Japan, China and Russia should import more from South Asian neighbours and China’s quest to become a member of the South Asian Association for Regional Cooperation (SAARC) should be welcomed by India and others.

A unified Korea may add much more glow to what seems like a thriving economic sunshine lurking in the Asian horizon. Regional leaders must encourage to defusing tensions in the Korean Peninsula and help re-unite the Korean people.

Lest one forgets, the rise of Brazil has greatly been facilitated by increased exports to China, which has been its largest trading partner since 2009. In the first half of 2011, Brazil exported more than $56 billion worth of basic goods. The main exports are soya and iron ore and China is the main buyer. Since 2000, Brazil’s exports to China increased more than fortyfold.

Currency war

South Asia is suffering from export stagnation and vagaries of currency manipulations. Regional economies may not be as yet aware that the most potent weapon in this ongoing economic warfare is not soldiers, tanks or drones, but currency. Intentional devaluation of currency by unbridled money printing is the new aggressive way to boost export by being more competitive.

The game is a dangerous one and it can only be avoided by reducing dependency on a single currency. Hence the Eurasian move to replace US dollar. Germany unleashed the first currency war after the First World War to boost post-war recovery. It ended with the Great Depression and World War II. Yet, the same trick has re-emerged with a sadistic sense of vengeance.

Lately, central banks in the US, UK and Japan have printed record amounts of money, either to weaken their currencies deliberately, or to spur internal demand through wage increase and stimulus injection. The US Senate’s passing of a bill in October to penalize China for what Washington termed as ‘deliberate currency devaluation’ was hypocritical and did little to reverse the tide.

 Return to Gold

For, the main reason for dumping US dollar as the global reserve currency is not tied to the currency war per se, as many insist. A gradual move away from the dollar is deemed to have the potential to dampen the shocks of the economic turmoil by quarantining individual economies.

Another reason is the desire and the necessity to switch over to a flexible gold standard by linking major currencies to the price of gold. The return to the Gold Standard may not bring back the golden age, but the system proved stable prior to the First World War and during the two - decade - long interregnum following the conclusion of the Second World War.

The US worries are hence misplaced and unwarranted. Given that major economies’ use of their local currencies will ease pressure on US dollar and depreciate its value, US exports will be cheaper and competitive. Faced with increased inflation, Beijing has already pushed its currency’s value upward since June 2010. The US must not squander this opportunity to redress its huge trade imbalance with Beijing.

These are desperate times sprinkling with revolutionary outburst. Social upheavals are snatching sleeps of leaders all across the globe. Radical shift in policies being badly in need to skirt off impending dangers, return to the gold standard is the way forward.

To defuse social unrest, nations need to re-adjust wages and incentives by using the leverage to printing money and devaluing currency. That entailing the danger of higher inflation, a gradual and persistent increase in gold supply may serve as an antidote to wrestling the impact of killer inflations until the economies regain their lost vitality.

 Currency war cries for IMF reform

(November 1, 2011)

One of the main casualties in the decade-long wars and economic turbulence is the global financial system. As recession lingers, global trading pattern is under a tectonic transformation.  Exports are falling, as are commodity prices. The US dollar is being replaced by a basket of currencies among which the Yuan is as yet stable.

The euro is in dire straits. The decision by Greece to call for a referendum on the acceptability of the EU rescue package is threatening the survival of the euro as the Europe’s common currency. If Greece opts out of the EU, the euro is likely to collapse (see from recession to depression).

In exasperation, nations are veering toward protectionism while protracted currency wars threaten to tear off the IMF-stewarded financial system itself. A major trade war is looming to further complicate an expected recovery from this grinding stagnation.

It’s time that the IMF reforms itself. Recession is not the only worry that has been keeping policy makers in constant spins in recent years. Nations want to export more to spur growth, by keeping the value of their currencies weaker to stay ahead in competition. That being a recipe for higher inflation, many also want their currency to stay stronger. China has become one of the main proponents of this particular thesis.

It’s a delicate balance and it poses enormous threat to the already fragile global economy. Global trading pattern is being derailed amidst major imbalances in pursuing sustainable trade policies.

Another growing trend is to chuck off the US dollar as the global reserve currency. The US-dominated global system may oppose that change, but changes are occurring.

In November 2010, Russia and China agreed to trade in local currencies in spot inter-bank market. This has helped bilateral trade to be hassle- free, faster and more voluminous. Bilateral trade between China and Russia are expected to reach $50 billion by early 2012.

Beijing is carving out similar arrangements with many Asian nations; including Malaysia, Thailand and Vietnam.   In April, China and Argentina signed an agreement that allowed Argentine businesses to buy Chinese imports in Yuan to avoid using US dollar.

Following the Chinese and the Russian footsteps, more and more countries have begun to trade with their own currencies, reducing demand on US dollars and gradually phasing out its status as the world’s currency for mutual transactions. Many leading EU nations too want the US dollar to get replaced by another currency, perhaps by the euro, as the currency of global reserve.

Besides China and Russia, French President Nicolas Sarkozy launched a major campaign in January as the head of the G-8 and G-20 groups in support of replacing US dollar as the global reserve currency. Across the spectrum, the US is blamed for mismanaging its own economy, for plunging the world into a serious crisis, and, proving unworthy of being the custodian of the global reserve currency.

As more and more nations clamour for the U.S. dollar to be replaced, restructuring of the IMF seems unavoidable. Under the existing mechanism, the IMF entitles countries to vote on the basis of their economic strength, measured by the strength of hard currency possession.

This is unfair.  The Chinese economy has been the best performing one for over a decade, yet, its currency is not traded internationally and it only has 3.7 percent of the voting power in the IMF decision making. That puts it behind the tiny Belgium, in terms of voting power. The IMF also irrationally impinges upon national growth by imposing unreasonable and harmful conditionality.

Social Watch, an independent watch dog, has been tracking IMF assistance to 11 developing countries since the beginning of the 2008 financial crisis and found that, in all the instances, conditionality for loans included a reduction in government expenditures and an increase in the cost of interest rates. That is what has skyrocketed the cost of borrowing in developing nations while interest rates in many OECD economies remain flat at 0-1 per cent.

Such prescriptions also have had devastating impacts on growth performance across the globe and triggered massive social unrests by creating mass unemployment. The Occupy Wall Street movement is a backlash to this gyrating unemployment culture (see urban revolutionaries, below).

The IMF prescription was tolerable in the past because developing economies could export more to the OECD nations, and, the denomination of the transactions being in the US dollar, the US could enjoy the leverage of printing more and more money to finance its debts. But it is not sustainable any more amidst reduced imports by OECD economies from the developing world.

There are allegations and evidence that the U.S’s dogged determination to protect this unique status had led to its invasion of Iraq once the regime of Saddam Hossain started to sell oil in euro. Notwithstanding other geopolitical rationales, the threat to attack Iran too stems largely from the Iranian decision to trade its oil with euro, or the Russian rubble. This new war is known as the petro currency war, which the US wants to win. But like the wars in Iraq and Afghanistan, it too seems un-winnable.

The new trends do pose a major threat to US dollar's reserve currency status, undercutting the US’s leverage to run up high deficits and to have its own debt be denominated in its local currency. This also enables the US to print unlimited dollars and inflate its way out of the debt imbroglio. Now that the US has no wiggle room to inflate further, its debt-GDP ratio being well past the 100 per cent mark, it must cave to the cries of the time.

Under the changed circumstances, the US and other OECD nations want to export more to revive growths. Many OECD economies are even adopting protectionist approaches to save local industries. The entire paradigm being under a sea change, the rules of the game must change too.

China is the largest consumer of energy and has the largest automobile market in the world. Russia is the world’s second biggest oil and the biggest natural gas exporter. The growing clout of Russia and China in the global energy market - and their phasing out of the US dollar in commodity trading - has begun to marginalize the status of the the dollar. A desperate struggle for survival is also spewing trade wars among nations. The time for changes is now; neither tomorrow, nor day after. 

From recession to depression?

(Global Review special)

(Nov. 1, 2011)

Most chemo therapies keep patients alive for a while. Hemmed in by political compulsions to save the Euro as the common European currency, the EU leaders have embarked upon a last ditch attempt to rectify a major problem, sovereign debt crisis, by using the economic version of a painful chemo.

The gambit is too risky to pay dividend to the terminally ill economies it aims to salvage. More importantly, it seems like a ploy as the promise to dole out money to troubling nations like Greece is in essence a deleveraging move to extract fund from nowhere. Perhaps hedging into the anticipated growth is the only hope.