Sharia Chameleon: Egypt's Clerics Decide on IMF?

People who are not distracted by business or trade from commemorating God - Sura 24:37

There's an interesting new complication in Egypt's never-ending quest to obtain IMF loans (which we aren't even sure the IMF wants to give anyway). Islamist lawmakers from the Salafist party want to add even more difficulties to the whole process as if there weren't enough. Remember, the Salafists are even more conservative than the Muslim Brotherhood-allied Freedom and Justice Party (FJP). The main bone of contention of the Salafist Islamic hardliners, as you probably know already, will surround the IMF charging interest (riba) on these emergency loans. Strictly speaking, the Quran disavows charging of interest. The famous quotation on usury is this one:

Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, "trade is like usury", but Allah has permitted trade and has forbidden usury - Al Baqra 2:275

It is here where the controversial new Egyptian constitution rammed through the legislature by the FJP with a little help from the Salafists has thrown a further money wrench into the bailout proceedings since it mentions consulting the clerics on matters relating to sharia law:

The Salafist Nour Party says the loan agreement, seen as vital to easing a deep economic crisis, must be approved by a body of senior scholars at Al-Azhar, a religious institution whose new role is embedded in the constitution. Such a challenge could complicate the Muslim Brotherhood-led administration's effort to finalize the International Monetary Fund deal that was tentatively agreed last year but shelved following political unrest in Cairo.

Abdullah Badran, head of the Nour Party's bloc in the upper house of parliament, told Reuters the move was intended to "activate the role of the Senior Scholars' Authority in all matters pertaining to sharia (Islamic law)". He said the party was studying its legal options. The Nour Party believes the IMF agreement must be vetted by the scholars because it includes a loan on which Egypt will pay interest - something that is forbidden under Islamic law.

The constitution states that the opinion of Al-Azhar's Senior Scholars' Authority must be sought "on matters pertaining to Islamic sharia". It does not say whether their opinion is binding on government nor make clear the scope of Al-Azhar's role. The article is one of several written into the constitution by the Islamist-dominated committee that finalized the document in December, fast-tracking it into law despite the objections of liberals, leftists, feminists and Christians, among others. 

A contention that erstwhile Muslim Brotherhood stalwart President Morsi has made is that the 1.1% concessional rate charged by the IMF hardly constitutes "usury," but it's certainly possible to argue that it's a rate of interest nonetheless. In other words, the interest rate doesn't matter so much as violating the principle that no interest should be charged to begin with.

And just when you thought things could not possibly get worse for Egypt, the path to an IMF bailout may have become even more torturous.

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More Than WTO, Vatican Needs Third World Head

Aside from China's arranged leadership succession, there are two more noteworthy ones this year at global institutions. The one we had long expected is that of WTO director-general. Since the WTO's formation in 1995, there has only been one from a developing country, Supachai Panichpakdi of Thailand. Adding insult to injury, he only served half a term because of internal politics at the WTO which meant he headed the institution for three years from 2002 to 2005. Meanwhile, the Frenchman Pascal Lamy served one full four-year term from 2005-2009 and is currently serving another from 2009 to September 1, 2013.

For his second term, I thought that he was not an ideal candidate since (1) he failed to move forward the Doha Round of trade negotiations--then in danger of becoming the most protracted in WTO/GATT history--and (2) he failed to gain the support of developing countries to move things forward despite them gaining an ever-larger share of world trade. The past four years appear to have validated my concerns: Not only has the Doha Round become the most protracted in history by quite some margin with no end in sight, but developing countries have also been lukewarm about its completion. Here's a chart that tells the tale:

To make a long story short, let's just say that someone from an LDC has headed the WTO for far less than around forty percent of the time that the organization has been in existence. Bottom line: we are overdue for a WTO director-general from the developing world.

The more surprising succession event, meanwhile, is at the Vatican. With the rather unexpected resignation of Pope Benedict XVI, the door is opened to what I have long advocated aside from someone from the developing world heading international organizations alike the World Bank (it's never happened there), IMF (ditto) and WTO (only once). That is, someone from outside Europe or the developing world should head the Catholic Church. Actually, three successors to Saint Peter (San Pedro) have already done so--albeit a very long ago: Pope Victor, Pope Miltiades and Pope Gelesius were from North Africa.

A definitional problem here though is of constructing an argument for the underrepresentation of LDC voices at the Vatican. It's more challenging to obtain descriptive statistics alike that for merchandise trade on the growth of the Catholic Church in the developing world vis-a-vis the developed world. INdeed, you can look at any number of pertinent things here:

1. The number of ordained priests and bishops;
2. The number of regular church attendees;
3. The number of baptized

I am more inclined to use 1 and 2 as metrics given the rapid secularization of Western Europe in particular, but there are methodological issues for determining the number of practicing Catholics
that even Vatican bean counters recognize:

The percentage of Catholics practicing their faith is declining almost everywhere around the globe. Almost all bishops report it, but it's difficult to prove statistically. Each year, the Vatican's own statisticians compile mountains of data about the number of Catholics, baptisms, priests and religious, weddings and annulments in each diocese and country.

The numbers illustrate trends over time, but many factors lead to the variations, said Enrico Nenna, the chief statistician in the Vatican's Central Office for Church Statistics. "It's very difficult to quantify Catholic practice, although many have tried with many different formulas," he said. "The only way to get an accurate picture of religious practice would be to carefully choose a cross section of the population, do a census, and then conduct interviews repeated over time." 

Absent longitudinal surveys, it is harder to make sense of the faith's fate. However, what you can be sure of is that traditional strongholds in Western Europe are in clear decline whereas there are more signs of hope in the developing world going by metrics alike those identified above. That is, Western Europe is a markedly shrinking market. Add in the fact that it's been scores of centuries since a non-European pope was elected and the case is made even stronger for one. Interestingly enough, British bookies are already offering odds on various putative successors should you be a betting man.
 
Care to take a punt on the next pope, as the Brits would say? As long as he's from the developed world, I am quite indifferent actually.

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Growing Export Markets by Immigration to Canada

Pro-migration voices like myself usually argue that the exchange of people is mutually beneficial for destination and source countries alike. Destination countries--usually wealthier Western nations experiencing declining birth rates--benefit from having newer workers joining the labour force whose activities help generate revenues to fund commitments made to previous generations. Meanwhile, source countries benefit from remittances sent and know-how gained by their migrants.

The Conference Board of Canada, however, has a novel addition to the benefits of migration: how about the destination countries growing their exports to the source countries of migrants in the process? HSBC Global Connections has a summary of the findings:

A recent paper, Immigrants as Innovators, published by the Conference Board of Canada, found a direct relationship between higher immigration and increased imports and exports from a particular country, a relationship that was independent of the wealth, geographic distance and language of the other country. A 1% increase in immigrants in Canada is associated with a 0.11 % increase in exports, which might not sound like much until you translate the figure into dollars.

Why does this happen? In the past, emphasis has been on the value of "learning English" as a source of migrants' eventual advantages. Consider, though, if the opposite holds true of them bringing their own unique languages, skills, and global networks to the benefit of Canada. A recent example is that of Filipinos who immigration rates to Canada lead all comers:

The report’s author Michelle Downie, senior research associate at the Conference Board, says immigrants have social and business networks, language skills and knowledge of their home culture that makes it easier for international relationships to form. “Businesses can put too much of a premium on Canadian experience—English-language skills and how people fit into Canadian culture—without considering the assets of the international experience immigrants are bringing,” says Downie.

The report offers the example of Filipinos, whose immigration rates to Canada rose faster than any other nationality in the last decade. “Between 1999 and 2008, the value of goods exported from Canada to the Philippines increased from $360 million in 1999 (in constant 2008 dollars) to nearly $560 million in 2008,” states the report. “The increase in the value of exports to the Philippines coincides with increases in permanent residents from that country.” 

Good stuff; the entire paper is downloadable from the Conference Board of Canada after registering online. To paraphrase an American leader from when the US was still more envied than pitied, migrants ask not what their destination country can do for them, but what they can do for their destination country.

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HM Imported BoE Guv'nor: Most Powerful CBanker

 I am currently watching former Bank of Canada Governor Mark Carney testify before Britain's Monetary Policy Committee about what he will do once he assumes the equivalent position at the Bank of England in July. These are difficult times for the UK; of that there's no doubt as a double-dip recession threatens to become a triple-tip recession. As always, it is debatable what role monetary policy plays in helping economic recovery along with even "Helicopter" Ben Bernanke circling overhead with the point that it can only do so much (and by extension him).

Aside from importing another country's central banker who has attained "rock star" status in the arcane ways of monetary policy setting, another intriguing aspect of Mark Carney taking this highest of high-profile jobs is that he will wield unprecedented power as far as BoE heads are concerned once he starts. If his predecessor Mervyn King was regarded by more than a few as too ostentatious by some in his manner, Mark Carney need not put on any airs since he will in fact wield powers beyond those possessed by his predecessors. It's all in the name of regulating banks better that new powers will be vested in Mark Carney. Testifying before the MPC, Adam Posen stated:

Bank of England Governor Mervyn King is too powerful and planned changes at the bank will worsen the situation by the time Canada's Mark Carney succeeds him, a former senior policymaker at the bank said on Tuesday. Adam Posen, speaking to legislators about three years on the bank's Monetary Policy Committee that ended in August, said the bank's non-executive directors, finance ministry officials and politicians were unable to effectively hold King to account.

New laws going through parliament are set to give the Bank of England's governor sweeping powers over financial regulation, something that raised further difficulties, Posen added.

The Telegraph reiterates this point about power:

That will not be true in the UK. When he takes over at the Bank, Carney will become the most powerful national central banker in the world – able to direct UK lenders to restrict all kinds of lending as he sees fit. The only check on his control is that he will have to operate via a set of committees.

Ditto CTV News: 

The issue is critical, said John Thurso, a Liberal Democrat MP and member of the committee, because with the Bank of England taking on new responsibilities as the regulator of financial institutions, Carney will de facto become the most powerful governor the 319-year-institution has ever seen."The question is, does the governor become the constitutional monarch of the bank with the power but who will defer to the advisers of the committees, or does he become the emperor of the bank?" he said.

It all fits in with his intention to target the money supply more closely. That said, while concentrating a lot of lending discretion in the hands of one individual in the name of enhancing regulation may be just what is needed to shake up the BoE at this point, what will lawmakers do if this experiment goes awry? In a way, importing a subject from other parts of the realm already is an extreme action which will not likely be repeated. Just think of the uproar if they end up with the monetary equivalents of, say, Sven-Goran Eriksson or (heaven forbid) Fabio Capello. 
What do all three have in common? When they were appointed, the English public very much lauded the selection of these superstars in their fields of endeavour. Hopefully, though, Mark Carney will better be able to deal with being in Britain's harsh public eye and get on with the job at hand. Expectations are high once more with their latest import, and the stakes are so much greater here than advancing in mere international football tournaments since the future of a global financial capital is at stake.  

Will there always be a Bank of England?

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United States vs S&P: Sovereign Ratings Next?

It is with great interest that I am following the ongoing civil suit by the United States against the rating agency Standard and Poor's. Awhile ago, Tim Sinclair over at Warwick University came out with a book entitled "The New Masters of Capital" describing how credit rating agencies supposedly had powers of nearly life and death on any number of countries and firms via the act of rating. I was not very receptive to this all-encompassing argument. First, the parent companies of S&P, Moodys and Fitch's have hardly outperformed broad market indices--which they would if they truly were "masters of capital." Second, while developing countries may be adversely affected by ratings decisions of these firms and affect their ability to access global capital markets, others are not so vulnerable. Japan and the US among others appear insensitive to credit downgrades. What's more, governments alike those in the US and Europe give them sanction to issue ratings in the first place. Think of America's SEC granting "Nationally Recognized Statistical Rating Organization" (NRSRO) status.

I believe my second argument is validated by the US declaring that it will file a civil suit against S&P causing its parent firm McGraw-Hill's stock to plunge in double-digit percentages. In other words, a true "master" would not be accountable to someone else:

The government said in a court filing it was seeking civil money penalties from S&P and McGraw Hill. "Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P's rating criteria and models," the government said.

Shares of McGraw-Hill plunged 13.8 percent on Monday after the company said it was expecting the lawsuit, marking their biggest one-day percentage decline since the 1987 stock market crash, according to Reuters data. The news also caused shares of Moody's Corp, whose Moody's Investors Service unit is S&P's main rival, to slide 10.7 percent.

I think it's evident where "power" lies here: the state with sanctioning power over credit rating agencies. The case mainly deals with conflict of interest in S&P being asked by various financial services concerns to rate mortgage-backed securities, collateralized debt obligations and what else have you for a fee. There was indeed some of that going on, but why now? Also, why S&P instead of the others alike Moodys and Fitch's? Some thoughts:

1. Ratings on mortgage-related securities were vastly overstated; the question is whether these errors came from flawed models / judgement OR deliberately being paid to inflate credit ratings;
2. This stuff is really old--2007 or 2008 vintage--so why is it only being prosecuted now?
3. Why S&P in particular? It's the biggest rating agency yes, but was it really alone in issuing flawed ratings?

Being ever-so-cynical, I am thinking that this action may have something to do with forthcoming credit downgrades of US sovereign debt. Think about it: filing the case has already depressed their stock valuations and reminded them that government displeasure is costly. Moreover, Uncle Sam can readily shut them out of the business of rating a huge swathe of dollar-denominated securities if it revokes their NRSRO status. Revocation of NRSRO status would mean that they can no longer pass judgement on US Treasuries among other things:

Under the Credit Rating Agency Reform Act, an NRSRO may be registered with respect to up to five classes of credit ratings: (1) financial institutions, brokers, or dealers; (2) insurance companies; (3) corporate issuers; (4) issuers of asset-backed securities; and (5) issuers of government securities, municipal securities, or securities issued by a foreign government. 

The United States may be reiterating that it can easily put them out of business Stateside if it chooses to. Given America's runaway debt expansion, what better time is there of reminding them of this fact than now when eminently justified downgrades are on the horizon? Downgrades may not so adversely affect US borrowing costs in the near-term, but the loss of prestige may be enough to motivate America to take action now. New masters of capital? You must be joking. When the world's largest debtor has got the credit rating agencies by the balls in so stark a fashion, I think they're more like the jesters of capital.

Bottom line: The US economy may be a sick joke, but the official econocomedians still lord it over the jesters of capital as recent events have demonstrated. As for me, I'll do my own due diligence when investing in securities instead of believing in either Uncle Sam or his NRSRO flunkies--and you should too.

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EU-Mercosur FTA vs Trade-Willing 'Pacific Alliance'

Which does not belong? In case you missed it, recent talks between EU and Latin American leaders again failed to produce an FTA that has long been under consideration, EU-MERCOSUR. This was at a CELAC gathering in Santiago, Chile where European leaders who bothered to make the trip alike Angela Merkel found that while there were non-MERCOSUR nations keen on trade deals, Argentina was (surprise!) not. What's more, el presidente Cristina Fernandez senses that the Latin American grouping now has the upper hand and says Argentina will make a counter-proposal later this year:

(T)he EU's most ambitious goal – to finally sign a free trade agreement with South America's trade bloc, Mercosur – was not achieved after years of negotiation. Even though individual leaders, like the presidents of Chile, Brazil and Colombia, pushed for more free trade, the head of the second largest Mercosur country, Argentina's Cristina Fernandez de Kirchner, vehemently opposed it...
 
"We are very concerned about certain protectionist tendencies in some countries," [Merkel] said on the sidelines of the meeting. Merkel also made it perfectly clear whom she meant, saying that she'd talk to the Argentine president about the subject. However, de Kirchner defended Argentine protectionism and poured more cold water on the proceedings. After these long negotiations, the conditions had fundamentally changed, meaning it had become a matter for Mercosur to discuss, she said. The bloc would make a new proposal to the EU by the end of the year at the earliest.

However, do note that there Argentina's position is at one extreme likely shared by the likes of Bolivia, Cuba, Venezuela, and so forth. (Raul Castro is now the head of CELAC which includes Latin American and Caribbean states sans the white majority-populated United States and Canada.) OTOH, there is also a coalition of the trade-willing that have broken away in yet another American grouping (I've lost count) deemed more progressive on trade matters:

Mercosur’s main achievement in the past year has been to suspend Paraguay, because its congress impeached its left-wing president, and admit Venezuela, which complies with few of the group’s rules. Meanwhile, it is being outshone by the Pacific Alliance, a newly formed group of faster-growing, free-trading Colombia, Chile, Mexico and Peru. Not by coincidence, these four already have free-trade deals with the EU. It was clear which countries the Europeans wanted to do business with. “We only have to look at the facts,” Mr De Gucht said. “The most open economies in the region are the ones that have had the most success.” Others have taken notice: Paraguay and Uruguay, another Mercosur member, have applied for observer status at the Alliance.

EU Trade Commissioner Karel de Gucht's assertion is perhaps self-serving, but it does reinforce the point that some are more willing to trade than others. Expansion of the so-called Pacific Alliance would make this point more evident.

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South Korea Declares Int'l Currency War on Japan

Ho hum, another week, another declaration by a non-Western country that it will attempt to staunch the inflow of capital from elsewhere that is driving up the local currency and making imports less competitive. Japan of course started the latest salvo when the LDP regained power and promptly declared that they would use open-ended fiscal and monetary support to get the Japanese economy jump-started after over two decades now of stagnation. (Western nations have long been on this path, having implemented them after the global financial crisis.)

In response, other Asian exporters have been manoeuvring to deal with the ongoing deluge from Nippon. Spooked investors in South Korea have begun pulling out in fear of the authorities taking a more proactive stance in determining the value of the Korean won. I suppose the Korean authorities are pleased with the results of their verbal jawboning thus far of making foreign investors think twice and weakening the currency:

South Korea's threat to impose a broad tax on financial transactions is the first sign of deepening concern in Asia that speculation of competitive currency devaluations is prompting investors to head for the exit. Until then, and because investors had not shown any big signs of concern, Asia's reaction to the tensions centring on the yen had been passive, comprising an asymmetric mix of jawboning and light currency intervention.

The selloff in Seoul markets this week turned into a warning sign. Foreign investors posted their biggest daily stock selloff in 16 months in South Korea and pushing the won, a currency that best serves as a proxy for Asia, to a three-month low. The risk is that the threat of policy action will prompt more market selling, pushing currencies down yet further and raising investor fears of the competitive devaluations that policymakers are trying to avoid.

"Korea is going to be the first domino, and it's that domino effect that the yen's depreciation clearly risks," said Rob Ryan, currency and rates strategist at RBS, referring to the increasing likelihood that Korea announces some form of currency control measure soon. "The real trigger has been the equity market reaction and the outflows from Korea. I think the concerns over intervention are a little overdone just yet, but clearly it is a big risk if the yen continues to weaken..."

The old state-guided development is returning with a vengeance as the government is seeking the cooperation of conglomerates and state-owned firms alike in stemming Korean won strength:

South Korea has understandably been the most vocal of Asian policymakers on the subject of the yen. Heavyweight Korean exporters such as Samsung Electronics Co and Hyundai Motor Co, which compete directly with Japanese electronics and auto companies, have seen their competitiveness eroded as the won increased in value from as low as 15 per yen to near 11.8 over the past six months. Foreigners have sold a net 1.8 trillion won ($1.65 billion) Korean stocks this month. The stock market is down 3 percent so far this year. Foreigners have been buying Taiwanese stocks, but those volumes are far lower than they were in 2012...

The Korean government will tell state-controlled firms to refrain from borrowing abroad and will further tighten rules on banks' currency derivatives trading to ease volatility in foreign exchange markets, Choi said. Seoul was opposed to imposing an outright levy on financial transactions, such as the Tobin tax being debated in Europe. But it would consider similar measures should speculation in the won intensify over time, he said.

There are follow-on effects that may be even direr. China, for one, is South Korea's single largest export market and may not take so kindly if the won is regulated further:

Still, many believe policy risks are rising. Nearly half of Japan's trade is with the Asia-Pacific region and China may not stand pat if Korea imposes currency controls given it is Korea's largest export market. In addition, capital controls have gained some acceptability as a policy response in emerging markets to deal with easy money in the developed world. Even the International Monetary Fund, traditionally a champion of liberalised markets, has conceded that capital controls are sometimes necessary.

I guess the trick is to spook hot money but not real investors who are in it for the longer haul. Where does that divide lie? Hard to tell, but Korea risks negating market sentiment if it goes overboard with these efforts to throw sand into the wheels of international finance and trade. It's not surprising that international currency war has finally hit East Asia--but remember who started it in the first place despite repeated denials.

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