Saturday, April 19, 2008

IMF and UN Rethorics Against BioFuels: Cut the US and EU Agricultural Subsidies Instead

Corn-based ethanol production in the US is known to be causing part of the current food inflation in the world since corn and grains serve as food basis for many areas of the world. The IMF (Dominique Strauss-Kahn), UN (Jean Ziegler), have recently taken the position of attacking biofuels in general. This rethoric has been increasing daily, to the point of declaring biofuels "a crime against humanity".
The world has over a billion of poor or hungry people, who were hungry before, and nobody was complaining then.
The problem is not biofuels.
Take the example of Brazil. Brazil has been producing Ethanol from sugar cane for over 20 years. Sugar cane is a much higher efficieny method of producing Ethanol. Aproximately half of Brazilians vars run on EThanol, even though the country will become in the future a major oil exporter. At the same time, Brazil has been increasing its production of grains and foods in general. The thesis that biofuels causes food inflation cannot be applied in that case.
Food inflation is complex and has many causes, increased demand from China, India, and other countries, and increased freight costs caused by the increase in the price of oil, and the subsidies in the US and the EU which prevent developing nations from exporting to those markets.
Brazil has proven that is possible to increase the production of biofuels and foods at the same time. Poor countries wish access to new technologies (equipment, techniques, seeds), financing, and the end of agricultural subsidies in the US and Europe. The US is producing Ethanol from what they have (corn), but why would they not rather buy it from Brazil, or partner with central americans countries which could produce it, and at the same time help alleviate the great poverty in these areas of the world? Brazil has been exporting its Ethanol-producing technology, currently doing so in Ghana.
Could the purpose of shifting the attention to biofules to divert attention from the Doha subsidies discussions? The problem has many roots. Could part of the problem be that US and European millionaires with huge lands wish to maintain their subsidies? The IMF and the UN should be attacking this instead. The problem is not biofuels.

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Wednesday, April 16, 2008

Libor Rate Being Underestimated

The Libor, London Interbank Offered Rate, was created in the 80s and is a fundamental piece of the global financial system. It is computed in London every morning from data supplied by the world's banks and indicates the average interest rate that banks use to lend to each other.

The Libor rises when banks are in difficulty and drops when all is good. Interest rates on trlllions of dollars in debt are set by the Libor. In the last few months of troubles, the rate has shot up. The differecne between the 3-m ointh TBill and the Libor, a measure widely see as indicative of the financial health of banks, has gone from 0.4% in August 2007 to 1.6% today.

There are growing suspicions that the banks troubles are worse than they admit and that they do not wish to inform the real high rates they are paying because that would show how desperate for cash they are. If the banks are lieing, this also means that borrowers are paying less than what they should for their loans.

The BBA, British Bankers Association is reportedly investigating the misreporting issues. Concerns are in the written minutes of the Banbk of England meeting back in November 2007.

An analyst of Citigroup ( Scott Peng) estimates that the Libor is being underestimated by as much as 0.3%. If this is correct, the implications are tremendous.

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Thursday, April 3, 2008

Canadian ABCP Saga: Small Investors Hire Lawyers, Hedge Fund Offers to Buy ABCP and Sue Big Banks.

The Canadian ABCP SAGA took another twist today. Private "small" investors hired Juroviesky and Ricci to stop the big banks from trasforming their short term ABCP into 8 to 9 year term paper. This was the essence of the so-called plan to save the $33B frozen in ABCP that was being proposed by the big financial institutions in Canada, a controversial plan that has hit many road blocks and delays and is yet to be approved.

Small investors decided to fight, and because they greatly outnumber the big banks, they have some clout. Although the big banks control the majority of the funds, there are a total of 1,800 investors affected, so they are the ones in control. These investors bought this ABCP junk paper thinking that they were safe AAA short term vehicles, and are obviously not happy with the big bank "bailout" plan.

Henry Juroviesky, the lawyer from Juroviesky and Ricci, commented today on BNN that the investors have an offer from an American hedge fund that would pay these investors upfront, at a small discount, and then would use its massive Billions of resources to possibly sue the Canadian banks, not only for principal, but for damages too.

Bluff or not? We will soon find out. In any case, the plan as is, is more than dead.

UPDATE: Banks hit back:

"ABCP holders told they're welcome to invite vultures"
Globe and Mail April 3, 2008 at 3:05 PM EDT
"A committee trying to persuade small investors to support a proposal to restructure the frozen $32-billion market for asset-backed commercial paper would not object if they sold their holdings to U.S. vulture funds, a spokesman said Thursday."

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