Pakistan faces bankruptcy with $3bn forex reserves: report

London, Oct 7 (IANS) Pakistan’s foreign exchange reserves are on the brink at a mere $3 billion - enough to buy only a month’s supply of oil and food, a newspaper reported Tuesday.The Daily Telegraph said that on paper the country’s central bank holds $8.14 billion of foreign currency, but if forward liabilities are included, the real reserves may be only $3 billion.

It said Pakistan had $16 billion of foreign exchange nine months ago, but high oil prices “have combined with endemic corruption and mismanagement to inflict huge damage on the economy”.

The report comes after President Asif Ali Zardari told the Wall Street Journal newspaper his country needs a $100 billion bail out package.

“If I can’t pay my own oil bill, how am I going to increase my police? The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful,” Zardari said in an interview published Saturday.

The Daily Telegraph said Pakistan’s efforts to defer payment for 100,000 barrels of oil supplied every day by Saudi Arabia have not yet yielded results, and that the government has failed to raise loans on favourable terms from “friendly countries”.

It said Zardari is expected to ask the international community for a rescue package at a meeting in Abu Dhabi next month.

Paul Monroe Says

Thanks, BJ. I enjoyed reading through that discussion - I doubt there are many Congressional candidate’s websites were so much interesting commentary can be found.
There certainly is a potential danger in inflating a currency, but I think that banks would realize that if they provide a bank note which has an unstable value or which devalues over time, people would be more reluctant to use it.
I don’t think that the supply of a bank’s notes would fluctuate much in practice, as banks would likely settle on a ratio and would probably not alter it much from there.
Also, doesn’t the discovery of gold confiscate the purchasing power of gold? The same goes with any other commodity. I think the morality argument applies more with the current system since it is a policy decision to debase the value of the currency. Even still, it is certainly debatable that it would also be immoral in a “free banking” system.

Dave Knaack Says

Regarding fractional reserve lending. After spending lots of time reading about how banking systems work (including lots of really dry stuff like international settlement systems) I’ve come to the conclusion that fractional reserve practices fill critically important and likely delicate roles in highly interconnected and critical global systems and that leading the charge to change those rules would be tilting at windmills. This is not the sort of problem where we should write a new system, reinstall and reboot.
We should instead address one of the major flaws of the system, the accumulation of debt in excess of the money supply (think of it as an in-memory patch).
Perhaps this issue could be solved with by tasking the Treasury with issuing into circulation of non-debt dollars in a quantity equal to the interest paid for each reporting period (quarterly I’d suppose).
I’m not convinced that the ‘boom and bust’ cycle is solely the result of Fed control of the monetary system (seems to me that complex social factors probably also play in important role; consider the development of CDOs and MBSs), or that it is /necessarily/ a bad thing. Booms encourage and enable new ideas (lots of money available results in funding of wild and harebrained ideas that just might work but that wouldn’t be able to pay off in an environment of higher interest rates one would expect in a completely stable economy), and busts weed out marginal or weak practices (the harebrained ideas). The cycle (provided it describes mild recessions rather than Great Depressions) may help to prevent stagnation.
What is bad is that in conjunction with the current practice of creating only principle rather than principle+interest the system can be managed to (or perhaps must) cause an accumulation of debt obligation toward the entities permitted to practice fractional reserve lending.
Perhaps we can greatly improve the system simply by causing to exist each quarter all the money required to pay off the interest on loans. This would begin the injection of credit money into the system with minimal impact on business.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!
Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtually doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.” Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not including outside currencies) now account for more than half of the total.
Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for swings and volatility. I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the “experts” are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent.

Spike in Eastern Europe is Short-Lived

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Fundamentals Catch up with Yen

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies. Barron’s reports:A reversal of the yen, from strength to weakness, will have “major global implications…” Perhaps beleaguered Japanese authorities already have begun reacting to the “carnage” the yen’s rise has wrought.

Dollar Retains Safe Haven Status

The ForexBlog recently reported that investors were cautiously wading back into emerging market currencies. In hindsight, it looks like this report was delivered prematurely, as this week marked a return to the notion of the Dollar as save haven currency, having displaced even the Japanese Yen. While President Obama did his best to assure taxpayers and investors that the economic stimulus would bring the economy out of its slump, the markets were unconvinced. Economic data, especially as it pertains to the housing market, has become increasingly grim, and even Chairman Bernanke of the Federal Reserve conceded that a recovery is unlikely before 2010. Given that the government will have to issue a tremendous quantity of Treasury Bonds in order to fund its ambitious spending plans, however, it’s possible that foreign investors will soon lose their appetite for low-yielding American securities. Reuters reports:
Any optimism that the global economy could be recovering, however, should prompt investors to sell the dollar and buy riskier assets and currencies.”When panic and risk aversion abate, money will start flowing into other regions such as Europe,” said a portfolio manager.