Into the maelstrom

Let me begin my reiterating my sympathies for the Japanese.

There are a number of very big cross currents at work for markets today. The first, of course, if the suffering of the Japanese. Across the world, the coverage is remarkably alike, a result perhaps of diminishing foreign correspondent budgets and the secrecy of the Japanese. The best piece of journalism I can find is from The Economist:

However hard it is to come to grips with the enormous devastation, another crisis is playing out in real time: the risk of a Three-Mile-Island-style radiation leakage at a nuclear-power plant in Fukushima prefecture, 250 miles north of Tokyo. Overnight, the cooling system at the third reactor at the Fukushima No. 1 nuclear power plant failed, and on March 13th Kyodo news agency cited the plant’s operator, the Tokyo Electric Power Company (Tepco), as saying that three metres of a Mox nuclear-fuel rod had been left above the water level. That raises the risk of a meltdown of the core reactor, which could lead to a nuclear catastrophe. Disconcertingly, Japanese anti-nuclear campaigners have fiercely opposed the introduction into Japan of Mox fuel, which is a mixture of plutonium oxide and uranium oxide, arguing, among other things, that plutonium is more unsafe than enriched uranium. The fuel was first used in the Fukushima plant last year. Five other reactors spread over two Fukushima plants have also experienced trouble with their cooling systems, and two (including the Mox one) have been doused with water—and possibly permanently crippled—to prevent overheating.

Yukio Edano, the government’s chief spokesman, said that it was possible the core reactor had been “deformed” by its exposure above water, but he denied that it was a meltdown. However, he said there were further complications. It was not clear whether the water was rising to cool the reactor, despite an injection of sea water. Pressure is also building up within the reactor, but the release valve is malfunctioning, he said. Given the potential build-up of hydrogen, he issued a warning that there could be another explosion of the type that destroyed the outer building of the plant’s first reactor on March 12th. But he said there was no danger to the thick, steel-and-reinforced-concrete container that surrounds the reactor, and he is downplaying the risk of a dangerous leak of radiation.

Mr Edano, who like Mr Kan is dressed in blue overalls to give the uniform-loving Japanese a sense of workmanship, is deftly trying to reduce the risk of panic around the country. His staff are telling foreign correspondents to reassure foreigners living in Japan that there is no need to flee Tokyo (the American ambassador has put out a similar message). The task is made harder by imprecise information on the levels of radiation that have leaked out and the dangers to the several dozen people near the Fukushima power plant who have so far been diagnosed as suffering from radiation.

Reportedly, levels of radiation have temporarily exceeded 1,000 micro sievert, which is twice the legal upper limit; but in many cases they have been little worse than an x-ray.  The government insists the radiation comes from its release of pressure from the reactor container vessels, and is not dangerous to humans. It rejects assertion that the leaks are out of control. However, there is a general mistrust among many Japanese about the authorities’ willingness to admit to a serious radiation problem if it were to occur. It might, of course, accidentally play down the risk in its efforts to avoid panic. What’s more, Tepco, which provides most of the information on its Fukushima plant, has obfuscated shockingly in the past. Its reputation is unlikely to be burnished by the fact that residents of greater Tokyo and elsewhere, as well as businesses, were told to brace for extended power cuts in coming days. The government says power supply for such areas has fallen by a quarter, from 41m kilowatts per day to 31m, because of the quake-induced disruption.

On top of those concerns, the Meteorological Agency, which on March 13th upgraded its assessment of the size of Friday’s earthquake from 8.8 to 9.0, has also warned than in the next three days, there is a 70% chance of another big quake. The huge movement of sub-sea earth at 2.46pm on Friday led to a quake at three different epicentres, along a 500km stretch of sea. This was why the quakes were felt so broadly, and why there have been such frequent aftershocks.

A slew of businesses have decided to close, in part because of disrupted supply chains, but also because of the uncertainty over access to power. Toyota, Nissan, Honda and Suzuki will idle some or all factories. But the north-east is not Japan’s industrial heartland, and factories in places like Kyoto, the centre of the country’s high-end technology components, have not said they plan to close on Monday. Meanwhile, in a bid to shore up the financial system and ensure suitable liquidity, the Bank of Japan provided ¥55 billion in cash to 13 banks over the weekend, in case customers line up to get money on Monday morning. Though the economic cost of the crisis is hard to see—in large part because of uncertainty about the consequences of the overheating nuclear reactors—estimates place it above the ¥10 trillion (around $120 billion) damage of the Kobe earthquake in 1995.

Perhaps bracing for further weeks of uncertainty, Tokyo residents and others have been stocking up on petrol and provisions. Pot noodles are gone from the supermarket shelves, as are bread and tins of tuna. In a nation with the best lavatories in the world, another coveted item is the damp face towel, which apparently can be used as toilet tissue if water supply is interrupted for long periods. Such are the unsubstantiated rumours flying around Tokyo, anyway.

I will add that if Tokyo residents can’t see what’s happening, what hope have global markets got? That’s a major weight to carry.

Also likely to weigh on markets is the news that yesterday the Bahrain insurrection erupted again and seems to be sliding towards civil war. As I have noted before, Bahrain is directly adjacent to Saudi’s Ghawar Field, the largest oil field in the world.

The sectarian division that underpins the Bahrain conflict is a minority Sunni government controlling a nearly three-quarters Shia population. And according to local leaders, the social fabric is tearing:

Thousands of anti-government demonstrators cut off Bahrain’s financial center and drove back police trying to push them from the capital’s central square – shaking the tiny island kingdom Sunday with the most disruptive protests since calls more freedom erupted a month ago.

Demonstrators also clashed with security forces and government supporters on the campus of the main university in the Gulf country, the home of the U.S. Navy’s Fifth Fleet.

The clashes fueled fears that Bahrain’s political crisis could be stumbling toward open sectarian conflict between Sunnis and Shiites, who account for 70 percent of the nation’s 525,000 people.

In some neighborhoods, vigilantes set up checkpoints to try to keep outsiders from entering. Bahrain’s interior ministry warned Saturday that the “social fabric” of the nation was in peril.

A day after visiting U.S. Defense Secretary Robert Gates urged quick progress toward reform, thousands of protesters gathered before dawn to block King Faisal Highway, a four-lane expressway leading to Bahrain’s main financial district in downtown Manama, causing huge traffic chaos during morning rush hour and preventing many from reaching their offices on the first day of the work week.

“No one was able to go to work today. Thugs and protesters were blocking the highway,” complained Sawsan Mohammed, 30, who works in the financial district. “I am upset that Bahrain no longer a stable place.”

Security forces dispersed about 350 protesters “by using tear gas,” the government said. But traffic was clogged until late morning and many drivers sent messages of rage and frustration to social media sites.

“I blame the protesters for what’s happened in Bahrain today,” said Dana Nasser, 25, who was caught in the traffic chaos and never made it to her office.

About two miles (three kilometers) away, police at the same time moved in on Pearl Square, site of a monthlong occupation by members of Bahrain’s Shiite majority calling for an elected government and equality with Bahrain’s Sunnis.

Many protesters in recent days have pressed their demands further to call for the ouster of the Sunni dynasty that has held power for more than two centuries.

Witnesses said security forces surrounded the protests’ tent compound, shooting tear gas and rubber bullets at the activists in the largest effort to clear the protesters since a deadly crackdown last month that left four dead.

Activists tried to stand their ground and chanted “Peaceful! peaceful!”

The crowd swelled into thousands with protesters streaming to the square to reinforce the activists’ lines as police continued firing tear gas. By early afternoon, police pulled back from the square, eyewitnesses said.

Bahrain is surrounded by Sunni states in the UAE and Saudi Arabia and Shia Iran is across the pond. Needless to say, this is a horrible scenario to have playing out anywhere, let alone at the absolute centre of global energy production.

I do not know enough about local politics to gauge the likelihood of a peaceful settlement, but with the larger settings of sectarian regional rivals, and the chance of proxy conflict, trust is going to be thin on the ground. Assuming that the protests continue, which looks more than likely, the most obvious scenario for Bahrain is escalating repression. If a genuine struggle emerges then Saudi will send its tanks over the causeway – sooner rather than later – to prevent the spread of conflict into Saudi’s neighbouring Al Ahsa province where Shiites also make up close to a majority and where Ghawar Field is located.

The outcome of that looks rather foregone, barring some action from Iran to protect regional Shia, which looks remote to me given its own antipathy to democracy.

With Bahrain home to the US Fifth Fleet, US Middle Eastern foreign policy may be about to experience one of the most sickening backflips I can remember. And it’s G.W. Bush, not Barack Obama, that will come out smelling the better.

US markets rallied Friday in part out of relief that Saudi’s day of rage didn’t erupt and that will be some relief this week too. But it must surely be becoming obvious to even the loony-bulls that run Wall St that the MENA revolution is alive and completely unpredictable. If you want to guess with your money, that’s up to you.

Finally this morning we have some less dire news emanating from Europe where markets seem to have terrified the Franko-German nexus into bailing out its banks again. From the FT:

The heads of the eurozone’s 17 governments have agreed an unexpected deal in to assist the debt-laden economies of Europe’s periphery, agreeing to strengthen the bloc’s €440bn rescue fund and lowering the interest rates on Greece’s bail-out loans.

After talks into the early hours of Saturday morning, the leaders also backed a plan to use the rescue fund to buy sovereign bonds of struggling governments when they are initially auctioned, a measure that could allow countries with high borrowing costs to raise cash at much lower yields.

But the deal did not give the rescue fund broad new powers to purchase bonds on the open market, an option that had been backed by several European Union leaders, including Jean-Claude Trichet, the head of the European Central Bank.

It is unclear whether the measures will be enough to calm market concerns that heavily indebted Greece, Ireland and Portugal will be not able to meet their debt payments.

Going into the emergency summit Friday, financial markets had expected very little from high-profile gathering, and yields on bonds for Greece, Ireland and Portugal all hit new highs in the days ahead of the gathering.

The decision to allow the €440bn fund to intervene in the so-called primary bond market was particularly unexpected. But under the terms of the deal, the fund – formally known as the European Financial Stability Facility – would only be able to buy sovereign bonds if a country is willing to enter into an austerity programme similar to the current bail-outs.

A statement issued at the end of the summit said such purchases would only take place “in the context of a programme with strict conditionality” – code words for a bail-out like fiscal oversight program run by the ECB and the European Commission, the EU’s executive branch.

“It won’t make a huge difference,” said Angela Merkel, the German chancellor.

The only element of a deal that was not agreed to was a cut in the interest rate for Ireland’s bail-out loans. Like Greece, Ireland was offered a full percentage point cut in its borrowing costs, from about 6 per cent to 5 per cent. But Enda Kenny, the new Irish prime minister, refused to cede ground to a Franco-German demand that he, in return, raise Ireland’s ultra-low corporate tax rate.

“Obviously, this is a very touchy subject for our Irish friends,” said Nicoals Sarkozy, the French president. “It’s hard to have other countries help or bail out Ireland when Ireland has the lowest corporate tax rates in Europe.” EU leaders said Mr Kenny would be given to the next EU summit, to be held on March 24 and 25, to go along with the deal.

This looks like more of the same to me. Enough to keep the euro alive, but not enough to prevent the crisis from rolling on. In the short term, it should provide markets some relief.

What does that all add up to? Every pundit is calling a selloff, which usually means we’ll get a rise. The only thing that’s certain right now is uncertainty. And that’s the problem.

Houses and Holes
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  1. The following article is by Stoneleigh from The Automatic Earth (consistently interesting blog). Stoneleigh’s “master thesis at the law faculty of Warwick University in Coventry, England, where she studied International Law in Development, was nuclear safety research.

    After graduating in 1997, she became a Research Fellow at the Oxford Institute for Energy Studies, where her research field was power systems, with a specific focus on nuclear safety in Eastern Europe.”

    Stoneleigh is Nicole Foss (she recently debated Deflation/Hyperinflation with Gonzalo Lira). She knows her stuff.

  2. Irish taxpayers bailing out German and French banks and not happy about it?
    how ungrateful: get them sticks and carrots for the greeks.
    the question is: which part will blow out first?
    1)Ireland hikes tax rate, continues to bail out bondholders and irish revolt or 2)bondholders (read banks) get apropriate haircuts and continental Europe sets on fire.