Mish's Global Economic Trend Analysis

Moscow Hikes Interest Rates to 17% from 10.5% in Emergency Middle-of-Night Action
Insolvent Scranton PA Pensions Rise 80%, Fire Fund to Run Out of Money in 2.5 Years; Bankruptcy Looms
Russian Ruble, Turkish Lira, Ukrainian Hryvnia Hit Record Lows; Global Currency Crisis on Deck

Moscow Hikes Interest Rates to 17% from 10.5% in Emergency Middle-of-Night Action

Posted: 15 Dec 2014 03:15 PM PST

I commented earlier today, that you do not defend a currency by foolishly wasting foreign reserves. The Russian central bank came to the same conclusion.

In an emergency middle-of-the-night central bank action, Moscow Lifts Interest Rates to 17%.

Russia has lifted its key interest rate to 17 per cent, hours after the rouble suffered its worst drop since 1998.

"The decision was driven by the need to limit the risks of devaluation and inflation, which have recently significantly increased," the central bank said in a statement.

The move in the middle of the Moscow night followed a day during which the rouble had tumbled more than 10 per cent as the implications of the fall in oil prices for the country's energy-dependent economy triggered a rout across Russian markets.

In the bleakest official forecast yet from Moscow, the Russian central bank warned that the country could see a 4.5 per cent to 4.7 per cent contraction in GDP next year if oil prices remained at $60 a barrel.

So far this year, it has lost half its value against the dollar, making it the world's worst-performing major currency, ahead of the Ukrainian hryvnia.

Traders said the central bank had intervened several times during Monday trading but had failed to halt the slide in the rouble for more than a few minutes on each occasion.

The central bank on Monday forecast that capital outflow from Russia would total $120bn in 2015, nearly matching the $134bn estimated to leave the country this year. It also predicted outflows of $75bn in 2016 and $55bn in 2017.

US$ vs. Ruble

At the end of 2013 the Ruble closed at 33.20-per-US$. It touched a low of 66.84-per-US$, a decline of slightly over 50% before settling today at 65.60, just under a 50% decline for the year.

Russia Serious About Halting Ruble Slide

That massive 6.5 percentage point hike may or may not stop capital flight and currency depreciation, but it does show Russia is very serious about the effort. 6.5 percentage points is genuine bazooka action.

Huge Recession Baked in Cake

Even if the hike stops the currency slide, it will come at a cost. A massive Russian recession is baked in the cake.

That recession will spill over into Eastern Europe including the eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Insolvent Scranton PA Pensions Rise 80%, Fire Fund to Run Out of Money in 2.5 Years; Bankruptcy Looms

Posted: 15 Dec 2014 12:08 PM PST

The city of Scranton hiked property taxes 57% and garbage collection fees 69% to shore up a police and fire pension funds that will run out of money anyway, in 5 years and 2.5 years respectively.

Amusingly (to outsiders) but certainly not to Scranton taxpayers, Scranton Pensions Increased as Much as 80 Percent as a result of inane mayoral promises.

The 2011 court ruling that awarded huge raises and millions of dollars in back pay to Scranton firefighters and police officers was a windfall for retirees too, with some seeing a more than 80 percent hike in their pensions between 2008 and 2012, a Times-Tribune investigation found.

The increase, most of which was paid in 2011, made the retirees among the highest paid in Pennsylvania, the newspaper's review of the Public Employee Retirement Commission records revealed.

The increased pensions come at a time when Scranton, in distressed status since 1992, is struggling to survive. Faced with a $20 million deficit, council enacted a 2014 budget with massive tax increases — hikes of nearly 57 percent in property taxes and 69 percent in garbage fees. The recently passed 2015 budget hiked property taxes 19 percent.

The plans' actuary, Randee Sekol, recently cited the raises as one of the key factors that have pushed the funds closer to insolvency. With a deficit of $78.8 million as of 2012, the fire fund is projected to run out of money within about 2½ years, while the police fund, with a deficit of $62 million, has less than five years left.

The city had no choice but to approve the pension hikes, issued under former Mayor Chris Doherty's administration, because they are contractually obligated under the union contracts, said city solicitor Jason Shrive.

No Choice?!

Of course the city had a choice. Actually, the city had two reasonable actions and curiously, Shrive even mentioned one of them.

Last week, the city asked the fire and police pension boards to forgo that increase. Both boards rejected the request.

Mr. Shrive made the request based on a section of the Class 2A city code that states no increases can be granted to retirees if an actuary determines the fire and police funds are not actuarially sound. Scranton is the only Class 2A city in the state.

Mr. Shrive acknowledged that the union contracts obligate the city to pay the retirees' raises, but he said he believes state law, which mandates the city follow the Class 2A code, takes precedent.

Tell, Don't Ask

Given Class 2A law, you don't ask police and fire for cuts, you tell them. Then if they fight, you make the final step:

Declare Bankruptcy on the Spot

The police and fire departments would have to plead their case in federal bankruptcy court, most likely getting haircuts of 50% or more.

Ultimately, bankruptcy is where all these cases are headed. Taxpayers certainly don't deserve preposterous tax hikes while inept politicians look for ways out, because there are no ways out.

In the meantime, collective bargaining of public unions needs to go the way of the dinosaur. Public unions and the hack politicians who support unions have wrecked more city and state budgets than the next 10 things combined.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Russian Ruble, Turkish Lira, Ukrainian Hryvnia Hit Record Lows; Global Currency Crisis on Deck

Posted: 15 Dec 2014 11:05 AM PST

As oil continues to slide so does the Ruble. Emerging market currencies have gone on for the ride as have the currencies of Eastern European countries, especially Ukraine. The Russian Ruble, Turkish Lira, and Ukrainian Hryvnia are at or near record lows.

Russian Ruble - RUB

Since the beginning of the year, the Ruble has gone from 32.99-per-US$ to 65.51-per-US$. That's a decline of 49.64%.

Ukrainian Hryvnia - UAH

Since the beginning of the year the Hryvnia has gone from 8.21-per-US$ to 15.75-per-US$. That's a decline of 47.87%.

Turkish Lira - TRY

Since the beginning of the year, the Lira has gone from 2.15-per-US$ to 2.37-per-US$. That's a relatively modest decline of 10.23%. However, the lira slide since the beginning of 2013 (not shown on chart) is 25.74%.

Traders Pressure Russian Central Bank

Bloomberg reports Ruble Tumbles Most Since 1998 as Traders Pressure Central Bank.

The ruble tumbled the most since 1998, sliding past 60 for the first time, as traders tested Russia's willingness to defend the currency amid an oil slump that's pushing the economy toward recession.

The ruble weakened 9.1 percent to 64.0005 per dollar at 7:57 p.m. in Moscow, the steepest slide on a closing basis since the year Russia defaulted on local-currency debt. The 10-year government bond yield rose 23 basis points to 13.23 percent. Three-month implied volatility for the ruble climbed to a six-year high as the rout triggered the Bank of Russia to sell foreign exchange, according to BCS Financial Group and MDM Bank.

Traders are pressing the central bank to buy more rubles to limit a selloff that has wiped out 22 percent of the currency's value this month.

"The collapse of the ruble has intensified amid falling oil prices and a central bank that failed to deliver a decisive actions to counteract the ruble decline," Bernd Berg, a London-based emerging-market strategist at Societe Generale SA, said in e-mailed comments. "Russia is facing the risk of a currency and confidence crisis."

The ruble's slump takes its 2014 depreciation to 48 percent, surpassing Ukraine's hryvnia for the first time as the world's worst performer among peers tracked by Bloomberg.

Failure to Halt Decline

Bernd Berg commented the "[Russian] central bank failed to deliver a decisive actions to counteract the ruble decline. Russia is facing the risk of a currency and confidence crisis."

That's a true but very misleading statement.

The worst thing Russia could do would be to blow its currency reserves in a foolish attempt to stop the Ruble slide. Were Russia to blow its currency reserves, Russia would cause or exacerbate a crisis, not prevent one.

The best thing for Russia to do is let the decline play out.The market will eventually find a level. In the meantime, there is little or nothing Russia can do.

Global Currency Crisis on Deck

Yes, Russia is facing a currency crisis. So is Ukraine, Turkey, Venezuela, and numerous other countries.

I believe a global currency crisis is in the works.

For more on the global currency crisis thesis, please see Next Phase in Currency Wars: Yen Plunge, Yuan Devaluation, and "Tidal Wave of Westbound Deflation".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Monday, December 15, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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