MacroScope

Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.

The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield.  Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result.  But almost a month after the BOJ announced its plans, the cash has not yet arrived.

EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).

But first, some good news. Retail investors are demonstrating some interest in emerging assets. Barclays says launches of toshin or investment trusts last week garnered $2 billion in subscriptions, with a Pacific Rim equities fund, partly geared to Asia, receiving $1.2 billion.  The previous week saw a $500 million ASEAN fund while an emerging equities toshin started in March took in $1.6 billion. There has also been net new uridashi bond issuance in the Mexican, Brazilian, Turkish and Russian currencies over the past few weeks, Barclays data shows.

The bad news is that Japanese  funds and insurers -- and that's where the big money is -- have steered clear of emerging markets, and indeed foreign assets so far.   Barclays writes that could be bad news for markets such as Hungary and South Africa, which have poor fundamentals and have benefited from talk of Japanese cash:

They’ve only been looking for it for a day but Cyprus’s Plan B has already taken on mythical status. A myth it might remain.

Ideas being floated include nationalizing the pension fund (back of the envelope calculations suggest that will raise less than a billion euros) and issuing bonds underpinned by future natural gas revenues (but no one is really sure how much they are worth). So to avoid default it still looks like the Cypriots may have to return to the bank levy they rejected so decisively in parliament on Tuesday, to raise the 5.8 billion euros the euro zone is demanding in return for a bailout.

Finance minister Sarris is still in Moscow hoping for some change out of the Russians and is out this morning saying discussions are ongoing about banks and natural gas.

The slow motion Cypriot car crash of the past five days reached impact point last night when not a single lawmaker voted for the bailout with bank levy attached – the first time a euro zone legislature has simply said no.

So what next? The finance minister is in Russia, ostensibly to seek an extension on an existing 2.5 billion euros loan on better terms, but could there be more on offer besides? The Eurogroup made clear last night that the 10 billion euros bailout was still on the table but that Nicosia had to come up with 5.8 billion euros of its own – the sum that a levy on bank depositors was supposed to raise. Could Moscow fill that gap, maybe in return for a slice of the island’s untapped offshore gas reserves? It looks unlikely but not impossible and there are powerful geopolitics at play. That there will be no more money from the euro zone looks like a given and there seems to be a resolve that it would be better to let Cyprus default then buckle at the last moment.

Finance minister Sarris has just said he hopes for a deal on the existing Russian loan today. In Nicosia, the president is meeting party leaders.

Cypriot lawmakers are supposed to vote today on a bailout that hits at least some of its bank depositors but the president’s spokesman has said any such legislation is unlikely to pass. This could be brinkmanship but it doesn’t sound like it.

Last night, euro zone finance ministers urged Nicosia to spare depositors with less than 100,000 euros in the bank and hit the richer harder, in order to raise 5.8 billion euros to free up a 10 billion euros bailout. Without it, Cyprus will surely go bankrupt but that is a deal that President Anastasiades baulked at in Brussels over the weekend. The government faces a stark choice: hit those who vote for it and rip up the deposit insurance they thought they had, or clobber the richer (many of them Russians), thus threatening the meltdown of its banking model.

Despite their belated support for the little guy, the euro zone will accept pretty much anything that raises the requisite cash. Germany and others insist the days of bailouts funded solely by taxpayers are over and the Bundestag probably wouldn’t sanction any other sort of deal.

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:

"How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy."

Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.

Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.

Warsaw wants to double next year's dividends from stakes in firms ranging from copper mines to utility providers to banks.

Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed "the forgotten side of the government balance sheet". It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm's length from the state and run along strict corporate standards to consistently grow profits.

The speed of the backlash building against Russia's paramount leader Vladimir Putin following this week's parliamentary elections has taken investors by surprise and sent the country's shares and rouble down sharply lower.

Comparisons to the Arab Spring may be tempting, given that the demonstrations in Russia are also spearheaded by Internet-savvy youth organising via social networks.

But Russia's economic and demographic profiles suggest quite different outcomes from those in the Middle East and North Africa. The gathering unrest may, in fact, signal a reversal of fortunes for the stock market, down 18 percent this year, argue  Renaissance Capital analysts Ivan Tchakarov, Mert Yildiz and Mert Yildiz.

Food and electricity bills are high. The cost of filling up at the petrol station isn't coming down much either. The U.S. economy is in trouble and suddenly the job isn't as secure as it seemed. Maybe that designer handbag and new car aren't such good ideas after all.

That's the kind of decision millions of middle class consumers in developing countries are facing these days. That's bad news for purveyors of everything from jeans to iphones  who have enjoyed double-digit profits thanks to booming sales in emerging markets.

Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People's credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
“The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting,” Goldman says, adding: “The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn.”

Come back Mr Fukuyama, all is forgiven.

In his 1992 book “The End of History and the Last Man”, American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.