TheChek News Flow

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Fed Refrains From Tapering, Keeps $85b/mo. of Purchases in Place 2013-10-30 18:07:57.471 GMT

By Vivien Lou Chen Oct. 30 (Bloomberg) -- FOMC keeps much of statement unchanged since Sept., leaves $45b/mo. of UST purchases and $40b/mo. of MBS purchases in place, and adds new language on slowing housing sector. * Officials keep language on “moderate pace” of economic expansion, and keep sentence on risks that inflation might fall persistently below 2% target * Fed adds new language on recovery in housing sector slowing somewhat in recent months, removes reference to strengthening in industry * FOMC removes language on possibility of tighter financial conditions slowing pace of improvement in economy and labor market * Fed reaffirms view that highly accommodative policy will remain appropriate for “considerable time” after QE ends and recovery strengthens * Committee still sees economy picking up from its recent pace with appropriate accommodation * FOMC continues to describe unemployment as “elevated” and gradually declining; keeps language saying downside risks to economic outlook and labor market have diminished since last fall * FOMC still expects medium-term inflation to return to objective, keeps reference to long-term expectations remaining stable * Fed retains current unemployment and inflation thresholds of 6.5% and 2.5% * Kansas City Fed Pres. Esther George dissents for seventh time on concern that high level of accommodation increases risks of imbalances and could cause higher long-term inflation expectations * Link to Statement: NSN MVHTZZ3V2803 <GO>

For Related News and Information: First Word scrolling panel: FIRST<GO> First Word newswire: NH BFW<GO>

--Editors: Greg Chang, Vivien Lou Chen

To contact the reporter on this story: Vivien Lou Chen in San Francisco at +1-415-617-7078 or vchen1@bloomberg.net

To contact the editor responsible for this story: James Holloway at +1-212-617-4454 or jholloway8@bloomberg.net

Closing Market Summary: Stocks Slump While FOMC Holds Pat

The S&P 500 registered its first decline in five sessions, losing 0.5%.Small caps faced additional selling pressure as the Russell 2000 fell 1.4%.

Stocks held modest losses into the afternoon, but slid to fresh lows after the Federal Reserve released its latest policy directive, which was little changed from prior statements. Most notably, the directive acknowledged the recent slowdown in the housing sector and noted that fiscal policy is presenting a headwind to growth. In addition, the Committee dropped the reference to "tightening financial conditions" that appeared in the September statement.

While the statement did not throw the market any taper-related curveballs, it may have been perceived to be somewhat hawkish as the Committee did not alter its outlook to account for the impact from the partial government shutdown.

Although stocks slumped in reaction to the release, it should be noted today's'weakness occurred after the S&P rallied more than 7.0% over the course of 15 sessions since October 8. Therefore, it is more likely the policy statement served as an excuse for the selling rather than a catalyst.

All ten sectors settled in the red, but their losses were limited to less than 0.8%. Defensive sectors led to the downside, and consumer staples (-0.8%) ended at the bottom of the leaderboard. Meanwhile, utilities (-0.7%) ended among the laggards despite seeing some intraday strength in reaction to above-consensus earnings from Exelon (EXC 28.55, +0.50). Among cyclical groups, energy (-0.6%) and materials (-0.6%) trailed the S&P while industrials (-0.4%) and technology (-0.2%) outperformed.

Even though the tech sector ended ahead of the broader market, the tech-heavy Nasdaq (-0.6%) lagged as the iShares Nasdaq Biotechnology ETF (IBB 207.25, -4.35) lost 2.1%. With just one more session left in October, the biotech ETF is on track to end the month with a loss of 1.0% after gaining more than 50.0% so far this year. Treasuries ended lower with the 10-yr yield up three basis points at 2.53%.

Trading volume was well below average as only 697 million shares changed hands on the floor of the New York Stock Exchange. Looking back at today's economic data, the CPI increased 0.2% in September after ticking up 0.1% in August. The consensus expected headline CPI growth of 0.1%. Energy prices, which fell 0.3% in August, were up 0.8% in September. That was the strongest increase since prices rose 3.4% in June. Food prices were flat in September after increasing 0.1% for the previous two months. Unlike the PPI, there were no large moves in any one sector. Food price movements were generally weak, up or down, across the board.

Excluding food and energy, core CPI increased 0.1% in September for a second consecutive month. That was exactly what the consensus expected.

Separately, according to today's ADP National Employment Report, employment in the nonfarm private business sector rose by 130K in October. This was a bit above the increase of 125K expected by the consensus.

Lastly, the weekly MBA Mortgage Index rose 6.4% to follow last week's decline of 0.6%. Tomorrow, October Challenger Job Cuts will be released at 7:30 ET and weekly initial claims will be reported at 8:30 ET. The day's data will be topped off with the 9:45 ET release of the Chicago PMI for October.

o Russell 2000 +30.2% YTD o Nasdaq +30.2% YTD o S&P 500 +23.6% YTD o DJIA +19.2% YTD

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Strategists’ S&P 500 Index Estimates for Year-End 2013 (Table) 2013-10-30 16:08:49.112 GMT

By Nick Taborek Oct. 30 (Bloomberg) -- The table presents estimates from strategists at brokerages for where the Standard & Poor’s 500 Index will finish 2013 and how much profit companies in the benchmark measure of U.S. stocks will generate.

*T

Firm Strategist 2013 Close 2013 EPS ============================================================== Bank of America Savita Subramanian 1,750 $109.00 Bank of Montreal Brian Belski 1,800 $110.00 Barclays Barry Knapp 1,800 $108.00 BTIG Dan Greenhaus 1,750 $109.00 Canaccord Tony Dwyer 1,760 $110.00 Citigroup* Tobias Levkovich 1,650 $109.50 Credit Suisse Andrew Garthwaite 1,730 $107.70 Deutsche Bank David Bianco 1,750 $111.00 Goldman Sachs David Kostin 1,750 $108.00 HSBC Garry Evans 1,680 Jefferies Sean Darby 1,735 $115.00 JPMorgan Thomas Lee 1,775 $110.00 Morgan Stanley* Adam Parker $105.50 Nomura Michael Kurtz 1,780 $106.50 Oppenheimer John Stoltzfus 1,730 $109.00 RBC Jonathan Golub $110.00 Scotiabank Vincent Delisle 1,650 $108.00 Stifel Nicolaus Barry Bannister 1,750 $108.00 UBS Julian Emanuel 1,750 $108.50 Weeden Michael Purves 1,620 Wells Fargo Gina Martin Adams 1,440 $105.00

BNP: "The Bigger The Rally, The Worse The Sell-Off Will Be" And "When The Fed Tightens, Bad Stuff Happens"

BNP's Paul Mortimer-Lee knocks it out of the park today with not one, not two, but pretty much all quotes in his latest note, "The Fed and QE: Hotel California?" A random sampling thereof (full note shortly).

From BNP

* History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point. * Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields. * Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy. * How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be. ...

Our overall assessment is that when the Fed [ZH: again] decides to ‘taper’, there will be an adverse effect on markets. Bonds will suffer from a higher term premium and an upward revision of expectations about future levels of Fed funds. Equities are likely to suffer, too. How big the selloffs will be will depend on the circumstances – how robust the recovery looks, to what extent inflation remains quiescent and to what extent the current period of maintained QE leads to excess valuations in markets. Those markets that sold off most during the ‘taper tantrum’ tended to be those markets that had rallied most in previous months.

Clearly, this is one of the disadvantages of QE – one of its purposes is to distort markets. When QE ends, those distortions begin to unwind. Because of the disequilibria in financial markets under QE, relative valuations, as well as valuations of the risk-free asset, are distorted. Markets may go through considerable gyrations as they try to find the “right” constellation of equilibrium prices. It is possible that sufficiently vigorous reactions could adversely affect the economy.

It may be difficult to foresee all the effects of ending QE. After all, except with relatively brief breaks, the Fed has been using its balance sheet to stimulate the economy since 2009. Markets and the economy have gotten used to it. Will there be unexpected effects when QE ends? Seems like a good bet. What they will be is more difficult to say.

...

In the 1977 Eagles song, Hotel California, a luxury hotel appears inviting and offers a tired traveller comforting relief from his journey. It turns out to be something of a nightmare, however, and he finds that "you can check out anytime you like, but you can never leave".

Does that sound a little bit like QE and the Fed? The FOMC signalled its intention to check out of QE at its June meeting, but by September, it found it could not leave.

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OGX Said to Plan Bankruptcy Protection File as Soon as Today (1) 2013-10-30 13:14:07.153 GMT

(Updates with comment from company in second paragraph.)

By Cristiane Lucchesi, Peter Millard and Juan Pablo Spinetto Oct. 30 (Bloomberg) -- OGX Petroleo & Gas Participacoes SA, the oil company controlled by former billionaire Eike Batista, could file for bankruptcy protection as soon as today, said a person with direct knowledge of the plans. The filing for judicial recovery, as the proceedings are known in Brazil, would be done after the close of trading in Rio de Janeiro, where OGX is based, said the person, who asked not to be identified before documents are submitted. The board is yet to decide on the filing, OGX said in a regulatory filing today. An official at OGX’s Rio press office, who isn’t an authorized spokesperson, declined to comment on the plans. The proceedings will put $3.6 billion of dollar bonds into default in Latin America’s largest corporate debt debacle and mark the final chapter in Batista’s demise as poster child for Brazilian entrepreneurialism. OGX will need creditors to approve a restructuring plan that is presented to the court to continue operations, said Leonardo Theon de Moraes, a bankruptcy lawyer at Sao Paulo-based Mussi, Sandri & Pimenta Advogados. “If creditors don’t accept the business plan, OGX will have its judicial reorganization converted into a bankruptcy process and a liquidation of assets,” Theon de Moraes said by telephone. “In a liquidation process the people who lose more are the shareholders.” Discussions between OGX, which is running out of money to test its most promising field, and holders of bonds due in 2018 and 2022 concluded without any restructuring agreement, the Rio- based company said in a statement released yesterday. While Batista is yet to decide, his shipbuilder probably will also seek protection against creditors, the person said.

Wealth Erosion

Batista became Brazil’s richest man after raising billions of dollars in equity markets and loans from a state bank to fund OGX’s drilling program and sister commodities startups. He then tapped debt markets, selling bonds to investors including BlackRock Inc. and Pacific Investment Management Co. Bankruptcy would culminate a 16-month decline that wiped out more than $30 billion of Batista’s fortune after offshore deposits he had valued at $1 trillion turned out to be duds. Shares of OGX, which Batista founded in 2007, lost 96 percent in the past 12 months, the worst-performing stock among 73 members of the Brazilian benchmark Ibovespa Index. The stock dropped 26 percent to a record low 17 centavos at 11:08 a.m. in Sao Paulo. Companies that file for bankruptcy protection will have shares suspended, the Brazilian exchange operator said in a statement last month. Batista asked bondholders to convert debt into equity, diluting his role in the company, two people with direct knowledge of the matter said Sept. 9. OGX’s $2.56 billion in bonds due in 2018 trade at 8.15 cents on the dollar.

Spillover Risk

“What the market is telling me is they don’t have a lot of faith even for bond holders to get money back,” Robbert Van Batenburg, director of market strategy at Newedge Group in New York, said by phone. “There’s a risk of a spillover - whether creditors are trying to pursue legal actions against other companies in Batista’s group.” OGX continues to review debt restructuring options, it said in yesterday’s statement. The company, which expects to run out of cash in the last week of December, needs about $250 million to sustain operations through April, it said in an Oct. 23 presentation to Rothschild, the adviser hired by bondholders. “New capital from either debt or equity financing is required to bridge near-term liquidity in the first quarter of 2014,” OGX said in the presentation posted yesterday on its website. “OGX is evaluating a number of farm-out opportunities to fully fund the mid- to long-term business plan.” The company’s cash fell to about $82 million at the end of September, it said in a separate document dated Oct. 7 and posted on its website yesterday.

Supplier Debt

OGX has an enterprise value of $2.72 billion in a “base case operating model”, the company said. That’s more than seven times OGX’s market value of 776.6 million reais ($357 million). The company has been building arrears with suppliers. Diamond Offshore Drilling Inc., a rig supplier to OGX, said Oct. 24 it wrote off $58 million from second and third quarter earnings on missed payments. Ensco Plc, another supplier, said on the same day that OGX’s “deteriorating” financial situation curbed its third-quarter profit. “Payments are only made to critical vendors who currently perform services at the Martelo field to get first oil production up and running,” OGX said in the Oct. 7 document, titled “Project Olympic.” The suppliers claims amount to $546 million, OGX said in a September presentation also posted on its website yesterday.

Missed Payment

The oil company missed a $45 million payment on Oct. 1, prompting Standard & Poor’s to assign a default rating to $1 billion of bonds. Moody’s Investors Service and Fitch Ratings are giving OGX the 30-day grace period before calling a default. The grace period expires tomorrow. Earlier this month, two people with direct knowledge said OGX was considering filing for bankruptcy protection late October or early November. Once a judge accepts a filing, the company would have 60 days to present a restructuring plan. OGX risks having the country’s oil regulator revoke its 30 oil and natural gas licenses in Brazil if it files for bankruptcy, according to Sao Paulo-based TozziniFreire Advogados, a law firm that has clients in the oil industry. The oil regulator, known as ANP, said by e-mail yesterday that the company would be allowed to keep its blocks under bankruptcy protection provided it has the funds to operate them.

For Related News and Information: Batista Party Boat Departs Rio as Olympic City Loses Patron NSN MSMCFF6JTSF3 <GO> No Batista Bailout as Rousseff Seeks Recovery: Corporate Brazil NSN MRUJKH6JTSEX <GO> Billionaire No More as Batista Wealth Sunk by Mubadala Debt NSN MQKA2Y6JIJUP <GO> Stories about OGX: OGXP3 BZ <Equity> CN <GO> Bloomberg Billionaires Index: RICH <GO> Wealth News: NI Wealth <GO>

--Editors: James Attwood, Robin Saponar

To contact the reporters on this story: Cristiane Lucchesi in Sao Paulo at +55-11-3046-2017 or clucchesi5@bloomberg.net; Peter Millard in Rio de Janeiro at +55-21-2125-2531 or pmillard1@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at +55-21-2125-2519 or jspinetto@bloomberg.net

To contact the editor responsible for this story: James Attwood at +56-2-2487-4019 or jattwood3@bloomberg.net

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BFW 10/30 15:20 Pimco Hires Schroders’s Maisonneuve to Lead Equities Expansion

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Pimco Hires Schroders’s Maisonneuve to Lead Equities Expansion 2013-10-30 15:18:26.93 GMT

By Alexis Leondis Oct. 30 (Bloomberg) -- Pacific Investment Management Co., the bond manager that started expanding into stocks four years ago, hired Virginie Maisonneuve from Schroders Plc to lead the push after Neel Kashkari left in January. Maisonneuve, who was head of global and international stocks at Europe’s biggest publicly traded fund company, will start in January in Pimco’s London office, according to a statement today from Newport Beach, California-based Pimco. Maisonneuve, 49, managed stock funds in Schroders’s London office for nine years, overseeing funds such as Schroder International Alpha Fund. Michael Diekmann, chief executive officer of Pimco parent Allianz SE, said earlier this month the bond manager’s expansion into stocks was proving harder than expected. Pimco, seeking to expand into stocks in anticipation of an end to the 30-year bond rally, has gathered less than 1 percent of the firm’s $1.97 trillion in assets into its four main stock mutual funds. “Virginie is a proven equity investor and leader who has delivered a track record of success for clients throughout her 25-year career as a portfolio manager and a business builder,” Mohamed El-Erian, Pimco’s chief executive officer and co-chief investment officer along with co-founder Bill Gross, said in the statement. El-Erian and Gross, whose name is synonymous with fixed- income investing, have sought to diversify beyond fixed income in anticipation of an end to the three-decade bond rally. Unlike rivals such as BlackRock Inc., which made acquisitions to move beyond bonds, Pimco chose to grow by adding managers and strategies one at a time. By hiring Maisonneuve, Pimco is hoping to reinvigorate its stock push just as investors are fleeing the bond market, removing an estimated $128 billion from fixed- income mutual funds since May.

Managing Money

Maisonneuve joins a year after the departure of Kashkari, who was hired in 2009 to oversee the unit’s expansion after earlier attempts to add stocks fizzled. Kashkari, who didn’t manage any funds, stepped down in January saying he wanted to pursue a career in public service. Maisonneuve, who joins as managing director, global head of equities and portfolio manager, joins other high-ranking women at Pimco, including Jennifer Bridwell, global head of alternative product development, Sabrina Callin, who oversees Pimco’s enhanced equity index and unconstrained bond products, and Jennifer Durham, chief compliance officer. The equity unit’s mutual funds account for about $3.8 billion of Pimco’s assets. Stock strategies including Pimco’s StocksPLUS funds, which attempt to beat the market using a combination of bonds and derivatives, total about $50 billion, according to today’s statement.

Maisonneuve’s Record

Kashkari joined Pimco after acting as senior adviser to former U.S. Treasury Secretary Henry Paulson and also had a career as an investment banker at Goldman Sachs Group Inc. Before Schroders, Maisonneuve worked at Clay Finlay in New York as co-chief investment officer and at State Street Corp. as a stock manager focused on Asian portfolios. Maisonneuve’s $199 million Schroder International Alpha Fund, which she’s managed since 2005, returned 15 percent over the past five years, ahead of 70 percent of rival funds, and 23 percent over the past 12 months, behind 65 percent of peers, according to data compiled by Bloomberg. Pimco is diversifying as Gross’s Pimco Total Return Fund, on track to have the worst redemptions ever this year, has lost almost $30 billion through Sept. 30, according to estimates from Morningstar Inc. in Chicago. Pimco’s U.S. mutual funds had four straight months of withdrawals starting in June, totaling $39 billion. This year through Sept. 30, the funds had $8.9 billion in net redemptions, Morningstar said. Diekmann said in an Oct. 15 interview that given Pimco’s size and significance on the bond side, the amount it’s attracted into stock funds is less significant. “It’s obviously more difficult than we expected it to be, but I’m very happy that they do this in a professional way, and not getting into sort of acquisition mode,” Diekmann said. “I don’t declare victory yet, but neither do I say it’s been a failure.”

For Related News and Information: Allianz CEO Says Pimco Equity Expansion Proving to Be Difficult NSN MURDYI6JIJUO <GO> Top Stories: TOP<GO> Top fund stories: TFUND <GO> Bloomberg fund performance: FPC <GO>

--Editors: Sree Vidya Bhaktavatsalam, Christian Baumgaertel

To contact the reporter on this story: Alexis Leondis in New York at +1-212-617-5773 or aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at +1-617-210-4624 or cbaumgaertel@bloomberg.net

*PIMCO HIRES SCHRODERS'S VIRGINIE MAISONNEUVE TO HEAD EQUITIES

Peugeot in talks with Dongfeng about potential partnership, not capital increase

Listed French car maker PSA Peugeot-Citroen is not holding discussions about a potential capital increase with Chinese competitor Dongfeng, CNBC reported. The report cited Chief Executive Maxime Picat as saying that Peugeot is indeed in talks with Dongfeng, but rather about a potential partnership and the creation of future industrial and commercial developments.

Picat added that PSA had no short-term issues regarding its financial situation as the group can boast around EUR 11bn of financial guarantees.

Source CNBC

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BN 10/30 14:38 *SANOFI CALL ENDS BFW 10/30 14:37 *SANOFI CEO SAYS REPURCHASING L’OREAL STAKE DEPENDS ON NESTLE BN 10/30 14:35 *SANOFI SAYS 'COULD WELL BE OTHER OPTIONS' FOR L'OREAL STAKE BN 10/30 14:34 *SANOFI CEO SAYS REPURCHASING L'OREAL STAKE DEPENDS ON NESTLE BFW 10/30 14:28 *SANOFI CEO SAYS SLOWDOWN IN CHINA PHARMA MARKET IS TEMPORARY BN 10/30 14:27 *SANOFI CEO SAYS CO. WILL CONTINUE TO INVEST AND EXPAND IN CHINA BN 10/30 14:26 *SANOFI CEO SAYS SLOWDOWN IN CHINA PHARMA MARKET IS TEMPORARY BN 10/30 14:25 *SANOFI CEO DOESN'T SEE STRUCTURAL CHANGES IN EMERGING MARKETS BN 10/30 14:24 *SANOFI SEES 'LITTLE BITS OF PRICING PRESSURE' ON RARE DISEASES BN 10/30 14:22 *SANOFI CEO SAYS HE SEES AMGEN AS MAIN COMPETITOR ON PCSK9 BN 10/30 14:19 *SANOFI CEO SAYS HE DOESN'T AGREE WITH PFIZER COMMENTS ON PCSK9 BN 10/30 14:17 *SANOFI CEO SAYS 'NOTHING HAS CHANGED' ON MID-TERM GUIDANCE BN 10/30 14:16 *SANOFI CFO CONTAMINE COMMENTS ON COGS-TO-SALES RATIO BN 10/30 14:16 *SANOFI SEES IMPROVEMENT IN COST OF GOODS TO SALES RATIO NEXT YR BN 10/30 14:13 *SANOFI ANIMAL HEALTH PROFITABILITY WILL BE LOWER THAN BEFORE BN 10/30 14:11 *SANOFI CEO SAYS NEXGARD WON'T BE THE SAME SIZE AS FRONTLINE BN 10/30 14:10 *SANOFI CEO SEES FULL SUPPLY OF VACCINES RETURNING IN 1Q 2014 BN 10/30 14:09 *SANOFI CEO SEES 'PROGRESSIVE' RETURN OF VACCINE SUPPLY IN 4Q BN 10/30 13:50 *SANOFI CEO 'CONFIDENT THINGS WILL GET BACK TO NORMAL' IN CHINA BN 10/30 13:44 *SANOFI CEO SAYS TECHNICAL ISSUE WITH VACCINES HAS BEEN RESOLVED BN 10/30 13:42 *SANOFI SEES W. EUROPE SALES SLIGHTLY LOWER OR FLAT IN NEXT YRS BN 10/30 13:40 *SANOFI CEO VIEHBACHER COMMENTS ON CONFERENCE CALL BN 10/30 13:40 *SANOFI EXPECTS ANIMAL HEALTH SALES TO BE DOWN 5% FOR REST OF YR

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*SANOFI WOULD LOOK AT BUYING STAKE FROM L'OREAL IF AVAILABLE 2013-10-30 14:34:35.223 GMT

--SIMEON BENNETT

-0- Oct/30/2013 14:34 GMT

Don’t look now, but another Asian crisis may be brewing–courtesy of the U.S. Federal Reserve.

A paper recently published by the Bank of International Settlements–a multilateral club of monetary authorities that includes the Fed–noted that central bank bond-buying, or “quantitative easing,” has made dollar-based loans so cheap that Asian companies are ramping up their borrowing in greenbacks. The paper’s authors fear that once the Fed and the Bank of Japan eventually turn off their liquidity taps, rising dollar interest rates will leave these Asian debtors unable to pay back the money. That should trigger uncomfortable memories of the debt and currency “death spiral” of 1997-98, when plunging local currencies fueled a crisis in Asia that spread financial contagion around the world. The BIS study focuses on South Korea, Hong Kong and China. But it is China, the world’s second-largest economy, that deserves the most attention. Despite the constraints imposed by capital controls, foreign-currency loans in China grew by a whopping 35% in the 12 months to March 2013, according to the researchers, Robert N. McCauley of the BIS and Dong He of the Hong Kong Monetary Authority. That’s more than twice the 15% growth in loans denominated in Chinese yuan–a pretty alarming statistic given how worried everyone has become about those yuan-denominated loans to construction-obsessed Chinese municipalities. Much–but not all–of the foreign borrowing in China is funded by local banks with onshore foreign-currency deposits. It’s also likely that Chinese companies are using a large chunk of it to finance operations in offshore subsidiaries. That would mean much of the borrowing is never converted into yuan and therefore wouldn’t trigger Beijing’s capital controls. On the surface, this seems like a more stable situation than was the case in Thailand and Indonesia before 1997, when dollars were borrowed to finance local-currency expenditures, creating a mismatch that became unmanageable when the home currencies plummeted. Yet Messrs. Dong and McCauley still worry about “substantial financial stability risks–not so much currency mismatch risks, but rather maturity and liquidity risks associated with dollar funding” in Asian economies. And for this they cite the dollar shortages of 2008 and 2009, when a failure to renew short-term loans led to paralysis in global trade. But it is the parallels with the Asia crisis and the lessons that experience offers for our understanding of the current phase of the global economic cycle that send the biggest warning signal. The authors note that the Fed is already facing a “difficult exit from very accommodative policy over the next several years,” much as it was also going through tightening process in 1997 until the Asian crisis disrupted it with the turmoil that was unleashed in world markets. They suggest that “financial instability in East Asia” could produce even worse “blow-back effects” to large economies this time because the region “has stronger trade links to North America and Europe today than it had 15 years ago. No one can say precisely how such contagion would play out. But for the sake of argument, we could imagine the Hong Kong subsidiaries of major European banks suffering heavy losses, for example, as one mainland Chinese debtor after another misses payments on foreign debts. And from there, it’s just one step before the euro crisis roars back to life as investors start worrying about the undercapitalized banks of the common currency region and their holdings of shaky governments’ bonds. The foreign exposures to this Asian debt buildup aren’t trivial. In China alone, foreign lending now stands at about $880 billion. While that’s still only 8.5% of total Chinese debt, it’s way up from 5.3% in 2009, according to the researchers. What’s more, dollar debt has a magnified capacity to trigger a credit crisis because foreign lenders can ignore government directives to roll over bad debtors’ loans–unlike the state-run banks. This is why defaults on foreign loans have often been the catalyst for Chinese credit episodes in the past, notes David Hoffman, managing director of The Conference Board’s China Center for Economics and Business. Some of the dollar-borrowing represents a long-term bet on the appreciation in the yuan. But the BIS paper shows that the biggest driver is the Fed’s massive quantitative-easing program, which pumps $85 billion into the global economy each month and which is creating easy credit conditions in foreign countries whose economic conditions don’t warrant them. We’ve already seen the extreme volatility that the mere hint of a reduction in Fed bond-buying created in emerging markets over the summer–the Indian rupee, for instance, dropped 20% versus the dollar between the beginning of May and the end of August–as all the “hot money” spurred by previous rounds of QE high-tailed out of those countries’ bond and money markets. Just imagine the damage when the Fed actually does something. The Federal Open Market Committee is highly unlikely to acknowledge such concerns when it releases a post-meeting statement this afternoon, one that will almost certainly retain the $85 billion-per-month operation. But for the sake of global stability, let’s hope it is at least taking them into account for policy planning–that is, if it’s not already too late.