November 11, 2022: Global News Roundup

Crypto collapse rattles markets, Great Powers dabble in diplomacy

This post was originally published on IPEwithSBB.org.

The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global political and economic issues and events.

While most American eyes were on the midterm elections, major drama unfolded in cryptocurrency markets this week. This year has been a tough one for crypto markets so far, and the collapse of the Bahamas/Antigua-based FTX Exchange this week is certainly the most significant event to date, with major ripple effects already apparent. (See here and here about other, recent crypto market troubles). Estimates are that the crypto market cap fell somewhere between US$100-$150 billion in the 24-hour period to Thursday morning, as FTX’s liquidity crisis dragged down the prices of cryptocurrencies, as well as the share prices of crypto exchanges and other trading platforms (like Robinhood) with crypto exposure. Bitcoin sank to a 2-year low, Ethereum fell 13%, and FTX’s crypto token (FTT) plummeted 50%. The founder of FTX, Sam Bankman-Fried, “suffered huge losses as his net worth fell to $990 million from $32 billion in a day…”.

Briefly, here's what happened. Early in the week (Sun-Mon), FTX experienced the exchange equivalent of a bank run, causing it to almost collapse entirely: “Customers fled the exchange after becoming concerned about whether FTX had sufficient capital.” The India Times reported that FTX had “repeatedly borrowed their own FTT token as collateral”, which “raised questions about the health of their balance sheet”. Also worrying investors was the solvency of Alameda Research, a crypto trading house also owned by Bankman-Fried: “[Alameda] will be scrambling to liquidate assets on their books to meet any debt obligations, of which there are many,” reported the Financial Times. Then, on Tuesday, FTX’s major “arch-rival”, Cayman Islands-based Binance, expressed interest in purchasing (and recapitalizing) FTX, which would have protected investors and potentially limited the fallout from FTX’s liquidity crunch. But by Wednesday morning, news hit that Binance had backed out of the deal, noting that FTX’s balance sheet was much worse than previously thought (turns out that FTX had a US$7 billion hole in its books, and that it had approached another rival exchange, Seychelles-based OKX, for billions in cash before moving onto Binance). The chart below shows the size of the largest global crypto exchanges in 2022 by trading volume:

(Image: “Top crypto exchanges by volume”, 2022, from Reuters, here.)

It is unclear at this time whether the contagion will spread into other asset markets. Crypto markets are generally unregulated, positions and crossholdings are not transparent, and there are no real reserve/capital adequacy requirements in place, making it hard to predict what happens next. “The news has shocked the crypto world, which up until now considered FTX as the safest, best run crypto exchange and a solid rival against industry behemoth Binance,” reported Fortune India. By Thursday, concerns about margin calls and spreading fallout were growing. “A “cascade of margin calls” is likely underway given the interplay between the exchange, its sister trading house Alameda Research and the rest of the crypto ecosystem,” reported The Edge Singapore, quoting JP Morgan analysts, “What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking.” FTX has indicated that it will likely apply for bankruptcy if it can’t be recapitalized. Alameda Research is preparing to shutter its trading operations. By last night, reports were coming out that FTX is now under investigation by US federal authorities and that some of Bankman-Fried’s assets had been frozen by regulators in the Bahamas.

The map below shows how widely owned crypto is around the world. (This article discusses the recent uptick in crypto usage among migrant workers, in case you’re interested in learning more about who uses cryptocurrencies and why, aside from financial investors).

(Image: “Over 320+ Million Crypto Owners Worldwide”, 2022, from Triple-A, here.)

In other economic news, the IMF approved a US$4.5 billion bailout loan to Bangladesh, following months of discussions. The November report from the UN Food and Agriculture Organization (FAO) revealed that global food prices are holding steady, with rising prices for cereals tempered by falling prices for meat, dairy, sugar, and oils. In the EU, an ECB report found that the poorest households are disproportionately suffering from inflation: “According to the ECB, lower income households face a higher effective inflation rate than the richer ones and the gap is now the widest since 2006.” And, US tech firms continued to lay off workers. This week it was Meta, cutting 11,000 positions or roughly 13% of its workforce: “The job cuts are part of a wider cull in tech. Companies that rely heavily on advertising revenue have been hammered as brands slash their budgets against a backdrop of high inflation and high cost of capital. According to Layoffs.fyi, a website that tracks tech companies’ job cuts, there have been more reductions in the first nine days of November than in any other month in 2022.”  

Things I’m keeping an eye on:

1.     Peace and diplomacy: Following last week’s Ethiopia-Tigray settlement, there’s more great news for world peace this week. The US is broaching talks with both Russia (talks are possible on nuclear issues/START treaty) and China (there’s some indication that Biden and Xi will talk on the sidelines of the upcoming G20 meeting in Indonesia later this month).

Diplomacy is also back on the table, it seems, in the US-Ukraine-Russia conflict. It’s been reported that Russia is evacuating citizens from Kherson and withdrawing troops, but Ukrainian forces fear it may be a trap. Meanwhile, there have been some confusing, though certainly hopeful, indications that Ukraine may be willing to negotiate some kind of settlement with Russia. While I saw these rumors only in American media for a few days (i.e. that the US was open to talks), Russian state media confirmed Ukraine’s new stance on negotiations on Thursday. The Guardian also reported this week that US and Russian officials have been quietly communicating for some time, in the interests of averting a nuclear standoff.

2.     Elections: Vote counts in the US midterm elections are ongoing, and its still unclear which party will control the Senate and the House. In Brazil, the Ministry of Defense released a report which relates evidentiary findings from its inquiry into possible election fraud in the recent presidential run-off election between Lula and Bolsonaro. The news is a little confusing at the moment. Some are reporting that the Ministry found no evidence of fraud, while others are suggesting that the report was merely preliminary, with additional investigations and/or audits to follow. I’m keeping an eye on this because of the military’s seemingly unusual involvement.

3.     Stagflation: US financial markets were excited on Thursday morning, with the CPI print coming in lower than expected. That said, the CPI figures were worrisome, especially for poor and working-class households. While goods inflation generally seems to be moderating somewhat (i.e., prices are growing at a slower rate than before), the prices of basic necessities (housing, energy, and food) are steaming ahead, again underscoring the very strong possibility of some kind of financial/debt crisis alongside rising prices of basic necessities.