The Chinese Banks At The Greatest Risk Of Keeling Over

With China’s credit-to-GDP ratio over 200%, it appears, as Barclays notes, that the PBoC is acting in line with the government’s efforts to deleverage, rebalance and position the economy towards a path for sustainable growth. Though they expect that the PBoC is likely to stabilize the interbank market in the near term (perhaps by more of the same 'isolated' cash injections), short-term rates are likely to remain elevated, at least for a while, possibly leading to the failing of some smaller financial institutions. With the small- and medium-sized banks having grown considerably quicker than the larger banks, having been more aggressive on interbank business (i.e. alternative channels to get around lending constraints), the following banks are at most risk of major disturbance of the funding markets remain stressed leaving the potential for retail bank runs or greater fragmentation in the commercial bank market.

Via Barclays:

A tipping point

The current liquidity squeeze has roots in a gradual tightening of liquidity in the banking system earlier in the year, but the tipping point was the abrupt drop in FX inflows in May (and likely in June) precipitated by the global unwind of the carry trade and the crackdown on unauthorised FX inflows by Chinese authorities. As the level of excess reserves dropped, banks started to hoard cash, in our view.

Unlike the recent past, the PBoC has not injected funds into the system through reverse repos. On the contrary, by issuing small amounts of bills this week, the bank has signalled its tolerance for the deleveraging process that ensued. Based on our projections, we do not think the liquidity situation will improve in the coming weeks barring strong FX inflows, which we think are very unlikely in the current environment.

The distress in China’s fixed income markets is palpable.

In the absence of prompt policy action, we expect the sell-off in rates to spread to bonds and other fixed income markets. The market will clear over time, but not before a significant level of deleveraging, in our view.

The rout in the fixed income market started at the end of May and accelerated after the three-day Dragon Boat Day holiday (10-12 June), as liquidity conditions did not ease. We think a confluence of several factors has created the tension in the funding market, which has now spilled over into bonds and equities, in our view. The following sequence of events played a role, in our view:

Tight liquidity has been building gradually this year. Banks’ reported excess reserves stood at 2% of deposits at the end of March, according to the PBoC, and we estimate that ratio dropped to 1.4% at the end of May. High deposit growth – a CNY4.2trn jump in March alone – which generated reserve demand of CNY1.47trn during January-May and OMOs that drained CNY478bn of liquidity in that period, were higher than the offsetting FX inflows of CNY1.57trn.FX inflows dropped sharply in May and are likely to have stayed low or turned negative in June, pushing the excess reserve balance into tight territory. The turnaround was very sudden and driven by global market volatility, in our view. Note that liquidity appeared flush, judging by low repo rates, as late as the second half of May.The hawkish policy response surprised the market. The PBoC has not responded to surging repo rates by injecting liquidity. Even though it let CNY252bn of repos expire in the first two weeks of June, this was not sufficient to break the trend. Moreover, the PBoC auctioned a token amount (CNY2bn) of 3m bills on 18 and 20 June, signalling tolerance for higher rates. In an unfortunate timing, the squeeze in the funding market came at the time when banks have been in the process of unwinding riskier wealth management products (WMPs) due to regulations introduced in March and require bridge financing for the assets behind those WMPs. Additionally, the rotation out of WMPs into deposits generates demand for reserves, which PBoC is not accommodating. Facing with the quarter-end liquidity needs, banks are probably hoarding cash now, transmitting the stress into bond, FX and equity markets.

The growth rates of small and medium-sized banks were faster than the large banks (the “big 4” banks). Moreover, they have higher interbank assets as a percentage of total assets than the big banks.

We believe this was mainly because:

1) the small and medium-sized banks were more aggressive on interbank business, which was used as an alternative lending channel to get around the lending quota, and LDR and capital constraints; and

2) they are more dependent on interbank funding to support their business growth.

In particular, we believe some mid-sized banks, such as Minsheng Bank and Industrial Bank, are using credit risk product-based (such as, discounted bills and Trust Beneficiary Rights [TBRs]) reverse repos and repos to arbitrage regulatory requirements. Such assets, which we believe have a much higher default risk than bonds-based reverse repos/repos, grew rapidly at these banks over the past two years.

Minsheng’s reverse repo under discounted bills increased 376% y/y in 2012 and Industrial Bank’s reverse repo under discounted bills and TBR increased 61% y/y in 2012.

In our view, the regulators are more likely to tighten these products in future.

Source: Barclays

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We Don't Need To Worry About Bernanke 'Tapering' As Early As He Projected

Last week we wrote that Bernanke could not be happy with the way long bond rates reacted to his press conference answer that the Fed could begin lessening its rate of bond purchases in the next few months, and that he would attempt to sooth the market in yesterday’s press conference following the FOMC meeting.  Well, he tried, but ended up making things worse, at least in the perception of the markets. 

The Chairman attempted to allay fears by setting specific dates and economic parameters for reducing and eventually eliminating the latest bond purchase program that, until recently, was assumed by the market to be open-ended.  He further took pains to assure the markets that just reducing the amount of purchases was not the same as tightening and that the fed funds rate would not likely be increased before early in 2015.  He also assured one and all that the decisions would still be data-dependent, and subject to adjustment.

Investors, however, took what Bernanke apparently thought was increased clarity to mean greater hawkishness, and, as a result, bond yields soared as stocks tanked.  In addition the markets gave far greater importance to the potential reduction of bond purchases, whereas the Fed attached greater significance to the continuing expansion of their balance sheet.  (On a separate topic, we also don’t want to overlook the financial and economic turmoil in China as an important contributing factor to the market drop.  We’ll have more to say on that in upcoming comments.)

That said, there are some puzzling aspects to the reasons Bernanke gave for cutting the program.  Although he referred to an “improving” economy, the Fed slightly reduced its 2013 GDP forecast range.  The more optimistic outlook was actually based on its forecast for 2014, which is still over six months away and, therefore, more speculative, particularly in view of the Fed’s poor forecasting record.  In each of the last three years the Fed forecast a strong second half economy, and each time their prediction fell short.  Indeed, both QE1 and QE2 were stopped, but had to be restarted again with the current program.

In our view, economic growth is not improving as the Fed and many others appear to believe.  The Fed’s 2014 economic forecast seems to us as highly optimistic and is unlikely to be met.  In that case the FOMC reduction of the pace of bond purchases may be started much later than they are currently projecting.  The Fed’s reduction of its inflation forecast also lends credence to our belief that QE may go on for longer than the Fed is indicating.  Growth has been tepid throughout the recovery and, if anything seems to be decelerating.  When asked where the improvement is, most observers cite housing and autos.  While housing has improved for now, vehicle sales have been flat since November, and major segments of the economy such as consumer spending, disposable income, production, employment and capital spending, are still in the doldrums.

The belief that economic growth is improving is not supported by the numbers. For the four quarters ending March 31st GDP grew by 1.8%, within the range of growth since the first quarter of 2010.  The second quarter is expected to come in at slightly under 2%, continuing the sluggish pattern.  Consumer expenditures for the year ended April 30th were up only 2.1% on a disposable income increase of only 1.1%, as the savings rate declined from 3.5% to 2.5%.  Since April 2010, consumers have had to reduce their savings rate from 5.3% to 2.5%, just to maintain a tepid rise in spending.  The savings rate is almost down to where it was in 2007, meaning consumers will have to depend increasingly on income that is barely rising.

Job growth is also weaker than many believe.  The three-month moving average of payroll employment is 155,000, the weakest of any moving three-month period since October.  Both the 4-week and 8-week average of new weekly unemployment claims have moved up, while wages and hours were flat in the latest reporting period.  Growth in durable goods orders is also decelerating.  Year-to-year gains in the period ended April 30th were 2.4%, compared to 7.6% last year and 7.9% two years ago.  May industrial production rose only 1.6% over a year, a significant drop from the 4.5% in May 2012.

All in all, we believe that economic growth will be too slow for the Fed to reduce QE as early as Bernanke indicated in his press conference, and that the low rate of inflation supports this view.  However, a delay in slowing down the bond purchase rate is not likely to help the market as a deteriorating rate of economic growth along with lower earnings expectations and the threat of deflation is consistent with a falling market.  In our view, the market top has been made and an imminent bear market is in store.

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Bitcoin Exchange Mt. Gox: We're Not Martyrs, But...

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MAULDIN: Regulations And Socialism Are Crushing The French Economy, And It's Going To Get Worse

The France that I see as I look out from the bullet train today is far different from the France I see when I survey the economic data. Going from Marseilles to Paris, the countryside is magnificent. The farms are laid out as if by a landscape artist – this is not the hurly-burly no-nonsense look of the Texas landscape. The mountains and forests that we glide through are glorious. It is a weekend of special music all over France, and last night in Marseilles the stages were alive and the crowds out in force. The French people smile and graciously correct my pidgin attempts at speaking French. I have found it diplomatic not to mention that I think France is in for a very difficult future. Why spoil the party?

But for you, gentle reader, I will survey the economic landscape that I see on my computer screen. It shows a far different France from the one outside my window, one that resembles its peripheral southern neighbors far more than its neighbors to the north and east. The picture is not all bad, of course. There is always much to admire and love about France. But there are a lot of hard political choices to be made and much reform to be undertaken if this beautiful country is to remain La Belle France and not become the sick man of Europe. This week, in what I think will be a short letter, we'll look at a few of the problems facing France.

Yesterday (June 20) the French called a Grand Summit of businesses, unions, and government officials to address the needed reforms to make France more competitive and its national budget more sustainable. Debt and deficits are high and rising as the country rolls into yet another recession in response to President Hollande’s hard left turn last year. One of the key issues is a very controversial plan to reform pensions.

Stratfor notes:

France spends roughly 12.5 percent of its gross domestic product on pensions, more than most almost any other Organization for Economic Co-operation and Development member. (For reference, Germany spends about 11.4 percent of its GDP on pensions, and Japan spends roughly 8.7 percent.)

[Note: elsewhere we find that France has a comprehensive social security (sécurité sociale) system covering healthcare, injuries at work, family allowances, unemployment insurance, and old age (pensions), invalidity and death benefits.  France spends more on ‘welfare' than almost any other EU country: over 30 per cent of GDP as a total entitlement cost. As a reference, that would be about $5 trillion in the US.]

The fact that an increasingly larger proportion of France's population qualifies for pensions factors into the debate. In 1975, there were 31 workers paying contributions for every 10 retirees; today, there are 14 workers paying contributions for every 10 retirees. As the baby boomers from the 1950s and 1960s begin to retire in the next decade, the pressure on France's coffers will grow substantially. The deficit of the French pension system is projected to double between 2010 and 2020, when it will exceed 20 billion euros.

It is hard for Americans to understand just how much it costs to support the average French worker (or to be self-employed). From Paris Voice:

Total social security revenue is around €200 billion per year and the social security budget is higher than the gross national product (GNP), i.e. social security costs more than the value of what the country produces. Not surprisingly, social security benefits are among the highest in the EU. Total contributions per employee (too around 15 funds) average around 60 per cent of gross pay, some 60 per cent of what is paid by employers (an impediment to hiring staff).  The self-employed must pay the full amount (an impediment to self-employment!)  However, with the exception of sickness benefits, social security benefits aren't taxed; indeed they're deducted from your taxable income.  Equally unsurprisingly, the public has been highly resistant to any change that might reduce benefits, while employers are pushing to have their contributions lowered.

And of course, almost the first thing that Monsieur Hollande did when he took office last year was to return the retirement age at which you qualify for a pension back to age 60 from the extremely controversial 62 that his predecessor, Sarkozy, had barely managed to push it to. Sarkozy’s “reforms” were greeted with massive protests, and Hollande used them to engineer a sweeping election victory for the Socialists. (I put “reforms” in quotes because nowhere else would a retirement age of 62 be seen as draconian, nor would the rest of the changes Sarkozy pushed through.)

Hollande faces a whole series of problems. Ambrose Evans-Pritchard notes:

The IMF’s Article IV Report on France published before the elections draws up the indictment charges: a state share of GDP above 55pc (or 56pc this year), higher than in Scandinavia, but without Nordic labour flexibility.

One of the rich world’s highest life expectancies but earliest retirement ages, a costly mix. Just 39.7pc of those aged 55 to 64 are working, compared with 56.7pc in the UK and 57.7pc in Germany. “French workers spend the longest time in retirement among advanced countries,” [the IMF] said. (the London Telegraph)

France has the highest tax and social security burden in the Eurozone and the second lowest annual working time. There has been a sharp rise in unit labor costs, making France even less competitive.

These developments have not gone unnoticed in Germany. A report by one of the conservative political parties there (the FDP) said, “French President Francois Hollande was trifling with reform, scarcely making a dent on the sclerotic labour market. Which is true of course. Hollande was elected in May 2012 on a campaign to preserve the status quo and protect the privileges of the French.” (Ambrose Evans-Pritchard, the Telegraph)

Not helping is the fact that France had a very anemic “recovery” after the Great Recession (never more than 1% a year) and is now back in full recession. Which means that tax revenues will go down, not up, and that deficits will swell.

Maulidin

And things are likely to get even worse. Charles Gave notes that French manufacturing is plummeting, and this has always led to further losses in GDP. The chart below from GaveKal shows the French Business Climate Survey advanced forward 9 months and the highly correlated GDP number, which follows. The IMF is now predicting a 2% annual recession in 2013, which means rising unemployment and very tepid 0.8% growth in 2014, not enough to really spur employment.

GaveKal

You can read a half a dozen reports and analyses of the French predicament, and they will all mention “labor rigidities” as being part of the problem. There is a high minimum wage cost, and it is hard to let employees go in difficult times, which discourages businesses from hiring young, inexperienced workers. New business start-ups, the source of real job growth, have fallen as a result of the relentless assault by the bureaucracy on entrepreneurs, not to mention the impredations of the tax-man. Corporate profit margins are thin in France, and companies are leaving for locales that afford them more-attractive cost options.

Debt servicing costs as a percentage of GDP have plunged in France from 3% in 1995 to 2% (today) even as the total amount of debt has risen four times. Low interest rates can be a thing of beauty if you want to lower costs, but when interest rates rise (and they would with a vengeance in the not too distant future if the ECB were not ready to step in, as the market clearly expects it to do) they can cripple a government already burdened with too large a deficit and unwieldy commitments. But without real reforms, how long will it be before the market sees France as another problem child, like Italy and Spain?

Austerity is a four-letter Anglo-Saxon – or even worse, Teutonic – word in socialist France, yet the market at some point is going to want to see a move toward sustainable budgets. Government bond investors are not philanthropists. They look for the least risk they can find. A realistic assessment will soon be made that France is no longer in the least-risky category.

Compounding Hollande’s problems is a growing disenchantment with the whole European project in France, the putative home of the movement for integration.

Mauildin

No European country is becoming more dispirited and disillusioned faster than France. In just the past year, the public mood has soured dramatically across the board. The French are negative about the economy, with 91% saying it is doing badly, up 10 percentage points since 2012. They are negative about their leadership: 67% think President Francois Hollande is doing a lousy job handling the challenges posed by the economic crisis, a criticism of the president that is 24 points worse than that of his predecessor, Nicolas Sarkozy. The French are also beginning to doubt their commitment to the European project, with 77% believing European economic integration has made things worse for France, an increase of 14 points since last year. And 58% now have a bad impression of the European Union as an institution, up 18 points from 2012. (Tyler Durden, Zero Hedge)

And Stratfor adds:

Hollande thus faces a dilemma: He could try to push for comprehensive reforms unilaterally, but that would be incredibly unpopular, at least in the short term. Otherwise, he could try to enact diluted reforms, which would be more palatable for French citizens but ultimately would be ineffective at reducing the costs of the French pension system.

Hollande's problem is shared by many Western European leaders, who have responded to the ongoing economic crisis by implementing painful reforms in their welfare states. The problem is that countries consider the welfare state one of the defining economic, political and social features of postwar Europe and a symbol of economic prosperity. The French have a long and rich tradition of fighting for their civil and social rights, and the notion of a social contract between rulers and the constituents is a key feature of French politics. For the French – not to mention the Italians, Spanish or Germans – a generous welfare state is an acquired right, a part of the social contract in Europe.

But what one group may see as an acquired right another will see as a tax burden, excessive cost, and unwanted risk. This is not just a French problem, of course. Governments everywhere have promised far more than they can ever deliver. And when a program gets prohibitively expensive, adjustments will be made. It goes without saying that when you cut a promised benefit to people who are already retired or soon will be, they will not be happy.

In July, 2012 Hollande called the first Grand Summit to solve the very same problems that were still facing at the latest one. As there is not yet a true crisis, no imminent cliff to fall over, I doubt that anything of substance will get done. Which means there will be yet another conference in the future as the stress intensifies.

Hollande is now down to a 30% approval rating. True reforms would anger his base, and a lack of them will lead to even lower ratings by the markets. He has no standing within his own party to force a compromise; and as elections draw closer, fewer and fewer within his party will want to be seen in a photo op with him.

France is on its way to becoming the new Greece. In 20 years, the Harvard Business School will do a case study on what not to do when faced with a massive fiscal crisis. France and Hollande will be Exhibit #1.

I am in Paris this weekend, meeting with my Mauldin Economics partner Olivier Garret in his home country. (He now lives in Vermont, so he still resides in a socialist state.) I fly to Cyprus on Monday morning, where I will have a series of meetings with local businessmen and officials for two days. I speak Wednesday evening at 6 pm at the Central Bank, through the auspices of the University of Cyprus and the Cyprus Chamber of Commerce, on the topic of "Currency Wars and Quantitative Easing."

Then I leave irrationally early the next morning for Split, Croatia, where I will spend a night before being gathered by the rogue Irish economist David McWilliams for a few days of relaxation and laughter. It is impossible to keep from laughing for very long around David, even when he is telling you that you are doomed. He has Irish gifts in abundance.

On Sunday I fly to Geneva, hoping my bags get there with me, to have meetings and face yet more deadlines; but I'll also get to enjoy an encore al fresco dinner with Herwig van Hove and friends. I see that several mutual friends will be there, chief among them Louis Gave, who will be in town for a different set of meetings.

I remember (I think it was two years ago about this time) that Herwig hosted another dinner party where Louis’s father, Charles, was in attendance and in rare form. I remember there were 16 people present, all involved in the investment business in one way or another. Charles and I were at the center of the table facing each other, bantering back and forth, with me serving as the straight man for Charles.

It was a gorgeous summer evening and the table was relaxed, with the wine and food matching the magnificence of the weather. We were debating the valuation of the euro, and I asked for a poll of the group as to whether they thought the euro would be higher or lower the next year. The show of hands had 11 voting lower, 7 thinking higher, and one abstention. (Yes, that is 19 votes for 16 people, but there were a number of economists present, who evidently felt compelled to vote in both directions, presumably using different hands, at least.)

I will remember the next moment all my life. I had noticed that Charles did not vote. I asked him about that, and he answered in that authoritative tone of voice that sounds to me exactly like what the voice of God should sound like, punctuating the air with his finger for emphasis, “John, that is an absurd question. The euro will not exist in a year.” I will remind Louis and the table of that moment and ask the same question if Herwig will allow me – and I'll report back.

I am in the midst of designing a new abode. Since it has been a very long time and I've undergone a few personal reinventions since I last owned a home, I have never really collected much in the way of art. And while I am not in a hurry to do so, I now find myself with an opportunity to discover some special pieces that I will enjoy seeing and sharing on a regular basis. I have “placeholder” pieces that can suffice while I patiently look, but I am currently seeking one special piece to hang over my dining room table. I am not looking for a chandelier, but rather a light that is art in and of itself. The apartment is a floor-to-ceiling glass high-rise, ten-foot ceilings, very open; and the table is glass. The overall theme is contemporary modern. When you walk in, almost the first thing you will notice after the view is that one piece of art suspended over the dining room table.

Except that I don’t know what it is yet. Since my readers obviously have exquisite taste,  it seems reasonable to ask you. I am very open to suggestions.

It is time to hit the send button as there is a music festival near here that needs my attention. Although last night I ended up in an Irish pub in Marseilles, listening to old ballads as I read and thought. Have a great week and spend a few moments with friends. They always pay the best dividends.

Your planning on seeing a few museums analyst,

John Mauldin
subscribers@MauldinEconomics.com

Copyright 2013 John Mauldin. All Rights Reserved.

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Now Not Even Journalists Will Get The Consumer Confidence Number Early

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Brazilian Breaks Silence On Protests — Promises Plan On Infrastructure And Corruption But Offers No Specifics

REUTERS/Marcos Brindicci

Demonstrators carry a banner made of Brazilian national flags during a protest against the Confederations Cup and President Dilma Rousseff's government, in Recife City June 20, 2013.

BRASILIA, Brazil (AP) — Brazilian President Dilma Rousseff spoke about her generation's struggles in battling a dictatorship during a prime-time speech meant to connect with the nation's youth who have energized widespread and at times violent anti-government protests.

The 10-minute address ended Rousseff's much-criticized silence in the face of the protests. She promised to make improvements in urban transportation and to battle corruption, but offered few details as to how that will happen.

The leader added she would soon hold a meeting with leaders of the protest movement, governors and the mayors of major cities. But it remained unclear exactly who could represent the massive and decentralized groups of demonstrators taking to the streets, venting anger against woeful public services despite a high tax burden.

Rousseff said that her government would create a national plan for public transportation in cities — a hike in bus and subway fares in many cities was the original complaint of the protests. She also reiterated her backing for a plan before congress to invest all oil revenue royalties in education and a promise she made earlier to bring in foreign doctors to areas that lack physicians.

"I want institutions that are more transparent, more resistant to wrongdoing," Rousseff said in reference to perceptions of deep corruption in Brazilian politics, which is emerging as a focal point of the protests. "It's citizenship and not economic power that must be heard first."

The leader, a former Marxist rebel who fought against Brazil's 1964-1985 military regime and was imprisoned for three years and tortured by the junta, pointedly referred to earlier sacrifices made to free the nation from dictatorship.

"My generation fought a lot so that the voice of the streets could be heard," Rousseff said. "Many were persecuted, tortured and many died for this. The voice of the street must be heard and respected and it can't be confused with the noise and truculence of some troublemakers."

Edvaldo Chaves, a 61-year-old doorman in Rio's upscale Flamengo neighborhood, said he found the speech convincing.

"I thought she seemed calm and cool. Plus, because she was a guerrilla and was in exile, she talks about the issue of protests convincingly," Chaves said. "I think things are going to calm down. We'll probably keep seeing people in the streets but probably small numbers now."

But Bruna Romao, an 18-year-old store clerk in Sao Paulo, said Rousseff's words probably wouldn't have an impact.

"Brazilians are passionate," she said. "We boil over quickly but also cool down fast. But this time it's different, people are in full revolt. I don't see things calming down anytime soon."

Trying to decipher the president's reaction to the unrest had become a national guessing game, especially after some 1 million anti-government demonstrators took to the streets nationwide Thursday night to denounce everything from poor public services to the billions of dollars spent preparing for next year's World Cup soccer tournament and the 2016 Olympics in Brazil.

The protests continued Friday, as about 1,000 people marched in western Rio de Janeiro city, with some looting stores and invading an enormous $250 million arts center that remains empty after several years of construction. Police tried to disperse the crowd with tear gas as they were pelted with rocks. Police said some in the crowd were armed and firing at officers.

Local radio was also reporting that protesters were heading to the apartment of Rio state Gov. Sergio Cabral in the posh Rio neighborhood of Ipanema.

Other protests broke out in the country's biggest city, Sao Paulo, where traffic was paralyzed but no violence reported, and in Fortaleza in the country's northeast. Demonstrators were calling for more mobilizations in 10 cities on Saturday.

The National Conference of Brazilian Bishops came out in favor of the protests, saying that it maintains "solidarity and support for the demonstrations, as long as they remain peaceful."

"This is a phenomenon involving the Brazilian people and the awakening of a new consciousness," church leaders said in the statement. "The protests show all of us that we cannot live in a country with so much inequality."

Rousseff had never held elected office before she became president in 2011 and remains clearly uncomfortable in the spotlight.

She's the political protege of former President Luiz Inacio Lula da Silva, a charismatic ex-union leader whose tremendous popularity helped usher his former chief of staff to the country's top office. A career technocrat and trained economist, Rousseff's tough managerial style under Silva earned her the moniker "the Iron Lady," a name she has said she detests.

While Rousseff stayed away from the public eye for most of the week, Roberto Jaguaribe, the nation's ambassador to Britain, told news channel CNN Friday the government was first trying to contain the protests.

He labeled as "very delicate" the myriad demands emanating from protesters in the streets.

"One of our ministers who's dealing with these issues of civil society said that it would be presumptuous on our part to think we know what's taking place," Jaguaribe said. "This is a very dynamic process. We're trying to figure out what's going on because who do we speak to, who are the leaders of the process?"

Marlise Matos, a political science professor at the Federal University of Minas Gerais, said before Rousseff spoke that answer wasn't good enough.

"The government has to respond, even if the agenda seems unclear and wide open," she said. "It should be the president herself who should come out and provide a response. But I think the government is still making strategic calculations to decide how to respond. What I'd like to see as a response is a call for a referendum on political reform. Let the people decide what kind of political and electoral system we have."

Social media and mass emails were buzzing with calls for a general strike next week. However, Brazil's two largest nationwide unions, the Central Workers Union and the Union Force, said they knew nothing about such an action, though they do support the protests.

A Thursday night march in Sao Paulo was the first with a strong union presence, as a drum corps led members wearing matching shirts down the city's main avenue. Many protesters have called for a movement with no ties to political parties or unions, which are widely considered corrupt here.

Several cities have cancelled the transit fare hikes that had originally sparked the demonstrations a week ago, but the outrage has only grown more intense.

Demonstrations for Saturday have been called by a group opposing a federal bill that would limit the power of prosecutors to investigate crimes.

Most protesters have been peaceful, and crowds have taken to chanting "No violence! No violence!" when small groups have prepared to burn and smash. The more violent demonstrators have usually taken over once night has fallen.

The unrest is hitting the nation as it hosts the Confederations Cup soccer tournament, with tens of thousands of foreign visitors in attendance.

Carlos Cardozo, a 62-year-old financial consultant who joined Friday's protest in Rio, said he thought the unrest could cost Rousseff next year's elections. Even as recently as last week, Rousseff had enjoyed a 74 percent approval rating in a poll by the business group the National Transport Confederation.

"Her paying lip service by saying she's in favor of the protests is not helping her cause," Cardozo said. "People want to see real action, real decisions, and it's not this government that's capable of delivering."

___

Barchfield reported from Rio de Janeiro and Brooks from Sao Paulo. Associated Press writers Stan Lehman in Sao Paulo and Jack Chang in Mexico City contributed to this report.

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