DPC “Unloading fish at ‘T’ wharf, Boston, Mass.” 1903
“..the Chinese government wasted $20 trillion worth of credit digging holes to mollify the fallout from the Great Recession of 2007..”
The Chinese stock market recently saw its biggest selloff in eight years as the dramatic 8.5% fall in Shanghai “A” shares also rattled markets around the world. For the past few weeks, China has been balancing its desire to keep the equity market from a complete meltdown, while still courting the international investment community with hopes of being a dominant player in the capital and currency markets. But recently, the IMF warned China’s government about its concern over limiting investors’ freedom to take equity out of financial markets. These concerns were raised when the IMF met with officials in to discuss the chances of including the yuan in the fund’s basket of currencies, also known as Special Drawing Rights.
As China tries to balance the demise of its equity bubble while still keeping the illusion of free markets intact, two delusional narratives have started to circulate around Wall Street. The first such Wall Street-inspired delusion is that the collapsing Shanghai stock market will have no effect on the underlying Chinese economy. However, even though China’s 260 million trading accounts may be a relatively small%age of its total population, it’s also the richest and most productive portion of its citizenry, which also happens to be equal to the entire U.S. population in 1993. And Chinese GDP growth accounts for 1/3 of total global growth. Therefore, we can already find the manifestation of slowing Chinese growth from the nascent fall in equity prices.
For example, the profit of China’s industrial firms fell 0.3% in June from a year earlier. That followed a 0.6% gain in May and a 2.6% jump in April. For the first half of 2015, industrial profits were down 0.7% from a year earlier. China’s producer price index fell 4.8% in June, the 39th straight monthly decline. In fact, the economy is headed for its poorest overall performance in a quarter of a century. The second fallacy is that Wall Street believes in the TV commercial that claims what happens in Las Vegas stays in Vegas. Or, in this case, what happens to the Chinese economy stays in China. But the truth is that the meltdown in China is already spreading all around the Asia-Pacific region. For example, Taiwan’s year-over-year export growth has hit multi-year lows due to collapsing trade with China.
But perhaps the biggest indicator of the magnitude of China’s slowdown can be found in the global commodities market. Most pundits are trying to link the recent selloff in commodities strictly to the rising dollar as measured by the Dollar Index (DXY). But that index is actually down about 3% since March. During that time, the rout in precious and base metals, as well as energy and agriculture, has greatly accelerated. We see the Bloomberg Commodities index now at a 13-year low. Copper is down 28% for the year, tin is down 30%, and nickel is down 44%. And then we have gold. Last week, China dumped four tons on the market, causing the price of the precious metal to fall almost 4% within a matter of seconds. This had little to do with the value of the dollar on the DXY, but it was rather mostly about the waning demand in China from its imploding economy and the need to sell what you can when capital controls are in place.
[..] The true message of plunging commodity markets is that the Chinese government wasted $20 trillion worth of credit digging holes to mollify the fallout from the Great Recession of 2007, primarily creating a huge fixed-asset bubble with little economic viability. And then it forced another $1.2 trillion in margin debt to engender a consumption-based economy, primarily by creating a stock-market bubble after the fixed-asset bubble strategy began to fail miserably.
“If investors think the market is coming down, of course they will place sell orders.”
Stock investors beware: big sell orders in China could land you in trouble with the authorities. That’s the message from the Shanghai Stock Exchange, which said on its microblog Monday that two trading accounts got verbal warnings for a “large amount of sell orders affecting security prices or volume.” The bourse said the trading was “abnormal,” but didn’t give any details on the two accounts or indicate whether any laws were broken. The warnings follow investigations into algorithmic trading and short selling, part of a government campaign to prop up share prices and prevent market manipulation after an almost $4 trillion selloff. While proponents of the intervention say it’s necessary to restore investor confidence, critics have argued that China is backtracking on its pledge to give markets more sway in the world’s second-largest economy.
“Investors will feel it’s not an international standard,” said Steven Leung at UOB Kay Hian. “If investors think the market is coming down, of course they will place sell orders.” The exchange also issued three warnings to accounts that had “frequent cancellations of orders involving large amounts,” it said in the posting after the close of local markets on Monday. The latter warnings are consistent with the bourse’s previously announced investigation of spoofing, a practice that involves placing then canceling orders to move prices. The Shanghai Composite Index fell 1.1% on Monday, extending its decline from a June 12 high to 30%.
Given the limited details in the Shanghai exchange’s statement, it’s unclear what it was about the sell orders that elicited a warning from the bourse, said Tony Hann at Blackfriars Asset Management. “If the move is against market manipulation, then the move is justified in any environment,” Hann said. “Without more details, we’re working in the dark.” For Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co., the warnings on sell orders are equate to “window guidance” from authorities. “It’s an unconventional strategy that’s used in a difficult time,” Wu said. “We are still in the stage of rescuing the market, and the regulators will try every possible means to stabilize the market.”
“Industrial output fell to the weakest level since November 2011.”
It’s official — foreign speculators are to blame. China’s stock market rout hit a new phase over the weekend, as officials began acting on their convictions that traders are responsible in part for the crash that has sent shares downward by 30% in the last month and a half after stocks rose by 140% in the preceding year. On Monday, the Shanghai composite index fell by a relatively gentle 1%. Citadel, the massive hedge fund and quantitative trading company controlled by Ken Griffin and advised by former Federal Reserve Board chairman Ben Bernanke, had one of its accounts suspended from trading by Chinese regulators, the WSJ reported.
The news comes two weeks after a high-ranking government official blamed foreign forces for torpedoing China stocks, invoking George Soros’s supposed role of shorting currencies in the Asian financial crisis of 1997 as proof that Westerners wreck havoc in Asian markets. The Citadel fund was one of 34 accounts frozen by regulators who are investigating whether algorithmic traders offer bids then retract them to influence prices– a process that has also come under scrutiny in the U.S. Analysts have viewed the investigation skeptically. A better explanation for the recent stock market decline is that leveraged traders have sold stocks to meet margin calls, causing panic and more selling. Monday also brought more evidence that Chinese officials should be looking at home for explanations of stocks’ continued decline.
New manufacturing data shows that the Chinese economy is failing to recover after multiple interest rate cuts and fiscal spending programs. The Caixin China Manufacturing Purchasing Manager’s Index (formerly HSBC’s PMI) fell to 47.8, which indicates economic contraction. It’s worse than the flash reading that was released last week. Industrial output fell to the weakest level since November 2011. “The official PMI was also weaker than expected for the month of July, suggesting that the manufacturing sector may again be losing momentum,” wrote HSBC economists Julia Wang and Qu Hongbin today in Hong Kong. What the PMI measure suggests is that the Chinese economy isn’t falling off a cliff, but it is not rebounding strongly, either, after months of supportive monetary and fiscal measures.
Ben Bernanke’s employer.
Chinese stock market regulators have suspended more than 30 trading accounts, including one owned by the brokerage unit of the big American hedge fund Citadel, as they continue trying to stabilize the country’s volatile markets. “We can confirm that while one account managed by Guosen Futures – Citadel (Shanghai) Trading – has had its trading on the Shenzhen exchange suspended, we continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations,” Citadel wrote on Monday in an email. The suspension came amid continued volatility in the markets, with Shanghai’s main share index closing an additional 1.1% lower on Monday. A week earlier, the index had plunged 8.5% in its biggest single-day loss in eight years.
Chinese regulators have been taking exceptional measures to help halt the recent slide in the country’s markets, including buying shares directly and barring major shareholders of companies from selling their stakes. Despite these efforts, shares have continued to tumble. From their peak in mid-June, the total value of all domestically listed stocks has declined by about a third, shedding more than $3 trillion in market value. The China Securities Regulatory Commission, which has in recent weeks pledged to crack down on “malicious” short-sellers and market manipulators, appears to be expanding its scrutiny to other types of trading. On Friday, the commission said it would strengthen its supervision of so-called program trading, which can include high speed, algorithmic or other computer-driven trading strategies.
It said 24 such trading accounts on the Shanghai and Shenzhen exchanges had been suspended on suspicion of harming the market with rapid-fire share purchase or sale orders that were canceled before they could be fulfilled, a strategy known as spoofing. By the time markets closed on Monday, the Shanghai and Shenzhen exchanges had announced suspensions for more than 10 additional accounts, bringing the total number of targeted accounts to more than 30. Spoofing “has the effect of boosting or pushing down the market, and during the recent period of market volatility the impact of this has been amplified,” Zhang Xiaojun, a spokesman for the regulator, said Friday in a statement on the agency’s website. Mr. Zhang was speaking generally about program trading and did not identify the accounts that had been suspended.
Recapitalization needs rise by the minute.
Greek stocks were down 4.5% in early trade on Tuesday, dragged down by another near 30% plunge in banking stocks, a day after sustaining record losses when the bourse opened following a five-week shut down. The main Athens index lost 16.2% on Monday, the worst fall on record, as investors reacted to continuing questions about a new bailout from the European Union and to Greece’s worsening economy. All four major Greek banking stocks were down more than 29% in early Tuesday trade, effectively their daily limit for losses. Bank recapitalisation is on this week’s agenda of talks between Greek finance ministry officials and the so-called quartet of bailout monitors from the EC, the IMF, the ECB and the European Stability Mechanism, the EU’s own bailout fund. Greece’s four systemic banks are together expected to need between €10 billion and €25 billion in capital from the latest bailout following a flight of deposits and a surge in nonperforming loans as the economy dived back into recession.
“You can’t have a market working properly with capital controls..”
Greece’s stock market reopened after five weeks to the most savage wave of selling in decades, underlining a crisis that’s crippled the economy and pushed the country’s euro membership to the brink. Banks led the plunge following the shutdown, which was due to capital controls to prevent the lenders from bleeding more deposits. Piraeus Bank SA and National Bank of Greece SA sank 30%, the daily maximum allowed by the Athens Stock Exchange. The benchmark ASE Index dropped 16% on Monday after sliding as much as 23%. “The situation in Greek equity markets will have to get a lot worse before it gets better,” said Luca Paolini, Pictet Asset Management’s chief strategist in London. “There are still critical risks to be resolved.”
The selloff shows the scale of the crisis still facing Prime Minister Alexis Tsipras as he negotiates a third bailout with creditors after six months that have put unprecedented strain on the Greek economy and its financial system. The Greek market came to a halt in June as Tsipras ended talks with the euro region to ask voters to decide in a referendum whether to accept the terms offered in exchange for emergency loans. The move snuffed out a short recovery in stocks, which have now lost more than 85% of their collective value since 2007. The ASE slump on Monday was the biggest since at least 1987.
Traders in Athens said the market couldn’t function properly because of continuous halts as prices plummeted. They expect stocks to hit their lows in coming days before the market can gain any semblance of normality, according to Stavros Kallinos, head asset manager at Guardian Trust. “It’s a total disaster, it’s like hell here,” he said from Athens. “You can’t have a market working properly with capital controls. It will be a gradual process. We’re moving forward, but a step at a time.”
Well, there’s always zero…
For Greek stock traders exhausted by yesterday’s selloff, relief may not be imminent. Given their first opportunity to trade for five weeks, investors spent Monday selling, sending the benchmark ASE Index down 16% for the worst decline since at least 1987. It should’ve been worse, according to local brokers, who said routine tasks like buying and selling were often impossible due to emergency curbs enacted before the session began. “Without the restrictions, the drop would be steeper,” said Nikos Kyriazis, an equity sales trader at NBG Securities in Athens. “There are a lot of orders in the system that are not executable.” Fractured trading worsened the sense of dread around Athens as losses in the ASE swelled to 23% in the first minutes of the exchange reopening.
The decline extended the rout in Greek equities that began in 2007 and has wiped 85% of the value of companies listed there. Under rules announced last week, stocks with extreme volatility were halted sooner than normal, while would-be buyers had to raise money from places other than their bank accounts due to capital controls implemented last month. The net effect is that it’s going to take time for prices to reach levels that balance supply and demand, traders said. “Greek people can’t buy anything,” said Stavros Kallinos, head asset manager at Guardian Trust in Athens. “Even if people were looking to buy, they’ll probably be on hold position for now, waiting for tomorrow and after tomorrow and see where things stand then.” Slumps in two of the country’s biggest lenders, Piraeus Bank and National Bank of Greece, were limited to the daily 30% allowed by the Athens Stock Exchange.
Monday was not the day for the curbs to be enforced, said Thanassis Drogossis at Pantelakis Securities. “They should have also widened the limit from minus 30%,” Drogossis said in a message. “That would have allowed the discovery of a clearing price much earlier.” In particular, the restrictions on bank withdrawals made it easier to sell than buy, traders said. If you were a local investor looking to purchase shares Monday, your funding was restricted to cash transferred from abroad or money that had been deposited as cash in the first place. “The problem is that there is no demand at current levels, especially for Greek banks due to the forthcoming recapitalization needs,” said Alexandros Malamas at Piraeus Securities. “For sure banking stocks will fall more.”
There is no other option.
Greece’s bruising fight with its international creditors sent economic sentiment to its lowest level in nearly three years in July and knocked manufacturing activity down to record lows. The data was released as Greece opened its stock market on Monday after a five-week shutdown prompted by the imposition of capital controls. The bourse’s main index fell around 23% at the open. Greek manufacturing activity plunged to the lowest level on record in July, going back at least 16 years. Significantly, Markit’s purchasing managers’ index (PMI) showed new orders plummeting. “Manufacturing output collapsed in July as the debt crisis came to a head,” said Markit economist Phil Smith.
“Although manufacturing represents only a small portion of Greece’s total productive output, the sheer magnitude of the downturn sends a worrying signal for the health of the economy as a whole.” Greece shut its banks and imposed capital controls on June 29 to avert a bank run after PM Alexis Tsipras called a referendum on whether to accept stringent conditions from lenders on a new bailout. The shutdown battered the economy, already weakened by a six-month standoff between Tsipras’ Syriza government and international lenders on the cash-for-reforms deal. The economy has also begun to reverse the gains it was making before Tsipras was elected on a strong anti-austerity platform. The EC predicts Greece will fall back into recession in 2015, with GDP contracting 2 to 4% having only just emerged from a six-year downturn.
Much of the emphasis over the past few years has been on Greece’s huge debt to GDP ratio. The lender-imposed focus has tended to be on lowering the debt rather than raising the GDP. The IOBE think tank showed economic sentiment hit its lowest level in almost three years in July, hurt by banking restrictions and political uncertainty. The index, which measures expectations in industry, services, retail, and construction along with consumer confidence, fell to 81.3 points last month from 90.7 in June, its lowest level since Oct. 2012. “The real impact of capital controls, which are unprecedented for the modern Greek economy, is not easy to be assessed right now, because there are still ongoing,” IOBE said. “But certainly, they are weighing down on already shrinking economic activity and will deepen recession.”
Nice conversation and observation.
Yanis Varoufakis is on the phone. Greece’s charismatic finance minister had resigned his position immediately following the referendum result. Varoufakis, an economist with an extensive academic career, has dual Greek and Australian citizenship after a decade-long stint working at the University of Sydney. His outsider status in the European Union political club, his refusal to use technocratic language or conform to bureaucratic style, was a constant sore spot in the negotiations with the Troika. But in many ways, the strong referendum result can be seen as a validation of his tactics and directness. The first thing I ask him is how he felt on the night of the vote, and how he feels now, a week later.
“Let me just describe the moment after the announcement of the result,” he begins. “I made a statement in the Ministry of Finance and then I proceeded to the prime minister’s offices, the Maximos [also the official residency of the Greek prime minister], to meet with Aleksis Tsipras and the rest of the ministry. I was elated. That resounding no, unexpected, it was like a ray of light that pierced a very deep, thick darkness. I was walking to the offices, buoyed and lighthearted, carrying with me that incredible energy of the people outside. They had overcome fear, and with their overcoming of fear it was like I was floating on air. But the moment I entered the Maximos this whole sensation simply vanished. It was also an electric atmosphere in there, but a negatively charged one. It was like the leadership had been left behind by the people. And the sensation I got was one of terror: What do we do now?”
And Tsipras’ reaction? Varoufakis’ words are measured. He insists his affection and respect for the beleaguered Greek prime minister are undiminished. But sadness and disappointment are evident in his reply. “I could tell he was dispirited. It was a major victory, one that I believe he actually savoured, deep down, but one he couldn’t handle. He knew that the cabinet couldn’t handle it. It was clear that there were elements in the government putting pressure on him. Already, within hours, he had been pressured by major figures in the government, effectively to turn the no into a yes, to capitulate.”
Out of loyalty to Tsipras, and to honour a promise he made, Varoufakis won’t name names. But he does tell me that there were powerbrokers within the fragile coalition government “who were counting on the referendum as an exit strategy, not as a fighting strategy”. “When I realised that, I put to him that he had a very clear choice: to use the 61.5% no vote as an energising force, or [to] capitulate. And I said to him, before he had a chance to answer, ‘If you do the latter, I will clear out. I will resign if you choose the strategy of giving in. I will not undermine you, but I will steal into the night.’”
Bloomberg’s editors have nothing to add, but will be weighed regardless.
Keeping Greece inside the euro system was a questionable decision at best – but, having chosen that course, the country’s government and creditors are obliged to make it work. Early signs aren’t encouraging. When the Athens Stock Exchange opened Monday for the first time in five weeks, it tanked. Factory production, according to new figures, is in its deepest slump for years. The IMF told its board last week that the fund couldn’t participate in the next Greek bailout unless Greece’s other creditors agree to another round of debt relief. That’s a problem. Germany and other creditors are opposed – while continuing to insist that the next program can’t happen without the IMF. When Greek Prime Minister Alexis Tsipras capitulated to the creditors’ demands last month, he thought he’d struck a deal.
Not for the first time, he was mistaken: The new program is falling apart before it even exists. Tsipras already has his work cut out to deliver his part of this vaporous bargain. The Greek parliament has passed two big packages of economic measures, including controversial tax increases and pension reforms. The creditors next want to see those implemented, and are pressing for new privatizations and other changes, too. Greece is likely to need bridging finance for a payment to the European Central Bank next month, and the European Union may impose new conditions in return. The ruling Syriza party, deeply divided over the concessions yielded so far, is on the verge of splitting. If that happens, Tsipras would probably have to call an election. No end to this confusion is in sight.
While it lasts, there’s little hope of any revival in confidence or investment — and slim chance of the broader economic recovery that Greece so desperately needs. No doubt, some degree of uncertainty was unavoidable. Greece has serially defaulted on loans and policy commitments. In extending further help, the creditors would be mad not to set conditions and closely monitor Greek compliance. As a result, the threat of a new financial crisis was bound to persist. Nonetheless, a strategy that offered Greece a navigable path to recovery was not too much to ask. As yet, there’s no such strategy. The creditors should agree right now on the principle that debt relief will be forthcoming so long as Greece negotiates in good faith and tries to keep its promises. Otherwise, with or without the IMF, the new program is likely to fail.
A failure for the people, a smash hit for the power hungry.
The nearly 16-year experiment with a financially integrated Europe is instead tearing the continent apart, stirring ugly ghosts of history and fueling the rise of extremist political parties that could one day control a NATO partner. While Greece’s latest travails capture the world’s attention, Conley sees dire consequences for all of Europe from a fatally-flawed monetary union of 19 countries. “It was a structurally flawed project,” Conley says of the Eurozone, born in 1999. “They were warned about it. This was an economic project designed politically to make Europe more united. But instead it’s pulling Europe apart.” Greece, she adds “should never have been let in; it did not have the economic indicators and strength to participate in this currency union.
But as a political project people said, ‘How can we not include the birthplace of democracy? The great recession showed the weakness and flaws, and we saw all of this unravel.” That unraveling has launched a number of dangerous political trends. Economic pain and anger at European leaders, on the left and right, is combining with the type of anti-immigrant sentiments that fuel the rise of populist and xenophobic parties. France’s far-right National Front and Spain’s far-left Podemos Party are on the upswing. In Britain, which held onto its own currency, UKIP has successfully pressured Prime Minister David Cameron to call a referendum on whether to stay in the EU. And Conley notes that even 25% of EU parliament members can be labeled Euro-skeptics.
“There will come a moment with a far left or far right party in a NATO country potentially forming a government,” she predicts, “and that is a nightmare because then we have to question the democratic credentials of our allies. That’s a thought we don’t want to have.” Conley warns of a dark era, not unlike 1914, with the world “sleep-walking” toward an abyss. “The free movement of labor is under attack,” she says. “The free movement of capital is under attack because of the Eurozone crisis,” she says. “Many EU officials will say Europe evolves through crisis. But this is not forging Europe, it’s pulling it apart.” As the continent’s strongest economy, source of bailout funds and enforcer of Eurozone rules, Germany is a target of populist wrath.
“If the canary dies, it does not tell you that there is something wrong with the canary, but with the mine.”
“All diplomacy is the continuation of war by other means,” former Chinese Premier Zhou Enlai once quipped. These days, the same might be said for eurozone summits. The EU was founded to ease the continent’s toxic wartime legacy, to allow Germany to help lead the continent, not dominate it. But in the aftermath of Greece’s most recent bailout this summer, the harsh austerity terms imposed on Greece have created an unprecedented level of animosity between the two countries. Now, as the rancor ripples across borders, many are questioning the EU’s political and economic future. Under the terms of the bailout, Greece receives funding up to €86 billion. In exchange, the coalition government, led by the left-wing Syriza party, must implement further austerity measures, increase value-added taxes and liberalize the rule-bound Greek economy.
Greece must place national assets worth €50 billion into a privatization fund that will be supervised by European institutions. The Greek parliament approved the deal on July 16, and the backlash was fierce. Zoe Constantopoulou, a Syriza lawmaker, says the bailout terms amounted to “social genocide.” Even moderate Greek politicians say the harsh terms of the deal will increase fear, insecurity and resentment in Greece. “There will be very strict monitoring of how Greece implements the new measures, almost policing the Greek economy,” says former Greek PM George Papandreou. “These have been put in place to create trust for the German taxpayer, but will create more distrust for Greek citizens. Greece’s access to markets is now more difficult, and some of the revenues simply go back to paying off the debt. Some of the burden should have been taken off.”
Meanwhile, the European banks that loaned billions to Greece have escaped any penalty. “If you are a drug addict, you are to blame for your addiction, but the dealer also bears some responsibility,” says Denis MacShane, a former minister for Europe and author of Brexit: How Britain Will Leave Europe. “Greece is an easy whipping boy, [but] French, German and Dutch banks lent recklessly.” The result: Postwar Greek-German relations have never been worse, analysts say. The trauma of the bailout is compounded by the enduring trauma of World War II, when Greece suffered one of the harshest Nazi occupations. What has surprised many observers is the ease with which both sides have slid into stereotyping, calling Greece a lazy, feckless nation that can’t be trusted, and Germany a Fourth Reich run by Chancellor Angela Merkel.
Greeks who believe the latter point to Walter Funk, the Nazi economics minister and one of Hitler’s most important economic theorists. Funk raised the idea of a German-dominated European monetary union in 1940. He recognized that the union would be complicated, in part because of different countries’ standard of living. Yet Funk, like many modern-day European politicians, was an optimist. As the Greek crisis shows, however, Funk’s faith, like that of the euro architects, was wildly misplaced. A currency union of highly disparate states without a shared central budget and fiscal policy was always going to be hobbled. “Greece,” says Peter Doyle, a former division chief in the IMF’s European department, “is the canary in the coal mine. If the canary dies, it does not tell you that there is something wrong with the canary, but with the mine. Greece is the canary, and the eurozone is the mine.”
Greece is unlikely to ask for an increase in emergency funding from the ECB for weeks, because its liquidity buffer has risen thanks to cash inflows and central bank help, two sources familiar with the situation told Reuters. The bank liquidity buffer has grown to about €5 billion from €1 billion to €2 billion at the height of Greece’s debt crisis, thanks to two Emergency Liquidity Assistance (ELA) increases from the ECB, tax and tourism inflows, and pension payments, said one of the sources, who asked not to be named. Greek banks, closed for much of July, rely on emergency liquidity from the ECB and limit cash withdrawals to €420 per week to prevent a run on banks. The capital controls have stopped the exodus of cash. And the increase in the buffer indicates that money is leaving banks slower than feared and they retain at least some confidence.
“There’s been relative little outflows and there was actually a week in July when there was a net inflow into the banks,” one source said. Another source close to the process added: “There is an adequate liquidity buffer, there is no reason to ask for an increase in the ELA cap.” The ECB increased ELA to Greek banks twice in July by €900 million each time and ELA is now capped at around €91 billion, of which about 5 billion is unused. The ECB is due to discuss ELA again on Wednesday, when the governing council holds a non-policy meeting. Last week, Greece did not ask for an increase, a sign the banks were stabilising. The Greek stock exchange, which reopened on Monday after being closed for five weeks, tumbled in early trade. Banking shares, which make up about 20% of the Greece index, were particularly hard hit, with the banking index down 30% limit.
High time to take a hike, Christine.
Something is going badly wrong in relations between Christine Lagarde, the IMF’s managing director, and the staff of the institution. Three times this month, in politically fraught negotiations over a Greek debt package, the IMF staff has disavowed its management over providing more loans to Greece as part of the third bailout deal of €82 billion to €86 billion that euro leaders stated they sealed on July 13. As Oscar Wilde might have said, to show one such contradiction might be a misfortune, two appears like carelessness, while three looks downright hapless. The fissures, as well as reinforcing uncertainty over the Greek imbroglio, cast doubt on Lagarde’s utility in attending European debt meetings, where she appeared to endorse decisions later rejected in Washington.
The bizarre nature of IMF divisions may influence a top-level government decision about whether to renew Lagarde’s five-year term that ends in July 2016. Although Lagarde has some support for her incumbency, she is coming under criticism from inside and outside the organization for displaying style rather than substance. The latest setback, revealed last week by the Financial Times, is the most damaging. The IMF’s board was told on Wednesday that Greece’s unsustainably high debt and shortcomings in realizing reforms preclude a third IMF bailout. This could fatally unhinge the package, since German Chancellor Angela Merkel has ruled out further funding unless the IMF participates in new loans from European governments.
The big question is whether legislators in Germany and other restive North and Central European creditors will start to walk away from a deal that is bound up with so many onerous and mutually incompatible conditions as to be well-nigh unrealizable. The latest news from Washington vindicates the analysis of Yanis Varoufakis, the former Greek finance minister, who said in an teleconference sponsored by the Official Monetary and Financial Institutions Forum on July 16, ”According to its own rules the IMF cannot participate in any bailout. They have already violated their rules twice to do so. But I don’t think they would do it a third time. I think they are kicking and screaming that they are not going to it a third time.”
Scapegoats keep ruling the industry.
Former UBS and Citigroup trader Tom Hayes, the first person to stand trial for manipulating Libor, was sentenced to 14 years in prison after being found guilty of conspiracy to rig the benchmark rate. After a week of deliberations, jurors unanimously found that the 35-year-old worked with traders and brokers to game the London interbank offered rate to benefit his own trading positions. Judge Jeremy Cooke’s sentence after the verdict is among the longest for financial crime in the U.K. “Probity and honesty are essential, as is trust. The Libor activities of which you took part in put that in jeopardy,” Cooke said as he handed out the sentence in London Monday. “A message needs to be sent to the world of banking.”
Hayes, dressed in a light blue shirt and sweater, shook his head from side to side as the jury returned their verdict. His wife, Sarah, bit her bottom lip and shook her head from the gallery and his parents looked on impassively as the charges were read out one by one. Prosecutors said during the nine-week trial that Hayes was the “ringmaster” of a global network of 25 traders and brokers from at least 10 firms who tried to manipulate Libor on an industrial scale. He would bribe, bully, cajole and reward his contacts for their help in skewing the benchmark, used to price more than $350 trillion of financial contracts from mortgages to credit cards and student loans. The scruffy, blond-haired Hayes has been the public face of the global scandal over Libor rigging since he was first charged by U.S. officials in 2012.
Authorities have levied $9 billion in fines against banks and brokerages, including a $1.5 billion penalty for UBS. Citigroup has been censured by Japanese regulators over its involvement. Before sentencing, Hayes’s lawyers reiterated their defense that benchmark manipulation was widespread in the industry. “The conduct Mr. Hayes has been convicted of was prevalent” for at least five years prior to his joining UBS, Neil Hawes, his lawyer, told Cooke. There were “others above him who were aware of the activity.” The sentence was double the seven-year term that was given to Kweku Adoboli, another UBS banker, who was convicted of fraud in 2012 in relation to a $2.3 billion trading loss.
How will it be different from the eurozone?
Puerto Rico has confirmed that it failed to make a debt payment at the weekend, in the latest sign of the economic crisis in the US territory. The government said it did not have the funds available to pay more than $50m due on bonds. The ratings agency Moody’s said it viewed the development as a default. Puerto Rico’s governor said in June that the island’s debts of more than $70bn were unpayable and that its finances needed restructuring. The US commonwealth paid only $628,000 of a $58m payment due on its Public Finance Corp (PFC) bonds, Government Development Bank President Melba Acosta Febo said in a statement on Monday. She said the reason was because the legislature did not appropriate sufficient funds.
The government said on Friday that although it would not complete the full payment, it should not be considered a default under a technical definition of the phrase. But that argument has been discounted by Moody’s and other financial institutions. Puerto Rico has $72bn of public debt. That makes it by far the most indebted territory or state per capita in the United States. Unemployment is at almost 14% – more than double the national average – and over the last decade there has been little or no growth, resulting in the economy teetering on the brink of oblivion. The island has been losing 1% (around 30,000 people) a year to Florida and other parts of the US. And it is mainly the economically active young who are leaving.
There will be many such polls in Europe in the years ahead.
Catalonia on Monday called early regional elections for September 27, polls that will serve as a proxy vote on independence from Spain and likely raise tensions with the central government in Madrid. Catalan President Artur Mas, who has taken up the secession cause in recent years amid a surge in popular support, formally called the poll for September 27, shortly before a Spanish general election due by year-end. The vote to elect a parliament in the wealthy northeastern region, a year earlier than necessary, ratchets up pressure on centre-right Spanish Prime Minister Mariano Rajoy, who has ruled out Catalan independence. It also forces the issue to the forefront of the national campaigns.
“We all know these elections will be very different,” Mas said in a television address, after signing a decree to dissolve parliament and setting the long-flagged election in motion. “Politically they are a plebiscite on Catalan freedom and sovereignty.” Separatist leaders have said in recent weeks that a victory for them in the election would launch a “roadmap” to Catalan independence within 18 months, although they have not said how they would overcome the staunch opposition from Madrid. Spain’s Deputy Prime Minister Soraya Saenz de Santamaria told a news conference earlier on Monday that the government could legally challenge the decision to call the polls if Mas did not respect the law. It has blocked attempts to hold a referendum on independence in the courts before.
Catalan separatist campaigners defied Madrid and staged a symbolic vote on independence last November, but the outcome was mixed. About 80% of the 2.2 million people who voted backed secession, but the turnout was little more than 40%. Polls suggest that some of the steam may have come out of the pro-independence campaign since then, with voters focusing on social and economic issues as the country emerges from recession. The main Catalan parties supporting a split from Spain, including Mas’ centre-right Convergencia Democratica de Catalunya (CDC), have agreed to present a joint list of candidates to avoid splintering the pro-independence vote. Election campaigning will start on the highly charged date of September 11, Catalonia’s national day.
How to create a generational war.
Life has changed a lot since fledgling homeowners took their first steps on the property ladder in 1969. Back then, the average first home cost £4,000, according to data from the Office for National Statistics – and you would typically have been able to buy it at the tender age of 25. Not any more. Now just 8% of 25-year-olds make it on to the property ladder, the Council of Mortgage Lenders says. The average price of a first home has increased by 5,225% over the past 46 years, to £209,000. This has massively outpaced the incomes of first-time buyers, which have grown at less than half that rate. Shelter estimates that today’s first-time buyers spend 30% to 40% more to buy their first home today than they would have done in 1969.
“If you were able to buy your first home before prices started rocketing, you have received massive unearned wealth gains – but only at the expense of the generation who are now locked out of ownership, and stuck paying the highest rents in Europe,” says Duncan Stott, director of the affordable housing campaign PricedOut. “Buying today requires your income to be in the top 20% of earnings and a willingness to take out unprecedented levels of mortgage debt.” What has driven these dramatic changes in home ownership – and will any other generation ever have it as good again? By 1971, growth in homeownership meant that an equal number of people rented as owned their homes – but by 1981 the number of owner-occupiers had risen to 58%, according to the ONS.
At around that time Margaret Thatcher launched the Right To Buy scheme, enabling council house tenants to buy their own homes. The legislation was passed in 1980 and was a response to a rise in incomes, argues Professor Colin Jones at Heriot-Watt University’s School of The Built Environment: “Rising incomes meant that more people were demanding home ownership and so some sort of scheme was inevitable. There was also none of the supply-side problem we have today, so councils felt perfectly comfortable selling off the stock.” Supply was so abundant that, even adjusting for general inflation, properties were mostly selling at less than their rebuilding cost, says Angus Hanton, co-founder of the Intergenerational Foundation.
Buying a home was also more affordable because, he says, “mortgage interest relief meant that interest payments on mortgages were tax-advantaged – buyers effectively paid their mortgage out of pre-tax income.” More than a third of property wealth in the UK is now owned by households where at least one occupant is 65 or older, and nearly one in 10 (9%) of 55- to 64-year-olds live in households with net property wealth of £500,000 or more; the highest of any age group, says the ONS. This trend shows no sign of abating and house prices are continuing to rise, with the typical pensioner’s home increasing by an average of £900 a month this year,
Seems nice, but there’s no many “buts” to count.
With fewer than 18 months remaining in his eight-year tenure, President Barack Obama has at last confronted what he accurately describes as the single greatest threat to America’s future: the proliferation of greenhouse gasses scientists overwhelmingly blame for raising the Earth’s temperature. The centerpiece of the president’s long-awaited Clean Power Plan is a rule from the Environmental Protection Agency that sets the first-ever limits on carbon emissions from coal-fired power plants. If they withstand a certain legal assault by the coal industry and electric utilities, the new limits could force the closure of hundreds of coal-fired power plants, end the construction of new coal plants and spur production of wind and solar energy. The plan sets a goal of reducing the power-plant carbon emissions recorded in 2005 by 32% by 2030.
It would impose hard but custom-tailored limits on the carbon each state’s power plants can release into the atmosphere and reward states that act most quickly to expand their investment in renewable forms of energy production, such as wind and solar. In an address announcing the promulgation of emissions rules that have been two years in the making, Obama asserted that the U.S. has already done more than any other country to reduce the production of greenhouse gasses. But he said pollution from power plants, which release more heat-trapping carbon into the atmosphere than the nation’s cars and homes combined, would have catastrophic consequences for weather patterns, national security and public health unless such emissions are dramatically reduced.
The opposition the president faces from the coal industry, electric utilities, congressional Republicans and coal-state governors in both parties is formidable. But so is the scientific evidence that has accurately described the urgency of global warming’s threat to the planet. “We are the first generation to feel the effects of climate change,” Obama observed, “and the last that can do something about them.” Where climate change is concerned, he added, “there is such a thing as being too late.” In a sense, the White House is already too late to assure that the rules it unveiled Monday will achieve the results it seeks. For one thing, the U.S. can’t take on global warming alone; reducing greenhouse gas emissions will require an equally muscular response by industrialized nations throughout the world, especially China and India. For another, the real impact of the new power-plant rules won’t be evident until 2018, the deadline for states to submit final plans for complying with the limits announced Monday.
Until we find out the true cost of wind and solar?!
US shale gas is the unexpected loser from President Barack Obama’s climate plan, as the White House abandons its previous enthusiasm for natural gas as a cleaner alternative to coal. Last year Mr Obama called natural gas from fracking a “bridge fuel” to smooth the transition from polluting coal to emission-free renewable energy. But the shale industry was left reeling by a sudden reversal on Monday. In its landmark plan to cut greenhouse gas emissions from power plants, the Obama administration eliminated an earlier projection that natural gas would contribute much more electricity, and instead upped the role of renewables. “I’m confused and disappointed,” said Marty Durbin, head of America’s Natural Gas Alliance, a trade group for gas producers.
“It seems the White House is ignoring the market. Natural gas today is already primed to play a big role in power generation.” The shift also caused griping among utility companies that have led the biggest power transformation of the shale era, spending hundreds of millions of dollars to switch generating plants from coal to shale gas. In addition to being cheaper than coal, the shale gas liberated from rocks by fracking, or hydraulic fracturing, generates half as much carbon dioxide as coal when burnt, making it less harmful to the climate, scientists say In April, electricity from natural gas briefly surpassed coal power for the first time since the early 1970s, accounting for 31% of the total while coal dipped to 30%, according to the Energy Information Administration.
The US has surpassed Russia to become the world’s biggest natural gas producer – and a draft of Mr Obama’s climate plan last June said its targets depended on a shift to more gas-fired electricity. But ahead of Monday’s launch of the final plan, a senior administration official said: “In the final rule, that early rush to gas is eliminated. Indeed, the share of natural gas is essentially flat compared to business as usual.” Instead, the White House expects wind and solar power and energy efficiency improvements to play a much bigger role in reaching its target, which is to cut power sector carbon emissions by 32% from 2005 levels by 2030. Renewable energy, including hydropower, wind and solar, accounted for just 13% of US electricity last year. But with generation costs falling, Gina McCarthy, head of the Environmental Protection Agency, the regulator behind the plan, said the shift to renewables had accelerated in the past year and was “happening faster than anybody anticipated”.
Great from Frankie Boyle.,
David Cameron used ‘swarm’ instead of ‘plague’ in case it implied that God had sent the migrants. David Cameron has offered France dogs, fences, and car parks – dealing with a humanitarian crisis like a primary school kid emptying his pockets for the bullies. I’ve mused before about whether he might be a psychopath and it’s worth noting that he has left reassessing the processing and treatment of genuine asylum applications until after his three-week holiday in Portugal. Cameron used the phrase “promiscuous swarm of foreign peoples”. Oops, my mistake, that was Hitler – but you get the general idea. Cameron’s use of the word “swarm” was carefully thought out; he avoided the word “plague” in case it implied God had sent them.
The Daily Mail (catchphrase circa 1938: “German Jews Pouring Into This Country”) has revelled in the kind of reporting that can only be the sign of a decadent society in freefall. No doubt Rome, in its later days, was also full of people who held very firm opinions based on little evidence, I simply can’t be bothered to find out. One headline reported on terrible food shortages. You might think: “How wonderful to see the Mail reporting on one of the driving forces for people leaving their countries,” but, of course, they meant no frankfurters for Hampshire. At least Calais has replaced the Mail’s hideous stories about how drowning migrants are ruining British people’s holidays, presumably because it’s now impossible for Brits to lay their bloated, burnt bodies down on the beach without locals trying to give them the kiss of life.
[..] Of course, the true existential threat to us might come from ourselves. If we can look at another human being and categorise them as “illegal”, or that chilling American word “alien”, then what has become of our own humanity? To support policies that dehumanise others is to dehumanise yourself. I think most people resist that, but are pressed towards it by an increasingly sadistic elite. If you’re worried about threats to your way of life, look to the people who are selling your public services out from under you. The people who will destroy this society are already here: printing their own money, printing their own newspapers, and responding to undesirables at the gates by releasing the hounds.