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Are Asian Central Bankers Even Crazier Than Our Own?

Feb 212016
 
 February 21, 2016  Posted by at 10:50 pm Finance Tagged with: , , , , , , , , , ,  6 Responses »


“6 gals for 99c”, Roosevelt and Wabash, Chicago 1939

That the world’s central bankers get a lot of things wrong, deliberately or not, and have done so for years now, is nothing new. But that they do things that result in the exact opposite of what they ostensibly aim for, and predictably so, perhaps is. And it’s something that seems to be catching on, especially in Asia.

Now, let’s be clear on one thing first: central bankers have taken on roles and hubris and ‘importance’, that they should never have been allowed to get their fat little greedy fingers on. Central bankers in their 2016 disguise have no place in a functioning economy, let alone society, playing around with trillions of dollars in taxpayer money which they throw around to allegedly save an economy.

They engage solely, since 2008 at the latest, in practices for which there are no historical precedents and for which no empirical research has been done. They literally make it up as they go along. And one might be forgiven for thinking that our societies deserve something better than what amounts to no more than basic crap-shooting by a bunch of economy bookworms. Couldn’t we at least have gotten professional gamblers?

Central bankers who moreover, as I have repeatedly quoted my friend Steve Keen as saying, even have little to no understanding at all of the field they’ve been studying all their adult lives.

They don’t understand their field, plus they have no idea what consequences their next little inventions will have, but they get to execute them anyway and put gargantuan amounts of someone else’s money at risk, money which should really be used to keep economies at least as stable as possible.

If that’s the best we can do we won’t end up sitting pretty. These people are gambling addicts who fool themselves into thinking the power they’ve been given means they are the house in the casino, while in reality they’re just two-bit gamblers, and losing ones to boot. The financial markets are the house. Compared to the markets, central bankers are just tourists in screaming Hawaiian shirts out on a slow Monday night in Vegas.

I’ve never seen it written down anywhere, but I get the distinct impression that one of the job requirements for becoming a central banker in the 21st century is that you are profoundly delusional.

Take Japan. As soon as Abenomics was launched 3 years ago, we wrote that it couldn’t possibly succeed. That didn’t take any extraordinary insights on our part, it simply looked too stupid to be true. In an economy that’s been ‘suffering’ from deflation for 20 years, even as it still had a more or less functioning global economy to export its misery to, you can’t just introduce ‘Three Arrows’ of 1) fiscal stimulus, 2) monetary easing and 3) structural reforms, and think all will be well.

Because there was a reason why Japan was in deflation to begin with, and that reason contradicts all three arrows. Japan sank into deflation because its people spent less money because they didn’t trust where their economy was going and then the economy went down further and average wages went down so people had less money to spend and they trusted their economies even less etc. Vicious cycles all the way wherever you look.

How many times have we said it? Deflation is a b*tch.

And you don’t break that cycle by making borrowing cheaper, or any such thing, you don’t break it by raising debt levels, and try for everyone to raise theirs too. Which is what Abenomics in essence was always all about. They never even got around to the third arrow of structural reforms, and for all we know that’s a good thing. In any sense, Abenomics has been the predicted dismal failure.

Now, I remember Shinzo Abe ‘himself’ at some point doing a speech in which he said that Abenomics would work ‘if only the Japanese people would believe it did’. And that sounded inane, to say that to people who cut down on spending for 2 decades, that if only they would spend again, the sun would rise in concert. That’s like calling your people stupid to their faces.

The reality is that in global tourism, the hordes of Japanese tourists have been replaced by Chinese (and we can tell you in confidence that that’s not going to last either). The Japanese economy simply dried out. It sort of functions, still, domestically, albeit it on a much lower level, but now that global trade is grasping for air, exports are plunging too, the population is aging fast and there’s a whole new set of belts to tighten.

So last June, the desperate Bank of Japan governor Haruhiko Kuroda did Abe’s appeal to ‘faith’ one better, and, going headfirst into the fairy realm, said:

I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’. Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.

And that’s not just a strange thing to say. In fact, when you read that quote twice, you notice -or I did- that’s it’s self-defeating. Because, when paraphrasing Kuroda, we get something like this: ‘the moment the Japanese people doubt whether their government can save the economy, they cease forever to believe that it can’.

Now, I’m not Japanese, and I’m not terribly familiar with the role of fairy tales in the culture, but just the fact that Kuroda resorted to ‘our’ Peter Pan makes me think it’s not all that large. But I also think the Japanese understood what he meant, and that even the few who hadn’t yet, stopped believing in him and Abe right then and there.

Then again, Asian cultures still seem to be much more obedient and much less critical of their governments than we are, for some reason. The Japanese don’t voice their disbelief, they simply spend ever less. That’s the effect of Kuroda’s Peter Pan speech. Not what he was aiming for, but certainly what he should have expected, entirely predictable. Why hold that speech then, though? Despair, lack of intelligence?

In a similar vein, we chuckled out loud on Friday, first when president Xi demanded ‘Absolute Loyalty’ from state media when visiting them, an ‘Important Event’ broadly covered by those same media. Look, buddy, when you got to go on TV to demand it, someone somewhere’s bound to to be thinking you don’t have it…

And we chuckled also when the South China Morning Post (SCMP) broke the news that the People’s Bank of China, in its monthly “Sources and Uses of Credit Funds of Financial Institutions” report has stopped publishing the “Position for forex purchase”, which is that part of capital movements -and in China’s case today that stands for huge outflows- which goes through ‘private’ banks instead of the central bank itself.

It’s like they took a page, one-on-one-, out of the Federal Reserve’s playbook, which cut its M3 money supply reporting back in March 2006. What you don’t see can’t hurt you, or something along those lines. The truth is, though, that if you have something to hide, the last thing you want to do is let anyone see you digging a hole in the ground.

But the effect of this attempt to not let analysts get the data is simply that they’re going to get suspicious, and start digging even harder and with increased scrutiny. And they have access to the data anyway, through other channels, so the effect will be the opposite of what’s intended. And that too is predictable.

First, from Fortune, based on the SCMP piece:

Is China Trying to Hide Capital Outflows?

China’s central bank is making it harder to calculate the size of capital outflows afflicting the economy, just as investors have started paying closer attention to those mounting outflows, which in December reached almost $150 billion and in January around $120 billion. The central bank omitted data on “position for forex purchase” during its latest report, the South China Morning Post reported today.

The unannounced change comes at a time pundits are questioning whether outflows have the potential to cripple China’s currency and economy. Capital outflows lead to a weaker currency, which concerns the hordes of Chinese companies that borrowed debt in foreign currencies over the past few years and now have to pay it back with a weaker yuan.

The news of the central bank withholding data is important because capital outflow figures aren’t released as line items. They are calculated by analysts in a variety of ways, one of which includes using the omitted data. The Post quoted two analysts concluding the central bank’s intention was to hide the true amount of continuing outflows.

The impulse to hide bad news shouldn’t come as a surprise. China’s government has been evasive about economic matters from this summer’s stock bailout to its efforts propping up the value of the yuan. Analysts still have a variety of ways to estimate the flows, but the central bank is making it ever more difficult.

And then the SCMP:

Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows

Sensitive data is missing from a regular Chinese central bank report amid concerns about capital outflow as the economy slows and the yuan weakens. Financial analysts say the sudden lack of clear information makes it hard for markets to assess the scale of capital flows out of China as well as the central bank s foreign exchange operations in the banking system.

Figures on the “position for forex purchase” are regularly published in the People’s Bank of China’s monthly report on the “Sources and Uses of Credit Funds of Financial Institutions”. The December reading in foreign currencies was US$250 billion. But the data was missing in the central bank’s latest report. It seemed the information had been merged into the “other items” category, whose January figure was US$243.9 billion -a surge from US$20.4 billion the previous month.

[..] “Its non-transparent method has left the market unable to form a clear picture about capital flows,” said Liu Li-Gang, ANZ’s chief China economist in Hong Kong. “This will fuel more speculation that China is under great pressure from capital outflows. It will hurt the central bank’s credibility.”

[..] All forex-related data released by the central bank is closely monitored by financial analysts. They often read item by item from the dozens of tables and statistics to try to spot new trends and changes. China Merchants Securities chief economist Xie Yaxuan said the PBOC would not be able to conceal data as there were many ways to obtain and assess information on capital movements.

“We are waiting for more data releases such as the central bank’s balance sheet and commercial banks’ purchase and sales of foreign exchange released by the State Administration of Foreign Exchange for a better understanding of the capital movement and to interpret the motive of the central bank for such change,” Xie said.

It’s like they’ve landed in a game they don’t know the rules of. But then again, that’s what we think every single time we see Draghi and Yellen too, who are kept ‘alive’ only by investors’ expectations that they are going to hand out free cookies, and lots of them, every time they make a public appearance.

And what’s going on in Japan and China will happen to them, too: they will achieve the exact opposite of what they’re aiming for. They arguably already have. Or at least none of their desperate measures have achieved anything close to their stated goals.

They may have kept equity markets high, true, but their economies are still as bad as when the QE ZIRP NIRP stimulus madness took off, provided one is willing to see through the veil that media coverage and ‘official’ numbers put up between us and the real world. But they sure as h*ll haven’t turned anything around or caused a recovery of any sorts. Disputing that is Brooklyn Bridge for sale material.

Eh, what can we say? Stay tuned?! There’ll be a lot more of this lunacy as we go forward. It’s baked into the stupid cake.


Professor Steve Keen and Raúl Ilargi Meijer discuss central banking, Athens, Greece, Feb 16 2016

Debt Rattle February 14 2016

Feb 142016
 
 February 14, 2016  Posted by at 9:59 am Finance Tagged with: , , , , , , , ,  6 Responses »


Dorothea Lange Water supply in squatter camp near Calipatria CA 1937

• China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)
• Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)
• BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)
• Swedish Central Bank Move Creates a Global Shudder (NY Times)
• Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)
• There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves
• Former Dallas Fed President Calls Out Central Banks (CNBC)
• Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)
• Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)
• This is How Financial Chaos Begins (WS)
• Pension Funds See 20% Spike In Deficit (AP)

A Debt Rattle largely filled with central banks and various opinions and assumptions about them. Just happened that way.

• China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine. Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability. The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday.

The country’s foreign-exchange reserves shrank to the smallest since 2012 in January, signaling that the central bank sold dollars as the yuan fell to a five-year low. The weakening exchange rate and declining share markets in China have fueled global turmoil and helped send world stocks to their lowest level in more than two years. The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.”Policy makers seeking to support the yuan amid slower growth and increasing outflows have been using up reserves. The draw-down has continued since the devaluation of the currency in August and holdings fell by $99.5 billion in January to $3.23 trillion, according to the central bank on Feb. 7.

The stockpile slumped by more than half a trillion dollars in 2015. China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s GDP and its exchange rate, Zhou said. Capital outflows need not be capital flight and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, he added. The country will not peg the yuan to a basket of currencies but rather seek to rely more on a basket for reference and try to manage daily volatility versus the dollar, Zhou said. The bank will also use a wider range of macro-economic data to determine the exchange rate, he said.

Read more …

By his own admission, no clue: “..what we have to do is to devise new tools, rather than give up the goal..”

• Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)

Bank of Japan Gov. Haruhiko Kuroda once awed the markets. Now he looks like just another central banker running out of options. Mr. Kuroda took the helm of the BOJ in March 2013, vowing to do whatever it takes to vault Japan out of more than a decade of deflation. He fired one “monetary bazooka” and then another, seeming to bend markets to his will both times. Japanese stocks rose, and the yen sank, key developments for “Abenomics,” Prime Minister Shinzo Abe’s growth program. But the introduction of negative interest rates two weeks ago failed to impress—except in the minds of some as confirmation that what the BOJ had been doing for three years wasn’t working. Japan’s economy is sputtering and Mr. Kuroda’s primary target—2% inflation—is as far away as ever, heightening skepticism about the limits of monetary policy and the fate of Abenomics.

It is an ominous development for Mr. Kuroda. He sees Japan’s long bout of deflation as a psychological disorder as much as an economic disease. His job as BOJ chief has been part central banker, part national psychologist. It has been all about creating confidence. From the start, many said he was attempting the impossible. Deflation is notoriously difficult to escape, and had taken deep root in Japan after years of policy missteps. Last summer he invoked a fairy tale to describe his task. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’” Mr. Kuroda said in June last year. “Yes, what we need is a positive attitude and conviction.”

Answering questions in parliament Friday, Mr. Kuroda dismissed claims that the introduction of negative interest rates were to blame for the recent stock market selloff. He pointed to global market volatility, and said the negative rates have had their intended effects, driving down yields on short- and long-term government bonds. “I believe those effects will steadily spread through the economy and prices going forward,” he said. Mr. Kuroda has also repeatedly rejected the notion that the central bank is running out of ammunition, insisting that there is “no limit” to its policy options. “If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal,” he said.

Read more …

Peter Pan rules.

• BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)

The deputy governor of the Bank of Japan has called on the country’s government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers’ groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said that the government now needed to do more to boost Japan’s growth potential. He referred to a joint statement on overcoming deflation, signed by the BoJ and the government in January 2013, a few months before the bank embarked on its first round of easing under the current governor, Haruhiko Kuroda.

In it, the central bank pledged to stimulate demand through ultra-aggressive monetary policy while the government promised to pursue ‘all possible’ supply-side reforms. Now that the Bank of Japan has taken monetary easing one step further … I think that the original third arrow of Abenomics, the growth strategy, must also fly faster, he said. The unusually candid speech comes as the success of the mix of the policies pursued by prime minister, Shinzo Abe, remains in the balance. After three separate bursts of monetary stimulus from the BoJ, inflation has gained some momentum while corporate profits have been boosted by a sharp drop in the value of the yen. However, Japan’s potential growth rate remains so low — around or slightly below 0.5%, according to the BoJ’s estimate – that any setback has the potential to tip the country into recession.

Economists at Goldman Sachs expect that the first reading of GDP figures for the fourth quarter, due on Monday, will show an annualised contraction of 1.2% from the third quarter, hit by a slump in consumer spending due to a mild weather and smaller winter bonuses. The BoJ now fears that many cash-hoarding companies are set to resist calls for higher wages, as they assume that inflation will be kept in check by a combination of weak demand, a lower oil price and a stronger currency. The national trades union group, Rengo, has already signalled a less aggressive stance in this year’s negotiations, saying it is aiming at an across-the-board increase of “around 2%” — less than the 2015 demand for “at least” 2%. That could threaten progress toward the BoJ’s sole policy target: an inflation rate of 2%. In December Japan’s consumer price index stood at 0.1%, excluding fresh food, and 0.8% excluding energy.

“The sluggish increase in nominal wages is thought to reflect low productivity growth and the strong deflationary mindset,” said Mr Nakaso. “My answer to what kind of policies are needed, is that both monetary and fiscal policies and structural reforms are indispensable.” Mr Nakaso is likely to make similar remarks during a speech to business leaders next month in Okinawa, according to people familiar with his thinking, imploring the government to take bolder measures to unlock growth. Takuji Okubo, managing director at Japan Macro Advisors, a research boutique, said that the government’s ‘third arrow’ record has been poor, citing a lack of true reform of the labour market, the service sector or the public pension system. He added that the sharp sell-off in the Japanese stock market since the beginning of the year, coupled with a renewed appreciation of the yen, seems strong enough to put an end to the Abenomics boom. “The expiry date has now come to pass,” he said.

Read more …

“What central bankers are doing now feels like a Jedi trick..”

• Swedish Central Bank Move Creates a Global Shudder (NY Times)

What if the bazooka is shooting blanks? Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors’ distress over the latest volley by a major central bank, the surprise decision on Thursday by the Swedish central bank to lower its short-term rate to minus 0.50% from minus 0.35%, has heightened fears that brazen actions by central bankers are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe haven instruments like gold and United States Treasury bills.

Markets generally embrace conviction and run away from indecision — which is what many see in the policy making of some of the large central banks these days. The Swedish central bank, the Riksbank, for example, has been criticized in the past for prematurely raising rates, and Thursday’s rate cut was opposed by two bank deputies. At the ECB Jens Weidmann, the head of the powerful German Bundesbank, remains at odds with the president, Mario Draghi, in terms of how loose the central bank’s policies should be. And in the United States, the Federal Reserve is seen by some market participants to be wavering in its commitment to higher rates in light of the market turmoil.

[..] “What central bankers are doing now feels like a Jedi trick,” said Albert Edwards, global strategist for Société Générale in London. “Everyone is in a currency war and inflation expectations are collapsing.” In other words, drastic steps by central bankers in Europe, Japan and China to keep their currencies weak and exports strong may not only be counterproductive in terms of stimulating global growth — someone has to buy all those Chinese and Japanese goods — but has other consequences as well. Negative interest rates, for example, are not only bad for bank profits and lending prospects, they can also make savers more fearful, hampering the central aim, which is to get people to spend, not hoard. All of which can lead to a global recession.

A perma-bear like Mr. Edwards is always in possession of a multitude of negative economic indicators to prove his thesis, which, in his case, is a fall of 75% in the S.&P. 500 from its peak last summer. Some are obvious and have been highlighted by most economists, like the increasing interest rates on corporate bonds in the United States — both investment grade and junk. But he also pointed to a recent release from the Fed that showed that loan officers at United States banks said that they had been tightening their loan standards for two consecutive quarters. “You tend to see that in a recession,” Mr. Edwards said. His prediction of a so-called deflationary ice age is still considered a fringe view of sorts, although he did say that a record 950 people (up from 700 the year before) attended his annual conference in London last month. Still, the notion that the global economy has not responded as it should to years of shock policies from central banks is more or less mainstream economic thinking right now.

[..] The well-known bond investor William H. Gross of Janus Capital took up this theme in his latest investment essay, arguing that there was no evidence to show that the financial wealth (and increased levels of debt) created by a long period of extra-low interest rates would spur growth in the real economy. As proof, he cited Japan’s persistent struggles to grow despite near-zero interest rates; subpar growth in the United States; and emerging market problems in China, Brazil and Venezuela. “There is a lot of risk in the global financial marketplace,” Mr. Gross said in an interview on Thursday. “It is incumbent on me to focus on safe assets now.”

Read more …

Debt is king, and Draghi its oracle.

• Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)

Investors will look next week for a whiff of confirmation from Mario Draghi that they weren’t wrong to push bond yields to record lows in anticipation of fresh stimulus from the ECB. The ECB president’s speech to European lawmakers in Brussels on Monday will come after a turbulent five days in which global markets exposed a schism in the euro region’s debt markets. German 10-year bund yields approached their record low from April while Portugal’s jumped by the most since May 2012, before Draghi made his famous “whatever it takes” speech in July that year. Investor demand for havens at these lower yields faces a challenge on Feb. 17 when Germany auctions €5 billion ($5.6 billion) of 10-year bonds.

That’s followed the next day by France selling up to €8.5 billion of conventional and inflation-linked bonds. The offerings come while the prospects of slowing growth and depressed inflation are prompting investors to pile into the region’s safer fixed-income assets, driving yields down toward levels that triggered a selloff last April and May. “Investors will keep a close eye for any hints for what type of policy easing will be forthcoming,” said Nick Stamenkovic at broker RIA Capital Markets. “People are plumping for safety, core government bonds and demanding a higher risk premium on peripherals in particular, and also some semi-core bonds. The upcoming auctions outside of Germany will be a good test of sentiment.”

Read more …

“Pessimism is unwarranted.” Darn, and I though it was time to panic. Finally. They can’t even agree on that.

• There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves

If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.” As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve – even after more than 635 interest-rate cuts since the financial crisis by Bank of America’s reckoning and with central banks now sitting on more than $23 trillion of assets. “Time and time again policy makers have shown themselves to be bolder and more inventive than asset markets give them credit for,” Stephen Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, said in a report to clients late on Thursday. “Pessimism is unwarranted.”

His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it. While he thinks targeted lending could help achieve that, he advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said. In a similar vein, Hans Redeker at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.

“I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” Critics say that’s the source of the problem. There’s little more bond-buying and rate cutting can do to stoke the real economy. And markets, they say, now recognize that. Part of this week’s pain in markets has stemmed from the concern that the negative interest rates increasingly embraced by the likes of the Bank of Japan and European Central Bank do more harm than good by hitting bank profits. That hasn’t stopped JPMorgan economists led by Bruce Kasman suggesting central banks could cut much deeper without any major side effects so long as they limit the reserves they are targeting. Citigroup said yesterday that Israel, the Czech Republic, Norway and perhaps Canada could also join the subzero club in the next couple of years.

Read more …

“Look, these are very smart people..”

• Former Dallas Fed President Calls Out Central Banks (CNBC)

Are central banks’ aggressive monetary policies to blame for the today’s economic woes? Former Dallas Federal Reserve President Robert McTeer says yes. Speaking to CNBC’s “Fast Money” this week, McTeer explained that while the Fedis comprised of smart and carefully minded individuals, they dropped the ball when it comes to their current approach. “[The Fed] waited too long to begin the tightening process,” noted the former FOMC member and 36-year veteran of the Federal Reserve system. The central banker’s critique echoed that of other economists, whom have argued that the trillions of cheap dollars flooding the system have exacerbated the current downturn, and made the market addicted to the liquidity.

Known for his prolific writing and plain-speaking style while at the Fed, McTeer has been a critic of the Fed’s ultra-loose monetary policy, which he previously argued stayed too low for too long. However, McTeer admitted that bad luck and unfortunate timing has compounded the current undesirable circumstances. He told CNBC that “as soon as they took the first step [to tighten], international developments overwhelmed the situation.” At that time, China’s slowdown became more pronounced, upsetting markets. McTeer further believes that the Fed’s delay enabled other central banks—from Japan to the European Central Bank—to enact negative interest rates, a policy move with which he disagreed. Now, with international markets in crisis, McTeer says Fed chair Janet Yellen needs to take a more proactive approach in addressing global concerns.

The former central banker advised that “she should probably show more concern [related] to recent market turmoil” when speaking in the future. On Friday, international markets saw a sell-off in Asia where the Nikkei dropped 4.8% to 14,952, its lowest close since October, 2014. Additionally, the yen ended the week down 11%, unwinding some of the massive flight to safety buying that has recently boosted Japan’s currency. The Dow Jones Industrial Average, S&P 500 Index and Nasdaq all posted big gains, and snapped a five day losing streak. At the same time, the market’s latest mantra has become negative interest rates, which have been introduced in Japan and Europe. Earlier this week, Yellen refused to rule out the policy move for the world’s largest economy, but acknowledged the issue needed more study.

Negative rates, however, is an idea McTeer does not endorse. The central bank “is not going to do it, but furthermore they can’t do it,” he noted, speaking of the Fed’s next potential move. In McTeer’s interpretation, negative rates are not an options because the Fed has adopted a new mechanical procedure for establishing the Fed funds rate, which is the interest rate that banks use to calculate overnight loans to other institutions. The rate currently calls for a positivity on bank deposits. McTeer believes that if the Fed tries to go negative, it would take years to re-work the system.

Read more …

Buybacks then! Solves everything.

• Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)

It’s as if Abenomics never happened for Japan’s biggest brokerages. Nomura and Daiwa Securities fell for an eighth straight day in Tokyo as the deepening stock-market rout continues to pummel investment banks around the world. Nomura is now trading below its price when Shinzo Abe became prime minister in December 2012, ushering in an economic-stimulus policy that sparked a stock-market rally and a profit rebound at Japan’s largest securities firm. The selloff may be overdone because brokerages remain stronger than they were before the Abe administration, according to SBI Securities analyst Nobuyuki Fujimoto. “Their fundamentals haven’t deteriorated that much,” Fujimoto said by phone. “The tide will turn as overseas investors in particular decide whether their profitability is really worse than it was before Abenomics.”

Shares of Tokyo-based Nomura closed 9.2% lower Friday, extending their decline to 33% since the company posted worse-than-estimated earnings on Feb. 2. At 446.6 yen, the price is the lowest since Dec. 21, 2012. Daiwa dropped 8.2% to 591.1 yen, the weakest since the month before Bank of Japan Governor Haruhiko Kuroda unveiled his first round of monetary easing in April 2013. An index of securities firms was the third-worst performer on the benchmark Topix, which slumped 5.4%. Investors continued dumping Nomura shares even after Chief Executive Officer Koji Nagai said this week that the company is considering buying back stock while it’s cheap. “The brokerage must also be advising Japanese firms to consider share buybacks, if the CEO’s remarks are any guide,” said Fujimoto. “I wouldn’t be surprised to see companies start announcing such plans soon, which will be beneficial to brokerages.”

Nomura has announced five share buybacks since May 2013, including two last year. The company is now trading at 0.57 times the book value of its assets, the cheapest since November 2012, according to data compiled by Bloomberg. Daiwa has a price-to-book ratio of 0.80 “We’re considering returning profit appropriately” to shareholders, Nagai said in an interview on Tuesday. “There’s no doubt that it’s better for us to do it when they’re cheap,” he said, declining to comment on the timing and size of any buyback.

Read more …

Oh wait, not everything…

• Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)

Investors who scooped up bonds sold by Deutsche Bank last month are pushing for better terms in the bank’s $5.4 billion debt buyback plan, saying they were misled because the German lender failed to disclose its true financial position before the sale, according to people with knowledge of the matter. Some of the bondholders who participated in the $1.75 billion, two-part offering say the bank, which announced a fourth-quarter earnings loss less than two weeks after the sale, should’ve made that disclosure before selling the bonds, the people said, asking not to be identified as the discussions are private. Some investors are so upset that they may raise the issue with regulators, the people said.

The money managers are planning to hold discussions next week to explore their options on how best to challenge the bank, the people said. In addition to raising concern about disclosure, the bondholders are pushing for greater priority and better terms in the bank’s buyback offer announced Friday. Deutsche Bank’s buyback comes as the lender attempts to reassure investors who dumped European bank bonds and shares this week amid concerns over declining earnings and slowing global growth. The lender’s debt in a Bloomberg investment-grade bond index have dropped 2.7% in the past month compared with a 0.4% decline for all bank debt. The $750 million of 4.1% notes sold in January slumped 5.7%.

The firms that bought the biggest piece of the January offering at 100 cents on the dollar are now getting an offer to sell them back to the bank at as much as 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities traded at 95.6 cents on Thursday. Deutsche Bank, which unveiled the sale of the bonds on Jan. 8, said on Jan. 21 that it would post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. Moody’s Investors Service cut its long-term debt rating on the bank to Baa1 from A3, citing structural issues that contributed to “weak profitability,” and the expense of maintaining a global capital-market footprint, the ratings firm said in a Jan. 25 statement.

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Junk bonds will be back.

• This is How Financial Chaos Begins (WS)

There are over $1.8 trillion of US junk bonds outstanding. It’s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was “contained.” Yet contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now “stressed” or “distressed.” And the entire corporate bond market, which is far larger than the stock market, is getting antsy. The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy. Today, that average yield is nearly 22%! Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:

At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues. It didn’t help that Standard & Poor’s just went on a “down-grade binge,” as S&P Capital IQ LCD called it, hammering 25 energy companies deeper into junk, 11 of them into the “substantial-risk” category of CCC+ or below. Back in the summer of 2014, during the peak of the wild credit bubble beautifully conjured up by the Fed, companies in this category had no problems issuing new debt in order to service existing debt, fill cash-flow holes, blow it on special dividends to their private-equity owners, and what not. The average yield of CCC or lower rated bonds at the time was around 8%.

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Beware: “.. which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%..”

• Pension Funds See 20% Spike In Deficit (AP)

Oregon Treasurer and Portland mayoral candidate Ted Wheeler issued a statement last week noting that the state pension fund’s investment returns were 2.1% in 2015. That beat the Standard & Poor’s 500 index and topped the performance of 88% of comparable institutional investment funds. What Wheeler’s statement didn’t mention was that investment returns for the year still fell 5.6 percentage points below the system’s 7.75% assumed rate of return for 2015. That’s terrible news for public employers and taxpayers. It means the pension system’s unfunded liability just increased by another 20% — growing from $18 billion at the end of 2014 to between $21 and $22 billion a year later. That will put renewed upward pressure on payments the system’s 925 public-sector employers are required to make.

Public employers had already been warned to expect maximum increases over the next six years, which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%, redirecting billions of dollars out of public coffers and into the retirement system. In reality, those “maximum” increases could be a lot bigger. Milliman Inc., the actuary for the Public Employees Retirement System, told board members at their regular meeting Feb. 5 that the pension fund now has 71 to 72 cents in assets for every $1 in liabilities. That’s an average number across the entire system. Some individual employers’ accounts, including the system’s school district rate pool, are flirting with the 70% threshold that triggers larger maximum rate increases.

Here’s how it works: To prevent rate spikes, PERS limits the biennial change in employers’ payments to 20% of their existing rate. For example, if an employer is required to make contributions equal to 20% of payroll, the rate increase is “collared” to 20% of that number, or a 4 percentage-point increase. That 20% increase is what employers have been warned to expect every other year for the next six years. But when an employer’s funded status falls below 70%, that collar begins to widen on a sliding scale — up to a maximum of 40%.

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Debt Rattle February 13 2016

Feb 132016
 
 February 13, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , ,  6 Responses »


DPC New Orleans milk cart1903

• Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)
• Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)
• The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)
• Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)
• ‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)
• The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)
• China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)
• America’s Big Banks Are Fleeing The Mortgage Market (MW)
• Large Increase in Debts Held by Americans Over Age 50 (WSJ)
• The Eurozone Crisis Is Back On The Boil (Guardian)
• Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)
• European Banks Are In The Eye Of A New Financial Storm (Economist)
• 150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)
• Four Billion People Face Severe Water Scarcity (Guardian)
• Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)
• EU Is Poised To Restrict Passport-Free Travel (AP)
• 80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

It was terminal when it began.

• Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)

Not long ago, Shinzo Abe was being heralded for the early success of his grand design to bring Japan out of a deflationary spiral that had haunted the world’s third-biggest economy for two decades. Soon after Abe became prime minister in December 2012, the first two of the three tenets of his ‘Abenomics’ programme – monetary easing and fiscal stimulus – were having the desired effect. In the first year of the programme, the Nikkei index jumped nearly 60%, and the strong yen, the scourge of the country’s exporters, finally ceded ground to the US dollar. And in April 2013 came the appointment of Haruhiko Kuroda, a Bank of Japan governor who shared Abe’s zeal for deflation busting through ever looser monetary policy.

But by Friday, at the end of a dismal week for the Nikkei share index, market volatility caused by renewed fears over the health of the global economy has left Abe’s prescription for economic recovery in jeopardy. While, as some suggest, it is too early to read the last rites for Abenomics, few would disagree that its symptoms are in danger of becoming terminal. There is damning evidence for that claim; enough, in fact, for Abe to reportedly summon key economic advisers on Friday to discuss a way out of the impasse. Japanese shares registered their biggest weekly drop for more than seven years after shedding 4.8% for the Nikkei s lowest close since October 2014. That took the index below the 15,000 level investors regard as a psychological watershed, and erased all the gains made since the Bank of Japan made the shock decision in October 2014 to inject 80tn yen into the economy.

To compound the problem, another pillar of Abenomics – a weak yen – is also crumbling, with the Japanese currency rising to its strongest level for more than a year on Friday. The intention was for a weak yen to push up corporate earnings and help generate inflation by raising import prices; instead, companies are now cutting earnings forecasts as speculation mounts that Japan will again intervene to rein in the yen’s surge. In recent weeks, slumping oil costs and soft consumer spending – the driving force behind 60% of Japan’s economic activity – have brought inflation to a halt. Official data released last month showed that Japan’s inflation rate came in at 0.5% in 2015, way below the Bank of Japan’s 2% target, as the government struggled to convince cautious firms to usher in big wage rises to stir spending and drive up prices.

In response, the Bank of Japan extended the deadline for achieving its 2% inflation target to the first half of the fiscal year 2017, from its previous estimate of the second half of fiscal 2016. In fairness, Abe is partly the victim of factors beyond his control, namely China’s slowdown, weak overseas demand and plunging oil prices. The problem for Abe and Kuroda is that they are quickly running out of options: witness how the market boost from last week’s surprise decision to adopt negative interest rates ended after a couple of days with barely a whimper. By the time Japan hosts G7 leaders this summer, Abe could be forced to concede defeat in his principal aim of dragging Japan out of deflation and boosting growth.

But higher share prices and a weaker yen were only part of the scheme. He has barely started to address the structural reforms comprising the “third arrow” of Abenomics: a shrinking and ageing workforce and the urgent need to boost the role of women in the economy. Next year, he is expected to introduce a highly controversial increase in the consumption tax – a move that will help Japan tackle its public debt and pay for rising health and social security costs, but which could also dampen consumer spending, the driving force behind 60% of the economy. He may be inclined to disagree after a month of upheaval that also saw the resignation of his economics minister, but Abe’s troubles may be only just beginning.

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When you lose the currency war.

• Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)

When the going gets tough, foreign-exchange traders turn to the yen. Japan’s currency may extend its biggest two-week rally since 1998 as investors continue to seek out refuge assets amid market turmoil, according Citigroup Inc. State Street Global Advisors Inc., which oversees about $2.4 trillion, says it’s buying yen and selling dollars as the tumult gripping financial markets bolsters the Japanese currency’s appeal. “We’re not counting on the market mood shifting any time soon,” said Steven Englander at Citigroup. Citigroup, world’s biggest foreign-exchange trader according to Euromoney magazine, expects haven currencies including the yen, euro and Swiss franc to appreciate in the near term, even though it said investors are being overly pessimistic about the prospects for economic growth in the U.S. and monetary stimulus elsewhere.

The yen has defied predictions to weaken this year while its biggest counterpart, the dollar, has upended forecasts for gains. Currency traders are questioning the idea that the U.S. economy is strong enough for the Federal Reserve to raise interest rates while central bankers in Tokyo and Frankfurt consider adding to stimulus. Japan’s currency rose 3.2% this week to 113.25 per dollar, adding to last week’s 3.7% gain. Its strength contrasts with a median forecast for the currency to drop to 123 against the dollar by the end of the year. Global equities fell into a bear market this week, and commodities declined, amid growing signs that central-bank policy tools were losing their stimulative effects. Fed Chair Janet Yellen signaled financial-market volatility may delay rate increases as the central bank assesses the impact of recent turmoil on domestic growth.

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“In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily..”

• The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)

An international trade that once looked like a no-brainer has turned into a major headache. The WisdomTree Japan Hedged Equity Fund (DXJ), which combines a long position on Japanese stocks with a short position on the Japanese yen, sounds like a niche product. But as that trade played out beautifully over the past few years, with Japanese stocks soaring as the yen tanked, the ETF has become downright mainstream. In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily, a pace it has maintained up to the present.

The product plays into a popular macro thesis: Expansive policies from the Bank of Japan should help Japanese stocks and hurt the yen. This trend indeed played out powerfully for a time, leading the DXJ to nearly double from November 2012 to June 2015. But the good times didn’t last. In the eight months after hitting that June peak, the ETF lost nearly all of its gain, falling back to its lowest level in more than three years. This as both legs of the trade failed, with Japanese stocks sliding and the yen strengthening amid a global sell-off in risk assets. What may make this especially frustrating is that Japanese monetary authorities haven’t exactly given up on their plan to send the yen lower in order to foster long-dormant inflation and to boost exports.

To the contrary, the BOJ has introduced a negative interest rate policy — which utterly failed in halting the yen’s rise. In fact, the currency is enjoying its best week in years.

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Omen.

• Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)

As markets plunge globally, investors are seeking refuge in an all-but-forgotten place. Trading volumes in the credit-default swaps market — where banks and fund managers go to hedge against losses on corporate and government debt — have surged. Transactions tied to individual entities doubled in the four weeks ended Feb. 5 to a daily average of $12 billion, according to a JPMorgan analysis of trade repository data. The volume of contracts on benchmark indexes in the market increased two-fold during that period to an average of $87 billion a day. The growth could represent a shift. The credit derivatives market has contracted for almost a decade, after loose monetary policies triggered a big rally in assets including corporate bonds, which made investors less eager to protect against the worst.

Regulators have also urged banks to curb their risk taking, reducing the appetite for at least some dealers to trade the instruments. Now, stock markets are selling off and junk bond prices are plunging, increasing investor demand for protection. “The surge we’ve seen in trading is likely to stay with us for the foreseeable future,” said Geraud Charpin at BlueBay Asset Management, which has traded more credit-default swaps on individual credits in the past three months. “The credit cycle has turned, so there’s more appetite to go short and buy protection.” Risk measures fell on Friday after soaring this week to the highest levels since at least 2012 in the U.S., and 2013 in Europe. The cost of insuring Deutsche Bank’s subordinated debt dropped from a record after the German lender said it planned to buy back about $5.4 billion of bonds to allay investor concerns about its finances. The bank’s shares have lost about a third of their value this year.

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The EU just gets crazier by the day. But currency in circulation is way up.

• ‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)

Austrians should have the constitutional right to use cash to protect their privacy, Deputy Economy Minister Harald Mahrer said, as the EU considers curbing the use of banknotes and coins. “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch,” Mahrer said on Austrian public radio station Oe1. “We will fight everywhere against rules” including caps on cash purchases, he said. EU finance ministers vowed at a meeting in Brussels on Friday to crack down on “illicit cash movements.” They urged the European Commission to “explore the need for appropriate restrictions on cash payments exceeding certain thresholds and to engage with the ECB to consider appropriate measures regarding high denomination notes, in particular the €500 note.” Ministers told the commission to report on its findings by May 1.

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“..orders for new vessels dropped 40% in 2015 [..] The demolition rate for unwanted vessels jumped 15%.”

• The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)

When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.” Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom.

Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year. Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to Clarksons Research. The demolition rate for unwanted vessels jumped 15%.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says. The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

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Beijing wants monopoly on sentiment.

• China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)

Speculators should not be allowed to dominate market sentiment regarding China’s foreign exchange reserves and it was quite normal for reserves to fall as well as rise, central bank governor Zhou Xiaochuan was quoted as saying on Saturday. China’s foreign reserves fell for a third straight month in January, as the central bank dumped dollars to defend the yuan and prevent an increase in capital outflows. In an interview carried in the Chinese financial magazine Caixin, Zhou said yuan exchange reform would help the market be more flexible in dealing with speculative forces. There was a need to distinguish capital outflows from capital flight, and tight capital controls would not be effective for China, he said. China has not fully liberalized its capital account.

Zhou added that there was no basis for the yuan to keep depreciating, and China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the U.S. dollar. The government also needed to prevent systemic risks in the economy, and prevent “cross infection” between the stock, debt and currency markets, he said. The comments come after China reported economic growth of 6.9% for 2015, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more economic stimulus measures over the near-term. A slew of economic indicators has sent mixed signals to markets at the start of 2016 over the health of China’s economy. Activity in the services sector expanded at its fastest pace in six months in January, a private survey showed on Feb. 3, while manufacturing activity fell to the lowest since August 2012.

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“..the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

• America’s Big Banks Are Fleeing The Mortgage Market (MW)

When it comes to residential mortgages, big banks are waving the white flag. Banks originated 74% of all mortgages in 2007, but their share fell to 52% in 2014, the most recent data available from the Mortgage Bankers Association. And it could go even lower. But even at these levels, the big bank backtrack is reshaping a lending landscape that’s already undergone seismic shifts since the housing bubble burst. While there’s widespread agreement that banks should have been reined in — and perhaps punished — after playing a major role in the housing bubble that helped tank the economy, the past few years have been tough for banks’ mortgage businesses. They now face a regulatory environment so strict that many are afraid to lend, even to customers with the most pristine credit.

They’re still paying up for misdeeds done during the bubble. There’s essentially no private bond market to whom to sell mortgages. And fighting those battles on behalf of their least-profitable divisions means residential lending just isn’t worth it for many banks. “We can’t make money in the business,” BankUnited CEO John Kanas said when he announced a mortgage retreat on a January earnings call. “We realized that this was the lowest-margin, most volatile business we had and we decided that we should exit.” Of the top 10 originators in 2015, banks lent 28.6% of all mortgages, according to data from Inside Mortgage Finance. That’s about half their share in 2012, when banks among the top 10 originators accounted for 54.4% of all mortgages.

For many analysts, that step is only natural. “The fact is that the cost of capital and compliance has convinced many bankers that making home loans to American families is not worth the risk,” said Chris Whalen, a long-time bank analyst now with Kroll Bond Rating Agency, in a speech early in February. Whalen expects the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

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Boomers. They’re supposed to be the richest Americans. “..the aggregate debt of the average Baby Boomer has soared 169% since 2003..”

• Large Increase in Debts Held by Americans Over Age 50 (WSJ)

Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations. The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, according to data from the Federal Reserve Bank of New York released Friday. The result: U.S. household debt is vastly different than it was before the financial crisis, when many younger households had taken on large debts they could no longer afford when the bottom fell out of the economy.

The shift represents a “reallocation of debt from young [people], with historically weak repayment, to retirement- aged consumers, with historically strong repayment,” according to New York Fed economist Meta Brown in a presentation of the findings. Older borrowers have historically been less likely to default on loans and have typically been successful at shrinking their debt balances. But greater borrowing among this age group could become alarming if evidence mounted that large numbers of people were entering retirement with debts they couldn’t manage. So far, that doesn’t appear to be the case. Most of the households with debt also have higher credit scores and more assets than in the past.

“Retirement-aged consumers’ repayment has shown little sign of developing weakness as their balances have grown,” according to Ms. Brown. The data were released in conjunction with the New York Fed’s quarterly report on household debt, that aggregates millions of credit reports from the credit-rating agency Equifax. The report was launched in 2010 to track the changing debt behaviors of U.S. households after the financial crisis. For the last two years, household debts have been slowly rising, although they remain well below where they were in 2008. That trend continued in the final quarter of 2015, with overall household indebtedness rising by $51 billion to $ 12.1 trillion.

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Timber!

• The Eurozone Crisis Is Back On The Boil (Guardian)

Greece is back in recession. Italy is barely growing. Portugal expanded but only at half the expected rate. The message could hardly be clearer: the next phase of the eurozone crisis is about to begin. On the face of it, the performance of the eurozone economy in the final three months of 2015 looks solid if unspectacular, with growth as measured by GDP up by 0.3%. But scratch beneath the surface and the picture looks far less rosy. The beneficial impacts of the European Central Bank’s quantitative easing programme have started to wear off, as has the effect of the big drop in oil prices in the second half of 2014. The eurozone peaked in the second quarter of 2015 and the trend was starting to weaken even before the recent turbulence on the financial markets.

Three individual countries bear closer examination. The first is Germany, for which growth of 0.3% in the fourth quarter of 2015 and 1.4% for the year as a whole is as good as it gets. Exports – the mainstay of the German economy – are going to face a much more challenging international climate in 2016, particularly with the euro strengthening on the foreign exchanges. Finland is noteworthy, not just because it is officially back in recession after two successive quarters of negative growth and still has a smaller economy than it did when the financial crisis erupted in 2008, but because its performance is worse than that of Denmark and Sweden, two Scandinavian EU members not in the single currency.

But by far the most worrying country is Greece, where a crumbling economy and the attempts to impose even more draconian austerity is leading, unsurprisingly, to violent protests on the streets. A contraction in growth makes it even harder for Greece to achieve the already ridiculously ambitious deficit and debt reduction targets set for it by its creditors, and on past form that will lead sooner or later (sooner in this case) to a fresh financial crisis and the imposition of further austerity measures. After six months out of the headlines, Greece is coming back to the boil. The danger is that other weak countries on the eurozone’s periphery – most notably Italy and Portugal – suffer from contagion effects.

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He’s trying so hard to boost Deutsche confidence it’ll backfire. People are going to say: ‘let’s see what you got’.

• Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)

The volatile Portuguese bond market is more alarming than plunging confidence in Deutsche Bank AG, Europe’s largest lender, according to German Finance Minister Wolfgang Schaeuble. Even as a global rout in stocks has driven down European bank shares by 27% this year, Schaeuble warned on Friday after a meeting of EU finance ministers in Brussels that Portugal doesn’t have enough “resilience.” “Portugal must do everything to counter uncertainty in financial markets,” he said. The German finance minister’s comments come after the yield on Portugal’s 10-year bond fluctuated in a range of 143 basis points this week, the largest five-day swing since July 2013. Prime Minister Antonio Costa, who was sworn in at the end of November, has rolled back reform measures introduced during the nation’s bailout program that ended in 2014.

Deutsche Bank, which issued a statement Friday reassuring investors it has enough reserves to service debt obligations, “has sufficient capital and is well positioned,” Schaeuble said. In an effort to allay anxieties, the Frankfurt-based lender announced plans to buy back about $5.4 billion of bonds in euros and dollars Friday. The move comes after the cost of insuring its senior debt via credit-default swaps rose to the highest since 2011. Deutsche Bank isn’t alone as confidence in banks’ abilities to return profits in a low interest rate environment is waning. Global banks including Citigroup, Bank of America, Credit Suisse and Deutsche Bank have all plunged more than 32%. European finance ministers, when asked about the negative sentiment around European banks, remained upbeat, citing confidence in the safeguards put in place after Lehman Brothers went under in 2008. “We have taken precautions to make banks more resilient after the lessons from the financial and banking crisis,” Schaeuble said.

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The chain is as strong as…

• European Banks Are In The Eye Of A New Financial Storm (Economist)

If the start of the year has been desperate for the world’s stockmarkets, it has been downright disastrous for shares in banks. Financial stocks are down by 19% in America. The declines have been even steeper elsewhere. Japanese banks’ shares have plunged by 36% since January 1st; Italian banks’ by 31% and Greek banks’ by a horrifying 60%. The fall in the overall European banking index of 24% has brought it close to the lows it plumbed in the summer of 2012, when the euro zone seemed on the verge of disintegration until Mario Draghi, the president of the ECB, promised to do “whatever it takes” to save it. The distress in Europe encompasses big banks as well as smaller ones. It has affected behemoths within the euro area such as Société Générale and Deutsche Bank – both of which saw their shares fall by 10% in hours this week – as well as giants outside it such as Barclays (based in Britain) and Credit Suisse (Switzerland).

The apparent frailty of European banks is especially disappointing given the efforts made in recent years to make them more robust, both through capital-raising and tougher regulation. Euro-zone banks issued over €250 billion ($280 billion) of new equity between 2007, when the global financial crisis began, and 2014, when the ECB took charge of supervising them. Before taking on the job, it combed through the books of 130 of the euro zone’s most important banks and found only modest shortfalls in capital. Some of the recent weakness in European banking shares arises from wider worries about the world economy that have also driven down financial stocks elsewhere. A slowdown in global growth is one threat. Another is that the negative interest rates being pursued by central banks to try to prod more life into economies will further sap banks’ profits.

A retreat in Japanese bank shares turned into a rout following such a decision in late January. Investors in European banks fret not just about lacklustre growth but also a possible move deeper into negative territory by the ECB in March. On February 11th Sweden’s central bank cut its benchmark rate from -0.35% to -0.5%, prompting shares in Swedish banks to tumble. But the malaise of European banking stocks has deeper roots. The fundamental problem is both that there are too many banks in Europe and that many are not profitable enough because they have clung to flawed business models. European investment banks lack the deep domestic capital markets that give their American competitors an edge. Deutsche, for instance, has only just resolved to hack back its investment bank in the face of a less hospitable regulatory environment following the financial crisis.

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What to say?

• 150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)

An estimated 150,000 Adelie penguins living in Antarctica have died after an iceberg the size of Rome became grounded near their colony, forcing them to trek 60km to the sea for food. The penguins of Cape Denison in Commonwealth Bay used to live close to a large body of open water. However, in 2010 a colossal iceberg measuring 2900sq km became trapped in the bay, rendering the colony effectively landlocked.Penguins seeking food must now waddle 60km to the coast to fish. Over the years, the arduous journey has had a devastating effect on the size of the colony. Since 2011 the colony of 160,000 penguins has shrunk to just 10,000, according to research carried out by the Climate Change Research Centre at Australia’s University of New South Wales. Scientists predict the colony will be gone in 20 years unless the sea ice breaks up or the giant iceberg, dubbed B09B, is dislodged.

Penguins have been recorded in the area for more than 100 years. But the outlook for the penguins remaining at Cape Denison is dire. “The arrival of iceberg B09B in Commonwealth Bay, East Antarctica, and subsequent fast ice expansion has dramatically increased the distance Adélie penguins breeding at Cape Denison must travel in search of food,” said the researchers in an article in Antarctic Science. “The Cape Denison population could be extirpated within 20 years unless B09B relocates or the now perennial fast ice within the bay breaks out” “This has provided a natural experiment to investigate the impact of iceberg stranding events and sea ice expansion along the East Antarctic coast.” In contrast, a colony located just 8km from the coast of Commonwealth Bay is thriving, the researchers said. The iceberg had apparently been floating close to the coast for 20 years before crashing into a glacier and becoming stuck.

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The next trigger for mass migrations.

• Four Billion People Face Severe Water Scarcity (Guardian)

At least two-thirds of the global population, over 4 billion people, live with severe water scarcity for at least one month every year, according to a major new analysis. The revelation shows water shortages, one of the most dangerous challenges the world faces, is far worse previously than thought. The new research also reveals that 500m people live in places where water consumption is double the amount replenished by rain for the entire year, leaving them extremely vulnerable as underground aquifers run down. Many of those living with fragile water resources are in India and China, but other regions highlighted are the central and western US, Australia and even the city of London. These water problems are set to worsen, according to the researchers, as population growth and increasing water use – particularly through eating meat – continues to rise.

In January, water crises were rated as one of three greatest risks of harm to people and economies in the next decade by the World Economic Forum, alongside climate change and mass migration. In places, such as Syria, the three risks come together: a recent study found that climate change made the severe 2007-2010 drought much more likely and the drought led to mass migration of farming families into cities. “If you look at environmental problems, [water scarcity] is certainly the top problem,” said Prof Arjen Hoekstra, at the University of Twente in the Netherlands and who led the new research. “One place where it is very, very acute is in Yemen.” Yemen could run out of water within a few years, but many other places are living on borrowed time as aquifers are continuously depleted, including Pakistan, Iran, Mexico, and Saudi Arabia. Hoekstra also highlights the Murray-Darling basin in Australia and the midwest of the US. “There you have the huge Ogallala acquifer, which is being depleted.”

He said even rich cities like London in the UK were living unsustainably: “You don’t have the water in the surrounding area to sustain the water flows” to London in the long term. The new study, published in the journal Science Advances on Friday, is the first to examine global water scarcity on a monthly basis and at a resolution of 31 miles or less. It analysed data from 1996-2005 and found severe water scarcity – defined as water use being more than twice the amount being replenished – affected 4 billion people for at least one month a year. “The results imply the global water situation is much worse than suggested by previous studies, which estimated such scarcity impacts between 1.7 billion and 3.1 billion people,” the researchers concluded. The new work also showed 1.8 billion people suffer severe water scarcity for at least half of every year.

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Making deals with Turkey while blaming Greece is just plain wrong on many different levels.

• Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)

German Chancellor Angela Merkel is turning to a subgroup of European Union members to tackle the region’s refugee crisis as the bloc as a whole bickers over how to handle the biggest influx of migrants into Europe since World War II. Merkel plans to meet again with a “coalition of the willing” in Brussels ahead of an EU summit in the city next week. Turkish Prime Minister Ahmet Davutoglu will attend the talks, which have taken place at previous EU gatherings. Turkey is the main country from which migrants enter the EU. “This doesn’t have to do with a permanent distribution mechanism but rather a group of countries that are willing to consider” taking refugees once the illegal trafficking has been stopped, Merkel said Friday at a Berlin press conference with her Polish counterpart Beata Szydlo.

“We will then report quite transparently to all 28 member states where things stand.” Merkel traveled earlier this week to Turkey to discuss the crisis with Davutoglu. Merkel said on Monday the only way to end the flood of illegal migration across the Aegean Sea from Turkey into Greece was to replace it with a legal avenue. That would involve the EU resettling allotments of mostly Syrian refugees directly from Turkey in return for Turkey halting the flow of migrants, she said. The chancellor has thus far failed to secure a wider EU deal to share in housing and caring for those who have already reached the bloc.

Germany, which took in more than 1 million refugees last year, has pushed to implement a quota system to distribute migrants among EU members – something that a number of the bloc’s states, in particular in the east, argue should only be done on a voluntary basis. “For Poland, a permanent mechanism of relocating migrants is currently not acceptable,” Szydlo said at the press conference with Merkel. “I think we will continue talking about this. But I want to stress that Poland wants to actively participate in solving the migrant crisis because it’s very important for the EU as a whole.”

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They’re too thick to see that this means the end of the union.

• EU Is Poised To Restrict Passport-Free Travel (AP)

EU countries are poised to restrict passport-free travel by invoking an emergency rule to keep some border controls for two more years because of the migration crisis and Greece’s troubles in controlling its border, according to EU documents seen by AP. The switch would reverse a decades-old trend of expanding passport-free travel in Europe. Since 1995, people have been able to cross borders among Schengen Area member countries without document checks. Each of the current 26 countries in the Schengen Area is allowed to unilaterally put up border controls for a maximum of six months, but that time limit can be extended for up to two years if a member is found to be failing to protect its borders.

The documents show that EU policy makers are preparing to make unprecedented use of an emergency provision by declaring that Greece is failing to sufficiently protect it border. Some 2,000 people are still arriving daily on Greek islands in smugglers’ boats from Turkey, most of them keen to move deeper into Europe to wealthier countries like Germany and Sweden. A European official showed the documents to the AP on condition of anonymity because the documents are confidential. Greek government officials declined to comment on the content of documents not made public. In Brussels on Friday, EU nations acknowledged that the overall functioning of Schengen “is at serious risk” and said Greece must make further efforts to address “serious deficiencies” within the next three months.

European inspectors visited Greek border sites in November and gave Athens until early May to upgrade the border management on its islands. Two draft assessments forwarded to the Greek government in early January indicated Athens was making progress, although they noted “important shortcomings” in handling migrant flows. But with asylum-seekers still coming at a pace ten times that of January 2015, European countries are reluctant to dismantle their emergency border controls. And if they keep them in place without authorization, EU officials fear the entire concept of the open-travel zone could be brought down. A summary written by an official in the EU’s Dutch presidency for a meeting of EU justice and home affairs ministers last month showed they decided that declaring Greece to have failed in its upgrade was “the only way” for Europe to extend the time for border checks.

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“..more than in the first four months of 2015..”

• 80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

Despite rough seas and harsh winter weather, more than 80,000 refugees and migrants arrived in Europe by boat during the first six weeks of 2016, more than in the first four months of 2015, the UN Refugee Agency, UNHCR, announced today. In addition it said more than 400 people had lost their lives trying to cross the Mediterranean. However, despite the dangers over 2,000 people a day continue to risk their lives and the lives of their children attempting to reach Europe. Comparable figures for 2015 show such numbers only began arriving in July. “The majority of those arriving in January 2016, nearly 58%, were women and children; one in three people arriving to Greece were children as compared to just 1 in 10 in September 2015,” UNHCR’s Chief spokesperson Melissa Fleming told a press briefing in Geneva.

Fleming added that over 91% of those arriving in Greece come from the world’s top ten refugee producing countries, including Syria, Afghanistan and Iraq. “Winter weather and rough seas have not deterred those desperate enough to make the journey, resulting in near daily shipwrecks,” she added. When surveyed upon arrival, most of them cite they had to leave their homeland due to conflict. More than 56% of January arrivals to Greece were from Syria. However, UNHCR stressed that solutions to Europe’s situation were not only eminently possible, but had already been agreed by States and now urgently needed to be implemented. Stabilization is essential and something for which there is also strong public demand.

“Within the context of the necessary reduction of dangerous sea arrivals, safe access to seek asylum, including through resettlement and humanitarian admission, is a fundamental human right that must be protected and respected,” Fleming added. She said that regular pathways to Europe and elsewhere were important for allowing refugees to reach safety without putting their lives in the hands of smugglers and making dangerous sea crossings. “Avenues, such as enhanced resettlement and humanitarian admission, family reunification, private sponsorship, and humanitarian and refugee student/work visas, should be established to ensure that movements are manageable, controlled and coordinated for countries receiving these refugees,” Fleming added.

Vincent Cochetel, UNHCR’s Director Bureau for Europe, added that faced with this situation, UNHCR hoped that EU Member States would implement at a faster pace all EU-wide measures agreed upon in 2015, including the implementation of hotspots and the relocation process for 160,000 people already in Greece and Italy and the EU-Turkey Joint-Action Plan. “If Europe wants to avoid the mess of 2015, it must take action. There is no plan B,” he also told the briefing.

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Debt Rattle December 29 2015

Dec 292015
 
 December 29, 2015  Posted by at 9:40 am Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Sloss City furnaces, Birmingham, Alabama 1906

• Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)
• Energy Stocks Fall Along With Oil Prices (WSJ)
• Saudi Riyal In Danger As Oil War Escalates (AEP)
• Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)
• Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)
• Where Next For The Three Arrows Of Abenomics? (Telegraph)
• Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)
• China Control Freaks (BBG)
• China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)
• China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)
• Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)
• UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)
• Questions and Answers (Jim Kunstler)
• Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)
• Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)
• German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)
• Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)
• Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)
• Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Forward looking.

• Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)

Shipping companies that transport commodities such as coal, iron ore and grain face a painful year ahead, with only the strongest expected to weather a deepening crisis caused by tepid demand and a surplus of vessels for hire. The predicament facing firms that ship commodities in large unpackaged amounts – known as dry bulk – is partly the result of slower coal and iron ore demand from leading global importer China in the second half of 2015. The Baltic Exchange’s main sea freight index – which tracks rates for ships carrying dry bulk commodities – plunged to an all-time low this month. In stark contrast, however, tankers that transport oil have in recent months enjoyed their best earnings in years. As crude prices have plummeted, bargain-buying has driven up demand, while owners have moved more aggressively to scrap vessels to head off the kind of surplus seen in the dry bulk market.

Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas, said the outlook for the dry bulk market was “very challenging”. “Demand fundamentals are so weak. The Chinese economy, which is the main driver of dry bulk, is way below expectations,” he added. “Only companies with very strong balance sheets will get through this storm.” The dry bulk shipping downturn began in 2008, after the onset of the financial crisis, and has worsened significantly this year as the Chinese economy has slowed. The Baltic Exchange’s main BDI index – which gauges the cost of shipping such commodities, also including cement and fertiliser – is more than 95% down from a record high hit in 2008. The index is often regarded as a forward-looking economic indicator. With about 90% of the world’s traded goods by volume transported by sea, global investors look to the BDI for any signs of changes in sentiment for industrial demand.

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Very thin trading.

• Energy Stocks Fall Along With Oil Prices (WSJ)

A fresh selloff in the oil market weighed down U.S. stocks, with energy shares posting sharp losses. Major U.S. indexes pared their steepest declines but still ended the day in negative territory, returning some of last week’s gains. The Dow Jones Industrial Average lost 23.90 points, or 0.1%, to 17528.27, after falling as much as 115 points intraday. The S&P 500 index fell 4.49, or 0.2%, to 2056.50. The Nasdaq Composite Index declined 7.51, or 0.1%, to 5040.99. Just 4.8 billion shares changed hands Monday, marking the lowest full day of U.S. trading volume this year, in a holiday-shortened week. Markets in London and Australia were closed Monday for Boxing Day. The U.S. stock market will be closed Friday for New Year’s Day. Energy stocks notched some of the steepest declines across the market. Chevron posted the heaviest loss among Dow components, falling $1.69, or 1.8%, to $90.36.

Marathon Oil shed 95 cents, or 6.8%, to 12.98. “We’re just following the price of oil,” said Peter Cardillo, chief market economist at brokerage First Standard Financial. December has been marked by unusually wide swings in U.S. stocks. A long-awaited interest-rate increase by the Federal Reserve earlier in the month has failed to quiet the recent volatility. A respite from the decline in oil prices last week helped lure investors into the energy sector. U.S. stocks last week posted their biggest weekly gains in more than a month, driven by the energy sector. But both oil prices and energy stocks remain sharply lower this year, even with last week’s rally. A global glut of crude oil has contributed to a 30% fall in U.S. oil prices this year. On Monday, U.S. crude prices fell 3.4% to $36.81 a barrel. Energy stocks in the S&P 500 are down 23% so far in 2015, while the S&P 500 is on track for a loss of 0.1%.

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if the dollar stays strong, the peg is history.

• Saudi Riyal In Danger As Oil War Escalates (AEP)

Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country’s former reserve chief has warned. “If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence,” said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA). “But if the reserves keep going down as they are now, they will not be able to keep the peg,” he told The Telegraph. His warning came as the Saudi finance ministry revealed that the country’s deficit leapt to 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. The IMF has suggested Saudia Arabia could be running a deficit of around $140bn.

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point. Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances. Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999. The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat. The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades. A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family. Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts. Dr Alsweilem, now at Harvard University, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preperaring the ground for recovery in prices. But the current situation is sui generis. The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

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End of free money.

• Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security. Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added taxation as well as a levy on tobacco. The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shiite rebels.

In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East. “This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.” This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman.

In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the cabinet, merging ministries and realigning the royal succession. The new measures are the beginning of a “big program that the economic council will launch,” Economy and Planning Minister Adel Fakeih told reporters in Riyadh. The subsidy cuts won’t have a “large effect” on people with low or middle income, he said.

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Immediate danger for House of Saud.

• Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)

Saudi Arabia said it plans to gradually cut subsidies and sell stakes in government entities as it seeks to counter a slump in oil revenue. The government expects the 2016 budget deficit to narrow to 326 billion riyals ($87 billion) from 367 billion in 2015. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals. The budget is the first under King Salman, who ascended to the throne in January, and an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman. The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade.

“The budget was approved amid challenging economic and financial circumstances in the region and the world,” the Finance Ministry said. “The deficit will be financed through a plan that considers the best available options, including domestic and external borrowing.” The 2015 deficit is about 16% of GDP, according to Alp Eke, senior economist at National Bank of Abu Dhabi. The median estimate of 10 economists in a Bloomberg survey was a shortfall of 20%. Oil made up 73% of this year’s revenue, according to the Finance Ministry. Non-oil income rose 29% to 163.5 billion riyals. The government has managed to reign in “some spending in the second half of the year,” Monica Malik at Abu Dhabi Commercial Bank said. “With the further fiscal retrenchment that we expect in 2016, we think that the fiscal deficit should narrow to about 10.8% of GDP.”

For 2016, the government allocated 213 billion riyals for military and security spending, the largest component of the budget as the kingdom fights a war in Yemen against Shiite rebels. “In terms of defense expenditure in particular there’s the burden of the war in Yemen,” Nasser Saidi, president of Nasser Saidi & Associates, said by phone. The outcome for 2016 depends on “the course of the war in Yemen, oil prices, how much will subsidies actually get reduced, how effective are they in reigning in public spending and rationalizing some of the spending on large projects, and finally how good are they at reigning in current spending,” he said.

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” Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP..”

• Where Next For The Three Arrows Of Abenomics? (Telegraph)

The last sales tax increase threw the world’s third largest economy into recession. For this reason, things may start getting more complicated at the checkout. Policymakers announced last week that they plan to exempt food from the next hike. This would be the first time Japan has adopted different consumption tax rates since it was introduced in 1989. The government estimates this will cost about one trillion yen (£5.5bn) in lost revenues – equivalent to about a fifth of what it expects the increase to bring in. While cynics highlight the move as a ploy to win votes ahead of next year’s upper house elections, it is also a reminder that steering Japan out of its two-decade malaise remains a challenge. It’s been three years since prime minister Shinzo Abe took power with a promise to smash deflation and “take back Japan”.

Under the stewardship of Bank of Japan governor Haruhiko Kuroda, the country launched a multi trillion yen quantitative easing programme in 2013 that was beefed up to ¥80 trillion (£446bn) annually last October. Pessimists argue that Japan’s monetary steroids have had little impact. As economists at BNP Paribas highlight, real GDP has grown by just 2.2pc between the fourth quarter of 2012 and the third quarter of this year – or an average of just 0.8pc per year – a poor performance compared with its G7 peers. Japan’s recovery has been lacklustre since the 2008 crisis, and the economy would currently be in a quintuple-dip recession if growth for the third quarter of 2015 had not been revised up this month. This month, the Bank of Japan revised down its growth forecast for the year ending next March to 1.2pc, from 1.7pc, citing weaker global growth.

It also pushed back its expectation of achieving 2pc inflation to the second half of the year or early 2017, from a previous forecast of mid-2016. This is the second time the target date has been moved since Mr Kuroda pledged in April 2013 to lift consumer inflation to 2pc in “around two years”. Policymakers are already talking down their chances of reflating the economy. Consumer prices rose by just 0.3pc in the year to October, while core inflation, which strips out the impact of volatile food and energy prices, stood at 0.7pc. “If consumer prices were rising more than 1.5pc then I don’t think you could complain when talking about the price target,” said Akira Amari, Japan’s economy minister.

On a brighter note, nominal GDP, or the cash size of the economy, has risen at a more robust pace. This is important because nominal GDP determines a country’s ability to pay down its debt, most of which is fixed in cash terms. Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP unless policymakers implemented vital structural reforms.

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M&A as a means to hide one’s indebtedness.

• Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)

It was a year for the record books when it comes to merger and acquisition activity. Nearly $5 trillion in deals were cut globally, a new all-time high, as dealmakers used consolidation to uncover cost cuts, bolster their scale and take advantage of historically low borrowing costs. Though 2016 may be a tougher year if emerging market growth slows further and the impact of a sharp rout in commodities hits North America, few expect today’s merger boom to slow. After all, most of the reasons M&A climbed from $3 trillion to $4 trillion and now a rounding error below $5 trillion remain. Corporations are using cheap debt financing to buy competitors and wrench out synergies that can quickly grow their earnings. Amid a mostly halting economic recovery in the United States, M&A has proven far more attractive and easy to pitch to investors than an expansion, which might require increased plant and equipment and rising expenses.

For the nation’s largest companies, there’s also been a race to increase market power, or respond to consolidation among competitors. In pharmaceuticals, these trends have manifest themselves in the race to merge with European-domiciled drugmakers who can access cash stockpiles without triggering repatriation tax and aren’t charged at U.S. rates globally. This has spurred a pharma merger wave that hit new records in 2015 and it isn’t expected to slow anytime soon. In technology, mergers are yet to hinge on tax savings. Instead, semiconductors facing tectonic shifts such as the adoption wireless devices and cloud computing are merging in an effort to round out their services. Consolidation in cable and telecommunications is being used to adapt to the commoditization of once lucrative services like video and data bundles.

The combination of overlapping wireless and broadband networks is also seen as an efficient way to build the infrastructure that’s needed to serve consumers’ shift to streaming media. Spongy financing markets have aided the M&A boom. Low economic growth, modest inflation and weak pricing power are all causing CEOs to look at engineering profits through share buybacks and mergers. Meanwhile, activist shareholders are putting pressure on C-Suites to provide a clear plan on how they reinvest profits. Bold bets have to be justified with credible return expectations and these days it seems the returns by way of M&A, not capital expenditure or expansion.

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Casino control.

• China Control Freaks (BBG)

Can authorities in China really take a back seat? In the midst of a bull market (stocks are up more than 20% from their August lows), Beijing appears to be handing control over to companies for all new initial public offerings from March onward. The shift toward a more U.S.-style disclosure system, where any company can list so long as they provide the requisite information, has been a long time coming. In a more market-oriented system, the regulator concentrates on supervising publicly traded firms rather than acting as a gatekeeper. Such a system would give China’s cash-strapped corporates a funding alternative to shadow banks and online peer-to-peer lenders, and help clear a logjam of almost 700 companies waiting to sell shares for the first time. The question is, can Beijing truly stop its tinkering?

According to KPMG, China has imposed moratoriums on IPOs nine times in the A-share market’s relatively short 25-year history – four of those in the last decade during periods when things were heading south. The most recent halt, enforced in July after several blockbuster share sales and some stomach-churning stock declines, ended only last month when a government-engineered rally revived the market.Even when IPOs have been approved, social policy dominates. A few years ago, when China was trying to cool its then-heady real estate sector and rein in burgeoning bad loans, no developer or city commercial bank would have stood a chance getting listing approval. Instead, some went to Hong Kong to raise funds. The conundrum for the China Securities Regulatory Commission is that letting any (qualified) company sell shares would result in a glut and damp appetite for the state-owned firms that dominate the market.

However, rationing admittance to the IPO market means bureaucrats rather than investors are making the decisions, and has resulted in an insatiable demand for new stock. An even bigger challenge for the CSRC, whose seven-member listing committee currently vets IPO applications, is managing investor expectations. In a nation where investment options tend to be limited to volatile wealth management products, equally choppy real estate or low-yielding bank accounts, people have little recourse for their some $22 trillion in savings beyond stocks. That explains why retail investors own about 80% of publicly traded companies’ tradeable shares unlike the U.S., where institutional investors dominate. Such a prevalence of individuals, who don’t have class action lawsuits to fall back on in cases of corporate malfeasance, also makes for a stock market more akin to a casino than a funding tool.

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Shadow banking clamp down.

• China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)

China’s banking regulator laid out planned restrictions on thousands of online peer-to-peer lenders, pledging to “cleanse the market” as failed platforms and suspected frauds highlight risks within a booming industry. Online platforms shouldn’t take deposits from the public, pool investors’ money, or guarantee returns, the China Banking Regulatory Commission said on Monday, publishing a draft rule that will be its first for the industry. The thrust of the CBRC’s approach is that the platforms are intermediaries – matchmakers between borrowers and lenders – that shouldn’t themselves raise or lend money. It rules out P2P sites distributing wealth-management products, a tactic that some hoped would diversify their revenue sources, and limits their use for crowdfunding.

“The rule is quite strict,” Shanghai-based Maizi Financial Services, which operates a P2P site and other investment platforms, said in a statement. “The industry’s hope of upgrading itself with wealth management products and adopting a diversified business model is completely dashed.” The banking regulator issued its plan at the same time as the central bank put out a rule to tighten oversight of online-payment firms. The looming clampdown – the regulator asked for feedback by Jan. 27 – comes as the police probe Ezubo, an online site that raised billions of dollars from investors according to Yingcan Group, a company which provides industry data. It also follows a stock boom and bust that was fueled by leverage, including some channeled through online lenders.

China had 2,612 online lending platforms operating normally as of November, with more than 400 billion yuan ($61.7 billion) of loans outstanding, while another 1,000 were “problematic,” the CBRC said. Firms such as Tiger Global Management, Standard Chartered and Sequoia Capital are among those to invest in the industry, which China initially allowed to develop without regulation. Under the planned rule, P2P platforms will need to register with local financial regulators and cannot help borrowers who want to raise money to invest in the stock market. They’re banned from crowdfunding “for equities and physical items,” a description that wasn’t clarified in the CBRC statement. “Many online lenders have strayed from the role of information intermediary,” the CBRC said in a separate statement, adding that it wanted to protect consumers and “cleanse the market.”

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Control clowns: “..a goal of doubling GDP and per capita income by 2020 from 2010..”

• China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)

China’s central bank said on Monday that it would “flexibly” use various policy tools to maintain appropriate liquidity and reasonable growth in credit and social financing. The People’s Bank of China will keep the yuan basically stable while forging ahead with reforms to help improve its currency regime, it said in a statement summarizing the fourth-quarter monetary policy committee meeting. The PBOC said it would maintain a prudent monetary policy, keeping its stance “neither too tight nor too loose”. The prudent policy has been in place since 2011. “We will improve and optimize financing and credit structures, increase the proportion of direct financing and reduce financing costs,” it said. The central bank said it would closely watch changes in China’s economy and financial markets, as well as international capital flows.

Top leaders at the annual Central Economic Work Conference pledged to make China’s monetary policy more flexible and expand its budget deficit in 2016 to support a slowing economy as they seek to push forward “supply-side reform”. The PBOC has cut interest rates six times since November 2014 and lowered banks’ reserve requirements, or the amount of cash that banks must set aside as reserves. But such policy steps have yielded limited impact on the economy, as the government has been struggling to reach its growth target of about 7% this year. President Xi Jinping has said China must keep annual average growth of no less than 6.5% over the next five years to hit a goal of doubling GDP and per capita income by 2020 from 2010.

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Betcha Cameron is more concerned right now with London’s flood control than Lancashire’s.

• Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)

The cost of the UK’s winter floods will top £5bn and thousands of families and businesses will face financial ruin because they have inadequate or non-existent insurance, a leading accountant has warned, as the government defended its record on flood defences. The prime minister faced growing anger from politicians in the north of England who accused the government of creating “a north-south gap” in financial support for flood-prevention schemes. On a tour of the region, David Cameron defended spending levels amid mounting criticism from MPs and council leaders. “We are spending more in this parliament than the last one and in the last parliament we spent more than the one before that,” he said during a stop in York.

“I think with any of these events we have to look at what we are planning to spend and think: ‘Do we need to do more?’ We are going to spend £2.3bn on flood defences in this parliament but we will look at what’s happened here and see what needs to be done. We have to look at what’s happened in terms of the flooding, what flood defences have worked and the places where they haven’t worked well enough.” But Judith Blake, leader of Leeds city council, said a flood prevention scheme for the city was ditched by the government in 2011, and warned that there was “a very strong feeling” across the region that the north was being short-changed.

“I think there’s a real anger growing across the north about the fact that the cuts have been made to the flood defences and we’ll be having those conversations as soon as we are sure that people are safe and that we start the clean-up process and really begin the assess the scale of the damage. “So there are some very serious questions for government to answer on this and we’ll be putting as much pressure on as possible to redress the balance and get the funding situation equalised so the north get its fair share.” Labour MP Ivan Lewis, meanwhile, challenged Cameron to back up his vision of the Northern Powerhouse by sending immediate help to residents and businesses in his Bury South constituency.

[..] On Monday, as the waters receded in the worst hit areas, residents began to face up the scale of the damage. In York telephone lines and internet connections were down and some cash machines were not working. Many of the bars and shops that were open were only taking cash. In Hebden Bridge in Calderdale, volunteers spent the day clearing out schools, shops and homes that had been overwhelmed by filthy floodwater – a scene repeated in scores of towns and cities across the region. Forecasters warned another storm – Storm Frank – is expected to bring more rain to the west and north of the UK on Wednesday. It is feared that up to 80mm (3in) will fall on high ground and as much as 120mm (4.7in) in exposed locations, accompanied by gale force winds..

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Oh yeah, an economy others are jealous of.

• UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)

British manufacturers will shed tens of thousands of jobs next year as they battle a tough export market, the fallout from steel plant closures and a collapse in demand from the embattled North Sea oil industry, an industry group has forecast. The manufacturers’ organisation EEF said the factory sector will shrug off this year’s recession and eke out modest growth in 2016 but it warned a number of risks loom on the horizon, chief among them a sharper downturn in China that could trigger a global slump. A cautious mood has prompted many firms to plan cuts to both jobs and investment in a further blow to George Osborne, after the latest official figures showed UK economic growth had faltered and that his “march of the makers” vow had failed to translate into a manufacturing revival.

EEF said its latest snapshot of manufacturers’ mood shows some bright spots for 2016, however, particularly in the car, aerospace and pharmaceutical sub-sectors. They will be the main drivers behind overall manufacturing growth of 0.8% in 2016, following an expected 0.1% contraction this year. Those sub-sectors will also buck the wider manufacturing trend of job cuts with an employment increase in 2016, EEF predicts. “Some of the headwinds have been a consistent theme over 2015 – the collapse in oil and gas activity, weakness in key export markets, and strong sterling. Others, like disappointing construction activity and the breakdown in the steel industry, have piled on the pain since the second quarter of 2015,” said EEF’s chief economist, Lee Hopley, in the report. “It’s not all doom and gloom however, with the resilience of the transport sectors and the rejuvenation of the pharmaceuticals industry providing reasons for cheer in UK manufacturing.”

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“..it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology.”

• Questions and Answers (Jim Kunstler)

The really big item in last night’s 60-Minutes newsbreak was that the latest Star Wars movie passed the billion dollar profit gate a week after release. That says just about everything you need to know about our floundering society, including the state of the legacy news media. The cherry on top last week was Elon Musk’s SpaceX company’s feat landing the first spent stage of its Falcon 9 rocket to be (theoretically) recycled and thus hugely lowering the cost of firing things into space. The media spooged all over itself on that one, since behind this feat stands Mr. Musk’s heroic quest to land humans on Mars. This culture has lost a lot in the past 40 years, but among the least recognized is the loss of its critical faculties. We’ve become a nation of six-year-olds.

News flash: we’re not going Mars. Notwithstanding the accolades for Ridley Scott’s neatly-rationalized fantasy, The Martian (based on Andy Weir’s novel), any human journey to the red planet would be a one-way trip. Anyway, all that begs the question: why are we so eager to journey to a dead planet with none of the elements necessary for human life when we can’t seem to manage human life on a planet superbly equipped to support us? Answer: because we are lost in raptures of techno-narcissism. What do I mean by that? We’re convinced that all the unanticipated consequences of our brief techno-industrial orgy can be solved by… more and better technology! Notice that this narrative is being served up to a society now held hostage to the images on little screens, by skilled people who, more and more, act as though these screens have become the new dwelling place of reality.

How psychotic is that? All of this grandstanding about the glories of space goes on at the expense of paying attention to our troubles on this planet, including the existential question as to how badly we are fucking it up with burning the fossil fuels that power our techno-industrial activities. Personally, I don’t believe that any international accord will work to mitigate that quandary. But what will work, and what I fully expect, is a financial breakdown that will lead to a forced re-set of human endeavor at a lower scale of technological activity. The additional question really is how much hardship will that transition entail and the answer is that there is plenty within our power to make that journey less harsh.

But it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology. Dreaming about rockets to Mars is easy compared to, say, transitioning our futureless Agri-Biz racket to other methods of agriculture that don’t destroy soils, water tables, ecosystems, and bodies. It’s easier than rearranging our lives on the landscape so we’re not hostage to motoring everywhere for everything. It’s easier than educating people to both think and develop real hands-on skills not dependent on complex machines and electric-powered devices.

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Wild theories welcome.

• Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)

Unidentified individuals travelling in as many as nine planes belonging to Qatar’s royal family made an emergency trip to Switzerland over the weekend for medical reasons, according to a Swiss official. A spokesman for Switzerland’s federal office of civil aviation confirmed local media reports that multiple aircraft made unscheduled landings at the Zurich-Kloten airport overnight from 25 to 26 December and that the planes were part of the Qatari royal fleet. He gave no details as to who was on board or who any of the potential patients may have been. “The emergency landing clearance was given by the Swiss air force,” he told AFP, explaining that the civil aviation office was closed during the hours in question.

Qatari authorities later said that the country’s former ruler, Sheikh Hamad bin Khalifa Al Thani, had been flown to Switzerland over the weekend for surgery after breaking a leg. The Qatari government’s communications office said early on Tuesday that Sheihk Hamad suffered “a broken leg while on holiday” and was flown to Zurich on Saturday to receive treatment. The office says the 63-year-old sheikh underwent a successful operation and was in Zurich “recovering and undergoing physiotherapy.” The government declined to say how or where Sheikh Hamad broke his leg but the royal family had reportedly been on holiday in Morocco at a resort in the Atlas mountains. Night landings and takeoffs are typically forbidden at Zurich-Kloten to avoid disturbing local residents.

Swiss foreign ministry spokesman Georg Farago told AFP in an email that the federation was informed about the “stay of members of Qatar’s royal family in Switzerland”, without giving further details. According to Zurich’s Tages Anzeiger newspaper, the first Qatari plane, an Airbus, landed in Zurich from Marrakesh shortly after midnight on 26 December. A second flight landed at Zurich-Kloten at 5am (0400 GMT) on 26 December, with a third plane coming 15 minutes later, both having originated in Doha, the paper reported. According to Tages Anzeiger, the medical emergency in question was so significant that six more planes linked to the Qatari royal family and government landed in Zurich through the weekend. Sheikh Hamad is believed to have been in poor health for years. He ruled the oil-and-gas-rich Qatar from 1995 until handing over power to his son, Sheikh Tamim, in 2013.

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“It’s as if a bomb went off. And, in fact, it did.”

• Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)

The vigorous low pressure system that helped spawn devastating tornadoes in the Dallas area on Saturday is forecast to explode into a monstrous storm over Iceland by Wednesday. Big Icelandic storms are common in winter, but this one may rank among the strongest and will draw northward an incredible surge of warmth pushing temperatures at the North Pole over 50 degrees above normal. This is mind-boggling. And the storm will batter the United Kingdom, reeling from recent flooding, with another round of rain and wind. Computer model simulations show the storm, sweeping across the north central Atlantic today, rapidly intensifying along a jet stream ripping above the ocean at 230 mph. The storm’s pressure is forecast by the GFS model to plummet more than 50 millibars in 24 hours between Monday night and Tuesday night, easily meeting the criteria of a ‘bomb cyclone’ (a drop in pressure of at least 24 mb in 24 hours),

By Wednesday morning, when the storm reaches Iceland and nears maximum strength, its minimum pressure is forecast to be near 923 mb, which would rank among the great storms of the North Atlantic. (Note: there is some uncertainty as to how much it will intensify. The European model only drops the minimum pressure to around 936 mb, which is strong but not that unusual). Winds of hurricane force are likely to span hundreds of miles in the North Atlantic. Environmental blogger Robert Scribbler notes this storm will be linked within a “daisy chain” of two other powerful North Atlantic low pressure systems forming a “truly extreme storm system.” He adds: “The Icelandic coast and near off-shore regions are expected to see heavy precipitation hurled over the island by 90 to 100 mile per hour or stronger winds raging out of 35-40 foot seas. Meanwhile, the UK will find itself in the grips of an extraordinarily strong southerly gale running over the backs of 30 foot swells.”

[..] Ahead of the storm, the surge of warm air making a beeline towards the North Pole is astonishing. [..] It’s as if a bomb went off. And, in fact, it did. The exploding storm acts a remarkably efficient heat engine, drawing warm air from the tropics to the top of the Earth. The GFS model projects the temperature at the North Pole to reach near freezing or 32 degrees early Wednesday. Consider the average winter temperature there is around 20 degrees below zero. If the temperature rises to freezing, it would signify a departure from normal of over 50 degrees.

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Hope some of that goes toward giving them jobs.

• German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)

Germany’s federal states are planning to spend around €17 billion on dealing with the refugee crisis in 2016, newspaper Die Welt said on Tuesday, citing a survey it conducted among their finance ministries. The sum, bigger than the €15.3 billion that the central government planned to allocate to its education and research ministry in 2015, is a measure of the strain that the influx is causing across the country as a whole. Germany is the favoured destination for many of the hundreds of thousands of refugees fleeing conflict and poverty in the Middle East and Africa, partly due to the generous benefits that it offers.

The German states have repeatedly complained that they are struggling to cope, and Chancellor Angela Merkel’s open-door policy has caused tensions within her conservative camp. Die Welt said that excluding the small city state of Bremen, which did not provide any details, current plans suggested the states’ combined expenditure would be €16.5 billion. The paper said actual costs would probably be even higher because the regional finance ministries had based their budgets on an estimate from the federal government that 800,000 refugees would come to Germany in 2015. In fact, 965,000 asylum seekers had already arrived by the end of November.

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Finance ministers have no place intervening in politics.

• Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)

Germany’s finance minister Wolfgang Schaeuble and a senior Bavarian politician criticized Greece on Sunday over the way it is managing its role in Europe’s biggest migration crisis since World War Two. Schaeuble, who has clashed repeatedly with Greek officials this year over economic policy, told Bild am Sonntag that Athens has for years ignored the rules that oblige migrants to file for asylum in the European Union country they arrive in first. He said German courts had decided some time ago that refugees were not being treated humanely in Greece and could therefore not be sent back there. “The Greeks should not put the blame for their problems only on others, they should also see how they can do better themselves,” Schaeuble said.

Greece, a main gateway to Europe for migrants crossing the Aegean sea, has faced criticism from other EU governments who say it has done little to manage the flow of hundreds of thousands of people arriving on its shores. Joachim Herrmann, the interior minister of the southern state of Bavaria, that has taken the brunt of the refugee influx to Germany, criticized the way Greece is securing its external borders. “What Greece is doing is a farce,” Herrmann said in an interview with Die Welt am Sonntag newspaper, adding any that any country that does not meet its obligations to secure its external borders should leave the Schengen zone, where internal border controls have been abolished.

[..] In contrast to his criticism of Greece, Schaeuble sought to offer to compromise with eastern European countries that have voiced reluctance to accept migrants under EU quotas. “Solidarity doesn’t start by insulting each other,” Schaeuble said. “Eastern European states will also have to take in refugees, but fewer than Germany.” The influx of hundreds of thousands of migrants, many fleeing war and poverty in the Middle East, also means that European countries will have to increase spending on defense, he said. “Ultimately our aim must be a joint European army. The funds that we spend on our 28 national armies could be used far more effectively together,” Schaeuble said.

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No, EU indifference on refugees has brought it down.

• Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)

The “ruinously selfish” behaviour of some member states towards refugees has brought the European Union to its knees, former attorney general Peter Sutherland has said. In a sharp denunciation of Europe’s failures on migration and social integration, Mr Sutherland, who is special representative to the United Nations secretary general for migration, said political “paralysis and ambivalence” was threatening the future of the EU and resulting in the rise of xenophobic and racist parties. With a population of 508 million, the EU should have had no insuperable problem welcoming even a million refugees “had the political leadership of the member states wanted to do so and had the effort been properly organised,” Mr Sutherland said. “But instead, ruinously selfish behaviour by some member states has brought the EU to its knees.”

There were several “honourable exceptions”, most notably German chancellor Angela Merkel, who he described as “a heroine” for showing openness and generosity towards refugees. Mr Sutherland made the remarks in the Littleton memorial lecture, which was broadcast on RTÉ radio on St Stephen’s Day. More than a million refugees and migrants arrived in the EU by land and sea in 2015, according to the International Organisation for Migration, making this the worst crisis of forced displacement on the continent since the second World War. Half of those arriving were Syrians fleeing a conflict that has left almost 250,000 people dead and displaced half the country’s pre-war population. A European Commission plan to use quotas to relocate asylum seekers arriving in southeastern Europe was adopted in the autumn against strong opposition from several states, including Hungary, Poland and the Czech Republic.

Slovakia said it would take in only a few hundred refugees, and they would have to be Christians. Mr Sutherland said the razor and barbed wire fences being erected on the Hungarian border to keep out migrants and refugees “are not just tragic but they are also particularly ironic, as Hungarians were for so long confined by the Iron Curtain.” He recalled that in 1956, after their failed revolution, 200,000 Hungarian refugees were immediately given protection throughout Europe and elsewhere. “Yet now, prime minister Viktor Orbán is the most intransigent and vociferous opponent of taking refugees in the EU.” Mr Sutherland accused some heads of government of “stoking up prejudice” by speaking of barring Muslim migrants and said the absence of EU agreement on a refugee-sharing scheme meant a Europe of internal borders was increasingly likely to become a reality across the continent.

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Waiting for the next surge as soon as the weather gets better.

• Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Over 800,000 refugees and migrants entered Greece between the start of the year and the end of November, with the number of arrivals increasing more than tenfold compared to last year’s total of 72,632, data published by the Greek Police showed Monday. The number tallies with figures from the United Nations High Commission for Refugees (UNHCR), which puts total arrivals in Greece from January 1 to December 24 at 836,672. The UNHCR also reported that in the three-day period from December 24 to 26, daily arrivals in Greece came to 2,950, with the monthly average at 3,400 per day, a significant drop from November’s average of 5,040. Most arrivals continue to enter Greece via the islands close to Turkey, the main transit point for refugees and migrants fleeing strife in the Middle East and South Asia and trying to enter the European Union.

On Lesvos alone, authorities estimate that they continue to receive from 2,000 to 2,500 arrivals every day, down from an average of over 5,000 in November. Police on the eastern Aegean island on Monday said that more than 3,500 refugees and migrants were waiting to be ferried to the mainland by this afternoon, while at the island’s main registration center in Moria, there are a further 4,000 people waiting to be processed and granted permission to leave for Athens, from where they will continue their journey north. In the capital, meanwhile, the Asylum Service of the Citizens’ Protection Ministry on Monday published data showing that only 82 of the 449 applications it has submitted so far for the relocation of refugees from Syria, Iraq and Eritrea to other parts of the European Union have been successful.

The initial plan drawn up by European authorities was for a total of 66,400 refugees to be transferred from Greece to other EU member-states, though only 13 countries have come forward, offering to take in a total of 565 asylum seekers. The repatriations that have been successful have been to Luxembourg, which took in 30 people, Finland (24), Portugal (14), Germany (10) and Lithuania, which accepted four relocations.

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Debt Rattle December 28 2015

Dec 282015
 
 December 28, 2015  Posted by at 9:55 am Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Gillender Building, corner of Nassau and Wall Streets, built 1897, wrecked 1910 1900

• Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)
• Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)
• China Industrial Profits Fall For Sixth Straight Month (Reuters)
• Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)
• World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)
• Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)
• End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)
• China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)
• The Danger Of Safety (Tengdin)
• Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)
• US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)
• US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)
• Britain’s New, Open Way to Sell Arms (BBG)
• China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)
• China Approves New Two-Child Birth Policy (WSJ)
• Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)
• Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)
• Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Oh, sure: “Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January. Zero Hedge take: ” • Household Spending plunges 2.9% YoY – worst since March (post-tax-hike) • Jobless Rate jumps to 3.3% (from 3.1%) • Industrial Production drops 1.0% MoM – worst in 3 months • Retail Trade tumbles 1.0% YoY – biggest drop since March (post-tax-hike) • Retail Sales plunges 2.5% MoM – Worst drop since Fukushima Tsunami (absent tax-hike)

• Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)

Japan’s factory output fell for the first time in three months in November and retail sales slumped, suggesting that a clear recovery in the world’s third-largest economy will be delayed until early in 2016. While manufacturers expect to increase output in coming months, the weak data casts doubt on the Bank of Japan’s view that an expected pick-up in exports and consumption will help jump-start growth and accelerate inflation toward its 2% target. Industrial output fell 1.0% in November from the previous month, more than a median market forecast for a 0.6% decline, data by the trade ministry showed on Monday. Separate data showed that retail sales fell 1.0% in November from a year earlier, more than a median forecast for a 0.6% drop, as warm weather hurt sales of winter clothing.

“We’re finally seeing signs of pick-up in exports, but the economy has yet to make a clear turnaround,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “There’s a risk consumption will remain sluggish and prevent economic growth from picking up,” he said. Japan’s economy narrowly dodged recession in July-September and analysts expect only modest growth in the current quarter, as consumption and exports lack steam. Some analysts warn the economy may suffer a contraction in October-December if household spending remains weak. Taro Saito, senior economist at NLI Research Institute, expects consumption in the current quarter to have risen less than a 0.4% quarter-on-quarter increase in July-September.

Wary of soft growth, the government plans nearly $800 billion in record spending in the budget for the fiscal year that will begin on April 1. The BOJ has signalled readiness to expand stimulus if risks threaten Japan’s recovery prospects. The central bank fine-tuned its stimulus programme on Dec. 18 to ensure it can keep up or even accelerate its money-printing. While sluggish emerging market demand dims the export outlook, analysts expect output to gradually increase early in 2016 as automakers ramp up production of new models. Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January.

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Abe can still go nuttier. Just watch him. He has one policy only, has been pumping it for 3 years now, and it has failed miserably (as we always said it must). So that’s his career. Next: panic.

• Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)

The head of an influential Japanese business lobby won’t pass on the government’s requests to its members to raise salaries next year, a worrying sign that real wages may not increase fast enough to boost consumption in the country. Higher wages are crucial to policymakers’ efforts to break a decades-long cycle of weak growth and deflation. Prime Minister Shinzo Abe has won modest wage gains from the largest firms, but this has been slow to filter through the economy. Renewed concern about a slowdown in emerging markets and weak overseas demand could make more companies reluctant to raise wages. This could in turn scupper the government’s efforts to increase consumption and put the Bank of Japan’s 2% inflation target out of reach.

“The government is hoping for higher wages, but the Keizai Doyukai, as an organization that corporate executives personally belong to, is not going to tell its members what to do,” said Yoshimitsu Kobayashi, chairman of the Keizai Doyukai, which regularly participates in the government’s corporate policy panels and is one of Japan’s top three business lobbies. “Companies that don’t have money obviously won’t raise wages.” Since taking office in late 2012, Abe has repeatedly asked big business lobbies to encourage their members to raise wages at annual spring salary negotiations with unions. Abe will also raise the minimum wage by about 3% from next fiscal year to encourage salaries to rise more broadly throughout the economy.

Many companies have enjoyed record profits recently, so there is room for these companies to offer their workers higher pay, Kobayashi said. Japanese companies also have the funds needed to increase domestic investment in plants, research and develop their workers’ skills, he said. However, around 65% of people work at small and medium-sized enterprises, many of which are losing money and are therefore unlikely to raise salaries or spend extra money on training employees.

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“Profits of state-owned enterprises among major industrial firms saw a 23% slump in the first 11 months this year..”

• China Industrial Profits Fall For Sixth Straight Month (Reuters)

Profits earned by Chinese industrial companies in November fell 1.4% from a year earlier, marking a sixth consecutive month of decline, statistics bureau data showed on Sunday. Industrial profits – which cover large enterprises with annual revenue of more than 20 million yuan ($3.1 million) from their main operations – fell 1.9% in the first 11 months of the year compared with the same period a year earlier, the National Bureau of Statistics (NBS) said on its website. The November profits of industrial firms have seen some improvement from the previous month. In October, profits fell 4.6% from a year earlier. “The November industrial profit data matched earlier output data and they showed some signs of stabilizing, which are in line with recent data from other Asian countries,” said Zhou Hao at Commerzbank in Singapore, adding the figures were slightly better than market expectations.

The NBS said investment returns for industrial companies in November increased from a year earlier by 9.25 billion yuan ($1.43 billion). The jump in November profits from the auto manufacturing and electricity sectors, up 35% and 51% from a year earlier, respectively, helped narrow overall declines, the statistics bureau said. “Declines in industrial profits narrowed in November, but uncertainties still exist,” said He Ping, an official of the Industry Department at NBS. He added that inventory of finished goods grew at a faster pace last month. Profits of state-owned enterprises (SOEs) among major industrial firms saw a 23% slump in the first 11 months this year from the same period in 2014. Mining remained the laggard sector, with profits falling 56.5% in the same period. Aluminum producer China Hongqiao Group said in early December it would cut annual capacity by 250,000 tonnes immediately to curb supplies.

Eight Chinese nickel producers including state-owned Jinchuan Group, said they would cut production by 15,000 tonnes of metal in December and reduce output next year by at least 20% from this year, in a bid to lift prices from their worst slump in over a decade. China’s producer prices have been in negative territory for nearly four years due to weak domestic demand and overcapacity. The country’s top leader last week outlined main economic targets for next year after they held the annual Central Economic Work Conference, where it said the government will push forward “supply-side reform” to help generate new growth engines in the world’s second-largest economy while tackling factory overcapacity and property inventories.

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Hotshots keep disappearing over there. Think they have a luxury resort they all gather in?

• Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)

The head of China Telecom, one of the nation’s big three telecoms firms, is under investigation for “severe disciplinary violations”, the government said Sunday, the latest high-profile target in a corruption crackdown. News of the probe into Chang Xiaobing, 58, was given in a statement on the website of the Central Commission for Discipline Inspection, the watchdog of the ruling Communist Party. The term is normally a euphemism for graft. Chang had been “taken away”, according to an article in the respected business magazine Caijing, which added that he disappeared just days before a meeting of the state-owned company planned for December 28. A memo saying the meeting would be postponed was issued on the evening of the 26th, the article said.

Chang’s phone was switched off and he had not responded to multiple calls, it added. In August, after 11 years as chairman and party secretary of China’s second largest telecoms provider China Unicom, Beijing announced Chang would head China Telecom. That decision, Caijing said, was made despite widespread rumours that the executive was under investigation. It sparked speculation about an imminent tie-up between the two industry leaders and the third major player, China Mobile. In April the state news agency Xinhua reported that China was considering merging scores of its biggest state-owned companies to create around 40 national champions from the existing 111.

Authorities have been pursuing a hard-hitting campaign against allegedly crooked officials since President Xi Jinping took office in 2013, a crusade that some experts have called a political purge. Several high-profile business leaders have been caught up in the web of graft investigations after authorities pledged they would turn their efforts to the state-owned enterprise system, a bulwark of graft that has resisted multiple attempts at reform. The campaign is seen as an attempt to force executives of state firms, who jealously guard their prerogatives, to toe the party line, reducing resistance to structural reforms intended to bolster the slowing economy. Beijing announced it had begun investigations into the country’s telecom industry earlier this year, while Chang was still at China Unicom.

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2016 looks like a black year for steel. And not only steel.

• World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)

The global steel industry is reeling amid a plunge in steel prices, a flood of low-priced imports from China and other countries, and a collapse in investment in pipes for oil drilling as a result of tumbling crude prices. USA TODAY economics reporter Paul Davidson spoke about these challenges with Wolfgang Eder, chairman of the World Steel Association and CEO of Austrian steel giant Voestalpine. The company has 46,000 employees worldwide and 2,500 workers and nearly two dozen factories in the USA.

Q: U.S. steelmakers are awaiting decisions on trade cases against China for illegally dumping steel below cost in this country. Is this a global problem? A: The current Chinese overcapacity problem affects all parts of the world. Chinese plants (are selling) not only to the U.S. but also to Europe. It’s an intensive discussion of what should be the reaction and an ongoing discussion to what extent Europe should follow the U.S. (in filing trade cases). The problem at the moment is enormous. I do hope we will find some balance again in the next months, but at the moment, the situation is a very serious and critical one.

Q: What’s the long-term solution? A: In the long run, a solution to the problem can only come from the reduction of capacities. According to OECD (countries in the Organization for Economic Cooperation and Development ), there are 600 to 700 million tons of overcapacity (worldwide), the largest part in China. That means permanent pressure on margins and prices.

Q: Is the plunge in steel prices affecting your company, Voestalpine? A: We are not (selling) any material via the spot market. We do have only high-quality steel, and this steel is only sold based on contracts. We are, of course, the (supplier) for the German auto producers — BMW, Mercedes, Audi, Porsche. So we are one of the largest suppliers for these car producers. They are only buying really high-tech, high-quality material where we can differentiate. Two-thirds (of production) is downstream — we make complete automotive components, exteriors of cars, we produce complete rail tracks.

Q: Still, you do make some raw steel, and the drop in prices has affected you, hasn’t it? A: We have started additional cost-cutting measures. We try to avoid layoffs because we do not want to lose highly qualified people. So for the time being, we have (cut staff) in only a very few locations — some in Germany, some in Brazil. And, of course, we try to extend our product range. We intend to sell more automotive parts.

Q: Have you been affected by the downturn in oil and gas drilling? A: We have not yet been affected by the weakness in the oil and gas market, but we do expect, looking forward … the second half (of the fiscal year) will be a really more difficult period. Inventories are extremely high now, of oil and gas, but also inventories for all the production equipment are at very high levels. We cannot expect oil and gas levels will come down quickly over the winter as they have reached levels we have never seen before. So it’s unlikely we’ll see recovery of this segment before the summer of next year.

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The same people eager to claim OPEC no longer functions are just as eager to say OPEC kills US shale.

• Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50% price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well. Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4% of a 43-year high. The problem? Oil’s no longer at $50. It now trades near $35. For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes at Wood Mackenzie in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great. Drillers including Samson and Magnum Hunter have already filed for bankruptcy. About $99 billion in face value of high-yield energy bonds are trading at distressed prices, according to Bloomberg Intelligence analyst Spencer Cutter.

The BofA Merrill Lynch U.S. High Yield Energy Index has given up almost all of its outperformance since 2001, with the yield reaching its highest level relative to the broader market in at least 10 years. “You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges,” said Jeff Jones at Blackhill Partners. “And $35 oil will clearly accelerate the distress.”

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“They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities.”

• End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)

Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light U.S. crude into fuels for export seemed like a pretty safe investment bet for a while. The bet was built on several converging dynamics: an ever-rising supply of condensate; a U.S. refining system built to run heavier crudes; and a longstanding ban on crude exports that appeared unlikely to unwind amid partisan paralysis in Washington, D.C. Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned.

Traders are wondering what will happen with existing splitters run by companies such as Kinder Morgan. They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities. Other pending projects without guaranteed buyers could be abandoned, experts say. The once-restricted domestic crude not only faces increased competition. It also is hurt by the inversion of the global oil market, where once-abundant U.S. production is declining while global supplies are rising. This has eliminated the price discount that underpinned their model.

“It’s a much different competitive environment now that we don’t have distressed condensate,” said Sandy Fielden, an analyst with RBN Energy. While the same can be said of the nation’s larger, older fleet of full-scale refineries, splitters may be most exposed to the sudden changes, given their dependence on the most deeply discounted variety of oil. “Why would you distill it here if you can distill it elsewhere? The only reason you want to do it here is when it’s cheaper, but now it doesn’t make sense,” said Nick Rados, global business director of feedstocks for IHS Chemical.

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Peanuts.

• China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)

China fined eight shipping lines 407 million yuan ($63 million) in total after finding them responsible for price collusion in the transportation of vehicles and heavy machinery. Japan’s Nippon Yusen, Mitsui OSK lines, Kawasaki Kisen Kaisha and Eastern Car Liner, Korea’s Eukor Car Carriers, Norway’s Wallenius Wilhelmsen, Chile’s Cia. Sud Americana de Vapores and its shipping line were the eight indicted after a year-long investigation, the National Development and Reform Commission said in a statement on its website Monday. The companies acknowledge wrongdoing, the top Chinese economic planning agency said. The probe follows similar investigations by the European Union in 2013 and Japan’s Fair Trade Commission.

Japanese regulators raided the offices of five shipping lines in 2013 over allegations they discussed raising rates together for transporting cars, and imposed fines on Nippon Yusen and Kawasaki Kisen in January 2014. AP Moeller-Maersk, CMA CGMand MSC Mediterranean Shipping were among companies in the European Union probe. Eukor will accept the Chinese decision and pay a fine of 284.7 million yuan, the company said in a statement on its website. The company also has implemented a competition law compliance program and corrective measures including antitrust compliance training, it said. Nippon Yusen has fully cooperated with the investigation by the Chinese agency and consequently received an immunity from the fine, the Japanese company said in a statement.

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Re: Minsky.

• The Danger Of Safety (Tengdin)

The US Forest Service was created in 1905. Teddy Roosevelt signed the bill in response to a series of disastrous forest fires, like the Great Hinckley Fire of 1894. These fires threatened future commercial timber supplies, and the Federal Government had begun to establish national forest reserves. Why create them, people wondered, if they were just going to burn down? So the Forest Service established a systematic approach to fire control, building a network of roads, lookout towers, ranger stations, and communications. They also offered financial incentives for states to fight fires. With new technology, like airplanes, smokejumpers, and chemicals, they established their 10 am policy: every fire should be suppressed by 10 am the day following its initial report.

But a funny thing happened: by eliminating fire from the forest ecosystem, a lot of dead wood and other fuel accumulated over time. This insured that when fires did break out, they would become far more destructive. Moreover, scientists noted that fire was an essential part of many plant and tree life cycles. The Forest Service changed its approach from fire control to fire management-letting naturally occurring fires burn, unless they threatened developed areas. Is this part of what led to the Financial Crisis of 2007-2009? During the 25 years prior, economists had noted that more effective bank regulation and monetary policy had led to a “Great Moderation”-a significant dampening of the business cycle in the US and other developed nations.

It’s possible that reduced economic volatility led investors, homeowners, and banks to take on greater risks. In essence, the Fed’s policy of fire suppression allowed toxic assets to be created and distributed throughout the financial ecosystem. Highly regulated (and insured) banks were replaced by (uninsured) shadow banks. These assumed particular risks and contributed to a culture of increased systemic risk. When some of their assets began to unravel, it was impossible to contain the damage. We find a sort of risk-homeostasis in other areas. Anti-lock brakes encourage more aggressive driving; better skydiving gear allows hazardous high-speed maneuvers close to the ground. This is sometimes called the Peltzman effect: people behave as if they want a certain level of risk in their lives.

This appears to be the case with ecosystems and economies, too. Are safety measures useless, then? Absolutely not! The rate of accidental fatalities has fallen dramatically over time, and there are also fewer bank failures. But like the US Forest Service, we need to focus on risk management rather than risk reduction. Don’t assume government regulators will control your financial risks. Diversification, analysis, and-above all-not paying too much are still crucial, and always will be. The biggest risk, after all, is believing that we aren’t taking any risk. In a dynamic world, that’s guaranteed to fail.

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Britain lost decades not acting on what was already obvious all those years ago.

• Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)

When more than 1,800 people died in the wake of the 1953 North Sea flood in the Netherlands, the national reaction was: never again. The resulting Delta programme to close off the south-western river delta from the sea was so bold that its name became synonymous with dealing with a crisis. If an issue needs a major response, you can be sure that a Dutch politician will call for a “Delta plan to tackle X”. It is time that the UK took some of that attitude and got a Delta plan to tackle flooding. Flooding has become an almost annual event in the UK. We are waiting for the next storm and flash flood to hit, with another group – or even the same group – of people evacuated, all followed by the promise of some money for a bit of flood defence work. As a nation, we can no longer afford to accept that.

Consider the personal misery for those affected, even in areas not traditionally flood-prone like Manchester and Leeds. Consider that the financial cost of these events will continue to rise – and not only for the government. Every home insurance policy now includes a £10.50 Flood Re levy to subsidise insurance for homes with a high risk of flooding. With the climate changing and becoming more volatile, we can expect heavier rain and more severe storms. Water management systems in the UK, and in particular in England, are unable to deal with what lies ahead. After almost every flood, journalists and policymakers go to the Netherlands to learn how they are adapting to climate change and what lessons there are for the UK. We see Dutch projects in the news, such as a neighbourhood with floating homes that forms part of a major national programme to create space for the rivers.

But those lessons never seem to be taken on board. Come the next flood, off they all go to Holland again. For the Dutch, water management goes to the core of their national identity. The country was forged in the battle against water. This common fight led to the pooling of resources and decision-making in regional water authorities – among the oldest democratic institutions in the world – which continue that work today. The national habit of consensus decision-making in tackling major issues became known internationally in the 90s as the “polder model”, echoing its water-based roots. No Dutch politician wants to be part of the generation that fails in the common endeavour against water, and no voter would accept someone caught sleeping on their watch.

The Netherlands has adapted to the changing nature of the threat. Today, the biggest danger is not the sea swallowing the land but the rain overwhelming it. The main focus no longer is building higher dykes and bigger dams, like they did after the 1953 flood. Instead, the Dutch have spent the past decade deepening and widening rivers, creating new side canals that provide extra capacity, and setting aside land as dedicated flood plains. This €2.3bn project is still ongoing. All this so that when the water does come, the swollen rivers can expand without flooding homes and causing misery. In Britain, we need to start to realise and accept that flooding is becoming an equally existential issue. There can be no northern powerhouse or sustainable prosperity anywhere if it risks being swept away by the rain.

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Putin won.

• US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)

Three months into his military intervention in Syria, Russian President Vladimir Putin has achieved his central goal of stabilizing the Assad government and, with the costs relatively low, could sustain military operations at this level for years, U.S. officials and military analysts say. That assessment comes despite public assertions by President Barack Obama and top aides that Putin has embarked on an ill-conceived mission in support of Syrian President Bashar al-Assad that it will struggle to afford and that will likely fail. “I think it’s indisputable that the Assad regime, with Russian military support, is probably in a safer position than it was,” said a senior administration official, who requested anonymity. Five other U.S. officials interviewed by Reuters concurred with the view that the Russian mission has been mostly successful so far and is facing relatively low costs.

The U.S. officials stressed that Putin could face serious problems the longer his involvement in the more than four-year-old civil war drags on. Yet since its campaign began on Sept. 30, Russia has suffered minimal casualties and, despite domestic fiscal woes, is handily covering the operation’s cost, which analysts estimate at $1-2 billion a year. The war is being funded from Russia’s regular annual defense budget of about $54 billion, a U.S. intelligence official said. The expense, analysts and officials said, is being kept in check by plummeting oil prices that, while hurting Russia’s overall economy, has helped its defense budget stretch further by reducing the costs of fueling aircraft and ships. It has also been able to tap a stockpile of conventional bombs dating to the Soviet era.

Putin has said his intervention is aimed at stabilizing the Assad government and helping it fight the Islamic State group, though Western officials and Syrian opposition groups say its air strikes mostly have targeted moderate rebels. Russia’s Syrian and Iranian partners have made few major territorial gains. Yet Putin’s intervention has halted the opposition’s momentum, allowing pro-Assad forces to take the offensive. Prior to Russia’s military action, U.S. and Western officials said, Assad’s government looked increasingly threatened.

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Let’s all buy shares!

• US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)

Foreign arms sales by the United States jumped by almost $10 billion in 2014, about 35%, even as the global weapons market remained flat and competition among suppliers increased, a new congressional study has found. American weapons receipts rose to $36.2 billion in 2014 from $26.7 billion the year before, bolstered by multibillion-dollar agreements with Qatar, Saudi Arabia and South Korea. Those deals and others ensured that the United States remained the single largest provider of arms around the world last year, controlling just over 50% of the market. Russia followed the United States as the top weapons supplier, completing $10.2 billion in sales, compared with $10.3 billion in 2013.

Sweden was third, with roughly $5.5 billion in sales, followed by France with $4.4 billion and China with $2.2 billion. South Korea, a key American ally, was the world’s top weapons buyer in 2014, completing $7.8 billion in contracts. It has faced continued tensions with neighboring North Korea in recent years over the North’s nuclear weapons program and other provocations. The bulk of South Korea’s purchases, worth more than $7 billion, were made with the United States and included transport helicopters and related support, as well as advanced unmanned aerial surveillance vehicles. Iraq followed South Korea, with $7.3 billion in purchases intended to build up its military in the wake of the American troop withdrawal there.

Brazil, another developing nation building its military force, was third with $6.5 billion worth of purchase agreements, primarily for Swedish aircraft. The report to Congress found that total global arms sales rose slightly in 2014 to $71.8 billion, from $70.1 billion in 2013. Despite that increase, the report concluded that “the international arms market is not likely growing over all,” because of “the weakened state of the global economy.”

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What better sign is there of our collective insanity?

• Britain’s New, Open Way to Sell Arms (BBG)

Champion cyclist Ryan Perry, a British army captain, was uncharacteristically tipsy the night of Nov. 25, but no one could blame him for enjoying the Champagne. Standing on the stage of a grand 15th century hall in London, the 28-year-old cradled a crystal plaque naming him the army’s sportsman of the year. Seated in front of him was one of the British military’s most influential officers, the chief of the general staff, or CGS. “Yesterday I was riding around Burnley in the wind and rain,” Perry told the crowd, referring to his seaside hometown. “Tonight I’m drinking Champagne with CGS.” Attending the banquet were executives from at least 20 contractors for the U.K.’s Ministry of Defence—including U.S.-based arms manufacturers Boeing, Lockheed Martin, and Raytheon.

They raised glasses with senior military officials, many of whom are directly involved in spending some of the $268 billion in defense procurement the U.K. has planned for the next decade. The contractors paid for the black-tie dinner in the historic Guildhall. The corporations are sponsoring the dinner through Team Army, a charity established in 2011 after an antibribery law went into effect in the U.K. The law was enacted following a string of high-profile corruption cases, including some in defense deals. Team Army’s role is to be in the middle of what were once unofficial big-dollar transactions between generals and defense companies. “It’s as clean as we can make the damn thing,” says Lamont Kirkland, a general who ran the army’s boxing, rugby, and winter sports programs before retiring to lead the charity.

Arms makers and other contractors pay Team Army as much as £70,000 ($104,000) for memberships. The members sponsor tables or buy tickets for Champagne receptions and other fêtes. Corporate suites at premier soccer games, rugby matches, and horse races are also used to raise money. Contractors are invited to spend time at the events with the top brass who buy their wares. The charity uses money from the contractors to fund military sports programs, Paralympics, and elite military athletes. Top-draw competitions, including the annual army-navy rugby match at London’s 82,000-seat Twickenham Stadium, are used for more fundraising. Although the official numbers won’t be public until 2016, Team Army raised a record amount this year, Kirkland says. Since 2011 the charity has amassed about $4.5 million for military sports.

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China, US, France, what’s the difference?!

• China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)

China’s legislature approved an antiterrorism law on Sunday after months of international controversy, including criticism from human rights groups, business lobbies and President Obama. Critics had said that the draft version of the law used a recklessly broad definition of terrorism, gave the government new censorship powers and authorized state access to sensitive commercial data. The government argued that the requirements were needed to prevent terrorist attacks. Opponents countered that the new powers could be abused to monitor peaceful citizens and steal technological secrets. Whether the complaints persuaded the government to dilute the bill was not clear: State news media did not immediately publish the text of the new law.

But an official who works for the Standing Committee of the National People’s Congress indicated that at least some rules authorizing greater state access to encrypted data remained in the law. “Not only in China, but also in many places internationally, growing numbers of terrorists are using the Internet to promote and incite terrorism, and are using the Internet to organize, plan and carry out terrorist acts,” the official, Li Shouwei, told a news conference in Beijing. Mr. Li, a criminal law expert, said the antiterrorism law included a requirement that telecommunication and Internet service providers “shall provide technical interfaces, decryption and other technical support and assistance to public security and state security agencies when they are following the law to avert and investigate terrorist activities.”

The approval by the legislature, which is controlled by the Communist Party, came as Beijing has become increasingly jittery about antigovernment violence, especially in the ethnically divided region of Xinjiang in western China, where members of the Uighur minority have been at growing odds with the authorities. Chinese leaders have ordered security forces to be on alert against possible terrorist slaughter of the kind that devastated Paris in November. Over the weekend, the shopping neighborhood of Sanlitun in Beijing was under reinforced guard by People’s Armed Police troops after several foreign embassies, including that of the United States, warned that there were heightened security risks there around Christmas.

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“..Chinese people over the age of 65 will jump 85% to 243 million by 2030..”

• China Approves New Two-Child Birth Policy (WSJ)

China’s lawmakers will allow all couples to have two children from the beginning of next year, implementing a new birth policy aimed at mitigating a potential demographic crisis. In a congressional meeting Sunday, Chinese lawmakers approved the new birth policy, which will take effect Jan. 1, 2016, Xinhua reported. Top Communist Party leaders had previously approved the new policy. The announcement sets a timeline for a policy that will replace the country’s controversial 35-year-old one-child policy. The National Health and Family Planning Commission, which implements China’s reproduction policy, said at the time it would move slowly to avoid population spikes. Demographers have warned China’s leaders for the past decade that falling birthrates in the nation may cause a future labor shortage that would endanger economic growth.

China has the world’s largest population at 1.37 billion, but its working-age population -those aged 15 to 64- is shrinking. The United Nations projects the number of Chinese people over the age of 65 will jump 85% to 243 million by 2030, up from 131 million this year. Many health experts say that while the new policy will likely enable up to 100 million couples to have additional children, they don’t expect a baby boom. Many Chinese couples say the cost of having children is prohibitive, and some will opt to have only one child. A previous relaxation of China’s one-child policy did not lead to a significant increase in baby numbers. Health officials previously said they are moving to simplify the birth application procedures for couples, who currently have to go through a complicated procedure that can often take months.

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This is actually an article on some grand projects that do still get built. I like the other side of the coin better.

• Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)

As construction continues to slump, the prevalent impression is that all building activity has come grinding to a halt. Yet this is only one side of the coin and mainly concerns private projects. According to data from the Hellenic Statistical Authority (ELSTAT), construction activity (measured by the number of permits issued) throughout the country dropped by 63.47% in the period from 2011 to 2014. Attica has been hit hardest by the economic crisis, with construction nosediving 73.10%, while the greatest losses have been seen in the residential property market. Up until the start of the crisis, 75% of investments in construction went toward residential property. In the third quarter of 2014, this had shrunk to 31%, with losses of €23.29 billion.

This is the “big picture” as a walk around any neighborhood in the Greek capital will attest. But there are also the shining exceptions, projects that were started well before the crisis or that defied the circumstances and forged ahead. The most important similarity between these projects is that they have progressed enough so they are no longer at risk of remaining on paper. And, irrespective of their scale, they are all important, if only on a symbolic level because they create a sense that something is happening, that there is movement in the works.

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Where did they find them?

• Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)

Germany has recruited 8,500 people to teach child refugees German, as the country expects the number of new arrivals to soar past the million mark in 2015, Die Welt daily reported on Sunday. About 196,000 children fleeing war and poverty will enter the German school system this year, and 8,264 “special classes” have been created to help them catch up with their peers, Die Welt said, citing a survey carried out in 16 German federal states. Germany’s education authority says 325,000 school-aged children reached the EU country in 2015 during Europe’s worst migration crisis since the second world war.

Germany expects more than a million asylum seekers this year, which is five times more than in 2014. It has put a strain on its ability to provide services to all the newcomers. “Schools and education administrations have never been confronted with such a challenge,” Brunhild Kurth, who heads the education authority, told Die Welt. “We must accept that this exceptional situation will become the norm for a long time to come.” Heinz-Peter Meidinger, head of the DPhV teachers’ union, said Germany would need up to 20,000 additional teachers to cater for the new numbers. “By next summer, at the latest, we will feel that gap,” he said.

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Better solve this fast.

• Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Europe’s refugee crisis is threatening to compound a hidden problem of statelessness, with experts warning that growing numbers of children are part of an emerging “stateless generation”. Gender-biased nationality laws in Syria combined with ineffective legal safeguards in the EU states mean that many children born to Syrian refugees in Europe are at high risk of becoming stateless – a wretched condition of marginalisation that affects 10 million people worldwide. Under Syrian law, only men can pass citizenship on to their children. The UN estimates that 25% of Syrian refugee households are fatherless. “A lot of those who are resettled to Europe are women whose husband or partner was killed or lost and are being resettled with their kids or are pregnant at the time, so that is becoming a bigger problem,” said Zahra Albarazi of the Institute on Statelessness and Inclusion, based in the Netherlands.

Sanaa* is a 35-year-old single mother who gave birth to her daughter, Siba*, in Berlin last year. “I went to the Syrian embassy and explained my situation but they said they cannot give Siba a passport because the father should be Syrian, and the father and mother married,” Sanaa said. Germany, in common with the rest of Europe, does not automatically grant citizenship to children born there. This means Siba does not have citizenship of any country. Under international treaties including the UN convention on the rights of the child, governments are obliged to grant nationality to any child born on their soil who would otherwise be stateless. But few EU countries have adopted this principle into domestic law and those that have consistently fail to implement it.

The UNHCR refugee agency estimates that at least 680,000 people in Europe are without citizenship of any country, although experts say the true figure is likely to be far higher because stateless people are hard to count. The statelessness problem is particularly bad in south-east Asia: in Myanmar alone the UN estimates there are more than 810,000 stateless people. But the situation in Europe is about to get much worse as a result of the unprecedented migration. Up until now, groups such as the Roma and Russian-speaking people from the Baltics have been most affected, although the UN blames statelessness on a “bewildering array of causes”, with people from a wide range of backgrounds finding they are not legally entitled to citizenship of any country.

No research has been done into the scale of statelessness among the children of Syrian refugees in Europe, but it is thought that many are likely to be in the same position as Siba. Statelessness in Europe can pose huge problems. Experts say many parents are unaware that their children are stateless. Often the children realise they do not have legal citizenship only when they reach adulthood and find they cannot legally work, marry, own property, vote or even graduate from school. [..] The UN says more than 30,000 babies born to Syrian refugees in Lebanon are at risk of statelessness. And research by Refugees International (RI) this year found that many of the 60,000 children born to Syrian refugees in Turkey since 2011 could be in the same position.

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Debt Rattle November 27 2015

Nov 272015
 
 November 27, 2015  Posted by at 10:14 am Finance Tagged with: , , , , , , , , ,  1 Response »


Jack Delano Freight train on the Chicago & North Western, Chicago to Clinton, Iowa 1943

• The $400 Billion Ripoff That Could Destroy The Greek Bailout (CNBC)
• Good News, Holiday Shoppers: Retailers Are Desperate (MarketWatch)
• China’s Stocks Sink Most in Three Months as Broker Probes Widen (Bloomberg)
• China October Industrial Profits Fall For Fifth Straight Month (Reuters)
• China’s Stock-Market Regulator is Investigating Citic Securities (WSJ)
• Japan Spending Slumps Even As Unemployment Hits 20-Year Low (Reuters)
• Japan Prime Minister Debuts New Social Programs to Help Economy (WSJ)
• Japan’s Debt Trap Won’t Fix Itself (Bloomberg)
• Bad Saudi PR Fuels Riyal Devaluation Talk (Reuters)
• EU Warns 12 Eurozone Nations Including Germany Over Imbalances (Bloomberg)
• Portugal’s Anti-Austerity Left Take Power In Watershed Moment For Euro (AEP)
• VW’s Emissions Scandal Exposes Far Deeper Problems In Europe (Bloomberg)
• ‘Classic Ponzi Scheme’: Sydney House Prices Are 12 Times The Annual Income (SMH)
• Biggest Overhaul Of Chinese Armed Forces In Six Decades (Bloomberg)
• Hollande, Putin Propose Closing Turkey-Syria Border (AFP)
• Russia Raiding Turkish Firms And Sending Imports Back (Al Jazeera)
• Turkish Journalists Charged Over Claim Secret Services Armed Syrian Rebels (AFP)
• Refugee Influx Threatens Fall Of EU, Warns Dutch PM (FT)
• After Uproar, German Town Warms To Refugees Who Took Over Church (Reuters)
• Stranded Migrants Try To Storm Into Macedonia, Tear Down Fence (Reuters)

Criminal behavior. “What is so disturbing is that this fire sale is going on with the blessings of European creditors. That makes it hard to brand it an asset looting. The loss for Greek taxpayers is enormous.”

• The $400 Billion Ripoff That Could Destroy The Greek Bailout (CNBC)

As if Greece didn’t have enough economic market woes, last week foreign investment funds managed to take control of four of the country’s largest banks — Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank — through $6.42 billion worth of capital increases and a complex set of legal manipulations. As a result, bank shares sold like penny stocks, diluting state ownership in these important institutions that have assets totaling $358 billion. The country’s stake in the National Bank of Greece dropped to 24% from 57%, and in Eurobank it fell to 2.4% from 35%, while its stake in Alpha Bank was reduced to 11% from 64% and in Piraeus Bank it dropped to 22% from 67%. This translates to a loss of almost $44 billion that Greek taxpayers gave to bail out the banks over the past three years.

Greek stock market and legal experts believe that the maneuvers were engineered after a statutory legal provision was amended by the Greek Parliament that allowed private investors to price bank shares using a so-called “book-building method.” Under this method, the share price in capital increases is not predetermined, and investors set the price at which they want to buy the shares. It also made it mandatory for the country’s regulatory body, the Hellenic Financial Stability Fund, to accept book-building prices, even if they were not properly reflecting share values. According to Greek banking sources, Capital Group, Pimco, WLR Recovery Fund, Wellington, Fairfax, Brookfield Capital Partners and Highfields Capital Management are among those who jumped at the opportunity to invest in Greek banks at below-market value this month.

The foreign investors valued the four banks at about $800 million, which is more than three times less than their current market value of $3 billion. Moreover, from Nov. 4 to Nov. 20, when the book building took place, the index of bank shares on the Greek stock market fell nearly 70%. This has hit the banks hard, according to Nikos Chryssochoidis, an Athens-based stockbroker. “In just 13 trading sessions, Alpha Bank’s stock dropped to .055 euros from its 0.125 euros closing on Nov. 4, losing 56%.” “These are horrendous figures,” Emilios Avgouleas, a professor of banking law at the University of Edinburgh, told CNBC. “What is so disturbing is that this fire sale is going on with the blessings of European creditors. That makes it hard to brand it an asset looting. The loss for Greek taxpayers is enormous.”

As the dust settles, the blame game is in full swing. The HFSF argues that its decisions are lawful and in line with the legislation passed by the Greek Parliament. The country’s creditors and euro zone officials have waived their responsibilities. In the meantime, there are worries about how this could affect overall trading on the Hellenic Stock Exchange. On Monday, Euro-area member states agreed to disperse €10 billion for the recapitalization of Greek banks after the nation completed the first set of milestones that included the overhaul of bank governance rules, eased restrictions on home foreclosures and raised wine and road taxes. These funds will be released to the Hellenic Financial Stability Fund on a case-by-case basis, as required by the European Commission.

At the same time, Greek creditors want the country’s authorities to tackle the remaining vulnerabilities in the banking system, notably those arising from $114 billion worth of nonperforming loans. If there is a capital shortfall in Greek banks that private investors cannot cover in 2016, then the EU will impose a surcap on unsecured bank deposits that are more than €100,000, like they did in Cyprus during its financial crisis three years ago. At that time, a €10 billion by the Eurogroup, European Commission and the IMF resulted in the closure of the country’s second-largest bank and a onetime bank deposit levy on all uninsured bank depositors. To date, the European Union has lent $49.22 billion to bail out Greek banks.

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“..they have literally never before had so much stuff they need to sell…”

• Good News, Holiday Shoppers: Retailers Are Desperate (MarketWatch)

As Black Friday kicks off and you prepare for the annual shopping orgy, here’s something you may find useful to know: The retailers need your money. I mean, they really, really need your money. The companies you know down at your local mall are under incredible pressure this Christmas season. They have sky-high inventories, flat-lining sales and collapsing stock prices on Wall Street. And they’ve got a few weeks to turn that around. You think you want a deal? Oh, boy, these guys need to make a deal. Let’s start with the inventories. The people running the stores place their Christmas orders many months in advance — often, in fact, as much as a year in advance. And when it came time to buy inventories for this season, they were super-optimistic and they went large.

As a result, they have literally never before had so much stuff they need to sell. They’re piled high with cashmere sweaters and pashminas and diamond earrings and plastic action figures and “Frozen” tiaras and embroidered oven mittens and exercise bikes and “Italian Stallion” golf balls. The managers are feeling sick just looking at it all. According to U.S. government data, America’s retailers are entering this holiday season with an incredible $584 billion in inventory to sell — equal to almost $5,000 per household. When compared with annual sales, these inventory levels are the highest since the financial crisis. When adjusted for inflation, they’ve never been so high. Christmas is the key period for retailers. It’s when they make their money.

The Christmas shopping season makes or breaks their entire financial year. In fact, “Black Friday” is traditionally the day of the year when retailers finally move into profit. With all that stuff to sell, it’s no wonder that “Cyber Monday” has now been brought forward to Sunday — and Black Friday apparently started about a week ago. These guys are nervous. They’re under a lot of pressure. Shock profit warnings, including those from stalwarts such as Macy’s, have revealed that all is not well down at the mall. Shoppers aren’t buying as much as hoped. And they’re buying more of it online — at lower margins. Take a look at stock prices. They tell a story. And they’re in free-fall.

Best Buy is off 20% so far this year. Wal-Mart and Bed Bath & Beyond are down about 30%. Gap, Ralph Lauren and Urban Outfitters are down by about a third. Macy’s is down more than 40%. And even the high-end is hurting. Tiffany and Nordstrom are each down about 30%. Bad news for them. Great news for you. There are plenty of sensible strategies for making sure the holiday season doesn’t bankrupt you. They include setting a budget, setting gift value limits, agreeing on a Christmas truce or just adopting the Secret Santa strategy so everyone gets one gift. I’ll confess I am so over the Christmas shopping mania. But no matter what strategy you adopt, if you’re looking for deals, you should know your enemy. The retailers look like they’re hurting. And that should mean that the longer you wait, the better the deals you’ll find.

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Shanghai closed at -5.48%, Shenzhen -6.11%.

• China’s Stocks Sink Most in Three Months as Broker Probes Widen (Bloomberg)

China’s stocks tumbled as some of the largest brokerages disclosed regulatory probes, the nation’s industrial profits fell and two companies flagged bond payment difficulties. [..] Citic Securities and Guosen Securities plunged more than 9% in Shanghai after saying they were under investigation for alleged rule violations, while Reuters reported Haitong Securities Co. is also being probed after the company suspended trading in its shares. Industrial profits slid 4.6% last month, data showed Friday, compared with a 0.1% drop in September. The crackdown in the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for a $5 trillion stock-market rout.

Authorities are also testing a bull-market rebound by paring emergency support measures, including lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions. A Chinese fertilizer maker and a pig iron producer became the latest companies to struggle to repay bonds after at least six defaults this year as the earliest economic indicators for November show a deterioration. “The investigations may be related to their roles in the stock rout,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, who’s keeping his holdings unchanged. “The regulator will probably further step up oversight and crack down that area. In the short term, the market will be pressured by that.”

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“The mining industry was the laggard with profits falling 56.3% in the first 10 months of the year from a year earlier..”

• China October Industrial Profits Fall For Fifth Straight Month (Reuters)

Profits earned by Chinese industrial companies fell 4.6% in October from a year earlier, data from the statistics bureau showed on Friday, declining for the fifth consecutive month. Industrial profits – which cover large enterprises with annual revenue of more than 20 million yuan ($3.13 million) from their main operations – fell 2.0% in the first 10 months of the year compared with the same period a year earlier, the National Bureau of Statistics (NBS) said on its website. In September, profits fell 0.1% from a year earlier. The impact of foreign exchange and lower investment income on companies’ profits were less pronounced in October than in prior months, the statistics bureau said in a statement. Falling sales, rising costs and hits to profit in the oil, steel and coal industries all contributed to October’s disappointing industrial profits, the NBS said.

The mining industry was the laggard with profits falling 56.3% in the first 10 months of the year from a year earlier, the NBS data showed. China’s Premier Li Keqiang said on Tuesday that China was on track to reach its economic growth target of about 7% this year, and the economy was going through adjustments to maintain reasonable medium- to long-term growth. China’s customs authorities announced a number of new measures on Wednesday to help exporters and importers, describing the current foreign trade environment as “complicated and grim.” The new policies include lowering various costs for importers and exporters, streamlining the clearance of goods at customs and gathering more accurate statistics.

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Broad investigations going on.

• China’s Stock-Market Regulator is Investigating Citic Securities (WSJ)

China’s securities regulator has launched a probe into Citic Securities for suspected violations of securities rules, escalating a crackdown on the country’s largest stockbroker at the center of a broad campaign to clean up the financial sector following the summer’s stock-market rout. In a statement to the Shanghai Stock Exchange, Citic Securities said that it has received notification from the China Securities Regulatory Commission regarding the investigation, without offering further details. The Beijing-based brokerage said it will cooperate with the authorities and that the firm’s operations remain normal.

The latest move by the Chinese authorities marks a significant shift in the nature of its probe into the brokerage, which has been at the forefront of Beijing’s effort to modernize its underdeveloped capital market and globalize the reach of its state-owned financial behemoths over the past decades. Guosen Securities, China’s third-largest broker by assets, also said on Thursday that it received investigation notification from the CSRC over suspected violation of securities rules, according to the company’s filing to the Shanghai Stock Exchange. No details were provided regarding the probe.

In recent months, Beijing has confined its investigation to Citic Securities’ employees, according to the company’s filings and reports by the official Xinhua news agency, with the Chinese police leading the effort after detaining a number of senior executives from the company. “The scope and depth of official crackdown on financial irregularities since the stock-market plunge in June has surpassed expectations,” said Hao Hong, managing director at Bank of Communications. “The probe into China’s leading broker serves as a clear warning to market participants.” Since August, several senior employees at Citic Securities, including general manager Cheng Boming , have been detained by the Chinese police over suspected illegal practices, such as insider trading.

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Can’t force spending. The more you try, the more people save, out of fear.

• Japan Spending Slumps Even As Unemployment Hits 20-Year Low (Reuters)

Japanese household spending unexpectedly fell in October for a second straight month, even as unemployment hit a two-decade low, underscoring the challenge facing premier Shinzo Abe in persuading reluctant companies to boost wages. Consumer price inflation fell for the third consecutive month, but after excluding the effect of lower energy bills, household costs rose. The data underlined the difficulty Abe faces as he campaigns for companies to spend more of their record profits on wages and investment, in the hope of pulling Japan out of recession. “Job offers are surging but the average sum each employee is earning isn’t rising much. That’s why household income isn’t increasing and consumption remains weak,” said Taro Saito, senior economist at NLI Research Institute.

“It’s quite difficult to generate a positive economic cycle just by applying political pressure on companies.” The jobless rate fell to 3.1% in October from 3.4% in September, hitting the lowest level since 1995, government data showed on Friday. Household spending fell 2.4% in October from a year earlier, against market forecasts for a 0.1% rise, and disposable income slid 0.3%, separate data showed. The core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, fell 0.1% in the year to October, matching a median market forecast.

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Abe’s games become more dangerous as time goes by and Abenomics is increasingly exposed as the failure it always was.

• Japan Prime Minister Debuts New Social Programs to Help Economy (WSJ)

Japanese Prime Minister Shinzo Abe said Thursday he would increase spending on social programs and raise the minimum wage as he tries to jump-start the flagging economy ahead of an election next summer. Mr. Abe said the government would give cash handouts to the elderly poor, and build child-care and elder-care facilities to help people enter and stay in the workforce, as part of a stimulus package expected to cost at least ¥3 trillion ($24 billion). Mr. Abe hopes to revive an economy that has slipped into recession for the second time in two years, heightening skepticism about whether Abenomics will ultimately succeed in generating sustainable growth. He announced a “second phase” of the growth program in September, offering few details but pledging to expand the economy by 20% by 2020, a target many economists dismissed as unrealistic.

The measures outlined Thursday, though modest in scope, reflect a new focus for Abenomics, which has been criticized for benefiting mostly big businesses while average Japanese struggle to keep up. Mr. Abe said the theme of the second phase is “inclusion,” while the goal is to help more people contribute to and benefit from economic activity. Kazumasa Oguro, professor of economics at Hosei University, described the package as “not bad as a first step,” but warned that it would take a long time to lift labor-force participation or growth. One of the biggest obstacles to growth has been stagnant wages, something a higher minimum wage is supposed to address. Mr. Abe and the Bank of Japan have urged businesses to share more of their record profits with workers, with limited success.

The government will also give ¥30,000 ($245) in cash to each of the nation’s 10 million elderly poor, whose numbers are on the rise. These people wouldn’t benefit from the push for higher wages but because they are on fixed incomes they suffer when prices rise. To ease a shortage of workers, the government plans to make working easier for people with children or elderly parents who need care. It will build enough public child-care facilities to accommodate more than 500,000 additional children by fiscal 2017 and make more temporary workers eligible for child-care leave. Mr. Abe said the government would also build enough new nursing homes to accommodate 500,000 additional elderly people by the fiscal year 2020, and offer scholarships to those wishing to become certified care givers.

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Rock and a hard place.

• Japan’s Debt Trap Won’t Fix Itself (Bloomberg)

When even Paul Krugman is worried about the national debt, you know you have a problem. The country in question isn’t Greece or the U.S., but Japan. With low unemployment and high labor force participation, Japan has essentially no idle resources. The scope for boosting the economy with fiscal stimulus or easy money is almost nil. But Japan continues to run an enormous budget deficit every year. In 2014, the government had a deficit of 7.7% of gross domestic product, with a primary deficit – which excludes interest payments – of just under 6%. Things are looking somewhat better for 2015. A hike in the consumption tax in 2014 has swelled revenues. Government coffers have also been boosted by increased profits at Japanese companies – which is then subject to the country’s high corporate tax rate.

As a result, the primary deficit is projected to be only about 3.3% in 2015. But 3.3% is still way too high. In the long run, any deficit that stays higher than the rate of nominal GDP growth is unsustainable. Japan’s nominal GDP growth is now about zero. Its long-term potential real GDP growth is no more than 1% (due to shrinking population), and the Bank of Japan has not managed to increase core inflation to the 2% target despite Herculean efforts. Even if interest rates stay at zero forever – allowing the country to eventually refinance all its debt in order to bring interest payments down to zero – borrowing 3.3% of GDP every year is just too much. And if interest rates rise, deficits would explode. The government, of course, knows this, and has pledged to cut the primary deficit to 1% by 2018 and to zero by 2020.

But its projections rely on unrealistically fast growth assumptions; it would require Japan to expand well above its long-term potential rate. As in the U.S., Japanese administrations are in the habit of over-optimism. The Ministry of Finance, full of sober-minded bureaucrats, projects that under more realistic growth assumptions, the primary deficit will shrink only to 2.2%. Even that improvement would require tax hikes, spending cuts or some combination of the two. A primary deficit of 2.2% would be at the very edge of long-term sustainability. If we assume a 1% real potential growth rate and 1.5% inflation, then a 2.2% deficit will be just barely under the maximum sustainable level of 2.5%. So Japan does have a chance to avoid disaster. But the risk is still high. A growth slowdown, a rise in interest rates or a fall in corporate profitability could easily nudge the government back to excessive debt growth. A secure future will require more serious deficit reduction.

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Saudi’s talk the talk. But there’s palpable uncertainty. And that’s what attracts predators.

• Bad Saudi PR Fuels Riyal Devaluation Talk (Reuters)

“If Saudi cannot resist the gravitational forces created by a persistently strong U.S. dollar and de-pegs the riyal to follow the Russian or Brazilian currencies, oil could collapse to $25 per barrel,” Bank of America Merrill Lynch wrote this week. In fact Riyadh is determined to avoid devaluation at almost any cost, the Gulf bankers said. The resulting market panic and import cost surge would outweigh the benefit to state finances from higher oil revenue after conversion from dollars to riyals. Saudi Arabia imports much of its food, consumer goods and machinery, and their rapid price inflation could stoke political discontent in the event of a devaluation. The state has reserves to support its currency for years to come. With Brent averaging $57.55 a barrel between March and September, the central bank’s foreign assets shrank at an annual rate of $87 billion, leaving it holding $647 billion.

Even if the asset depletion accelerated, it would take several more years to reach $225 billion, or a generous 18 months of import cover – twice the cushion most nations enjoy. Such arithmetic does little to ease market jitters, however, when Saudi officials have yet to explain how they will handle the pressure. Rare public pronouncements have so far been confined to general assurances of economic health, leaving many investors unconvinced. Earlier this month, as dwindling oil receipts drove interbank money rates SAIBOR= to their highest levels since 2009, the central bank governor brushed off what he called a “slight” rise in rates, insisting that banks had liquidity aplenty. Borrowing costs have since risen further.

In a country renowned for government secrecy, reluctance to engage with the markets may have been heightened by leadership changes ushered in with new King Salman’s accession in January. His son, Mohammed bin Salman, has taken over much of the economic policy apparatus just as it grapples with an oil price slump whose extent may have caught officials off-guard. The last serious bout of market speculation on a Saudi devaluation was handled by their predecessors, in 1998. Another reason to keep likely countermeasures under wraps is their political sensitivity. Curbing public sector wages, trimming subsidies and slowing construction projects would hit the lavish welfare policies that have helped maintain Saudi Arabia’s social peace. In a sign of their delicacy, Oil Minister Ali al-Naimi has toned down comments last month that domestic energy prices may have to rise.

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Pointless.

• EU Warns 12 Eurozone Nations Including Germany Over Imbalances (Bloomberg)

The European Commission flagged up potential economic troubles in 12 of the 19 euro-zone countries, from the export powerhouse Germany to the perpetually debt-ridden Italy. The commission said on Thursday that it will have a closer look at imbalances in those countries, under a monitoring policy introduced at the height of the euro debt crisis. In a repeat of criticism from last year, export-oriented Germany was faulted for a high trade surplus that leaves it vulnerable to an economic slowdown elsewhere. “The very large and increasing external surplus and strong reliance on external demand expose growth risks and underlines the need for continued rebalancing toward domestic sources,” the commission said.

Overall, the commission said it will conduct further analysis of Germany, France, Italy, Ireland, the Netherlands, Portugal, Spain, Belgium, Slovenia and Finland; it added Austria and Estonia to the list. Six countries not using the euro – Britain, Sweden, Romania, Bulgaria, Croatia and Hungary – also face renewed monitoring Findings will be published in February. Governments that ignore repeated warnings face financial penalties, though none have been imposed since the imbalances system was set up in 2011.

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President lost.

• Portugal’s Anti-Austerity Left Take Power In Watershed Moment For Euro (AEP)

Portugal’s anti-austerity Left has taken power with the support of Communists and radical forces after eight weeks of bitter wrangling, breaking Germany’s grip on economic policy and setting the scene for a bruising fight with Brussels on budget plans. The triumph of the triple-Left alliance under Socialist leadership is a historic moment for the country and implies a sweeping reversal of austerity cuts imposed by the now-departed EU-IMF Troika. President Anibal Cavaco Silva warned the Socialists that he will sack the government if it violates eurozone deficit rules and the Fiscal Compact, or endangers the “external credibility” of the country. “It is an illusion to think that Portugal can dispense with the institutions and creditors,” he said. Yet his rhetoric cannot disguise the fact that an establishment centre-Left party has, for the first time, defied the prevailing ideology in the eurozone.

The Germans can no longer count on Lisbon to make the austerity case for them, and to provide political cover. “They have lost their best ally for fiscal discipline,” said Ricardo Amaro, from Oxford Economics. Portugal’s revolt is not a replay of the Syriza saga in Greece. The country escaped Troika tutelage last year, and is not dependent on money from the eurozone rescue fund (EMS). “We have no leverage,” said one EU official. The pro-European Socialist leader, Antonio Costa, has gone out of his way to reassure bankers and business leaders that he will avoid the sort of showdown that brought Greece to its knees. Yields on Portugal’s 10-year bonds have settled down to 2.33pc since spiking earlier this month – though this could change when the Europe Central Bank stops buying its bonds under quantitative easing.

The new finance minister is Mario Centeno, a Harvard-trained labour economist with “Blairite” leanings, deemed to be a cautious team-player. “He is not another Yanis Varoufakis,” said Rui Tavares, a Portuguese commentator. Yet the picture remains chaotic and fraught with danger. The Socialists are to rule by minority, with no encompassing coalition agreement. The Communists and the Left Bloc reserve the right to dissent, and have made it clear that they will do so. “It could break over Syria, or TTIP (trade deal), or anything,” said Mr Tavares. Mr Cavaco initially deemed the triple-Left grouping too dangerous for power, warning that there could be no government in Portugal that relied on parties opposed to the euro, the Fiscal Compact or Nato. He reappointed a Right-wing minority government even though it had lost its parliamentary majority, and openly urged rebel Socialists to switch sides.

This gambit failed. The Left held rock solid. He has been forced to back down. The issues of euro membership, debt restructuring and Nato have been finessed but have not gone away. While the Socialists vow to abide by eurozone budget rules, their policies are incompatible with the Fiscal Compact and go against the grain of market reforms. They will reverse wage cuts and a pension freeze for state workers. The minimum wage will be lifted to €600 a month, plus two months’ bonus. Electricity will be subsidized for poor families. VAT be will cut for restaurants. They will halt privatization of the water group EGF and the airline TAP, and suspend plans to open transport in Lisbon and Oporto to private competition.

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Every carmaker is included.

• VW’s Emissions Scandal Exposes Far Deeper Problems In Europe (Bloomberg)

The Volkswagen diesel emissions scandal might have started in the U.S., but it’s becoming clear that the controversy has opened far deeper wounds in Europe. Though the European Union is known for its strict vehicle carbon dioxide emissions standards, the Volkswagen ordeal – which centers around nitrogen oxides (NOx), a hazardous type of diesel pollutant – has revealed profound weaknesses in the EU’s entire regulatory system. With millions of diesel vehicles on the road across Europe, the stakes are high – and environmental groups are anxious not to let this scandal go to waste. Leading the charge against what he calls major weaknesses in regulation is Axel Friedrich, a chemist and activist who has spent the last 35 years agitating for cleaner auto emissions.

Friedrich, with help from environmental group Deutsche Umwelthilfe (DUH), says the NOx emissions testing scandal extends well beyond VW. Vehicles from General Motors’s European division Opel and French automaker Renault have been tested under his guidance and found wanting: Opel’s Zafira 1.6 CDTi emitted up to 17 times the legally allowed levels of NOx in DUH tests, and Renault’s Espace 1.6 dCi exceeded the Euro 6 level by as much as 25 times. Friedrich argues that these results – along with those from a number of other automakers that he says DUH will reveal in the coming weeks – is mounting proof that VW’s scandal is just the tip of a massive iceberg. Behind Europe’s reputation for strict environmental regulation, he argues, lies a broken system.

And the damage he is trying to head off is not distant and only potentially controversial, as so many emissions issues are. Rather, NOx is a carcinogen whose concentrations in Europe’s urban centers are not dropping as fast as official emissions. “People need to understand that this is not a game,” he told me. “People are dying.” And yet the automakers that are failing Friedrich’s tests are playing legal gymnastics to defend themselves. Opel and Renault – just as VW initially did – say DUH’s testing methods deviate from official procedure and that, when “properly” tested, their vehicles meet all relevant regulations.

But this defense actually makes Friedrich and DUH’s point for them: Official test procedures are so specific that automakers can program their vehicles in myriad ways to recognize testing conditions and perform better in the tests than they do in the real world. The fact that NOx emissions rise above legal levels as soon as official testing conditions are abandoned shows that automakers essentially teach to the test, making emissions monitoring tools nearly irrelevant. By focusing on a merely legal approach to compliance, Friedrich says, regulators and automakers alike are hiding the problem of real-world NOx emissions from the public, whose health it directly affects.

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Incredible that some people still deny Sydney’s in a bubble.

• ‘Classic Ponzi Scheme’: Sydney House Prices Are 12 Times The Annual Income (SMH)

Sydney houses now cost 12 times the annual income, up from four times when Gough Whitlam was dismissed. As many first time buyers turn to the bank of mum and dad to top up their deposits, a new report “Parental guidance not recommended” warns Australians are being caught up in a classic “Ponzi scheme”. The report by economic consultancy LF Economics – which has previously sensationally warned of a “bloodbath” when Sydney’s property bubble bursts – estimates it will now take the average first time buyer in Sydney nine years to save a deposit, up from three years in 1975. Baby boomers, who have benefited from skyrocketing prices, are increasingly able to fast track their children’s path to property ownership by either stumping up part of the deposit or putting up their own homes as collateral.

LF Economics, founded by Lindsay David and Philip Soos, warns this may be helping a new generation to over-leverage into mortgages they can’t afford, leaving their parents’ homes exposed. “Unfortunately, this loan guarantee strategy in a rising housing market for securing ever-larger amounts of debt is essentially pyramid or Ponzi finance. This leaves many parents in a dangerous predicament should their children experience difficulties making loan payments, let alone defaulting and suffering foreclosure.” “In reality, many parents – the Baby Boomer cohort – are asset-rich but income-poor. The blunt fact is few parents have enough savings and other liquid assets on hand to meet their legal obligations without selling their home if their children default,” the report warns.

Property experts disagree furiously about whether prices are in a bubble and about the best measure of housing affordability. LF Economics argues that price gains have outstripped the fundamental worth of properties. “Financial regulators have ignored the Ponzi lending practices by lenders, believing the RBA will have the adequate ability to bail them out at taxpayers’ expense the day this classic Ponzi lending scheme breaks down.”

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Wonderful.

• Biggest Overhaul Of Chinese Armed Forces In Six Decades (Bloomberg)

President Xi Jinping announced a major overhaul of China’s military to make the world’s largest army more combat ready and better equipped to project force beyond the country’s borders. Under the reorganization, all branches of the armed forces would come under a joint military command, Xi told a meeting of military officials in Beijing, the official Xinhua News Agency reported. Bloomberg in September reported details of the plan, which may also seek to consolidate the country’s seven military regions to as few as four. The Chinese president said the reform aimed to “build an elite combat force” and called on the officials to make “breakthroughs” on establishing the joint command by 2020, Xinhua said. Xi announced the changes at the end of a three-day meeting attended by about 200 top military officials, Xinhua said.

Xi, who also became chairman of the Central Military Commission upon taking power in 2012, is directly managing the overhaul. He made a public display of his commitment to the reforms when he announced that the People’s Liberation Army would shed 300,000 troops at a September military parade in Beijing to mark the 70th anniversary of Japan’s defeat in World War II. “This is the biggest military overhaul since the 1950s,” said Yue Gang, a retired colonel in the PLA’s General Staff Department. “The reform shakes the very foundations of China’s Soviet Union-style military system and transferring to a U.S. style joint command structure will transform China’s PLA into a specialized armed force that could pack more of a punch in the world.”

Under Xi, China has been more assertive over territorial claims in the East China Sea and South China Sea, raising tensions with neighbors such as Japan and the Philippines, as well as the U.S. Xi’s policy marks a shift from China’s previous approach of keeping a low profile and not attracting attention on the world stage, a philosophy laid out by former paramount leader Deng Xiaoping. “The reform enhanced the power of the Central Military Commission and its chairman,” Yue said. “This is also a lesson learned from last generation of military leaders, as the former CMC chairman had little real power over the armed forces.”

The plan also seeks to strengthen the Communist Party’s grip on the military. The army was urged to strictly follow the Party’s orders, and the plan called for enhancing the military leadership of the Party, Xinhua said. Xi also said the PLA would build a new disciplinary structure and a new legal and political committee to make sure the army is under the rule of law. Xi has also made the military one of the targets of his anti-corruption campaign as he consolidates his power over the PLA. Two former CMC vice-chairman were both expelled from the party since Xi took power in 2012, as were dozens of generals accused of everything from embezzling public funds to selling ranks.

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The exact opposite of what Erdogan wants.

• Hollande, Putin Propose Closing Turkey-Syria Border (AFP)

Russia vowed Thursday to cooperate in the fight against terrorism as French President Francois Hollande began the last leg of a diplomatic bid to step up efforts to crush the Islamic State group. Sitting down to talks with Hollande at the Kremlin, Russian President Vladimir Putin pointed to the November 13 assaults in Paris which 130 people were killed, and the IS-claimed bombing of a Russian jetliner over Egypt on October 31, with the loss of all 224 people onboard. These “make us unite our efforts against the common evil,” Putin said. “We are ready for this cooperation.” Hollande, pitching a message he had taken to other major capitals with varying degrees of success, said, “We have to form this large coalition together to strike against terrorism.” Moscow was the last stage of a whirlwind campaign by Hollande to intensify efforts to crush IS in Iraq and Syria.

[..] Hollande’s diplomatic foray suffered a heavy blow after Turkey shot down a Russian jet on Tuesday. Turkey’s military said the following day it did not know the jet was Russian but Moscow called the incident a “planned provocation”. The sole surviving pilot said he received no warning and the aircraft did not violate Turkish air space, but the Turkish military released audio recordings claiming to show the Russian jet was repeatedly warned to change course. “We still have not heard any articulate apologies from Turkey’s highest political level nor any proposals to compensate for the harm and damage,” Putin told Russian TV on Thursday. The Turkish foreign minister vowed that Ankara would not apologise for downing the plane, while Moscow said it was preparing a raft of retaliatory economic measures.

Moscow has intensified its strikes in Syria after IS claimed it brought down a Russian passenger plane over the Sinai. Ankara and Moscow have backed opposing forces in the four-year Syrian conflict, with Turkey supporting rebel groups opposed to President Bashar al-Assad, while Russia is one of his last remaining allies. Russian Foreign Minister Sergei Lavrov welcomed a proposal by Hollande to close off the Syria-Turkey border, considered the main crossing point for foreign fighters seeking to join IS. “I think this is a good proposal and… President Hollande will talk to us in greater detail about it. We would be ready to seriously consider the necessary measures for this,” Lavrov said.

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Russia will not forgive.

• Russia Raiding Turkish Firms And Sending Imports Back (Al Jazeera)

Russian police have been raiding Turkish companies in different regions of Russia and, in some cases, have suspended their operations, two Turkish businessmen with investments in the country have told Al Jazeera. Moscow has also started sending back Turkish trucks loaded with exports at the border and stopped Turkish tourists – who normally do not need visas – entering the country, at least two businessmen said. Turkish companies in Russia, particularly construction companies, are being raided. Moscow’s move comes after Turkish fighter jets shot down a Russian Sukhoi Su-24 warplane on Tuesday for allegedly violating Turkish airspace. The two sides, who are at odds over the Syrian crisis, have opposite claims over whether the airspace breach is true or not.

“Turkish companies in Russia, particularly construction companies, are being raided,” a Turkish executive with a manufacturing company active in Russia told Al Jazeera, on condition of anonymity. “They check if anyone with expired or no working visas is actively working in these companies or not. They check if working regulations were implemented or not. “There have been serious breaches in this area within construction companies and Russian authorities know it. Activities of some companies have been frozen on these grounds.” Cevdet Seylan, a businessman with trade relations in the city of Kazan, also confirmed that police had been raiding Turkish companies there. Osman Bagdatlioglu, the chairman of Turkey’s Ornamental Plants and Products Exporters Union, said that several trucks loaded with flowers returned back to Turkey on Wednesday after Russian authorities blocked their entry into the country.

“Six trucks came back yesterday. We stopped all deliveries. We stopped deliveries by planes as well,” Bagdatlioglu told Al Jazeera. [..] Meanwhile, several Turkish citizens confirmed to Al Jazeera that Russia was sending back Turkish tourists trying to enter the country by finding “excuses” and was delaying entry of Turks with work or residence permit. Turkish and Russian tourists have been able to travel between the two countries without a visa since 2011, following an agreement signed between the two countries.

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Fast track into the EU, anyone?

• Turkish Journalists Charged Over Claim Secret Services Armed Syrian Rebels (AFP)

A court in Istanbul has charged two journalists from the opposition Cumhuriyet newspaper with spying after they alleged Turkey’s secret services had sent arms to Islamist rebels in Syria. Can Dundar, the editor-in-chief, and Erdem Gul, the paper’s Ankara bureau chief, are accused of spying and ‘divulging state secrets’, Turkish media reported. Both men were placed in pre-trial detention. According to Cumhuriyet, Turkish security forces in January 2014 intercepted a convoy of trucks near the Syrian border and discovered boxes of what the daily described as weapons and ammunition to be sent to rebels fighting against Syrian president Bashar al-Assad. It linked the seized trucks to the Turkish national intelligence organisation (MIT).

The revelations, published in May, caused a political storm in Turkey, and enraged president Recep Tayyip Erdogan who vowed Dundar would pay a ‘heavy price’. He personally filed a criminal complaint against Dundar, 54, demanding he serve multiple life sentences. Turkey has vehemently denied aiding Islamist rebels in Syria, such as the Islamic State group, although it wants to see Assad toppled. “Don’t worry, this ruling is nothing but a badge of honour to us”, Dundar told reporters and civil society representatives at the court before he was taken into custody. Reporters Without Borders had earlier on Thursday urged the judge hearing the case to dismiss the charges against the pair, condemning the trial as political persecution .

The Cumhuriyet daily was awarded the media watchdog s 2015 Press Freedom Prize just last week, with Dundar travelling to Strasbourg to receive the award. “If these two journalists are imprisoned, it will be additional evidence that the Turkish authorities are ready to use methods worthy of a bygone age in order to suppress independent journalism in Turkey”, said RSF secretary general Christophe Deloire in a statement. Reporters Without Borders ranked Turkey 149th out of 180 in its 2015 press freedom index last month, warning of a dangerous surge in censorship .

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Rome fell because it didn’t protect its borders? Really?! Oh well, what do your voters know, right? Protect from whom, though? Barbarians? Is that what you now want to compare Syrian refugees to?

• Refugee Influx Threatens Fall Of EU, Warns Dutch PM (FT)

The EU risks suffering the same fate as the Roman empire if it does not regain control of its borders and stop the “massive influx” of refugees from the Middle East and central Asia, the Dutch prime minister has warned. Mark Rutte, whose government assumes the EU’s rotating presidency in January, said southern EU countries had yet to implement policies agreed to stem the flow, which has exceeded 850,000 arriving by sea so far this year, according to the International Organisation for Migration. Mr Rutte said Greece, where more than 700,000 have landed this year, might have to increase its “reception capacity” to at least 100,000. Athens has so far committed to about half that, insisting that it does not want to become a giant refugee camp.

Hundreds of thousands of refugees have travelled on from Greece and Italy to other EU countries -principally to Germany and Sweden- creating huge administrative and political strains across the union. “As we all know from the Roman empire, big empires go down if the borders are not well-protected”, said Mr Rutte in an interview with a group of international newspapers. “So we really have an imperative that it is handled.” His comments echoed a warning by Jean-Claude Juncker, president of the European Commission, that a breakdown of the EU s 26-country open-border system, known as Schengen, would put the whole union in peril. “We have to safeguard the spirit behind Schengen, Mr Juncker told the European Parliament on Wednesday.

“Yes, the Schengen system is partly comatose. But … a single currency does not exist if Schengen fails. It is one of the pillars of the construction of Europe”. Mr Rutte said the EU needed to act quickly to stem the migrant flow, adding that he was optimistic that Sunday’s summit in Brussels between President Recep Tayyip Erdogan of Turkey and EU leaders would help ease conditions by providing €3bn to improve refugee camps in Turkey and disrupting the “business model” of human smugglers channelling migrants in boats to Greece. “It’s not the case that you will close a deal and then, on Monday, everything is delivered”, he said. “It’s not like you buy a house. But I think, on both sides, we need confidence building.”

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Still plenty to learn: Reuters put this story in its ‘Lifestyle’ section.

• After Uproar, German Town Warms To Refugees Who Took Over Church (Reuters)

When Daniela Handwerk looked out of her window earlier this month and saw the church across the street being emptied out and turned into a refugee shelter, she panicked – and she was not alone. As news of the plan to house 50 refugees in the church and suspend Sunday services spread through this community on the outskirts of Oberhausen, in the Ruhr valley, angry residents pressed church and city officials to reconsider. Some worried about safety, others about real estate values and, at a raucous meeting of locals held in the church shortly before the refugees arrived, one man complained that his new Mercedes might get scratched. But nearly a month on, the uproar, played up at the start in the German media, has died down and residents are beginning to warm to the refugees, including 20 children, who are camped out in the ochre-colored brick church built in the early 20th century.

“Initially, there was fear among the neighbors and I don’t exclude myself,” said Handwerk. “I have two small children and of course I was worried about what was going to happen here.” Now she is part of a local support group that counts roughly 100 volunteers. They teach German, assist with bureaucratic hurdles and play with the refugee children. The Protestant church, surrounded by pointy-roofed stone buildings that were built to house miners, is the first in Germany to have been set aside for refugees since they began streaming into the country by the thousands in late summer. Germany expects about 1 million migrants to arrive this year, far more than any other European country.

German politicians are under intense pressure to stem the flow as local communities complain that they are being overwhelmed. But the story of the church in Oberhausen suggests that Germany’s “Willkommenskultur”, or welcome culture, remains alive and well in some pockets of the country. Local resident Sebastian Possner launched a neighborhood initiative nearly a month ago to protest against the conversion of the church. Now he says his kids are playing with the refugee children and that he’s donated bicycles and toys. “Some of them even manage to greet us in German now,” Possner said. Up to 140 refugees are landing in Oberhausen every week, forcing authorities to come up with new locations to house them. City officials say they had little choice but to use the church.

In early November, workers removed the altar and dozens of chairs, replacing them with metal beds, which are separated by makeshift partitions to give the church’s new residents a semblance of privacy. There was no question of removing the large metal cross that sits in the church, even though many of the new residents are Muslim. One reason for the initial uproar, locals say, was that many of them learned about the plans in the newspaper. “In the beginning, many older members of the parish couldn’t comprehend what was happening to the church they had been going to for so many years, but we’ve come a long way and people now appreciate the importance of Christian charity,” pastor Stefanie Zuechner said.

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Bad weather coming this weekend. Gale force winds and lots of rain.

• Stranded Migrants Try To Storm Into Macedonia, Tear Down Fence (Reuters)

Hundreds of Moroccans, Algerians and Pakistanis tried to storm the border between Greece and Macedonia on Thursday, tearing down part of the barbed wire fence at the crossing and demanding to be allowed to carry on into northern Europe. They were among about 1,500 migrants who have been stranded near Greece’s northern border town of Idomeni after Europe decided to filter migrants, allowing only those fleeing conflict in Syria, Afghanistan and Iraq to cross into the Balkans. Some threw stones at police while others fell to their knees shouting, “We want to go to Germany!” A few ran across into Macedonia but were quickly detained by police. Police in riot gear guarded a gap where migrants had torn down about 30-40 meters of fence, and a Reuters photographer saw riot police armed with assault rifles.

More than 800,000 refugees and migrants from the Middle East, Africa and Asia have arrived in Europe by sea so far this year, most through the Greek islands, seeking a better life in wealthier European countries such as Germany. Balkan countries have clamped down at their borders recently to stem the largely unchecked stream of people, leaving tens of thousands stranded in Macedonia, Serbia and Croatia. The United Nations has condemned the new restrictions on travel based on nationality. So far, only 148 refugees have been relocated from Italy and Greece to other EU countries under a plan for transferring 160,000 agreed by EU leaders in September.

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Debt Rattle November 16 2015

Nov 162015
 
 November 16, 2015  Posted by at 10:34 am Finance Tagged with: , , , , , , , , , ,  10 Responses »


DPC Pine Street below Kearney after the great San Francisco earthquake and fire 1906

• Japan ‘Quintuple Dip’ Recession Delivers A Fresh Blow To Abenomics (Reuters)
• Asia Pacific Shares Fall Sharply On Paris Attacks, Japanese Recession (Guardian)
• Quiet US Ports Spark Slowdown Fears (WSJ)
• Debt Market Distortions Go Global as Nothing Makes Sense Anymore (Bloomberg)
• China’s Currency Path and the Dollar-Debt Time Bomb (WSJ)
• China’s Banks Aren’t Feeling the Love (Bloomberg)
• As China Firms Walk Out On Wall St., Spurned Investors Demand Payback (Reuters)
• What To Do About Debt (Kazul-Wright)
• Greece Misses Bailout Deadline As Talks With Creditors Drag On (Guardian)
• It Is Hard To See How Italy Can Stay In The Eurozone (Münchau)
• Europe’s Youths Yearn to Move as Prosperity Proves Elusive (Bloomberg)
• Merkel Warns Against Drawing Innocent Refugees Into Terror Fight (Bloomberg)
• US States To Turn Away Syrian Refugees (CNBC)
• Brazil Mining Flood Could Devastate Environment For Years (Reuters)
• An Alternative Long Shot (Theo Kitchener)
• Snow Decline, Water Shortage To Hit 2 Billion Living in N. Hemisphere (Reuters)

A Reuters article based one-on-one on Zero Hedge terminology, without proper attribution. Curious. Even nicked the graph.

• Japan ‘Quintuple Dip’ Recession Delivers A Fresh Blow To Abenomics (Reuters)

Japan has slid back into recession for the fifth time in seven years amid uncertainty about the state of the global economy, putting policymakers under growing pressure to deploy new stimulus measures to support a fragile recovery. The world’s third-largest economy shrank an annualised 0.8% in July-September, more than a market forecast for a 0.2% contraction, government data showed on Monday. That followed a revised 0.7% contraction in the previous quarter, fulfilling the technical definition of a recession which is two back-to-back quarterly contractions. It is the fifth time Japan has entered recession since 2008, a so-called “quintuple dip”. The Nikkei share average dipped sharply by at the opening of trade on Monday as the poor figures compounded nervousness on markets in the wake of the Paris terror attacks.

But it recovered to just 1% down at lunchtime on the hope that the news would force policymakers to launch another round of stimulus measures. “The headline was weak, but the market is shifting to expectations for more measures,” said Mitsushige Akino at Ichiyoshi Asset Management. The yen rose slightly, reflecting its safe haven status against the euro. But the outlook for the Japanese economy remains weak. Many analysts expect the economy to grow only moderately in the current quarter as companies remain hesitant to use their record profits for wage rises, underscoring the challenges premier Shinzo Abe faces in pulling the country out of stagnation with his “Abenomics” stimulus policies. The dismal reading may affect debate among politicians and policymakers on how much fiscal spending should be earmarked in a supplementary budget that is expected to be compiled this fiscal year.

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Make that Japan.

• Asia Pacific Shares Fall Sharply On Paris Attacks, Japanese Recession (Guardian)

Stock markets in Asia Pacific have fallen sharply in the wake of the Paris terror attacks and downbeat economic data. Leading the losers was the Nikkei index in Japan which tumbled nearly 1.3% as official figures showed that the country’s economy had entered recession for the fifth time in seven years. The widely tracked CBOE volatility index or “fear gauge” was at its highest level since 2 October and bourses in Australia, South Korea and Hong Kong all saw substantial falls of more than 1% in early trading. In Europe, futures trade pointed to sharp falls in the main markets with the FTSE100 predicted to be down 40 points or around 0.6% at the open and the Dax in Germany down 1%. The French financial markets were due to open as usual on Monday, with extra security measures taken for staff, stock and derivatives, the Euronext exchange said.

The CAC40 French bourse was set to open 2% lower on Monday. With concerns about how European leaders would respond to the Paris attacks, the euro was sold heavily in Asian trading and fell to a six-month low of $1.071. Global security concerns were better news for some commodities, however, as Brent crude oil was up 1% at $44.92 a barrel after shedding 1% on Friday. US crude was up about 0.54% at $40.96 a barrel. Gold added about 0.5% to stand at $1,091.96 an ounce. “Risk aversion is on the rise and we are seeing broad-based U.S. dollar strength across the board and this may continue until the year end as recent economic data has also disappointed,” said Mitul Kotecha, head of Asian FX and rates strategy at Barclays in Singpore.

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World trade is shrinking. Get used to it.

• Quiet US Ports Spark Slowdown Fears (WSJ)

America’s busiest ports are sending a warning about the U.S. economy. For the first time in at least a decade, imports fell in both September and October at each of the three busiest U.S. seaports, according to data from trade researcher Zepol Corp. analyzed by The Wall Street Journal. Combined, imports at the container terminals at the ports of Los Angeles, Long Beach, Calif. and around New York harbor, which handle just over half of the goods entering the country by sea, fell by just over 10% between August and October. The declines came during a stretch from late summer to early fall known in the transportation world as peak shipping season, when cargo volumes typically surge through U.S. ports.

It is a crucial few months for the U.S. economy as well: High import volumes can signal a confident view on the economy among retailers and manufacturers, while fears of a slowdown grow when ports are quiet. Economists are divided as to whether the peak season slump signals a short-term hiccup for the U.S. economy, or marks the start of a sustained period of weakness. Some say the slump is being driven by businesses that have cut back on imports because of a weak economic outlook, which could point to sluggish global growth ahead. Others say it is a side effect of a massive inventory buildup that took place earlier in the year. Despite the weak peak, imports in the first 10 months of the year at the nation’s busiest ports are still up 4% from a year earlier, Zepol data show.

Rather than ordering huge shipments of goods in the late summer and early fall, more businesses are stocking up throughout the year and holding on to inventories for longer. “There was a little bit of overdoing it in the beginning of the year,” said Ethan Harris at Bank of America Merrill Lynch. “Once we adjust to it, I would expect that business picks up again, shipping picks up again, container imports should pick up again.” But the missing peak season has been a major headache for trucking companies, railroads and steamship lines. One large maritime carrier, Singapore’s Neptune Orient Lines, told investors there was “no peak season” in North America as an explanation for a $96 million quarterly loss.

Some of the country’s biggest trucking companies and railroads have recently reported weaker-than-expected earnings. Many have cut the rates they charge customers as demand sagged during what is usually their strongest months. For trucking companies in particular the turnabout has been abrupt, with some companies pivoting from expressing concerns about tight capacity to worries about future profits in the space of a few weeks. Whether it proves a temporary drag or not, the inventory unwind has a long way to go. Nationwide, the seasonally adjusted ratio of inventories to sales at U.S. retailers, wholesalers and manufacturers in September was at 1.38, up from 1.31 in September 2014 and the highest reading for that month since 2001, according to the U.S. Census Bureau.

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What central banks produce.

• Debt Market Distortions Go Global as Nothing Makes Sense Anymore (Bloomberg)

Something very strange is happening in the world of fixed income. Across developed markets, the conventional relationship between government debt – long considered the risk-free benchmark – and other assets has been turned upside-down. Nowhere is that more evident than in the U.S., where lending to the government should be far safer than speculating on the direction of interest rates with Wall Street banks. But these days, it’s just the opposite as a growing number of Treasuries yield more than interest-rate swaps. The same phenomenon has emerged in the U.K., while the “swap spread” as it’s known among bond-market types, has shrunk to the smallest on record in Australia.

Part of it simply has to do with the fact that investors are pushing up yields on Treasuries – which guide rates for just about everything – as the Federal Reserve prepares to raise borrowing costs for the first time in a decade. But in many ways, it reflects the unintended consequences of post-crisis rules designed to make the financial system stronger. Those changes have made it cheaper and safer to use derivatives to hedge risk, and more onerous and expensive for bond dealers to make markets in the safest securities. “These kinds of dislocations can be expected to grow over time,” said Aaron Kohli at Bank of Montreal, one of 22 primary dealers that trade directly with the Fed. “The market structure and regulatory structure has evolved in a period with very low volatility. Once you take that away, it’s not clear what the secondary implications of that will be.”

It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. And as the Fed prepares to end its near-zero rate policy, those distortions are coming to the fore. The rate on 30-year swaps, which allow investors, companies and traders to exchange fixed interest rates for those that fluctuate with the market, and vice versa, has been lower then comparable yields on Treasuries for years now as pension funds and insurers increasingly hedged their long-term liabilities. But in the past three months, spreads on shorter-dated contracts have also quickly turned negative. Now, five-year swap rates are 0.05 percentage points lower than similar-maturity Treasuries, while those due in three years are also on the verge of flipping.

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$4.4 trillion added in dollar denominated debt to non-banks outside US. That’s a lot of bankruptcies.

• China’s Currency Path and the Dollar-Debt Time Bomb (WSJ)

Investors betting that China won’t take another run through the bull’s market shop ought to be careful. Things are looking more settled than in August, when a surprise devaluation by China sent paroxysms through global markets. Stocks in developed countries have mostly recovered, even as investors contend with the likelihood the Federal Reserve will raise rates. One possible reason for the calm is that investors may have reckoned that China, having backed off after witnessing the problems that it unleashed in August, is loath to repeat the experience. Indeed, the value of the yuan has been remarkably stable since the summer’s policy change. But this may have only created a false sense of security among investors. A decision expected later this month from the IMF on whether to include the yuan in its reserve currency basket may have China holding off on any sudden moves.

Once that decision is made, China may feel freer to let the currency fall. If so, it wouldn’t take much to unsettle markets again. This summer’s yuan devaluation was relatively minor, falling by just 3% versus the dollar over three days. Yet it set off fears of a series of competitive devaluations. Other currencies fell against the dollar, and commodity prices came under heavy pressure. One reason that is such a concern: In recent years, there has been a marked increase in dollar-denominated lending outside the U.S., much of it coming through bond issuance rather than banks, and much of it destined for emerging-market borrowers. The Bank for International Settlements estimates that the amount of dollar-denominated credit extended to nonbanks outside the U.S. reached $9.7 trillion in the first quarter this year, from $5.3 trillion at the end of 2007.

For commodity producers straining under dollar debt loads, like Brazil, the pain can be acute. The MSCI Emerging Markets Index, which had already been under pressure this summer, fell by 13% in two weeks after China’s move. It has since gained back much of that lost ground. So what happens next? The “X” factor is Chinese capital flows. Part of the reason China blinked in August is that the move triggered a large outflow of cash. This is inherently destabilizing because it undermines the ability of China’s central bank to keep the financial system liquid. For years, China relied on inflows to boost money supply. When money is flowing out, banks starve for cash.

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I said the other day that it’s trnage to include state owned banks in these ‘exercises’.

• China’s Banks Aren’t Feeling the Love (Bloomberg)

China’s biggest banks aren’t happy about being included in international rules that require them to raise extra capital to protect taxpayers in the event of a renewed bout of financial turmoil. It’s hard not to sympathize.China, after all, wasn’t responsible for the global financial crisis. Unlike in the U.S. or Europe, not a single bank collapsed. The country sailed through the upheaval largely unscathed, cushioned by a record $586 billion stimulus plan.Seven years after the collapse of Lehman, the total loss-absorbing capacity, or TLAC, rule is all about the tender loving care of the general public. The idea is that by making banks sell bonds that are explicitly exposed to losses, a lender that fails can be wound down and recapitalized without the government having to resort to taxpayer-funded bailouts.

Here again, China has cause for complaint. The TLAC rule is designed for a world in which systemically important banks, and the bond investors who funded them, could engage in risky behavior without having to bear the consequences. A world of moral hazard, in other words. Creditors of a bank were implicitly relying on the state to back them up and therefore didn’t pay much attention to what the institutions were doing, as Mark Carney, head of the Financial Stability Board, which designed the rule, noted last week. Governments poured hundreds of billions of dollars into banks after the 2008 crisis: Much of that went to rescue bondholders, whose claims were equal to those of depositors.

But China doesn’t work like that. All the biggest and most systemically important banks in China are controlled by the state, so the country isn’t exposed to the kind of moral hazard that laid waste to public finances in the U.S. and Europe. And Chinese taxpayers will ultimately remain on the hook for anything major that goes wrong with those banks, with or without a TLAC rule. The FSB included China’s four biggest lenders on its list of the world’s too-big-to-fail institutions: Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China. They lobbied hard to be excluded, using various reasons in their submissions, including the fact that customer deposits account for a large proportion of total liabilities, making for a lower liquidity risk than for banks whose focus is primarily on wholesale funding.

There are practical as well as philosophical objections. To meet the board’s requirements, Chinese banks may have to sell as much as 4.4 trillion yuan ($690 billion) of securities, according to ICBC’s estimates. That’s going to be a challenge, to put it mildly, in a bond market with a total size of about $5.2 trillion. China’s bond market has been growing, though it remains equal to only about half the size of the country’s $10.4 trillion economy. The U.S. bond market, by contrast, is about one and a half times the size of the economy. What’s worse, the biggest players in China’s bond market are…Chinese banks. Since lenders aren’t allowed to buy each others’ bonds for TLAC purposes (for obvious reasons), that means the effective size of the bond market is even smaller.

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China firms want to get back to ther own casino. More gambling going on.

• As China Firms Walk Out On Wall St., Spurned Investors Demand Payback (Reuters)

Chinese firms listed in New York are finding out the hard way that it’s easier to love global investors than leave them. As dozens plan buyouts and a return home in search of higher valuations, companies that were once Wall Street’s darlings for the first time face the wrath of minority shareholders. Asset managers are publicly demanding better premiums, reflecting historical valuations and not 2015’s slide. In deals collectively worth $40 billion, some 33 mainland China companies have unveiled plans this year to be taken private and delisted from the Unites States, according to Thomson Reuters data. But a cottage industry of hedge funds and lawyers is coalescing around those determined not to accept low-ball bids for their assets.

“We want to put as much pressure as possible,” said portfolio manager Lin Yang at FM Capital, a Britain-based hedge fund backed by the Libyan sovereign wealth fund that owns 1.4% of medical firm China Cord Blood. FM Capital is urging a group of mainland China investors to raise a buyout offer, saying the shares are worth 2.5 times the proposed bid. “If no shareholder challenges the offer, it will go through on the cheap,” said Lin. Peaking at a valuation of $615 million in August this year, China Cord Blood’s market capitalization has shrunk to just over $500 million; the bid was made in late April, valuing the target at $512 million.

There’s no deadline for the China Cord Blood buyout offer is and it’s unclear what the outcome will be; the company didn’t respond to email seeking comment. But minority investors have scored notable successes this year: In one case, Chinese investment firm Vast Profit Holdings raised by 34% a March buyout offer that initially valued dating service Jianyuan.com at $178.9 million after pressure from U.S. asset manager Heng Ren Investments and others.

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“Global debt has grown some $57 trillion since the collapse of Lehman Brothers in 2008, reaching a back-breaking $199 trillion in 2014..”

• What To Do About Debt (Kazul-Wright)

Over the last few months, a great deal of attention has been devoted to financial-market volatility. But as frightening as the ups and downs of stock prices can be, they are mere froth on the waves compared to the real threat to the global economy: the enormous tsunami of debt bearing down on households, businesses, banks, and governments. If the US Federal Reserve follows through on raising interest rates at the end of this year, as has been suggested, the global economy – and especially emerging markets – could be in serious trouble. Global debt has grown some $57 trillion since the collapse of Lehman Brothers in 2008, reaching a back-breaking $199 trillion in 2014, more than 2.5 times global GDP, according to the McKinsey Global Institute.

Servicing these debts will most likely become increasingly difficult over the coming years, especially if growth continues to stagnate, interest rates begin to rise, export opportunities remain subdued, and the collapse in commodity prices persists. Much of the concern about debt has been focused on the potential for defaults in the eurozone. But heavily indebted companies in emerging markets may be an even greater danger. Corporate debt in the developing world is estimated to have reached more than $18 trillion dollars, with as much as $2 trillion of it in foreign currencies. The risk is that – as in Latin America in the 1980s and Asia in the 1990s – private-sector defaults will infect public-sector balance sheets. That possibility is, if anything, greater today than it has been in the past.

Increasingly open financial markets allow foreign banks and asset managers to dump debts rapidly, often for reasons that have little to do with economic fundamentals. When accompanied by currency depreciation, the results can be brutal – as Ukraine is learning the hard way. In such cases, private losses inevitably become a costly public concern, with market jitters rapidly spreading across borders as governments bail out creditors in order to prevent economic collapse. It is important to note that indebted governments are both more and less vulnerable than private debtors. Sovereign borrowers cannot seek the protection of bankruptcy laws to delay and restructure payments; at the same time, their creditors cannot seize non-commercial public assets in compensation for unpaid debts. When a government is unable to pay, the only solution is direct negotiations. But the existing system of debt restructuring is inefficient, fragmented, and unfair.

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“Greek banks have been weighed down by a mountain of bad loans with lenders claiming that many are the result of strategic defaulters..”

• Greece Misses Bailout Deadline As Talks With Creditors Drag On (Guardian)

The deadline to dispense further rescue loans to debt stricken Greece was extended by eurozone countries once again on Sunday amid continuing deadlock between Athens and its creditors. With negotiations still bogged down over failure to agree on a new foreclosure law – legislation the leftist-led government says would push austerity-hit Greeks over the edge – lenders postponed a critical Eurogroup Working Group until Tuesday. The meeting, a final assessment of the reform progress Athens has made since it signed up to a third bailout in July, is crucial to unlocking €2bn in rescue loans and €10bn for the recapitalisation of Greek banks. Finance ministers gathered in Brussels last week had insisted talks should be concluded by Monday, to trigger the release of the next instalment of the €86bn euro bailout programme.

But announcing the delay, Jeroen Dijsselbloem who chairs the Eurogroup of euro area finance ministers, also heaped praise on Greece saying headway had been made. “I welcome that good progress has been made between the Greek authorities and the institutions in the discussions on the measures included in the first set of milestones,” the Dutch politician said in a statement Sunday. “Agreement has been reached on many issues.” The Eurogroup Working Group sets the tone for decisions taken by finance ministers representing EU member states in the single currency. Talks were meant to have been completed by mid-October but have repeatedly stalled on the issue of how much protection local home-owners should be given in the event of defaulting on mortgages. Greek banks have been weighed down by a mountain of bad loans with lenders claiming that many are the result of strategic defaulters deliberately failing to keep up with payments.

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“From next year EU “bail-in” rules take effect. Then the Italian government will no longer simply be able to bail out banks but will have to make bondholders and depositors pay up first.”

• It Is Hard To See How Italy Can Stay In The Eurozone (Münchau)

Yoram Gutgeld last week made one of the most astonishing economic statements I have heard in a long time. The adviser to PM Matteo Renzi said in an interview that Italy’s economy was immune to global developments for the next 12 to 24 months because of the tax cuts and reforms of the present administration. The idea that a G7 club of rich nations is immune to the global economy is ludicrous. This is the 21st century. Granted, Mr Gutgeld may have spoken as the prime minister’s spin-doctor. That is part of his job. But what worries me is that the Italian government is not ready for when the impact of the slowdown in China and emerging markets hits Europe. Friday’s preliminary figures for eurozone GDP show that the slowdown has started. Italy’s quarter-on-quarter growth rates have been falling: from 0.4% in the first quarter to 0.3% in the second to 0.2% in the third.

Italy’s ability to sustain a healthy rate of growth is critical — for the country’s political stability, for its young people with no hope of finding work, for debt sustainability and in particular for its future in the eurozone. The euro has brought Italy nothing but stagnation. Real GDP is now at the same level as at the start of 2000, a year after the euro was launched. GDP today is 9% below the pre-crisis level in early 2008. If Italy fails to bounce back strongly from this recession, it is hard to see how it can stay in the eurozone. At some point it might well be in the country’s undisputed economic self-interest to leave and devalue. So when we ask whether the economic recovery is sustainable, we are not having a technical dialogue about economics. We are talking about Italy’s future in Europe.

There are three reasons why I am sceptical. The first is evident in last Friday’s GDP data. Italy is not exceptional. The second reason is the lack of restructuring of Italian banks. The stock of non-performing loans as a percentage of all loans is about 10%, which is close to the peak level in the current cycle. Many of the small and medium-sized banks are in effect insolvent. The clean-up of the banking system — following the 2008 crisis and the two subsequent recessions — has yet to happen. If it does, it will take place in a much tougher regulatory environment. From next year EU “bail-in” rules take effect. Then the Italian government will no longer simply be able to bail out banks but will have to make bondholders and depositors pay up first.

Can we be sure the rotten banks will continue to sustain the recovery in this environment? My third concern is Mr Renzi’s fiscal policy choices. His priority has been to ensure that these create more winners than losers. This is exactly what Silvio Berlusconi did when prime minister. And it should come as no surprise that Mr Renzi ends up with similar policies. Instead of reforming the public administration or the judiciary, he has opted for a cut in the housing tax. This will win votes but will not deliver the change to the economy. We have been here before.

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As I wrote last week, it’s the convergence of refugees and a depressed economy that will define Europe going forward.

• Europe’s Youths Yearn to Move as Prosperity Proves Elusive (Bloomberg)

An unprecedented number of migrants from Asia, Africa and the Middle East have headed for Europe this year in their quest for safety and prosperity. Yet for almost a quarter of its youths, the continent is no wonderland. On average, 23% of Europeans aged between 18 and 24 years old are contemplating moving to another country to escape the financial situation at home, according to a report by Intrum Justitia, Europe’s biggest debt collector. “What our survey shows is that many young people in several parts of Europe are considering moving to other countries and that is sad since it indicates that many young people lack hope for their economic future,” Erik Forsberg, Intrum Justitia’s acting CEO, said in the report. Still, the refugees who are escaping violent conflicts and coming to Europe “is another, much more acute problem,” he said.

What’s perhaps no coincidence, some of the highest percentages in the survey involve countries that have been the least welcoming of refugees. Hungary, which built a razor-wire fence along its southern border to keep them out, topped the survey with 60% of its young people considering a move. Poland and Slovakia, both unhappy with redistributing refugees across the EU, followed with 41% and 40%, respectively. The percentage of those considering a move abroad was also well above 30% in Italy, Portugal and Greece, according to the company’s European Consumer Payment Report, which surveyed 22,400 people in 21 countries. Those numbers correlate closely with national youth unemployment rates.

They underscore the quandary facing many EU nations – particularly those still grappling with the fallout from Europe’s debt crisis – when it comes to dealing with the hundreds of thousands of asylum seekers arriving from Syria and other war zones in the Middle East. Some of their governments tend to justify their reluctance to welcome refugees by arguing that they already have enough to cope with trying to provide for their own citizens. At about 21%, the average unemployment rate for Europeans under age 25 is double the overall jobless rate for the 28-member bloc. While 67% of those surveyed said they had “a reasonable chance of substantially improving their economic situation in life,” 17% see no prospect of a better life. One in five of those polled expect their children to be worse off financially.

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“We all know that time is running out to return hope to the millions of refugees..”

• Merkel Warns Against Drawing Innocent Refugees Into Terror Fight (Bloomberg)

German Chancellor Angela Merkel pushed back against critics of her open-door policy on refugees, saying those fleeing war zones shouldn’t have to bear the blame for the terrorist attacks in Paris. Merkel’s comments during a Group of 20 summit in the Turkish coastal resort of Antalya Sunday were a rebuff to domestic opponents who cited the slaughter in the French capital as evidence that the chancellor must reverse her stance and turn people away. A statement by the Greek authorities that raised the possibility one of the assailants may have entered Europe posing as a refugee raised the pressure on Merkel still further. She hit back in her only public comments on the first day of the two-day summit of world leaders that’s taking place in the shadow of the Paris attacks.

Merkel called for a swift investigation into the motives behind the terrorist carnage to “find out who the perpetrators were, who’s behind them and what connections there were.” “We owe it to the victims and their relatives, but also for the sake of our own security,” Merkel told reporters. “And we owe it to all the innocent refugees who are fleeing from war and terrorism.” Merkel said she’d discuss efforts to resolve the Syrian conflict with Russian President Vladimir Putin late Sunday, then again in a one-on-one meeting with U.S. President Barack Obama on Monday, as she steps up her international diplomacy aimed at stemming the flow of refugees to Europe.

In Germany, some among her political allies stoked further tension over the projected arrival of some one million refugees this year alone. Friday night’s attack in Paris “changes everything,” Markus Soeder, a member of the Bavarian state government, said in a Twitter post. Merkel said that G-20 leaders, who will release a statement Monday on fighting the terrorist threat, were sending a “decisive signal” that all forms of terrorism will be defeated. A key element is resolving the war in Syria peacefully and as soon as possible, she said. “We all know that time is running out to return hope to the millions of refugees,” Merkel said. “It’s also completely clear – and that’s borne out by the discussions here – that we have to tackle the root cause of where the refugees are coming from.”

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Oops, too late there, Angela. Or: what a few planted passports will get you.

• US States To Turn Away Syrian Refugees (CNBC)

Two U.S. states have said they will not allow the resettlement of Syrian refugees following the terrorist attacks in Paris that killed 129 people on Friday. Alabama Governor Robert Bentley said in a statement Sunday that he would oppose any attempt to relocate Syrian refugees to Alabama through the U.S. Refugee Admissions Program. “The acts of terror committed over the weekend are a tragic reminder to the world that evil exists and takes the form of terrorists who seek to destroy the basic freedoms we will always fight to preserve,” he said in a statement issued Sunday. “I will not place Alabamians at even the slightest, possible risk of an attack on our people.”

There have been no Syrian refugees relocated in Alabama to date, Bentley said, but added that the Alabama Law Enforcement Agency is working with the Federal Bureau of Investigation, Department of Homeland Security and federal intelligence partners to monitor any possible threats. The statement added that law enforcement presence had been increased at big events in Alabama to further insure the safety of citizens. It added that there had been no credible intelligence of any terrorist threats in the state. The news came at the same time as the local media in Detroit reported Michigan state would look to take similar action.

Governor Rick Snyder’s office released a statement Sunday saying it would not be accept any Syrian refugees until the U.S. Department of Homeland Security fully reviewed its procedures, according to the Detroit Free Press. “Michigan is a welcoming state and we are proud of our rich history of immigration,” Snyder said in the statement, according to the news publication. “But our first priority is protecting the safety of our residents.” Kristine Van Noord, a refugee program manager for Bethany Christian Services in Michigan, told a local radio station in October that the organization settled 27 Syrian refugees in the last fiscal year and was expecting the number for next year to be “much, much higher.” President Barack Obama has previously stated that his administration would accept at least 10,000 displaced Syrians over the next year.

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Vale and BHP Billiton. It will take years, too, to conclude any court case against them.

• Brazil Mining Flood Could Devastate Environment For Years (Reuters)

The collapse of two dams at a Brazilian mine has cut off drinking water for quarter of a million people and saturated waterways downstream with dense orange sediment that could wreck the ecosystem for years to come. Nine people were killed, 19 are still listed as missing and 500 people were displaced from their homes when the dams burst at an iron ore mine in southeastern Brazil on Nov. 5. The sheer volume of water disgorged by the dams and laden with mineral waste across nearly 500 km is staggering: 60 million cubic meters, the equivalent of 25,000 Olympic swimming pools or the volume carried by about 187 oil tankers.

President Dilma Rousseff compared the damage to the 2010 oil spill by BP in the Gulf of Mexico and Environment Minister Izabella Teixeira called it an “environmental catastrophe.” Scientists say the sediment, which may contain chemicals used by the mine to reduce iron ore impurities, could alter the course of streams as they harden, reduce oxygen levels in the water and diminish the fertility of riverbanks and farmland where floodwater passed. Samarco Mineração, a joint venture between mining giants Vale and BHP Billiton and owner of the mine, has repeatedly said the mud is not toxic. But biologists and environmental experts disagree. Local authorities have ordered families rescued from the flood to wash thoroughly and dispose of clothes that came in contact with the mud.

“It’s already clear wildlife is being killed by this mud,” said Klemens Laschesfki, professor of geosciences at the Federal University of Minas Gerais. “To say the mud is not a health risk is overly simplistic.” As the heavy mud hardens, Laschesfki says, it will make farming difficult. And so much silt will settle along the bottom of the Rio Doce and the tributaries that carried the mud there that the very course of watershed could change. “Many regions will never be the same,” he says.

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Theo’s a good friend of ours from Melbourne.

• An Alternative Long Shot (Theo Kitchener)

This article is an attempt to chart what might happen in terms of climate change, both in terms of science, and particularly the potential politics, if we see a serious financial collapse followed by further contraction due to peaking energy and resources. Despite this being quite a likely scenario, there is barely anything written on the topic. Peak oilers, often end up thinking that we don’t need to worry about climate change because peak energy will take care of it for us. I think this view is strongly mistaken. While it is true that peak energy leads to less emissions than would otherwise be possible, we still end up in the zone of highly likely runaway climate change, and there will still be much that needs doing on an activist front in order to minimise our risk.

On the other hand, climate change activists are often blind to the possibility of financial collapse or even peak energy collapse. Accordingly, I think their strategies are based on business as usual continuing, which I don’t think is realistic. Climate change activists tend to already know that their hopes to create a mass movement that will convince governments to act, and act enough, are likely to fail, but it’s a long shot worth fighting for if the current context is all you have to go on. What I’m offering below is simply an alternative long shot, one I think is more likely to succeed, considering it is based more on the short term interests of the population rather than long term interests, which are harder to get people active on.

Below is a brief analysis of what financial collapse means for the climate, followed by an analysis of potential political scenarios, and particular detail on what I see as the most likely strategies to create a safe climate. These include a decentralised movement to reduce greenhouse gas concentrations, emphasising a shift to permaculture and appropriate technology, the continuation of the anti-emissions movement, a mass movement mobilising to take what’s left of our industrial capacity out of the hands of elites, and put it into good use drawing down carbon, remediating the planet and providing for our needs. This scenario could definitely be seen as an unlikely long shot; however, considering the situation we find ourselves in, a long shot is much better than no shot.

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That tangled web again..

• Snow Decline, Water Shortage To Hit 2 Billion Living in N. Hemisphere (Reuters)

Large swathes of the northern hemisphere, home to some 2 billion people, could suffer increasing water shortages due to shrinking snowpacks, researchers said on Thursday. Data shows reduced snowpacks – the seasonal accumulation of snow – will likely imperil water supplies by 2060 in regions from California’s farmlands to war-torn areas of the Middle East, according to a team of scientists in the United States and Europe. In total, nearly a hundred water basins dependent on snow across the northern hemisphere run the chance of decline. “Water managers in a lot of places may need to prepare for a world where the snow reservoir no longer exists,” said Justin Mankin, the study’s lead author and a researcher at Columbia University’s Earth Institute in New York, in a statement.

Basins in northern and central California, the Ebro-Duero basin in Portugal, Spain and southern France and the Shatt al-Arab basin affecting much of the Middle East including Iraq and Syria count among those most sensitive to changes, the study shows. In these areas, global warming is disrupting snow accumulation, which acts as a seasonal source of water when it melts, the researchers said. Still, across most of North America, northern Europe, Russia, China and southeast Asia, rainfall is projected to continue meeting demand, according to the study published in the online journal Environmental Research Letters. Earlier this year, amid a devastating drought in California, U.S. authorities reported that a dry, mild winter had left the country’s Western mountain snowpack at record low levels.

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Debt Rattle September 25 2015

Sep 252015
 
 September 25, 2015  Posted by at 8:41 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


DPC Bromfield Street in Boston 1908

• The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)
• Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)
• Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)
• The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)
• Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)
• China Becomes Asia’s Biggest Securitization Market (WSJ)
• Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)
• Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)
• EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)
• German Government Boosts Funding To States For Refugees (Reuters)
• Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)
• ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)
• Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)
• VW Faces Deluge Of UK Legal Claims (Guardian)
• Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)
• German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)
• Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)
• Australia Pays the Price for Depending on China (Bloomberg)
• Time To Dig Deep? Big Miners Face A Big Problem (Guardian)
• US Energy Lending Caught in a Squeeze (WSJ)
• Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

More and more people figure out what I wrote ten days ago: in the end it’s all about credibility, which the Fed is rapidly losing through its (non-)actions.

• The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)

Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions. In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. This sets the stage for any number of absurdly self-referential outcomes. For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself.

But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses.

They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.

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Keeping everyone hanging in suspension eventually will backfire.

• Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)

Federal Reserve chair Janet Yellen has made clear that she expects US interest rates to be raised from their current record low before the end of the year.In an extensive 40-page speech Yellen set out the case for raising rates – for the first since 2006 – as she expects inflation will gradually move up to the Fed’s target rate of 2% as the unusually low oil price rises and strong dollar weakens.“I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective,” she said during a speech in Amherst, Massachusetts, on Thursday.

Her comments come just a week after Fed policymakers voted to keep interest rates at near-zero – where they have been since the 2008 financial crisis – and she warned that the US economy was not yet strong enough to withstand “recent global economic and financial developments” following a worldwide markets slump due to concerns about the health of the Chinese economy. On Thursday Yellen suggested that the current global economic weakness will not be “significant” enough to alter the Fed’s plans to raise its key short-term rate from zero by December. “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal,” Yellen said.

“But I expect that inflation will return to 2% over the next few years as the temporary factors weighing on inflation wane.” Yellen also warned that if rates were kept low it could lead to excessive risk taking. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” she said. “The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.”

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Look out below. America’s benchmark stock is cratering.

• Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)

That machinery and manufacturing giant Caterpillar has suffered its fair share of disappointing sales and earnings in recent years is no secret and yet an announcement it made Thursday morning still proved to be an unpleasant surprise for both its employees and its shareholders. Caterpillar said Thursday that its full-year sales and revenue for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower than 20152 s already-diminished levels. In an attempt to soften this blow to shareholders, the company also announced that it will undergo significant restructuring and cost savings initiatives, an effort that could see as many as 10,000 job cuts over the next three years.

Caterpillar said Thursday that it now expects 2015 revenue to come in around $48 billion, down from the prior forecast of $49 billion. For 2016, it said, sales and revenue are expected to be 5% lower than 2015 levels. The company admitted that this year’s decline in sales is its third consecutive down year for sales and revenues; if this trend continues, 2016 would mark the first time in the company s 90-year history that sales and revenues have decreased four years in a row. In an effort to compensate for these declines and save $1.5 billion annually, Caterpillar also said Thursday that it will undergo “significant restructuring and cost reduction actions” and these actions include a significant number of job cuts. Specifically, as many as 10,000 layoffs by the end of 2018.

The bulk of the cuts will come in the short-term, though: the company said it expects to permanently reduce its salaried and management workforce by 4,000 to 5,000 positions by the end of 2016, with most of those cuts occurring this year. The additional 5,000 to 6,000 cuts could occur as Caterpillar gradually closes and consolidates certain manufacturing facilities over the next three years. “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors. namely in mining and energy”, Doug Oberhelman, Caterpillar chairman and CEO, said in a statement. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”

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That’s a lot of dough going Poof!

• The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)

You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day.

Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world. Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…

#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market.
#2 China – The Shanghai Composite Index has plummeted nearly 40% since hitting a peak earlier this year.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the 2015 peak.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse.
#5 The United Kingdom – British stocks are down about 16% from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18%.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015.
#8 Italy – Watch Italy. Italian stocks are already down 15%, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, a nd analysts are deeply concerned as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list.

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“If you really want to know what is going on in China’s markets, there is no better research method than walking down the street ..”

• Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)

China’s economy is officially growing at 7%, but few economists actually believe that number to be accurate. Mauro Gozzo, chief economist at Business Sweden – an organization jointly owned by the government and the business community – estimates that the real growth of China’s gross domestic product is just 3%.“China is wrestling with serious economic difficulties and our estimates place the actual growth at a much lower rate than the official data,” he said in a new report. “We have often pointed out that the official statistics should be taken with a grain of salt.”According to Gozzo, the slowdown is the result of failed economic policies, which has brought to light the impossibility of combining a market economy with central planning.

For example, the country has seen the real appreciation of the currency during the last two years, which is part of the government’s rebalancing of the economy from exports and investments to private consumption. But it has also weakened the industry.“The rebalancing may have been necessary,” he said. “But dealing with the imbalances between the various sectors of the economy has become a big headache for the Chinese administration.”He added that the devaluation of the yuan in August was not sufficient, and should rather be seen as a signal that China is no longer intent on following the upward movement of the dollar.At the same time, consumption is being held back by factors like a housing bubble, the system of resident permits, and the absence of social support systems.

Although the plunge in the stock market, which has more than wiped out all of the gains of this year, has had limited repercussions on many households, the negative effects on the financial system are hardly negligible, he said. Gozzo also said that China’s official growth of industrial production of around 6% is “strongly exaggerated.” A number of other indicators, like the consumption of electricity, domestic cargo volumes and manufacturing activity, indicate much lower production.“The industry is wrestling with difficulties, but services are doing better and one good reason why the economy as a whole is still growing.”“It is now clear that China is struggling with a number of economic deficiencies and we believe that the actual growth rate is more likely 3%, not 7%,” Gozzo concluded.

Also Oxford Economics, which has used a model based on alternative indicators, estimating the actual growth this year to around 3-4%. New York-based Evercore ISI, which is using its own GDP equivalent index, goes even further and puts the annual growth at -1.1%, or rather a contraction. The high level of uncertainty actually makes many economists say it’s more or less pointless to look at China’s economy data. Matthew Crabbe, author of the book “Myth-busting China’s number”, points out that the country has a century-long history of secrecy and number-fudging and that the top-line GDP figure is “increasingly meaningless” for China. “If you really want to know what is going on in China’s markets, there is no better research method than walking down the street and watching what really goes on”, he said.

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Rocking the Ponzi.

• China Becomes Asia’s Biggest Securitization Market (WSJ)

China’s fledging securitization market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades. In the past few months, Chinese officials have laid out new rules to expand and quicken the process for car makers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015—to $26.3 billion from $20.8 billion in the same period last year, according to data publisher Dealogic. Though the Chinese securitization market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets like South Korea and Japan.

Asset securitization helps free up capital from banks or financing firms to support smaller businesses and projects that typically have less credit available to them. Leading the drive are state-owned and medium-size lenders seeking to unload loans from their books by packaging them into products known as collateralized loan obligations. Such firms account for the bulk of the market—CLO issuance totaled $20.9 billion between January and August, a third more than $15.9 billion over the same period last year. While securities backed by auto loans comprise a smaller piece of the market, issuances from the financing units of car makers including Ford and Volkswagen have increased fivefold to $4 billion from January through August, compared with $1.8 billion over the same period last year.

The State Council, China’s cabinet—which sets the country’s total issuance of asset-backed securities—said in May it would allow companies to issue up to 500 billion yuan ($80 billion) of such securities. That compares with $49 billion in all of 2014. The central bank and the banking regulator also will speed up the process by allowing select borrowers to issue securities after registering with regulators. Previously, each issuance had to be approved on a deal-by-deal basis.

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Lost it. A three-year gross failure leads to: “Tomorrow will definitely be better than today!”

• Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)

Japan’s prime minister Shinzo Abe, fresh from a bruising battle over unpopular military legislation, announced Thursday an updated plan for reviving the world’s third-largest economy, setting a GDP target of 600 trillion yen ($5 trillion). Abe took office in late 2012 promising to end deflation and rev up growth through strong public spending, lavish monetary easing and sweeping reforms to help make the economy more productive and competitive. So far, those “three arrows” of his “Abenomics” plan have fallen short of their targets though share prices and corporate profits have soared. “Tomorrow will definitely be better than today!” Abe declared in a news conference on national television.

“From today Abenomics is entering a new stage. Japan will become a society in which all can participate actively.” Abe recently was re-elected unopposed as head of the ruling Liberal Democratic Party. He has promised to refocus on the economy after enacting security legislation enabling Japan’s military to participate in combat even when the country is not under direct attack. Thousands of Japanese gathered for noisy street protests last weekend over the “collective self-defense” law, and Abe’s popularity ratings took a hit. “He has to deliver the message that he is so committed to achieving the economic agenda, that is, to make people’s lives better,” said analyst Masamichi Adachi of JPMorgan in Tokyo.

Abe said he was determined to ensure that 50 years from now the Japanese population, which is 126 million and falling, has stabilized at 100 million. He said his new “three arrows” would be a strong economy, support for child rearing and improved social security, to lighten the burden of child and elder care for struggling families. But with Japan also committed to reducing its massive public debt, it is unclear how he intends to achieve those goals. “There’s nothing wrong with him saying he wants to achieve a better life for everybody. But how to achieve it is a different matter,” Adachi said.

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Europe is setting itself up for something truly epic.

• Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)

A tide of refugees from the Middle East and Asia showed no sign of abating on Thursday, after European Union leaders began the task of trying to prevent tens of thousands of people fleeing war or poverty from streaming unchecked through the continent. After weeks of recrimination and buck-passing, a summit on Wednesday produced a glimmer of political unity on measures to help the refugees closer to home, or at least register their asylum requests as soon as they enter the EU. However, all attempts in recent weeks to stem the flow have only prompted more desperate people to make a dash for Europe before the doors are shut or winter makes the trip too perilous.

On Thursday, about 1,200 crossed from Turkey to the Greek island of Lesvos on 24 boats in under an hour, following the 2,500 who had made the dangerous crossing the previous day. Weeks ago, most would have found the quickest route into the EU and their preferred destination of Germany was from Serbia into Hungary. But since Hungary took unilateral action by sealing its border with razor-wire, an overwhelmed Serbia has passed the problem to the EU’s newest member, Croatia, which says it also cannot keep pace with the influx. Demanding that Serbia send at least some of the refugees and migrants to Hungary or Romania, Croatia barred all Serbian-registered vehicles from entering. Serbia compared those restrictions to racial laws enforced by a Nazi puppet state in Croatia in WWII.

It blocked Croatian goods and cargo vehicles in the escalating dispute, which has dragged relations between the former Yugoslav republics to their lowest ebb since the overthrow of Serbian strongman Slobodan Milosevic in 2000. Money for middle east. In an attempt to forestall such rows, EU leaders on Wednesday night pledged at least €1 billion for Syrian refugees in the Middle East and closer cooperation to stem the flow of people. The summit also decided that EU-staffed “hotspots” would be set up in Greece and Italy by November to register and fingerprint new arrivals and start the process of relocating Syrians and others likely to win refugee status to other EU states, while deporting those classed as economic migrants.

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All cowards lack vision.

• EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)

Following a bruising fight this week to agree a new quotas regime sharing 120,000 refugees across Europe, EU policymakers say that by Christmas member states will be embroiled in much bigger battles over how to distribute up to a million newcomers. The signals emerging from two days of summitry in Brussels on Tuesday and Wednesday and days of non-stop negotiations behind the scenes suggest that the EU’s biggest refugee crisis is but in its infancy, and that Europe’s agony has barely begun. The meetings of leaders and interior ministers produced breakthrough decisions in EU policy terms, but at the same time they hardly scratched the surface of an emergency whose scale is predicted to balloon by the end of the year.

A Brussels summit that ended early on Thursday began to heal the divisions and cool the tempers that have flared for months over what to do about immigration, fragmenting the union between east and west, north and south, big and small. The leaders did not decide very much but managed to communicate more civilly with one another, unlike in June when they engaged in an unseemly bout of recrimination until 3.30am. The breakthrough came on Tuesday when EU interior ministers employed the blunt instrument of a majority vote to impose refugee quotas against the will of four central European countries and despite the strong reservations of many others and widespread doubts over whether compulsory sharing will work. “We don’t believe it will ever be implemented,” said a senior diplomat in Brussels.

It was a damaging and divisive exercise in which Berlin, Brussels, and Paris prevailed. The European commission, the initiator of the quotas idea, thinks it has set a precedent for future action. But the experience was traumatic for some and the question is will it ever be repeated, especially when the numbers are likely to be much higher the next time. Donald Tusk, the conservative Polish politician and European Council president who chaired the summit, did not convene the emergency session until he had visited the camps holding four million Syrians in Jordan, Lebanon, and Turkey. He seems to have been shocked by what he found. Following the summit he said the “tide” of refugees coming to Europe would get much bigger. He seems certain that almost all of those in the camps are determined to head for the EU and that the refugees have convinced themselves they are welcome.

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Here’s wondering what to think of the entire EU throwing €1 billion at the issue this week, but Germany spending much more than that at home.

• German Government Boosts Funding To States For Refugees (Reuters)

The German government agreed on Thursday to give its 16 regional states around €4 billion next year to help them cope with a record influx of refugees that is straining their budgets and resources. Chancellor Angela Merkel made the announcement after meeting state premiers to discuss ways of helping the states, which are struggling to look after 800,000 asylum seekers expected this year alone. Merkel said the government would pay the states €670 each month for every asylum seeker they took in. Sources from her SPD coalition partner indicated that the package could be worth around €4 billion once extra payments for providing social housing and looking after unaccompanied young refugees were taken into account.

The government had previously pledged to offer the states €3 billion for next year to help cover the additional costs of housing and caring for the refugees and asylum seekers. German public opinion has been divided on the rising numbers of new arrivals, with some warmly welcoming people fleeing conflict in the Middle East and Africa but others concerned about how easily they can be integrated. Merkel told the German parliament earlier on Thursday that the European Union needed the support of the United States, Russia and countries in the Middle East to help tackle the underlying causes of the refugee crisis. Merkel has been criticized by some eastern EU neighbors for what they see as actions that have fueled the influx of people trying to reach Germany.

As well as feeding and housing the newcomers, Germany is also weighing their impact on Europe’s largest economy. Finance Minister Wolfgang Schaeuble said he still aimed to maintain a balanced budget next year. Some lawmakers have questioned whether that will be possible given the rising costs associated with the migrant crisis.

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How much worse could timing get? Has Merkel shifted to “attack is the best defense”?

• Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)

Europe’s dominant country is stepping out from its own shadow. Seventy years after Germany’s defeat at the end of World War II, Chancellor Angela Merkel’s government is signaling a willingness to assume a bigger role in tackling the world’s crises without fear of offending allies like the U.S. Spurred into more international action by the refugee crisis, Merkel on Wednesday prodded Europe to adopt a “more active foreign policy” with greater efforts to end the civil war in Syria, the source of millions fleeing to safety. As well as enlisting the help of Russia, Turkey and Iran, Merkel said that will mean dialogue with Bashar al-Assad, making her the first major western leader to urge talks with the Syrian president.

Germany’s position as Europe’s biggest economy allowed Merkel and her finance minister, Wolfgang Schaeuble, to assume a leading role during the euro-area debt crisis centered on Greece, but the change in focus to beyond Europe’s borders is very much political. After decades of relying on industrial prowess – now under international scrutiny as a result of the Volkswagen scandal – globalization and the necessity to keep Europe relevant are opening up options for Merkel to make Germany a less reluctant hegemon. Syria has spurred “a rethink in German foreign policy,” Magdalena Kirchner at the German Council on Foreign Relations in Berlin, said. “As the refugee crisis developed, the view took hold that this conflict can no longer be fenced off or ignored. With her stance on the crisis, Merkel may be prodding other European leaders toward a bigger international engagement.”

Merkel will address the United Nations General Assembly in New York on Friday as she and key members of her cabinet begin to leverage Germany’s economic might and turn it into a force for global policy-making. Having been at the forefront of Ukraine peace talks, Merkel can also point to Germany’s part in forging a nuclear deal with Iran and efforts to spur the U.S. and others into action against climate change. “There is a rising awareness in the political class and even to some extent in the public that Germany has to assume more responsibility, especially in and around Europe,” said Kai-Olaf Lang, a senior fellow at the German Institute for International and Security Affairs in Berlin.

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How to put the Union in danger. Greece should adopt similar measures.

• ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)

vThe ECB faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers.vThe Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks.vThe Frankfurt-based ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation.

“It will take a long time for euro-area member states to reach full acceptance that banking-sector policy is no longer in their hands,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. “National regulations, as in this German case, are essentially rearguard actions. But this kind of skirmish diverts” the ECB’s “attention from its important tasks of ensuring European banks are safe and sound.” Two weeks ago, German Finance Minister Wolfgang Schaeuble chided other countries in the bloc for putting the “cart before the horse” by pushing for a European deposit-guarantee system before they had fully implemented measures already on the books. At the same time, less than a year into the new era of centralized bank supervision in the euro area, Schaeuble’s ministry is chipping away at the authority of the ECB.

The central bank is trying to unify an array of national banking systems with strong historical roots, such as the savings and mutual banks in Germany and Austria. And Germany’s not alone in pushing back against the ECB. Fabio Panetta, Italy’s member of the ECB’s Supervisory Board, has warned that the central bank risks criticism for “unwarranted” and “arbitrary” decisions over higher capital requirements for euro-area lenders that could harm the fragile economy. One point of contention is “early intervention” rules enshrined in the EU’s Bank Recovery and Resolution Directive. The law gives supervisors the power to order capital increases, call shareholder meetings or oust managers in certain cases Yet triggers for early intervention vary widely in national laws implementing BRRD. The German rules are cast so narrowly that it’s practically impossible to use them unless a bank is already on the brink of collapse, negating the purpose of the law.

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Better do it well. Fire the right people, not scapegoats.

• Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)

Volkswagen will start firing people responsible for rigging U.S. emissions tests and shake up management on Friday, two sources familiar with the plans said, as the German carmaker tries to get to grips with the biggest scandal in its 78-year history. The supervisory board of Europe’s biggest automaker is meeting on Friday to decide a successor to chief executive Martin Winterkorn, who resigned on Wednesday. The sources said it would give initial findings from an internal investigation into who was responsible for programming some diesel cars to detect when they were being tested and alter the running of the engines to conceal their true emissions. Top managers could also be replaced, even if they did not know about the deception, with U.S. chief Michael Horn and group sales chief Christian Klingler seen as potentially vulnerable.

Volkswagen shares have plunged around 20% since U.S. regulators said on Friday the company could face up to $18 billion in penalties for falsifying emissions tests. The company said on Tuesday 11 million of its cars globally were fitted with engines that had shown a “noticeable deviation” in emission levels between testing and road use. Regulators in Europe and Asia have said they will also investigate, while Volkswagen faces criminal inquiries and lawsuits from cheated customers. When he resigned, Winterkorn denied he knew of any wrongdoing but said the company needed a fresh start. “There will be further personnel consequences in the next days and we are calling for those consequences,” Volkswagen board member Olaf Lies told the Bavarian broadcasting network, without elaborating.

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This will go global.

• VW Faces Deluge Of UK Legal Claims (Guardian)

Volkswagen could face a barrage of legal claims from British car owners over the emissions tests scandal, according to top law firms. Lawyers say they have been indundated with enquiries from VW drivers whose cars may have been far more polluting than claimed, after the German carmaker admitted installing defeat devices to cheat tests. The CEO of Volkswagen, Martin Winterkorn, quit on Wednesday, with the group facing criminal investigation in the US and other countries, plus potential legal claims worldwide, with 11m vehicles directly affected. Leigh Day, a London law firm specialising in personal injury and product liability claims, says it has been “inundated” by inquiries; the number of potential claimants they were talking to would number “in the thousands – it’s constant enquirers at the moment.”

Another law firm, Slater & Gordon, said it was fielding calls from concerned drivers. The firm’s head of group litigation, Jacqueline Young, said both owners and car dealerships would have viable legal claims for breach of contract, with the value of vehicles falsely boosted by VW’s misrepresentations. Shareholders might also have a case, Young said, after the 30% fall in its share price since the scandal erupted. Young said a huge class-action lawsuit was possible: “If the Volkswagen scandal applies to cars in the UK then this has the potential to be one of the largest group action lawsuits this country has seen.” The German transport minister, Alexander Dobrindt, has now confirmed that Volkswagen vehicles containing software to fix emissions standards were also sold across Europe.

VW has put aside an initial €6.5bn to deal with the costs of the crisis, although that sum could be dwarfed by fines from US regulators. The carmaker has enlisted Kirkland & Ellis – the US law firm employed by BP in the Deepwater Horizon oil disaster – to deal with its mounting legal claims. Concerns over true pollution levels have also spread to fuel consumption, with consumer group Which? having long reported discrepancies between official miles per gallon test figures and their own results, with the VW Golf the second-worst offender in their research. Richard Lloyd, the Which? executive director, said: “Our research has consistently showed that the official test used by carmakers is seriously in need of updating as it contains a number of loopholes that lead to unrealistic performance claims.”

Pressure has grown on the UK government to follow up its call for a European commission inquiry, after it was revealed that the Department for Transport had been lobbying in private for less rigorous tests. Environmental law organisation ClientEarth has written to the DfT demanding it take action to establish whether VW’s use of defeat devices was part of wider industry practice, and to release all information held on the real-world emissions performance of cars licensed for sale on UK roads.

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The stats in the graph are devastating. Does anyone believe Germany or France will volunteer to break their car industries?

• Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)

For years, EU researchers have warned that diesel cars emit more nitrogen oxides, or NOx, than the regulations allow. A 2011 report said road tests of 12 diesel vehicles showed NOx levels exceeded European limits by as much as a factor of 14. A 2013 follow-up report by the same researchers said many modern cars used “defeat devices,” sensors or software that detects the start of an emissions test in a laboratory. The report suggested testing cars on the road, rather than in laboratories, was the best way of thwarting the use of such deviceswhich falsify results. Politicians are now calling for a review of testing protocols, while car makers attempt to calm the public by claiming their cars are as clean as advertised.

The EC, the EU’s executive arm, on Thursday asked governments to examine how many cars now on the road have software or sensors that can mask true emissions. “It is fundamental that the French authorities can guarantee…that the vehicles on the road in France respect the rules,” said Ségolène Royal, the French environment minister, Thursday after meeting with auto executives. French officials said they would form an independent commission to test around 100 cars and deliver results in a matter of weeks. The U.K. also said it would conduct random emissions tests on cars. The regulators will compare emissions from tests done in laboratories with those done in real-world situations, using relatively new portable testing equipment.

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Potentially explosive: “..it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.“

• German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)

The German Green party has claimed that the German Government, led by Chancellor Angela Merkel, knew about the software car manufacturers used to rig emissions tests in the US. The Green party has said it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.” The Transport Ministry denied knowing that the software was being used in new vehicles, however. The timing of the questions has raised concerns over whether the German government knew about the activities at Volkswagen stretching back to 2009.

“The federal government admitted in July, to an inquiry from the Greens, that the [emissions] measurement practice had shortcomings. Nothing happened,” said Oliver Krischer, a German Green party lawmaker. Alexander Dobrindt, the German transport minister, has denied the government knew about emissions rigging. “I have made it very clear … that the allegations of the Greens party are false and inappropriate. We are trying to clear up this case. Volkswagen has to win back confidence,” he said. Governments and manufacturers are both aware that diesel vehicles emit up to five times the amount of poisonous nitrogen dioxide that they are limited to under law, but this is the first time a manufacturer has admitted to deceiving the authorities.

Note: in the graph, every other brand does worse than VW.

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Commodity economies.

• Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)

The Canadian dollar touched its weakest level in more than 11 years against the greenback on Wednesday and kept falling today, following July domestic retail sales figures that fell short of expectations and another plunge in volatile oil prices. New car and clothing sales helped push Canadian retail sales higher for the third month in a row in July, up 0.5% and in line with economists polled by Reuters, but sales were flat and below expectations when automotive figures were excluded. Volumes were also weaker than the headline, while figures from the previous month were revised lower.

“People had been thinking that we’d get a decent contribution to the next quarter’s GDP growth and show some positive data,” said Don Mikolich at CIBC World Markets, adding that the soft data also underscored the interest rate differential between Canada and the United States. “In a quiet week of data, that one sticks out as having a bit of a negative sentiment around the economy here. (Oil’s) the other big driver.” The loonie has plunged some 25% since last summer, along side the price of crude, a key Canadian export, but had been mostly rangebound over the last month after hitting a previous 11-year low at 75.18 U.S. cents. The price of crude, a key Canadian export, reversed course during the session to give up an earlier rally after large gasoline builds raised concerns about high autumn fuel supplies.

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More of the same.

• Australia Pays the Price for Depending on China (Bloomberg)

Throughout Australia’s industrial heartland, factories are closing. About an eight-minute car ride from the center of Melbourne, a General Motors plant that in 1948 produced the first automobile wholly made in the country is scheduled to shut for good in 2017, victim of a rising Australian dollar that caused labor costs to nearly double from 2001 to 2011. Toyota and Ford factories are set to close within two years, leaving Australia without any domestic auto production. Down the road from the GM plant is a facility operated by Boeing. In 2010 it sold the plant’s equipment for making metal aircraft parts to Mahindra & Mahindra, an Indian company that’s shipping the machinery to Bengaluru. Last year, Alcoa closed a nearby aluminum smelter.

Until recently the sad decline of heavy industry had little impact on the country’s highflying economy. Australia’s factories were closing, but its mines were booming. Chinese demand for Australian iron ore and other resources kept the economy humming. The country hadn’t suffered through a recession since the early 1990s. The boom is over as the Chinese economy slows, and the woes of the manufacturing sector are complicating the job of new Prime Minister Malcolm Turnbull. Lawmakers from the right-of-center Liberal Party on Sept. 14 chose the former Goldman Sachs banker to be their new leader, ousting Prime Minister Tony Abbott amid concerns that Australia’s long run of economic growth was in danger. Gross domestic product in the second quarter expanded just 0.2% over the first quarter, worse than the 0.4% expected by economists.

The unemployment rate is at 6.2%, holding near a 13-year high. Turnbull, who was communications minister under Abbott, is promising action. “My government has a major focus on tax reform,” he told reporters on Sept. 20. That will mean less reliance on income taxes and more on consumer levies. An early investor in technology startups before entering politics, Turnbull in March co-authored an article in the Australian newspaper with Vivek Kundra, executive vice president of Salesforce.com and former chief information officer for President Obama. The pair lauded companies like Uber and Airbnb. “The most successful businesses in the 21st century will be those that embrace digital disruption as an opportunity, and not something to guard against,” they wrote.

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Behold: deflation at work.

• Time To Dig Deep? Big Miners Face A Big Problem (Guardian)

How severe is the crisis in the world of over-borrowed big miners? Here’s an illustration. Anglo-American, a company founded in 1917, employing 148,000 people around the world and generating sales last year of almost £20bn, now has a stock market value of £8.7bn. By contrast, Next, the clothing chain with a £4bn turnover, is worth £11bn. Even Whitbread, pumping out Costa Coffees rather than digging for diamonds, coal and iron ore, is within a whisker of Anglo’s market value. Or try this one. Glencore, Ivan Glasenberg’s trading-cum-mining house, has seen its share price fall 20% since it raised £1.6bn last week to make its balance sheet “bullet proof”. Thursday’s closing price was 98.6p, versus a flotation price of 530p in 2011. Glencore is now worth just £14bn, even after consuming Xstrata in 2013 in a merger worth £55bn at the time.

Beleaguered mining executives speak despairingly of the deterioration in “market sentiment”, especially in the past fortnight. By that, they mean investors are terrified by every piece of weak economic data that emerges from China – the latest was a slowdown in manufacturing for the seventh consecutive month. The US Federal Reserve also spooked everybody by failing to raise interest rates last week; by fretting about “global economic and financial developments,” the Fed, in effect, invited others to do the same. If you are even slightly optimistic on China, you can find a parade of analysts arguing that mining shares are now cheap. The trouble is, many of the same voices were singing the same tune when Glencore and Anglo were at twice their current share prices earlier this year.

Predicting commodity prices – and thus miners’ cash-flows – is a mug’s game when nobody can really know the true state of affairs in China, the biggest customer. The only rough certainty is that most industrial commodities are over-supplied. But judging whether demand for copper, say, comes into balance in 2017, 2018 or 2019 is pure guesswork.

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Must. Restructure.

• US Energy Lending Caught in a Squeeze (WSJ)

Banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch. The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street. On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be. Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral.

Banks are now beginning their fall reviews of the quality of that collateral and worry regulators could ding them for making loans the banks think are prudent. “We’re concerned about it,” said Matt McCaroll, CEO of Fieldwood Energy. “These are challenging times for our business…and to have additional pressure on the relationship between borrower and lender is going to be very problematic.” The oil and gas exploration company has about $1.75 billion of reserve-based loans with 23 banks. Mr. McCaroll said he has voiced his concerns with congressmen.

The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan, Wells Fargo, Bank of America, Citigroup and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks. Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans.

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Desperation: “Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually..”

• Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

Oil services companies in Europe are finding alternative ways to raise cash and repay debt after falling crude prices made it difficult for them to get funding from traditional sources. Dolphin Group AS has sought to persuade private-equity and hedge funds to finance projects exploring and mapping seabeds in return for interest tied to sales, according to people familiar with the matter. At least two Norwegian drillers are planning to sell and lease back ships to raise cash and fund operations as they struggle to access loan and bond markets, said the people, who asked not to be identified because the matters are private. Energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60% from last year’s peak.

Services companies in Europe are starting to run out of cash as producers from Shell to Petrobras cut their own investments and delay projects. “Bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage,” said Nigel Thomas, partner at law firm Watson Farley & Williams in London. “Services companies need to buy time to survive during the downturn and alternative investors are able to give them that, albeit at a very expensive cost.” Bonds issued by oil-services businesses globally dropped to $6.7 billion this year, on pace for the least in a decade, according to data compiled by Bloomberg. French oilfield surveyor CGG said it had to cancel a loan in July because banks had offered unfavorable terms.

Energy-services companies are searching for new investors and funding strategies as even lenders of last resort pull back. Hedge funds and private-equity firms that previously sought to lend at high rates are becoming reluctant to step in after getting stuck with losing positions. Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually, people familiar with the matter said. The Bergen-based company is working with a potential lender for a deal that will pay interest linked to data sales, Chief Executive Officer Atle Jacobsen said this month. “We have never seen this type of funding in the industry before,” said Hakon Johansen at Fondsfinans in Oslo. “The market remains very weak, but Dolphin’s management wants to expand operations, hoping that someone in the end will buy their data.”

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Debt Rattle September 17 2015

Sep 172015
 
 September 17, 2015  Posted by at 9:48 am Finance Tagged with: , , , , , , , ,  2 Responses »


NPC Newsstand with Out-of-Town Papers, Washington DC 1925

• Europe Faces Several Decades Of Heavy Immigration (NY Times)
• The Growth of Refugee Inc. (WSJ)
• Refugees Face Tear Gas, Water Cannons As They Cut New Paths Through Europe (WaPo)
• Turkey Threatens To Oust Refugees Camped Near Greek Border (Guardian)
• Bulgaria Sends Troops To Guard Border With Turkey (Reuters)
• The German Town Offering Refugees Work For €1 An Hour (Bloomberg)
• Fed Decision-Day Guide: Zero Hour for Moves on Rates, Dot Plot (Bloomberg)
• QE’s Cost: Fed Exit May Hit Economy Faster Than in Past Cycles (Bloomberg)
• World Bank Fears ‘Perfect Storm’ As Fed Weighs First Rate Hike Since 2008 (AFP)
• China Stocks Sink in Late Trade With Volatility at 18-Year High (Bloomberg)
• Japan Rating Cut by S&P as Abe Falls Short of Early Promise (Bloomberg)
• Goldman Sees 15 Years of Weak Crude as $20 U.S Oil Looms (Bloomberg)
• Shale Oil’s Retreat Threatens to Leave US Short on Natural Gas (Bloomberg)
• Macquarie: Emerging Markets Not Facing 1997-Style Crisis, But Worse (Bloomberg)
• The African Nations Most Exposed to China’s Slump (Bloomberg)
• Jeremy Corbyn’s QE For The People Is Exactly What The World May Soon Need (AEP)
• Ukraine Bans Journalists Who ‘Threaten National Interests’ From Country (Guardian)
• New Zealand Blocks Farm Purchase By Chinese Firm (BBC)
• Look Out New Zealand, Here Comes Another Act of God (Bloomberg)

“..a wave of migration that makes current debates about accepting hundreds of thousands of asylum seekers seem irrelevant..”

• Europe Faces Several Decades Of Heavy Immigration (NY Times)

European leaders probably don’t want to hear this now, as they frantically try to close their borders to stop hundreds of thousands of desperate migrants and asylum seekers escaping hunger and violence in Africa and the Middle East. But they are dealing with the unstoppable force of demography. Fortified borders may slow it, somewhat. But the sooner Europe acknowledges it faces several decades of heavy immigration from its neighboring regions, the sooner it will develop the needed policies to help integrate large migrant populations into its economies and societies. That will be no easy task. It has long been a challenge for all rich countries, of course, but in crucial respects Europe does a particularly poor job.

Perhaps it’s not surprising, as a recent report by the OECD found, that it is harder for immigrants to get a job in EU nations than in most other rich countries. But that doesn’t explain why it is also harder for their European-born children, who report even more discrimination than their parents and suffer much higher rates of unemployment than the children of the native-born. Rather than fortifying borders, European countries would do better to improve on this record. The benefits would be substantial, for European citizens and the rest of the world. Over the summer, as Hungary hurried to lay razor wire along its southern border and E.U. leaders hashed out plans to destroy smugglers’ boats off the coast of North Africa, the United Nations Population Division quietly released its latest reassessment of future population growth.

Gone is the expectation that the world’s population will peak at 9 billion in 2050. Now the U.N. predicts it will hit almost 10 billion at midcentury and surpass 11 billion by 2100. And most of the growth will come from the poor, strife-ridden regions of the world that have been sending migrants scrambling to Europe in search of safety and a better life. The population of Africa, which has already grown 50% since the turn of the century, is expected to double by 2050, to 2.5 billion people. South Asia’s population may grow by more than half a billion. And Palestine’s population density is expected to double to 1,626 people per square kilometer (4,211 per square mile), three times that of densely populated India.

Over the next several decades, millions of people are likely to leave these regions, forced out by war, lack of opportunity and conflicts over resources set in motion by climate change. Rich Europe is inevitably going to be a prime destination of choice. “With Africa’s population likely to increase by more than three billion over the next 85 years, the EU could be facing a wave of migration that makes current debates about accepting hundreds of thousands of asylum seekers seem irrelevant,” wrote Adair Turner, the former chairman of Britain’s Financial Services Authority and now chairman of the Institute for New Economic Thinking.

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Quite a story.

• The Growth of Refugee Inc. (WSJ)

The annual report in 2013 from a multibillion-dollar London private-equity firm that counts a French pastry baker and a Dutch shoemaker among its holdings touted a new opportunity with “promising organic and acquisitive growth potential.” That investment was the management of refugee camps. “The margins are very low,” said Willy Koch, the retired founder of the Swiss company, ORS Service, which runs a camp in Austria that overflowed this summer with migrants who crossed from the Balkans and Hungary. “One of the keys is, certainly, volume.” Since early 2014, more than a million people have claimed asylum in the EU. Germany alone is preparing for at least 800,000 asylum-seekers this year. The surge, experts say, amounts to the biggest movement of people in Europe since World War II.

The crisis has produced harrowing tales of tragic deaths and lives in upheaval. It is also giving shape to an industry that everyone from small Greek shop owners to some of America’s biggest pension funds are benefiting from: the business of migration. In many ways, private companies are increasingly defining the European migration experience. In some cases, the companies see potential to win favor with a future group of European consumers, a welcome jolt amid the Continent’s economic doldrums. In other cases, they are stepping in to help provide services that governments can’t or won’t. At times they have provoked protests from advocacy groups who accuse them of cutting corners in order to profit from human misery. Some of the businesses, in turn, say they are sensitive to the risks of working with vulnerable people, and they argue that neither governments nor charities can meet on their own the huge range of demands resulting from the tide of migrants now arriving in Europe.

“Because of our involvement it is a better service run more efficiently,” said Guy Semmens, partner at Geneva-based private-equity firm Argos Soditic, which previously invested in ORS. There are also profits to be made. In Germany, Air Berlin was paid some $350,000 last year operating charter flights to deport rejected asylum seekers on behalf of the government. In Sweden, the government paid a language-analysis firm $900,000 last year to verify asylum-seekers’ claims of where they were from. In Athens, a Western Union branch has been disbursing €20,000 a day to migrants, reaping fees on each transaction. “I’m making at least twice the money I was making last year,” said Mohammed Jafar, the Afghanistan-born owner of the branch. “I wouldn’t make this in any other country in Europe.”

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Let’s see Hungary attract tourists after this.

• Refugees Face Tear Gas, Water Cannons As They Cut New Paths Through Europe (WaPo)

Refugees blazed a new pathway through Europe on Wednesday, with hundreds hiking through cornfields to reach welcoming Croatia even as others faced tear gas and water cannons from Hungarian police determined to turn them away. The contrasting scenes along the Serbian border highlighted both the make-or-break resolve of the asylum seekers and the growing friction facing Europe, which has failed to create a coordinated policy for the unprecedented influx of economic migrants and war refugees from the Middle East, Africa, Afghanistan and Pakistan. “We hit a stone and we flow around it”, said Arazak Dubal, 28, a computer programmer from Damascus, who had been on the road for 18 days.

He and his three companions reached Belgrade only to discover on Facebook and WhatsApp that the Hungarian border was closed to refugees. “So I went to Google Maps, and here we are”, said Dubal, huffing in the hot afternoon as he trudged across the farm fields. A two-hour drive to the northeast -along Serbia’s frontier with Hungary- the route was slammed shut. Just steps from Hungary, thousands of people spent the night in the wet grass on the Serbian side of the border. Hours later, hundreds tried to punch through the cordon of razor wire and riot police massed near the Serbian border town of Horgos. But they ran headlong into security forces≠ who unleashed tear gas and pepper spray to drive them back. Some refugees were swatted by batons and crumpled to the ground in pain.

“Open the door! the refugees yelled as they hurled water bottles and debris at riot police. Nearby, children screamed for their missing parents. Water cannons sprayed crowds on the Serbian side, forcing refugees to retreat to a squalid squatters camp that took root just after Hungary closed the border Tuesday. There were no major injuries, but some refugees were treated by Serbian authorities for respiratory problems from the tear gas and at least one migrant had a leg injury, AP reported. It was the first major clash between security force and migrants since police used stun grenades to stop refugees from crossing into Macedonia from Greece almost a month ago “We fled wars and violence and did not expect such brutality and inhumane treatment in Europe”, said Amir Hassan, who was drenched from a water cannon and tried to wash tear gas from his eyes, according to AP.

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“Turkey is hosting approximately 2 million refugees..”

• Turkey Threatens To Oust Refugees Camped Near Greek Border (Guardian)

Turkish authorities have announced that hundreds of refugees who have set up camp on a main road at Edirne near the Greek border will be forcibly removed in three days if they refuse to leave. Many others are holding out at Istanbul’s main bus station in the hope of reaching northern Europe by land rather than risk the perilous sea journey. Bus services from the main terminal in Istanbul to cities on the Greek and Bulgarian borders were suspended last week, prompting several hundred refugees, most of them Syrians, to take to the road in an attempt to reach the European Union on foot. In the small green spaces around the bus terminal, some refugees have set up camp, with families trying to shelter smaller children against the sun with blankets and jackets.

Renas, 25, a Syrian-Kurdish construction worker from Qamishli, said he had no other hope than trying to reach Europe to claim asylum. “We are running away from a war and from the oppression of [Syrian president] Bashar [al-Assad]. There is nothing in Syria anymore, no jobs, no life, no future. In Turkey life is very difficult, because we are not allowed to work and there are no jobs here.” Turkey is hosting approximately 2 million refugees, the largest such population in the world. But increasingly difficult living and working conditions, as well as the impossibility of claiming asylum in the country, has led a growing number of people to try to reach Europe via smugglers’ routes.

Renas said he did not want to risk the dangerous journey by sea. “I have several relatives who drowned on their way to Greece,” Renas said. “These boats are nothing but floating death traps, they are not safe at all.” On Tuesday at least 22 people drowned off the Turkish coast after their boat capsized. Most refugees have resorted to paying smugglers to take them from the Turkish coast to Greek islands after authorities cracked down on the routes from Turkey to Greece and Bulgaria via the land borders.

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All together now!

• Bulgaria Sends Troops To Guard Border With Turkey (Reuters)

Bulgaria is sending more soldiers to strengthen controls along its border with Turkey and avoid a refugee influx that has overwhelmed its neighbours, Defense Minister Nikolay Nenchev said on Wednesday. “There is a change in the situation in the past few days and it is hard to predict where the refugee wave will head…so we are standing ready,” Nenchev told public BNR radio. Fifty soldiers have been sent to the border and a further 160 could be deployed by the end of Thursday. The Bulgarian army could send up to 1,000 troops to back up border police if needed, he added.

Bulgaria took the measures after reports that hundreds of mostly Syrian refugees have spent the night in the open near the Turkish border with Greece, which is also very close to Bulgarian-Turkish border. Bulgaria is a member of the European Union but not the border-free Schengen Area. About 660 migrants have tried to cross the Bulgarian-Turkish border in the past 25 hours but have returned voluntarily after they had seen that the border was well-guarded, the chief secretary of the interior ministry Georgi Kostov, told reporters. Bulgaria is a member of the European Union but not the border-free Schengen Area.

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“.. the maximum allowed for new arrivals. ..”

• The German Town Offering Refugees Work For €1 An Hour (Bloomberg)

Anas Al-Asadi spent three months and €6,000 making his way from his home in Damascus to Germany, braving the frigid waters of the Mediterranean aboard leaky, overcrowded ships on three separate occasions, culminating in a rescue by the Italian Coast Guard and finally a bus across the Alps. For the next four months, he was bored stiff. Then the 26-year-old got a job through a municipal program in Pfungstadt, a German town 25 miles south of Frankfurt, where he landed in February. The work wasn’t exactly challenging for Al-Asadi, who had been an attorney in Syria, and it certainly wasn’t well paid. His employer was a local youth club, since private companies are barred from hiring people without work permits, and he earned just €1 per hour, the maximum allowed for new arrivals.

But he says even simply vacuuming and sorting library books helped him better understand German culture and forced him to learn the language. “I was just sitting there sleeping, eating, doing nothing,” said Al-Asadi, who has since gotten asylum and just started working as a waiter in a local cafe. “I asked if I could do something – anything.” The town of 24,000 is home to more than 100 refugees seeking to start the formal asylum process and 50 others who have been granted residency, with more sure to come. The best way to integrate them, local officials say, is to help them find work, even if it’s odd jobs at community centers.

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2 pm EDT.

• Fed Decision-Day Guide: Zero Hour for Moves on Rates, Dot Plot (Bloomberg)

Here’s what to look for when the Federal Open Market Committee releases its policy statement along with quarterly economic projections at 2 p.m. Thursday in Washington, and Federal Reserve Chair Janet Yellen holds a press conference at 2:30 p.m. he FOMC will weigh the impact on the U.S. outlook from slowing growth overseas and falling stock prices, as committee members determine whether to end almost seven years of near-zero interest rates. Economists are close to evenly divided on the outcome, with 59 of 113 surveyed by Bloomberg expecting the Fed to stand pat “It is a very finely balanced question,” said Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former economist at the central bank’s Division of Monetary Affairs. “It is close to a 50-50 call.”

While economic data have been “pretty compelling,” investors are skeptical the FOMC will want to move in the face of recent financial turbulence, said Stephen Stanley at Amherst Pierpont Securities. The FOMC’s forecasts of the benchmark fed funds rate, revealed in dot-filled charts representing each official’s projections, may suggest a more gradual pace of tightening over the next few years than was suggested in June, said Michael Hanson at Bank of America. “The most important thing investors will try to ascertain is the pace of hikes going forward,” he said. “Yellen has emphasized that it is not liftoff that matters but it is the pace of tightening and we will get some additional information on that.”

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New tricks, never tested, eyes wide shut and costing trillions.

• QE’s Cost: Fed Exit May Hit Economy Faster Than in Past Cycles (Bloomberg)

Yellen and her colleagues on the Federal Open Market Committee wrap up a two-day meeting on Thursday to debate whether to increase the benchmark federal funds rate, which they have held near zero since late 2008. If and when they do move, it won’t be like before, and they’ll be using new tools to lift rates higher. In the past, the central bank kept the fed funds rate at or near the target chosen by policy makers by injecting or draining bank reserves from the system via the New York Fed’s trading desk. The amounts of cash involved were small and the Fed was pretty good at hitting its desired rate. Not anymore. Three rounds of so-called quantitative easing from 2008 to 2014, in which the Fed bought bonds to support the economy, has swamped banks with cash –deposited with them by investors who sold bonds to the Fed.

That added $2.6 trillion of reserves in excess of requirements to banks’ accounts held at the Fed. It also boosted the size of the Fed’s own balance sheet to $4.5 trillion, a five-fold increase from pre-crisis levels. [..] With so much cash and little need for banks to borrow in the fed funds market, the Fed has lost the ability to lift the funds rate in the way that it did before the crisis. It has also decided for now against selling the bonds back to investors, which would shrink its own balance sheet and extinguish the excess reserves. Instead, Fed officials designed new tools to help the central bank raise rates without reducing its balance sheet, which it hopes to slowly shrink over years by letting the bonds it now holds mature, without reinvestment. Officials say they expect to phase out reinvestments sometime after liftoff.

Their main innovation, an overnight reverse repurchase agreement facility, is a powerful solution, but heavy usage may cause problems for banks trying to comply with new regulations installed in the wake of the financial crisis, said Zoltan Pozsar at Credit Suisse. The facility promises to drain reserves from the banks by encouraging investors to withdraw the deposits created when they sold bonds to the Fed, and place the cash in money-market mutual funds. Through overnight reverse repos, the Fed can borrow the cash from money funds at a specified rate and post securities as collateral, unwinding the trades the next day. In effect, the Fed will be borrowing back the money it created to buy the bonds while cutting out the middlemen in the banking system.

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No doubt there. But is that so bad?

• World Bank Fears ‘Perfect Storm’ As Fed Weighs First Rate Hike Since 2008 (AFP)

The U.S. Federal Reserve opened a two-day meeting Wednesday to weigh a historic interest rate increase amid calls for it to move gingerly as world economic growth slows. The World Bank has warned developing economies to prepare for more capital and currency market turmoil while the OECD urged the Fed to move slowly and make its policy plans clear, whatever it decides. Most analysts saw the Fed again putting off the long-awaited increase to the benchmark federal funds rate, which has been locked at 0-0.25% since the 2008 crisis, giving the world a massive supply of cheap dollars. While U.S. growth has been strong, still-weak inflation and the recent China-driven turmoil in global markets “most likely mean that the FOMC will leave rates unchanged at this week’s meeting,” said Harm Bandholz of UniCredit.

The Fed has not raised rates in more than nine years, and what would probably amount to an increase of 0.25 percentage point would represent a momentous break with the extraordinary crisis stance it has adopted since the 2008-2009 recession. It would begin what is expected to be a slow series of rate hikes toward a “normal” monetary policy stance of around 3% in the next two years. But it would also make the dollar more expensive and hike borrowing costs for developing economies around the world. The policy-setting Federal Open Market Committee, led by Fed Chairwoman Janet Yellen, will announce a decision at 1800 GMT Thursday. Yellen will then address the media, with analysts saying her justification will be as crucial to markets as the decision itself.

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Zero faith in Beijing left. This could get very ugly very fast.

• China Stocks Sink in Late Trade With Volatility at 18-Year High (Bloomberg)

China’s stocks sank in the last 30 minutes of trading in thin volumes as traders tested the limits of state support amid the biggest price swings since 1997. The Shanghai Composite Index slid 2.1% to 3,086.60 at the close, wiping out an advance of as much as 1.7%, as material and drug companies slumped. The benchmark gauge jumped 4.9% on Wednesday in a last-hour rally – the hallmark of state-backed fund buying – after falling dropped 6.1% in the first two days of the week. Volatility is surging and turnover is slumping on concern government intervention will fail to shore up the world’s second-largest stock market amid signs of a deeper economic slowdown.

Price swings have been exacerbated by state investigations into market manipulation as well as the Federal Reserve’s interest-rate meeting this week. “The market is becoming increasingly volatile as state support has caused confusion to the market and investors,” said Li Jingyuan, head of securities investment at Shanghai Zhaoyi Asset Management. “Information on state buying isn’t transparent and it seems that the national team doesn’t have a clear strategy and tactics. So you see a volatile market as investors don’t follow state buying.”

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Abenomics’ third arrow turns out to be a downgrade.

• Japan Rating Cut by S&P as Abe Falls Short of Early Promise (Bloomberg)

Standard & Poor’s cut Japan’s long-term credit rating one level to A+, saying it sees little chance of the Abe government’s strategy turning around the poor outlook for economic growth and inflation over the next few years. The move comes just a day after the Bank of Japan refrained from boosting record asset purchases, betting there will be a resumption in growth and inflation. That’s left the onus on Prime Minister Shinzo Abe and his Cabinet to consider a fiscal stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far. “We believe that the government’s economic revival strategy – dubbed “Abenomics” – will not be able to reverse this deterioration in the next two to three years,” S&P said in a statement. “Economic support for Japan’s sovereign creditworthiness has continued to weaken.”

Japan’s problems are mounting, with inflation near zero, the economy contracting last quarter and debt rising as the population ages. The IMF estimates public debt will increase to about 247% of gross domestic product next year. Japan’s sovereign debt yield and bond risk have stayed low as the Bank of Japan pushes on with its unprecedented asset purchases. The benchmark 10-year government bond yield was at 0.37% on Wednesday, after touching a record low of 0.195% in January. Credit-default swaps insuring Japan’s sovereign notes have dropped 30 basis points this year to 37 basis points, according to data provider CMA. “The government’s fiscal reform plan released in June lacked details and specifics, making it look unreliable on how to ensure fiscal sustainability,” said Masaki Kuwahara at Nomura in Tokyo, who said the downgrade wasn’t a surprise after a cut by Moody’s in December.

“Today’s downgrade is a message that the government will need to have a more credible fiscal reform plan.” Toshihiro Uomoto, a credit strategist at Nomura, said the risk now is that overseas investors will take a more critical view of Abenomics. “Japan is trying to escape from deflation, but it’s not succeeding,” he said. “The perception is that the Bank of Japan’s policy isn’t having as much of an impact as it was originally aiming for.” Japan is now rated lower than China and South Korea – two of its key economic rivals – by S&P. South Korea was lifted one level to AA- on Tuesday, with S&P citing the nation’s sound fiscal position and relatively strong economic performance.

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Take out the zombie capital and restructure. Only way forward.

• Goldman Sees 15 Years of Weak Crude as $20 U.S Oil Looms (Bloomberg)

A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs. There’s less than a 50% chance that prices will drop to $20 a barrel, most likely when refineries shut in October or March for maintenance, Jeffrey Currie, head of commodities research at the bank, said in an interview in Lake Louise, Alberta. Goldman’s long-term forecast for crude is at $50 a barrel, he said. Goldman cut its crude forecasts earlier this month, saying the global surplus of oil is bigger than it previously thought and that failure to reduce production fast enough may require prices to fall near $20 a barrel to clear the glut. Prices may touch that level when stockpiles are filled to capacity, forcing producers in some areas to cut output, Currie said Wednesday.

“When we think of the longer term oil price, yes we put it at $50 a barrel,” he said. “However the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.” Lower iron ore, copper and steel prices as well as weaker currencies in commodity-producing countries have reduced costs for oil companies, according to Currie. The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said.

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Rest of the world will keep pumping all out.

• Shale Oil’s Retreat Threatens to Leave US Short on Natural Gas (Bloomberg)

The retrenchment in drilling for U.S. oil is threatening to leave a different market short: natural gas. “The impacts of oil rig counts extend beyond oil: the outlook for U.S. natural gas is critically dependent on the outcome of this balancing act in U.S. oil rigs,” Anthony Yuen, a strategist at Citigroup Inc. in New York, said in a report to clients Wednesday. “If the oil market remains oversupplied and oil-rig counts fall, the decline in associated gas production would leave the market short of gas.” Associated gas is the gas that comes out of oil wells along with the crude. Supplies of this byproduct from fields including the Bakken formation in North Dakota and the Eagle Ford in Texas may fall by about 1 billion cubic feet a day next year as drillers idle rigs in response to the collapse in oil prices, Yuen said.

That’s about 7% of U.S. residential gas demand. The U.S. Energy Information Administration has already forecast that shale gas production will drop in October for the fourth straight month, a record streak of declines. U.S. oil has lost half its value in the past year amid a worldwide glut of crude. Drillers have responded by sidelining almost 60% of the country’s oil rigs since Oct. 10. Crude producers in the lower 48 states may have to keep the number of working rigs low for a while longer to balance the global market, Yuen said. A recovery in the rig count may “exacerbate the current oversupplied environment” and weaken prices, he said.

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Back 100 years?!

• Macquarie: Emerging Markets Not Facing 1997-Style Crisis, But Worse (Bloomberg)

If the 1997 Asian financial crisis was a heart attack for emerging markets, the current situation is akin to chronic cardiovascular disease, according to Macquarie analysts led by Viktor Shvets and Chetan Seth. In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong’s stock market that led to losses in markets around the globe. While parallels exist between 1997 and the current emerging market selloff (notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade), the Macquarie analysts reckon the current situation might actually be worse.

Instead of sharp heart attack (a la 1997), it is far more likely that EM economies and markets would face an extended period that can be best described as a “chronic disease”, with limited (if any) cures or exits, punctuated by occasional significant flare-ups (short of an outright heart attack). In many ways it is likely to be a far more painful and insidious process. In the meantime, any signs of significant strain (either at a country or corporate level) could easily freeze up the emerging market universe.

The crux of their argument is that despite the difficulties of 1997, its effects were mitigated by rising global leverage, liquidity, and trade shortly thereafter. This time around, those factors might not be there.

[A c]ombination of excessively loose monetary policies (particularly post 2000 bursting of dot-com bubble) and China’s integration into global trade systems has enabled both EMs and DMs to recover quickly. This does not describe the environment facing EMs and DMs over the next five to ten years. The combination of long-term structural shifts (primarily driven by the grinding deflationary progress of the Third Industrial Revolution, which first became apparent in early 1990s but matured into a global phenomenon over the last decade), is aggravated by the more recent impact of overleveraging and associated overcapacity.

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“If you are at the top of the list in terms of dependence on China and your economy is not well diversified, there are a bunch of negative things which can fall like dominoes..”

• The African Nations Most Exposed to China’s Slump (Bloomberg)

China’s slowdown is rippling across Africa and these three nations are the most exposed, relying on demand from the Asian economy for almost half their exports: Republic of Congo, Angola and Mauritania. Oil accounts for the bulk of Angola’s and Congo’s exports, damaging their prospects after crude prices plunged 55% since the beginning of June last year to below $50 a barrel. The price of iron ore, which makes up more than 40% of Mauritania’s exports, has dropped by almost a third in the past year. The three nations each shipped more than 45% of their exports in 2014 to China, data from the IMF shows. “For countries like Angola, which basically only has one commodity, there is a huge knock when prices fall and less oil is being exported to China,” Christie Viljoen at NKC African Economics, said.

“It’s a case of when things are good, it’s really good, but when it turns bad, it’s really bad.” Angola, Africa’s second-largest oil producer after Nigeria, has been forced to devalue its currency twice since June and has slashed its budget by a quarter following a slump in revenue. Congo’s fiscal deficit almost doubled to 8.5% of gross domestic product in 2014 from the previous year and in May Finance Minister Gilbert Ondongo cut $500 million of spending from the 2015 budget to bring it down to $4.5 billion. Reliance on a single commodity and exposure to one country for the bulk of exports is a double-whammy. China’s slowdown means weaker currencies and higher import prices for these African nations, which in turn feeds into more pressure on their exchange rates and a run down of central bank reserves, said Viljoen.

“If you are at the top of the list in terms of dependence on China and your economy is not well diversified, there are a bunch of negative things which can fall like dominoes,” he said. While South Africa is the continent’s single biggest exporter to China – with shipments totaling $45 billion in 2014 – its exports are more diversified and destined to a wider range of countries. China buys 37% of South Africa’s goods, followed by the European Union at 20%. Commodities such as gold, platinum and iron ore still make up the bulk of exports at just over half, though vehicle shipments have grown in importance to reach 13% of the total, according to data from the South African Revenue Service.

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Ambrose is confused.

• Jeremy Corbyn’s QE For The People Is Exactly What The World May Soon Need (AEP)

There are many good reasons to gasp at Jeremy’s Corbyn’s planned assault on capital, but his enthusiasm for “People’s QE” is not one of them. Overt monetary financing of deficits – the technical term – is exactly what the world will need if the global economy tips into another recession with interest rates already at zero and debt ratios stretched to historic extremes. Governments that do not have such a contingency plan in place to combat a potential deflationary shock from East Asia should be hauled before their respective parliaments to account for their complacency. HSBC’s chief economist, Stephen King, argues such drastic measures may be our last resort in a “Titanic” world with few lifeboats left, if anything goes wrong. He is not alone in the City of London.

“A pervasive sense that the financial elites pulled a blinder – while austerity is for little people – explains in part why Mr Corbyn has suddenly stormed into the limelight, and why the US socialist Bernie Sanders has so upset the Democratic primaries” Jeremy Lawson, from Standard Life, gave his blessing to radical action this week, arguing central banks should be willing to fund fiscal stimulus directly, and even inject money “directly into household bank accounts” if need be. Mr Corbyn’s ideas are a variant of “helicopter money”, the term coined by Milton Friedman, the doyen of monetary orthodoxy, lest we forget. Friedman did not, of course, mean that banknotes should be dropped from the sky, though they could be in extremis, but rather that central banks have the means to create money to fund tax cuts, or to cover state spending, until the economy comes back to life.

We cannot revert to plain vanilla forms of quantitative easing at this stage. The various rounds of QE by the US Federal Reserve and the Bank of England after the Lehman crisis were assuredly better than nothing. They averted a depression. But little more can be extracted from pulling down long-term interest rates by a few more basis points. The trade-off between risk and reward has, in any case, turned negative. Much of the money has leaked into asset booms, greatly enriching the “haves”, with a painfully slow trickle-down to the rest of society. A pervasive sense that the financial elites pulled a blinder – while austerity is for little people – explains in part why Mr Corbyn has suddenly stormed into the limelight, and why the US socialist Bernie Sanders has so upset the Democratic primaries.

This is not a criticism of the Anglo-Saxon central banks. The public would not have accepted avant-garde QE or helicopter money at the time. The Fed’s Ben Bernanke faced impeachment calls by hard-liners in Congress even as it was. He did what was humanly possible. Yet if we have to do QE again – and right now the US and the UK are preparing to tighten, so it is not imminent – it would surely be better to inject the money directly into the veins of the real economy.

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Journalists from BBC, El Pais, Die Zeit, RT and more. In total nearly 400 individuals from France, Greece, Israel, Spain, Italy, USA, Russia, Poland, Switzerland, Germany, the UK and several other countries..

• Ukraine Bans Journalists Who ‘Threaten National Interests’ From Country (Guardian)

President Petro Poroshenko has banned two BBC correspondents from Ukraine along with many Russian journalists and public figures. The long-serving BBC Moscow correspondent Steve Rosenberg and producer Emma Wells have been barred from entering the country, according to a list published on the presidential website on Wednesday. The decree says those listed were banned for one year for being a “threat to national interests” or promoting “terrorist activities”. BBC cameraman Anton Chicherov was also banned, along with Spanish journalists Antonio Pampliega and Ángel Sastre, who went missing, presumed kidnapped, in Syria in July. The list targeted people involved in Russia’s 2014 annexation of Crimea and the aggression in eastern Ukraine, Poroshenko said, referring to the conflict with Russia-backed rebels that has continued in certain hotspots this year despite a February ceasefire.

Andrew Roy, the BBC’s foreign editor, said: “This is a shameful attack on media freedom. These sanctions are completely inappropriate and inexplicable measures to take against BBC journalists who are reporting the situation in Ukraine impartially and objectively and we call on the Ukrainian government to remove their names from this list immediately.’ The reason for the BBC correspondents’ ban was not clear, but media coverage of the conflict with the rebels – whom the authorities and local media often call “terrorists” – has been a sensitive subject. Russian television has covered the Ukrainian crisis in a negative light, frequently referring to the new Kiev government as a “fascist junta”, while international media has focused on civilian casualties and the use of cluster munitions in populated areas by both sides.

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One moment of clarity.

• New Zealand Blocks Farm Purchase By Chinese Firm (BBC)

New Zealand’s government has blocked the $56m (£36m) purchase of a local farm by Chinese firm Shanghai Pengxin. The government said it was not satisfied that the sale of the Lochinver farm would be of substantial benefit to the country, which is a key requirement for a big land purchase. The surprise move comes after the body that oversees bids for sensitive assets in New Zealand had approved the sale. There have been growing concerns about foreign land ownership in New Zealand. Those fears were stoked after Shanghai Pengxin New Zealand, which is a unit of the Chinese parent firm Shanghai Pengxin, bought 16 dairy farms in the country in 2011. China is New Zealand’s biggest market for many dairy and meat products. Dairy products are also New Zealand’s biggest export.

The Chinese firm said in a statement that it was “surprised and extremely disappointed with the decision and will be considering our options”. The 13,800-hectare Lochinver farm is located in North Island and is used to breed sheep, as well as cattle for beef and dairy products. The Chinese government has encouraged its companies to look to overseas markets to meet the demands of its growing consumer class. Stevenson Group, the company selling the farm, said it was also disappointed by the outcome after a 14-month process. “We are unclear as to why this property is different to the many others that have been approved through the Overseas Investment Office process, given the obvious benefits both to the farm and to Stevenson Group,” it said in a statement.

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El Niño.

• Look Out New Zealand, Here Comes Another Act of God (Bloomberg)

As if a sharp fall in the price of milk, New Zealand’s biggest export, wasn’t bad enough, the country is now bracing for a summer drought that could further hurt farmers and raise the risk of recession. The most severe El Nino weather pattern in at least 18 years is brewing and set to bring dry winds and below-average rainfall to the South Pacific nation in the months ahead. That will play havoc with dairy farmers and other agricultural producers that together account for a third of New Zealand’s export earnings. While no economists are yet forecasting a recession, central bank Governor Graeme Wheeler last week said if the El Nino is severe and continues into the middle of 2016, a contraction could be the result. The National Institute of Water & Atmospheric Research says soil moisture levels are already falling in eastern regions and there is an elevated risk of drought later in the summer amid signs the weather event may be the worst since 1998.

New Zealand’s economy, while among the world’s most developed, is particularly vulnerable to nature turning against it. The country suffered its most recent recession in 2010 after an earthquake struck the city of Christchurch, while the two previous economic contractions in 2008 and 1998 coincided with severe droughts and slumps in financial market sentiment. Agriculture and food processing industries make up about 9% of the nation’s GDP, making the economy sensitive to climate swings and global demand. “Over history, to get into recession we need to have multiple shocks,” said Nathan Penny, an economist at ASB Bank Ltd. in Auckland. “A drought makes us vulnerable, and if we got a drought plus say a shock from China then that would make a recession quite possible.”

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Debt Rattle July 24 2015

Jul 242015
 
 July 24, 2015  Posted by at 8:48 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


Harris&Ewing WSS poster, Washington DC 1917

• Why The Casino Is In For A Rude Awakening, Part I (David Stockman)
• Gold Is In Its Worst Slump Since 1996 (CNN)
• Cheap Money Is Here to Stay (Pesek)
• A 50% Stock Market Plunge Would Not Be A Surprise (Blodget)
• Forced Austerity Will Take Greece Back 65 Years (Jim Fouras)
• Greece Braces For Troika’s Return To Athens (Guardian)
• Italy’s Plan B For An Exit From The Euro (Beppe Grillo)
• Beppe Grillo Wants Nationalisation Of Italian Banks, Exit From Euro (Guardian)
• Grillo Calls For Italy To Throw Off Euro ‘Straitjacket’ (FT)
• Italy Leans While Greece Tumbles (Bloomberg)
• Interview: Yanis Varoufakis (ABCLateline)
• “Why I Voted ‘YES’ Tonight” (Yanis Varoufakis)
• Why I’ve Changed My Mind About Grexit (Daniel Munevar)
• The Eurozone’s German Problem (Philippe Legrain)
• The Return of the Ugly German (Joschka Fischer)
• Schäuble – The Man Behind the Throne (Martin Armstrong)
• German FinMin Schäuble’s Tough Tone Heightens Uncertainty Over Bailout (WSJ)
• Greece: Out of the Mouth of “Foreign Affairs” Comes the Truth (Bruno Adrie)
• Greek Store Closures Spike As Recession, Austerity Return (AP)
• A Few Thoughts On Greek Shipping And Taxes (Papaeconomou)
• Greek Financial Crisis Makes Its Migration Crisis Worse. EU Must Help. (WaPo)
• Abenomics Needs To Be ‘Reloaded’, Warns IMF (CNBC)
• Australia Weighs Steps to Rein In Sydney Property (WSJ)

“..to understand the potentially devastating extent of the coming asset deflation cycle, it is important to reprise the extent of the just completed and historically unprecedented global capital investment boom.”

• Why The Casino Is In For A Rude Awakening, Part I (David Stockman)

The reason that the Bloomberg index will now knife through the 100 index level tagged on both the right- and left-hand side of the chart is the law of supply and demand – along with its first cousin called variable cost pricing and a destructive interloper best described as zombie finance. The latter is what becomes of central bank driven bubble finance when the cycle turns, as it is now doing, from asset accumulation and inflation to asset liquidation and deflation. But to understand the potentially devastating extent of the coming asset deflation cycle, it is important to reprise the extent of the just completed and historically unprecedented global capital investment boom.

Thus, in the case of the global mining industries, CapEx by the top 40 miners amounted to $18 billion in 2001. During the original boom cycle it soared to $42 billion by 2008, and then after a temporary pause during the financial crisis, reaccelerated once again, reaching a peak of $130 billion in 2013. Owing to the collapse of commodity prices as shown above, new projects and greenfield investments have pretty much ground to a halt in iron ore, met coal, copper and the other principal industrial materials, but there is a catch. Namely, that big projects which were in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being carried to completion owing to the sunk cost syndrome. This means that available, on-line capacity continues to soar.

The poster child for that is the world’s largest iron ore port at Hedlund, Australia. The latter set another shipment record in June owing to still rising output in mines it services – a record notwithstanding the plunge of iron ore prices from a peak of $190 per ton in 2011 to $47 per ton a present. The ramp-up in E&P investment for oil and gas was similar. Global spending was $100 billion in the year 2000, but had risen to $400 billion by 2008 and peaked at $700 billion in 2014. In the case of hydrocarbon E&P investment, however,the law of variable cost pricing works with a vengeance because “lifting costs” even for shale and tar sands are modest compared to the front-end capital investment. Accordingly, the response of production to plunging prices has been initially limited and will be substantially prolonged.

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“All of that is creating an anti-inflationary environment that sucks the air out of the gold market.”

• Gold Is In Its Worst Slump Since 1996 (CNN)

So much for predictions that gold would spike to $2,000 an ounce. The yellow metal is in a deep slump. It’s down more than 40% from its 2011 peak and crashing back toward $1,000. The slide just keeps getting worse. Gold has declined for 10 straight days. That’s the longest losing streak for gold since September 1996. To put that into perspective, back then oil prices were fetching just $19 a barrel, New York Yankees rookie shortstop Derek Jeter was nearing his first World Series title and rap fans were mourning the death of Tupac Shakur. So why is gold getting creamed? It comes down to three key factors: a strong U.S. dollar, China slowing down its gold purchases and little worry about inflation anymore.

1. Strong dollar: A strong greenback hurts commodities that are measured in dollars because it makes them more expensive for overseas buyers. It’s a double negative for gold because the precious metal is supposed to be a hedge against inflation and the devaluing of currency. “Gold has taken it on the chin with the strength in the dollar. Over the past week or so, it was almost like a perfect storm,” said Bob Alderman, head of wealth management at Gold Bullion International, a provider of precious metals. The U.S. dollar lost ground against most currencies on Thursday, giving gold a short reprieve. Gold prices ticked up 0.2% to $1,093 an ounce. But over the coming months, the dollar is expected to keep climbing.

2. China, Iran & Greece: Gold plummeted by as much as $40 an ounce in mere minutes after China’s central bank gave a rare update on how much gold it’s hoarding. The numbers showed the world’s largest gold producer has been stockpiling gold reserves at a slower pace than previously thought, spooking gold investors. Gold has also been hurt by easing tensions in Europe and the Middle East. Iran’s landmark nuclear agreement with the West has lessened some fears about a conflict in that volatile region. Those fears had allowed gold, and more so oil, to trade at a premium. Likewise, Greece landed a last-minute deal with its creditors that allows the crisis-ravaged country to stay in the euro. Investors are no longer speculating about a Greek exit or the long-term implications for the currency union. “The new bailout softened the fear of contagion. That was not a good thing for gold,” said Alderman.

3. What inflation? Inflation worries also remain muted. When gold topped $1,900 in September 2011, some investors bought gold because they feared the Federal Reserve’s money printing would cause runaway inflation. But inflation continues to undershoot the Fed’s goals despite extremely low interest rates and years of massive bond purchases. “Over the last 5,000 years gold has been a store of value that will be there for a time when there is inflation. There is no inflation now,” said George Gero at RBC Capital Markets. In fact, the recent collapse in the commodities complex is only lowering inflation and inflation expectations. Everything from coffee, sugar, beans to crude oil is heading south. Industrial metals like copper and aluminum have renewed their tumble in recent days as soft global economic growth hurts demand and supply gluts deepen. All of that is creating an anti-inflationary environment that sucks the air out of the gold market.

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Does China have a choice?

• Cheap Money Is Here to Stay (Pesek)

For decades, central banks lorded over markets. Traders quivered at the omnipotence of monetary authorities – their every move, utterance and wink a reason to scurry for safe havens or an opportunity to score huge profits. Now, though, markets are the ones doing the bullying. Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.” Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero.

But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6%) and Australia (2.3%), it’s hard not to conclude that ultralow rates will be the global norm for a long, long time. Indeed, the major monetary powers that are easing – Europe, Japan, Australia and New Zealand – have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile – the Fed and Bank of England – are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus.

“As interest rates continue to fall across most of the globe, central banks are also united in their main message: Once rates have come down, they’re likely to stay down,” says Simon Grose-Hodge of LGT Bank. “And when they finally do tighten, the ‘normal’ rate is going to be a lot lower than it used to be.” Could the People’s Bank of China be next? “With underlying GDP growth still looking weak, more monetary policy moves are likely,” says Adam Slater of Oxford Economics. “And China may even face the prospect of short-term rates dropping towards the zero lower bound.”

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But Henry expects a resurge. On what basis, though?

• A 50% Stock Market Plunge Would Not Be A Surprise (Blodget)

As regular readers know, for the past ~21 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise. I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash. So don’t say no one warned you! So far, these concerns have just made me sound like Chicken Little. The S&P 500 is up strongly from where I first sounded the alarm. That’s actually good for me, because I own stocks. But my concerns haven’t changed. Earlier this year, for the first time, I even put (some) money where my mouth is!

In February, I changed the “dividend reinvestment” policy on my S&P 500 fund. (I’m an indexer — I think stock-picking is generally a lousy strategy for individuals.) Specifically, I stopped reinvesting dividends. I’m a long-term investor, so I don’t really care what stocks do next. This dividend change was a bet that, at some point in the future, I will be able to reinvest the cash from these dividends in stocks at lower prices than today. If stock prices never fall below today’s level, this will cost me money. It will also make me feel dumb for (sort of) trying to time the market. But at some point you’ve got to put some money behind what your analysis is telling you. What my analysis is telling me is:

1) stocks are extremely expensive and will eventually revert toward historical means, probably via a sharp correction of 30% to 50%

2) long-term stock returns from today’s level will be about 2% per year — nothing to write home about

So if I think there’s risk of a crash, why don’t I just sell everything? For the reasons outlined below. Again, I don’t care if the stocks I own tank, as long as they don’t tank permanently. A crash will just give me a chance to buy more at lower prices.

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Jim Fouras is a former speaker of the Queensland Parliament.

• Forced Austerity Will Take Greece Back 65 Years (Jim Fouras)

It’s hard to believe that in the last five years, Greece’s financial situation is comparable to those dark days when Germany invaded Greece. For example: a 25% decline in GDP; 25% unemployment (50% among youth); 40% of children living below the poverty line; soaring suicides rates; people cannot afford basic medicines and health care. Austerity measures are suffocating Greece and causing a brain drain that will damage it for generations. German leader Angela Merkel, in unison with the Troika, has forced austerity programs on the Greeks. For five years, Merkel has dominated the crisis management of the Greek economy through her insistence on fiscal rigour and cuts despite a huge economic slump and impoverishment of Greek society.

The IMF has argued internally for at least three years that the organisation was breaching its own rules by taking part in any bailout that held little prospect of achieving the debt sustainability that the IMF rescues prescribed. IMF boss Christine Lagarde ignored this advice. Nobel prize-winning economist Joseph Stigliz argues that “when the IMF arrives in a country, they are only interested in one thing. How do we make sure that banks and the financial institutions are paid … they are not interested in development or what helps a country get out of poverty”. The Troika has assumed their bailout programs would reduce Greece’s debt to well below 110% (of GDP) by 2022. The Guardian has published IMF documents showing that under the best-case scenario, which includes a growth projection of 4% per year for the next five years (a ridiculous assumption), the country’s debt level will drop to 124% Greece’s debt level is now 175% and the nation slid back into recession.

The Greek economy will continue to slide unless there is a significant reduction of its debt and policies that allow Greece to grow at a rate to service those debts. Two days before the recent referendum, the IMF conceded that the crisis-ridden country needs up to 60 billion euros of extra funds over the next three years and large-scale debt relief. Germany will not accept debt relief, consequently it is not the Troika’s agenda. Greece is being forced to sell assets worth €50 billion with the proceeds earmarked for a trust fund supervised by its creditors — foreign leaders demanding almost total surrender of its national fiscal sovereignty. It would be difficult to imagine any sensible seller taking part in such a fire sale. The Greek Parliament will now vote for their country to be poorer.

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“How Greeks will react remains unclear, with much depending on media coverage.”

• Greece Braces For Troika’s Return To Athens (Guardian)

Greece is bracing for the return to Athens of officials representing the reviled “troika” of creditors as the debt-stricken country prepares to start negotiations for a third bailout. Mission chiefs with the EU, ECB and IMF fly into the Greek capital on Friday for talks on a proposed €86bn (£60bn) bailout, the third emergency funding programme for Athens since 2010. The return of the triumvirate, a day after internationally mandated reforms were pushed through the parliament by MPs, marks a personal defeat for the prime minister, Alexis Tsipras, who had pledged never to allow the auditors to step foot in Greece again. How Greeks will react remains unclear, with much depending on media coverage.

“The press will almost certainly make a big deal out of this and the government will try to play it down,” said Aristides Hatzis, a leading political commentator. “But given what people have gone through recently it might seem rather trivial and that is to Tsipras’ advantage. Their presence will definitely reinforce the realisation that another bailout is here.” Much has changed for Tsipras, the young firebrand catapulted into office on promises to eradicate the biting austerity policies that over five years have created record levels of unemployment and poverty. In the six months since his election, the radical leftist has been brought face-to-face with the brute force of fiscal rectitude and a German-dominated Europe.

Addressing parliament ahead of the crucial vote, Tsipras, who succumbed to the demands of foreign lenders earlier this month – accepting an ultimatum to find €12bn of savings, by far the heaviest austerity package to date – conceded that his government had been defeated. But he insisted the alternative – bankruptcy and exit from the euro – would have been catastrophic. He told MPs: “We chose a difficult compromise to avert the most extreme plans by the most extreme circles in Europe.” [..] “We are turning our back on our common battles when in essence we say … austerity and giving into blackmail is a one-way street,” said Panagiotis Lafazanis, who heads the Left Platform, the far-left faction around which mutinous MPs rally around. “Greece does not have a future as a blackmailed eurozone colony under memorandum [bailout],” added the former minister who now advocates a return to the drachma.

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” The drama of the Euro will keep going as long as the Americans want it to, that is until the definitive approval of the TTIP by which the USA will place Europe in subjugation..”

• Italy’s Plan B For An Exit From The Euro (Beppe Grillo)

Tspiras couldn’t have done a worse job of defending the Greek people. Only profound economic short-sightedness together with an opaque political strategy could transform the enormous electoral consensus that brought him into government in January into the victory for his adversories, the creditor countries, only six months later, in spite of winning the referendum in the mean time. An a priori rejection of a Euroexit has been his death sentence. Like the PD, he was convinced that it’s possible to break the link between the Euro and Austerity. Tsipras has handed over his country into the hands of the Germans, to be used like a vassal. Thinking that it’s possible to oppose the Euro only from within and presenting oneself without an explicit Plan B for an exit, he has in fact ended up by depriving Greece of any negotiating power in relation to the Euro.

So it was clear from the beginning that Tsipras would have crashed even though Varoufakis did try to react a few times. Only Vendola, the PD and the media inspired by the Scalfari-style lies (among many) of the United States of Europe and of those who are nostalgic about the Ventotene Manifesto could have believed in a Euro without Austerity. And they are obliged to go on believing in this so as not to have to admit that there is an exit opportunity after seven years of economic disasters. The consequence of this political disaster is before everyone’s eyes:
– Explicit Nazi-ism on the part of those that have reduced the periphery of Europe to a protectorate by using the debt, with alarming echoes of historical parallels.
– Mutism or explicit support for Germany by the oher European countries perhaps because of opportunism (north) or because of subordination (periphery).
– Financial markets that are celebrating the end of democracy with new highs.
– Expropriation of the national wealth by mortgaging €50 billlion of Greek property that ended up in the fund created by Adolf Schauble so as to get to rake in the cash from the war debts.

It was all thought out, foreseen, and planned down to the last detail. The drama of the Euro will keep going as long as the Americans want it to, that is until the definitive approval of the TTIP by which the USA will place Europe in subjugation in a way that is not dissimilar to how Germany is subjugating the periphery. By now the Euro is an explicit battle between the creditors and the debtors. It’s not useful for our government to try to appear to be on the virtuous side of the winners – those supporting the Euro – and supporting reform. It’s not possible to reform the Euro from within but the fight must be fought on the outside and we must abandon this anti-democratic straitjacket. Our debt and lack of growth together with deflation, place us neatly in the category of those who are beaten by debt. Thus we’d do well to prepare ourselves with a government that is explicitly anti-Euro to defend ourselves from the final assault on the wealth of the Italian people who are ever more at risk, unless we reclaim our monetary sovereignty.

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“[This] is how not to lose the first battle we will face when the time comes to break away from the union and the ECB..”

• Beppe Grillo Wants Nationalisation Of Italian Banks, Exit From Euro (Guardian)

The populist leader of Italy’s second largest political party has called for the nationalisation of Italian banks and exit from the euro, and said the country should prepare to use its “enormous debt” as a weapon against Germany. Former comedian-turned-politician Beppe Grillo, who transformed Italian politics when he launched his anti-establishment Five Star Movement in 2009, has long been a bombastic critic of the euro. But his stance hardened significantly in a blogpost on Thursday in which he compared the Greek bailout negotiations to “explicit nazism”. Grillo constructed what he called a “Plan B” for Italy, which he said needed to heed the lessons of Greece so that it was ready “when the debtors come round”.

His plan called for Italy to adopt a clear anti-euro stance and to shake off its belief that – if forced to accept tough austerity – other “peripheral” countries would come to its aid. Grillo said Italy had to use its enormous €2tn (£1.4bn) debt as leverage against Germany, implying that the potential global damage of an Italian default would stop Germany from “interfering” with Italy’s “legitimate right” to convert its debt into another currency. He said Greece’s hand had been forced by the threat of bankruptcy to its banks, and that Italy therefore needed to nationalise its banks and shift to another currency. “[This] is how not to lose the first battle we will face when the time comes to break away from the union and the ECB,” Grillo wrote.

Setting aside Grillo’s colourful language and analogies, analyst Vincenzo Scarpetta of Open Europe said there was some merit to his arguments. “That blogpost does have some elements of truth,” Scarpetta said. “The lesson from Greece was that if you want to be in the eurozone you have to agree to rules of austerity.” The strength of anti-euro sentiment in Italy is easy to overlook since Matteo Renzi, the centre-left prime minister and head of the Democratic party, is a strong defender of Italy’s role in the eurozone. But Scarpetta pointed out that supporters of the Five Star Movement, coupled with supporters of the rightwing Northern League, which is also anti-euro, means that about 40% of Italians are at least sympathetic to anti-euro sentiments.

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No, really, M5S was the biggest single party in the latest elections. Renzi got in because of a ‘vote link’ between his party and another one.

• Grillo Calls For Italy To Throw Off Euro ‘Straitjacket’ (FT)

Beppe Grillo, the leader of Italy’s populist Five Star Movement, has launched a full-throated attack on the euro, saying Rome should abandon what he called an “anti-democratic straitjacket”. Mr Grillo, whose party is the second most popular in Italy, demanded the government formulate a “plan B” to exit the single currency and “take back our monetary sovereignty”. The comedian has become an increasingly trenchant critic of the euro at a time of rising euroscepticism across the Italian political landscape, spurred in part by the agonies of Greece and its prolonged bailout talks. But his attack on the single currency in an extensive blog post was nonetheless remarkable for its ferocity.

It suggests Mr Grillo sees a political opportunity in doubling down on his anti-euro message in the wake of Greece’s last-minute acceptance of exacting terms for a third bailout. It is also a sign of political contagion, or concerns that populist forces might gain traction from the Greek crisis. The Five Star Movement has been rising steadily in the polls since March. It is now garnering the support of nearly 25% of Italian voters and has narrowed the gap with the ruling centre-left Democratic party led by Matteo Renzi, the prime minister. Mr Grillo was particularly scathing about Alexis Tsipras, the Greek prime minister, whom he had professed to admire before the deal was reached. “It would be difficult to defend the interests of the Greek people worse than Tsipras did,” Mr Grillo wrote.

“His refusal to exit the euro was his death sentence. He was convinced that he could break the marriage between the euro and austerity, but ended up delivering his country into Germany’s hands, like a vassal.” To avoid that fate, Mr Grillo said Italy should use its heavy debt load — worth more than €2tn, or 130% of GDP — as a threat. “[The debt] is an advantage that allows us to be on the offensive in any future negotiation, it is not a bogeyman that should make us bite at any request from our creditors,” he said.

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“Its €2.3 trillion debt, more than 132% of GDP, is second only to Greece in the euro area. Italy has lost a quarter of its industrial output, and GDP has contracted by 9% since 2007.“

• Italy Leans While Greece Tumbles (Bloomberg)

Viewed from Berlin or London, the financial woes of Italy and Greece can look dangerously similar. Both sit on mountains of public debt and suffer from double-digit unemployment. So why hasn’t Italy had to shutter banks, submit to austerity measures in return for emergency loans, and contemplate an exit from the euro? For now Italy is chugging along, paying its debts and selling bonds. Its benchmark stock index is up 25% this year. It’s emerging from a record recession even as Greece enters a new slump after a brief rebound in 2014. Rome-based Eni, Europe’s No. 4 oil company, is pumping 1.7 million barrels per day globally and says output will keep rising. Finmeccanica sells helicopters to corporations and armed forces from the U.K. to China. Carnival cruise liners are made in Fincantieri’s Trieste shipyard.

Italian luxury goods, from Fendi to Ferrari, are at the top of consumer shopping lists. Among European manufacturers, Italy trails only Germany in production. The Greeks? They’ve got tourism and shipping and little else, says Marc Ostwald, a fixed income strategist at ADM Investor Service in London. Greek exports fell 7.5% in the first quarter, while Italy’s rose more than 3%. Tourism in Italy generated about €34 billion last year, almost triple what it did in Greece. With 60 million residents, Italy is more than five times as populous as Greece. History makes a difference, too. Rebuilding from World War II, Italy set off on the Dolce Vita boom years, popularizing the Vespa scooter and making a mark in international design.

Nutella, a nut-based chocolate spread introduced after the war, had annual sales of €8.4 billion last year, making the Ferrero family one of Italy’s richest. Greece, by contrast, went from government by junta in the 1960s and 1970s to a republic run by a political elite and a bloated government in the 1980s. Cutting its civil service and pension costs down to an appropriate size lies at the heart of the struggle between Greece and Europe on economic reform. Italy’s strength as an industrial exporter has provided stability, helping the country build up gold reserves of $90 billion—the world’s third-biggest stash after the U.S. and Germany and more than 20 times what Greece holds. Just a single Italian bank needed a public bailout after the 2008 crisis, even as dozens of lenders in northern Europe had to dip into state coffers to stay open.

[..] Italy may yet become another Greece. Aside from the recent uptick in growth, its numbers are grim. The global financial crisis of 2008-09, followed by the euro debt crisis, triggered the deepest and longest recessions in Italy’s postwar history. Its €2.3 trillion debt, more than 132% of GDP, is second only to Greece in the euro area. Italy has lost a quarter of its industrial output, and GDP has contracted by 9% since 2007. As a member of the euro zone, Italy can’t counter falling foreign demand by devaluing its currency, as it often did when the lira was in use. Unemployment is 12.5%, and 45% among youth—many of whom flee abroad. “Some of my best pupils, who speak English and other languages, have had to move to the U.K. or Germany to find jobs and a better future,” says Ivo Pezzuto at Università Cattolica in Milan

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“..we don’t believe in it and we should not be trying to implement a program whose logic we contest.”

• Interview: Yanis Varoufakis (ABCLateline)

EMMA ALBERICI: What was the point of the referendum then? The Greek people told you they didn’t want you to cave in to the demands from your eurozone partners and the IMF, but then that’s exactly what you’ve ended up doing.

YANIS VAROUFAKIS: That’s an excellent question, isn’t it? Let me remind you that on that night, the night of the referendum when I discovered that my prime minister and my government were going to move in the direction that you’ve mentioned, I resigned my post. That was the reason why I resigned, not because anybody else demanded it.

EMMA ALBERICI: So would it surprise you if you were forced back to the polls and indeed if you lost the next election?

YANIS VAROUFAKIS: Nothing would surprise me these days in Europe. We seem to be doing the wrong thing consistently. It’s a comedy of errors, from 2010 onwards. It’s my considered opinion that the responsible thing to do for our party will be to hand over the keys of government to those who believe in this program, in this fiscal consolidation reform program and the new loan, ’cause we don’t believe in it and we should not be trying to implement a program whose logic we contest.

EMMA ALBERICI: And it’s curious because at a time when Australia is debating a rise in the GST from 10 to 15%, the Greek people have seen their GST go up from 13 to 23% on public transport and processed foods. I mean, you didn’t get voted in to government – you actually got voted into government promising the opposite: no more austerity.

YANIS VAROUFAKIS: Precisely. It’s the reason why I resigned. To increase VAT in a broken economy like Greece to 23%, in an economy where the problem is not that the tax rates were too low, but the tax take was too low because of tax evasion. I spent five months in the Ministry of Finance trying to devise ways of having a new social contract between the state and the Greek people, the basis of which would be: we will reduce the rates for you, but you will pay it and you will not evade. And then you have the troika of lenders, the creditors, ruthlessly, effectively implementing the policies of a coup d’etat and putting our Prime Minister in a position where he had to choose between measures like the ones you mentioned, pushing VAT up to exorbitant heights, and therefore condemning our tax take to be reduced significantly or having our banks remain shut forever. This is a major assault both on rationality and on European democracy.

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“with the hope that my comrades will gain some time, and that we, all of us, united, will plan a new resistance to autocracy, misanthropy, and the (facilitated) acceleration and deepening of the crisis.”

• “Why I Voted ‘YES’ Tonight” (Yanis Varoufakis)

[..] .. in the document that I had sent to the institutions, I was merely accepting the responsibility of a “new Civil Code” and certainly not the one they would dictate. Nor would I have ever imagined that our government (under the supervision of the Troika) would accept to submit all those changes to the Parliament under the label “urgent”, thus negating all the adjustments and annulling the Parliament. Last Wednesday I had no other choice but to vote with a thunderous NO. Mine came to stand beside the NO that 61.5% of our compatriots answered to a capitulation under the infamous TINA (there is no alternative). I

have denied this for the past 35 years in all 4 continents where I have lived. Today, tonight, those two measures, which I had myself proposed on February, are introduced to the Greek Parliament in a manner that I had never imagined; a manner which adds no credit to the government of SYRIZA. My disagreement with the way we handled the negotiations after the referendum is essential. And yet, my main goal is to protect the unity of SYRIZA, to support A.Tsipras, and to stand behind E.Takalotos. I have already explained all that in my article with the title Why I voted NO published in EfSyn .

Accordingly, today I will vote YES, for two measures that I, myself, had proposed, albeit under radically different conditions and requirements. Unfortunately I am certain that my vote will not be of any help to the government towards our common goals. And that is because the Euro Summit “prior actions’ deal was designed to fail. I will, however offer my vote with the hope that my comrades will gain some time, and that we, all of us, united, will plan a new resistance to autocracy, misanthropy, and the (facilitated) acceleration and deepening of the crisis. (i) This morning, while participating at the Financial Committee of the parliament, I ascertained that no colleague of mine, not even the Minister of Justice, agreed with the new civil code. It was a sad spectacle.

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Daniel Munevar is a 30-year-old post-Keynesian economist from Bogotá, Colombia. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis”

• Why I’ve Changed My Mind About Grexit (Daniel Munevar)

What do you make of the latest bailout agreed between Greece and its creditors? Well, first of all it’s still not clear that there will be an actual agreement – there are several parliaments that need to approve their country’s participation in an ESM bailout. And even if they somehow reach an agreement, there is simply no way it can work. The economics of the program are just insane. They haven’t announced the precise fiscal targets yet, but if we look at the Debt Sustainability Analyses (DSAs) published by the IMF and the Commission, they both state that the target should be a 3.5% primary surplus in the medium term.

But if you look at what has happened over the course of the past five years, Greece has managed to ‘improve’ its structural balance by 19 points of GDP. During that same time, GDP has collapsed by about 20% – that’s an almost one-to-one relation. So if you start from -1% – which is the general assumption for this year – to make it to 3.5 means you need an adjustment of over 4% of GDP, which means GDP will collapse by another 4 points between now and 2018. This brings us to another point, which is that the current agreement is just a taste of things to come. The final Memorandum of Understanding (MoU) is definitely going to contain much harsher austerity measure than the ones currently on the table, to offset the drop in GDP that we have witnessed in the past months as a result of the standoff with the creditors.

The problem is that these Memorandums are turning Greece into a debt colony: you’re basically creating a set of rules which, as the government misses its fiscal targets – knowing for a fact that it will –, will force the government to keep retrenching even more, which will cause GDP to collapse even further, which will mean even more austerity, etc. It’s a never-ending vicious circle. This underscores one of the core problems of this whole situation: i.e., that the institutions have always disentangled the fiscal targets from the debt sustainability analyses. The logic of having debt relief is that it allows you to basically have lower fiscal targets and distribute over time the impact of fiscal consolidation. But in Greece’s case, even if there is debt relief on the scale that they are suggesting – which is unlikely – Greece will still have to implement massive consolidation, on top of everything that has been already done.

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“.. in exchange for these loans, Merkel obtained much greater control over all eurozone governments’ budgets through a demand-sapping, democracy-constraining fiscal straitjacket..”

• The Eurozone’s German Problem (Philippe Legrain)

The eurozone has a German problem. Germany’s beggar-thy-neighbor policies and the broader crisis response that the country has led have proved disastrous. Seven years after the start of the crisis, the eurozone economy is faring worse than Europe did during the Great Depression of the 1930s. The German government’s efforts to crush Greece and force it to abandon the single currency have destabilized the monetary union. As long as German Chancellor Angela Merkel’s administration continues to abuse its dominant position as creditor-in-chief to advance its narrow interests, the eurozone cannot thrive – and may not survive. Germany’s immense current-account surplus – the excess savings generated by suppressing wages to subsidize exports – has been both a cause of the eurozone crisis and an obstacle to resolving it.

Before the crisis, it fueled German banks’ bad lending to southern Europe and Ireland. Now that Germany’s annual surplus – which has grown to €233 billion, approaching 8% of GDP – is no longer being recycled in southern Europe, the country’s depressed domestic demand is exporting deflation, deepening the eurozone’s debt woes. Germany’s external surplus clearly falls afoul of eurozone rules on dangerous imbalances. But, by leaning on the European Commission, Merkel’s government has obtained a free pass. This makes a mockery of its claim to champion the eurozone as a rules-based club. In fact, Germany breaks rules with impunity, changes them to suit its needs, or even invents them at will. Indeed, even as it pushes others to reform, Germany has ignored the Commission’s recommendations.

As a condition of the new eurozone loan program, Germany is forcing Greece to raise its pension age – while it lowers its own. It is insisting that Greek shops open on Sundays, even though German ones do not. Corporatism, it seems, is to be stamped out elsewhere, but protected at home. Beyond refusing to adjust its economy, Germany has pushed the costs of the crisis onto others. In order to rescue the country’s banks from their bad lending decisions, Merkel breached the Maastricht Treaty’s “no-bailout” rule, which bans member governments from financing their peers, and forced European taxpayers to lend to an insolvent Greece. Likewise, loans by eurozone governments to Ireland, Portugal, and Spain primarily bailed out insolvent local banks – and thus their German creditors.

To make matters worse, in exchange for these loans, Merkel obtained much greater control over all eurozone governments’ budgets through a demand-sapping, democracy-constraining fiscal straitjacket: tougher eurozone rules and a fiscal compact.
Germany’s clout has resulted in a eurozone banking union that is full of holes and applied asymmetrically. The country’s Sparkassen – savings banks with a collective balance sheet of some €1 trillion ($1.1 trillion) – are outside the European Central Bank’s supervisory control, while thinly capitalized mega-banks, such as Deutsche Bank, and the country’s rotten state-owned regional lenders have obtained an implausibly clean bill of health.

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Fischer (German Foreign Minister and Vice Chancellor from 1998-2005) is still a major voice in Germany. But he’s been awkwardly silent.

• The Return of the Ugly German (Joschka Fischer)

In terms of foreign policy, Germany rebuilt trust by embracing Western integration and Europeanization. The power at the center of Europe should never again become a threat to the continent or itself. Thus, the Western Allies’ aim after 1945 – unlike after World War I – was not to isolate Germany and weaken it economically, but to protect it militarily and firmly embed it politically in the West. Indeed, Germany’s reconciliation with its arch-enemy, France, remains the foundation of today’s European Union, helping to incorporate Germany into the common European market, with a view to the eventual political unification of Europe. But in today’s Germany, such ideas are considered hopelessly “Euro-romantic”; their time has passed.

Where Europe is concerned, from now on Germany will primarily pursue its national interests, just like everybody else. But such thinking is based on a false premise. The path that Germany will pursue in the twenty-first century – toward a “European Germany” or a “German Europe” – has been the fundamental, historical question at the heart of German foreign policy for two centuries. And it was answered during that long night in Brussels, with German Europe prevailing over European Germany. This was a fateful decision for both Germany and Europe. One wonders whether Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble knew what they were doing. To dismiss the fierce criticism of Germany and its leading players that erupted after the diktat on Greece, as many Germans do, is to don rose-tinted glasses.

Certainly, there was nonsensical propaganda about a Fourth Reich and asinine references to the Führer. But, at its core, the criticism articulates an astute awareness of Germany’s break with its entire post-WWII European policy. For the first time, Germany didn’t want more Europe; it wanted less. Germany’s stance on the night of July 12-13 announced its desire to transform the eurozone from a European project into a kind of sphere of influence. Merkel was forced to choose between Schäuble and France (and Italy). The issue was fundamental: Her finance minister wanted to compel a eurozone member to leave “voluntarily” by exerting massive pressure.

Greece could either exit (in full knowledge of the disastrous consequences for the country and Europe) or accept a program that effectively makes it a European protectorate, without any hope of economic improvement. Greece is now subject to a cure – further austerity – that has not worked in the past and that was prescribed solely to address Germany’s domestic political needs. But the massive conflict with France and Italy, the eurozone’s second and third largest economies, is not over, because, for Schäuble, Grexit remains an option. By claiming that debt relief is “legally” possible only outside the eurozone, he wants to turn the issue into the lever for bringing about a “voluntary” Grexit.

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“Behind the curtain, the federalization of Europe is the ultimate goal, although politicians always denied that in front of the curtain.”

• Schäuble – The Man Behind the Throne (Martin Armstrong)

Many Europeans are starting to see a very hard-line German position championed by Schäuble, which they are characterizing behind the curtain as a more selfish edge by demanding painful measures from Athens and resisting any firm commitment to granting the Greek relief from crippling debt, despite the fact that it was such debt relief that enabled Germany to recover. Yet the position of Schäuble from the outset was his vision that the other nations must coordinate with the core, of which the other nations were not actually regarded. That perception of a selfish Germany has been fueled by Schäuble’s statement suggesting that Greece would get its best shot at a substantial cut in its debt ONLY if it was willing to give up membership in the European common currency. Schäuble is expected to take his tough stance once again with the next crash candidate. For many, that appears to be Italy, which is now considered the greatest risk within Euroland. Yet, his views are spelled out in his 1994 paper.

Schäuble seems to have foresaw the crisis back in 1994, distinguishing between core members and non-core members. Therefore, his thinking is quite different from that of France. Paris has jumped the gun after the Greece disaster and now want a core Europe push, but clearly with Italy as a full-fledged member into a new federalized Europe. Behind the curtain, the federalization of Europe is the ultimate goal, although politicians always denied that in front of the curtain. The curtain is starting to be drawn, but the equal federalization of Europe was never part of the German mindset. There seems to be a conflict emerging between Germany and France because France wiped out its economy with insane taxation. It too will fall in this next downward cycle.

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Schäuble has of course been at least as detrimental as Varoufakis to the conversation, but he’s still in place. Go figure.

• German FinMin Schäuble’s Tough Tone Heightens Uncertainty Over Bailout (WSJ)

Germany’s finance chief departed for his annual vacation on a posh North Sea island on Thursday, leaving the capital to mull a summer mystery that could decide Greece’s fate: What’s going on with Wolfgang Schäuble? Over the past two weeks, the 72-year-old Mr. Schäuble has puzzled even German officials who know the finance chief well with remarks questioning the wisdom of a new bailout for Greece. He has also hinted he might resign over differences with Chancellor Angela Merkel. The comments mark a shift to a more hawkish tone for Germany’s longest-serving national politician, whose career has been defined by loyalty to his political allies and to the idea of European integration.

They also underscore the fragility of last week’s agreement among eurozone leaders to work toward a new bailout deal for Greece, which governments will need to sign off on as early as next month. A person who works closely with Mr. Schäuble said the minister remained guided by a commitment to European interests—and that giving in to Greek demands, for instance, by forgiving debt would damage the EU’s credibility. The Finance Ministry is working to lay the groundwork for a new bailout, the person said, even though Mr. Schäuble’s preferred solution would have been for Greece to agree to a temporary “timeout” from the euro.

But Mr. Schäuble’s open skepticism over whether a new bailout would work has heightened uncertainty over what would happen once officials representing international creditors reached a preliminary deal with Athens, which is expected in the middle of next month. Over the weekend, Mr. Schäuble mused in response to a German magazine interviewer’s question about his differences on Greece with Ms. Merkel that he would resign if someone forced him to violate the responsibilities of his office. “I could go to the president and ask for my dismissal,” Mr. Schäuble told Der Spiegel, before adding that he wasn’t, in fact, considering resigning.

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“Greece was only a pipe through which French and German banks, for the most part, saved themselves.”

• Greece: Out of the Mouth of “Foreign Affairs” Comes the Truth (Bruno Adrie)

In an article by Mark Blyth titled “A Pain in the Athens: Why Greece Isn’t to Blame for the Crisis” and published on July 7th 2015 in Foreign Affairs, one discovers surprising statements, which are all the more surprising when one knows that this magazine is published by the Council on Foreign Relations that gathers the American élite, the New-Yorker banking élite being there for the most part. According to the author, “Greece has very little to do with the crisis that bears its name”. And, to make us understand this, he invites us to “follow the money—and those who bank it”. According to him, the origins of the crisis are not to be looked for in Greece but “in the architecture of European banking”.

Indeed, during the first decade of the euro, European banks, attracted by easy money, granted massive loans in what the author calls “the European periphery”, and, in 2010, in the middle of the financial crisis, banks had accumulated impaired periphery assets corresponding to €465 billion for French banks and €493 billion for German banks. “Only a small part of those impaired assets were Greek”, but the problem is that, in 2010, Greece published a revised budget equivalent to 15% of the GDP. Nothing to be afraid of actually since it only represented 0.3% of the Eurozone’s GDPs put together. But, because of their periphery assets and above all a leverage rate* twice as high—that is to say twice as risky—as the American banks’, European banks feared that a Greek default would make them collapse.

This is what really happened. The banks’ insatiable voracity led them, as always, to act carelessly, and, as they did not accept their failure, as always, they made sure that others would foot the bill. Nothing new under the golden sky of the Banking Industry, unless, this time, it went a bit further than usual. These banks set up the Troïka program in order to “stop the bond market bank run”. And no matter if it increased unemployment by 25% and destroyed the third of the country’s GDP. It doesn’t make much difference to the bankers. This is what the rescue plans have been used for. Apparently aimed at Greece, they were created by and for the major European banks. Today, given that the Greek can no longer pay French and German banks, even the European taxpayers are solicited.

Greece was only a pipe through which French and German banks, for the most part, saved themselves. On the total amount of €203 billion that represents the two rescue plans (2010-2013 and 2012-2014), 65% went right to the banks’ vaults. Some people even go so far as to say that 90% of the loans did not pass through Greece. This approach, expressed in the columns of Foreign Affairs, cannot be seen as heterodox. It is even confirmed by the ex-director of theBundesbank, Karl Otto Pöhl, who acknowledged that the rescue plan was meant to save the banks, and especially the French banks, from their rotten debts.

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The idea is to get the whole population on its kness.

• Greek Store Closures Spike As Recession, Austerity Return (AP)

Running a business in Koukaki is becoming a struggle. Shop-owners in the central Athens neighborhood, one of the capital city’s most financially diverse, are finding it a lot more difficult to get by. They could be cutting hair or selling extra-large shirts – it makes no difference. Their tales of hardship can be repeated up and down the country of nearly 11 million people. Empty storefronts are again a feature of Greeces towns and cities amid a crisis that put Greece’s future in the euro in doubt. The downturn worsened after the late-June decision by the Greek government to impose a series of strict controls on the free flow of money, with a paltry 60-euro a day limit on daily withdrawals from ATMs. Though banks reopened this week for the first time in more than three weeks, the ATM withdrawal limit is unchanged and cash is becoming scarce.

For an economy where cash payments are the norm, that’s a problem. In Koukaki, about 2 kilometers south of downtown Athens, 65-year-old mechanic Giorgos Prasinoudis is angry. His wife and 11-year-old daughter have already moved to Germany – the country that’s ironically blamed for many of the economic and social problems afflicting Greece. On Wednesday, he sat drinking coffee on the sidewalk outside his motorcycle repair shop, with posters of bikes and children’s drawings pinned to the wall. Hes closed the store after 32 years. A “For Sale” sign is taped to the window. “It’s over for Greece. We won’t recover for another 50 years,” he said. “The country borrowed so much money, those who benefited left the country, and ordinary people have been handed the bill …

I hope my daughter learns German and doesn’t come back. Not even for a holiday.” Prasinoudis is one of the countless victims of Greeces economic crisis. Locked out of international bond markets in the spring of 2010, the country has relied on foreign rescue money to pay its debts – on condition that tough austerity measures, such as cuts to spending and increases in taxes were imposed. The cost has been huge. A million jobs, mostly in the private sector, have been lost since then ? around a fifth of the country’s workforce. But after appearing to stabilize last year, the Greek economy has gone into reverse but unemployment remains high. At last count, unemployment was still over 25% and more than 50% for the under-25s.

Alongside the capital controls, the government imposed a new round of austerity, raising sales taxes and levies on businesses, while maintaining emergency taxes on households that have eaten up disposable incomes. Early Thursday, parliament approved a second round of measures demanded by rescue creditors for a new bailout. Retail associations fear a return to the peak levels of unemployment around 2012 when they were hit by a surge of business failures.

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“The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.”

• A Few Thoughts On Greek Shipping And Taxes (Papaeconomou)

We have all witnessed a lot of Greek drama during the past few weeks as the impasse between the Greek government and its international creditors reached its climax. It now appears that after months of terse negotiations between the two parties, Greece has finally agreed to pass and implement austerity measures in exchange for financial aid. One of the innocent bystanders in all this has been the Greek shipping community. As part of the broad agreement between Athens and the Eurozone, the Greek government has undertaken to increase the tonnage tax, a flat tax that is assessed each year on all ships that are managed by shipping companies based in Greece.

As expected the shipping community has been up in arms crying foul over the proposed tax and threatening to leave to more tax-friendly locales like Monaco, Dubai, or Singapore. This has made me wonder: what would be the effect of increased tonnage tax on a shipping company’s running costs?

[..] Let’s assume for example that the Greek government unilaterally doubles the tonnage tax in accordance with the agreement provision. Star Bulk Carriers will have to pay an additional $129 per ownership day. Is this amount really the straw that will break the camel’s back and force a mass exodus of Greek shipping companies to greener pastures? I don’t think so. But let’s further assume that Greek shipping companies do decide to move to Monaco, Dubai, Singapore, or even London or New York. Have shipping executives done a cost of living comparison between say Monaco or New York City and Athens? The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.

I believe the lobbying on behalf of Greek ship-owners is not about tonnage taxes, but about keeping their income tax-free status. Greek ship-owners are some of the hardest-nosed traders you can find. I don’t believe a tempest in a teapot will cloud their business acumen. I suspect that they will cut a deal with the taxman sooner or later, and if I may add, for the benefit of both sides.

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EU doesn’t want to help.

• Greek Financial Crisis Makes Its Migration Crisis Worse. EU Must Help. (WaPo)

Greece’s problems are many. Thanks to the financial crisis, citizens have endured long ATM lines and shortages in stores. Greece may be the last place in Europe equipped to handle its newest problem: record numbers of migrants, particularly Syrians, arriving daily by boat. Since the beginning of 2015, an astounding 79,338 migrants have arrived by sea, 60% of whom are Syrian. Slightly more migrants have transited to Greece than to Italy, a reversal from 2014, when Italy received 170,100 migrants and Greece only 34,442 total, according to estimates from the International Organization for Migration. These migrants pay traffickers exorbitant fees and risk their lives on dangerous journeys. Once arrived, they find the small communities on Greece’s many islands totally overwhelmed and unable to help. Most try to move northwards, to states like Hungary, via the Balkans.

Other migrants remain in hungry squalor throughout Greece. UNHCR recently reported more than 3,000 refugees in makeshift accommodations at a site on the northern Aegean island of Lesbos. Refugees kept in detention centers have limited access to electricity and water. Dozens sleep on makeshift pallets in the Kos police station courtyard. Greece’s financial crisis exacerbates xenophobia and discrimination against migrants. While many Greeks have rallied to help the migrants, the far-right portrays these migrants as taking precious resources and sullying Greek culture. Golden Dawn, a far-right party, said “We will do everything we can to protect the Greek homeland against immigrants.” Even before the 2015 surge, 84% of adults in Greece wanted decreased immigration — the highest proportion in the world — according to 2012 and 2014 Gallup interviews.

And Greece’s No. 1 industry, tourism, could suffer. Migrants crowd the sidewalks of island resort towns beside vacationers, but the contrast could hardly be starker between the wet and hungry arrivals from Iraq, Afghanistan and Syria, and the European tourists who dine on fine meals and rest in posh surroundings. Many migrants fleeing conflict-ridden states have walked almost 40 miles across Greece, sick, exhausted and sometimes pregnant, because they were not allowed to take public or private transportation due to a law that equated anyone assisting migrants with human smugglers. The law — overturned this month — kept both private citizens and public buses from driving migrants that landed in Greece without being rescued by coast guards.

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It needs to be abandoned.

• Abenomics Needs To Be ‘Reloaded’, Warns IMF (CNBC)

Japan needs to reduce its reliance on a weak yen to reflate its economy, the IMF warned, as it called on authorities to speed up “high impact” structural reforms and prepare for further monetary easing. “The Bank of Japan needs to stand ready to ease further, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target in a stable manner,” the IMF said in its 2015 Article IV Consultation with Japan published late Wednesday. Under current policies, the central bank won’t meet its 2% inflation target in the medium-term, or over a five-year horizon, according to the international lender. After rising to 1.5% in mid-2014, core inflation – excluding fresh food and the effects of the consumption tax increase – has declined rapidly and has been close to zero since February 2015.

“Abenomics needs to be reloaded so that policy shortcomings do not become a drag on growth and inflation,” the IMF said. Abenomics refers to three-pronged economic revival plan launched by Prime Minister Shinzo Abe in late 2012, consisting of monetary easing, fiscal expansion and structural reforms. Deeper structural reforms must accompany further easing if the government is to achieve its inflation goal, the IMF stressed. “With the exception of corporate governance and some progress on female labor force participation, structural reforms have not yet been in areas that could provide the biggest bang for the buck,” it said.

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Much too late.

• Australia Weighs Steps to Rein In Sydney Property (WSJ)

Fast-rising house prices are prompting regulators in New Zealand and Australia to try, or consider, measures to prick nascent bubbles in single cities, an unusual move for any country. In Auckland, New Zealand’s biggest city, property prices have jumped 17% over the past year, compared with a nationwide average of 9.3%, and now are more than 50% higher than eight years ago. Sydney prices have risen about four times as fast as those in almost all other Australian state capitals in the past 12 months. It is rare for countries to focus tough new clamps on a single city or district. But a surge in homegrown speculators, and of buyers from countries such as China, has left too many people chasing too few properties in Sydney and Auckland.

Policy makers are increasingly concerned that a sudden crash could derail their economies. In Australia, Sydney-specific regulation is merely under discussion. But in New Zealand, measures to limit the impact of a price surge in Auckland are in place already: From October, real-estate investors in the city will be required to put down deposits of at least 30% on properties they want to purchase. No such rules will apply to property investment in other cities. Until now, Australian policy makers have sought to temper house-price growth by restricting lending to speculators and making it costlier to provide mortgages to residential buyers generally, anywhere in the country. In the past several weeks, however, the central bank has made clear it sees the issue as essentially a local one, describing soaring prices in the nation’s most populous city as “crazy.”

The narrowing focus on Sydney has triggered speculation that similar moves to New Zealand’s may be in the offing, steered by the banking regulator. “The boom is now quite singularly in Sydney,” said George Tharenou at UBS. “It’s difficult and very micro to target Sydney house prices, but it’s getting to the point where it needs to be considered.” Earlier this month, Citigroup said the risk of a crash had become so real that it was time to stop banks lending so freely to Sydney property investors specifically. “The horse has already bolted,” said Paul Brennan at Citi Research, Australia. “Additional prudential measures directed at the Sydney market may be unavoidable, even if it is late in the cycle.”

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