Mar 032015
 
 March 3, 2015  Posted by at 10:53 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


William Henry Jackson Saltair Pavilion, Great Salt Lake 1900

Heta Senior Bonds Plunge as Austria Cuts Off Aid to Bad Bank (Bloomberg)
The Great Global Monetary Easing of 2015 May Be Done by Midyear (Bloomberg)
Fed Ushers In A New Era Of Uncertainty On Rates (Hilsenrath at FT)
To Beat Austerity Greece Must Break Free From The Euro (Costas Lapavitsas)
Greece Eyes Last Central Bank Funds To Avert IMF Default (AEP)
Mixed Messages On Third Greek Bailout Talks (Reuters)
Greeks in the Crisis: ‘We Need To Explain Ourselves’ (Spiegel)
Investor Survey Shows 38% Chance Of Eurozone Break-Up In 12 Months (Reuters)
French Factory Decline Even Worse Than Greece (Telegraph)
Spain To Split? Snap Vote On Catalan Independence (CNBC)
Portugal’s Successful Turnaround? A Fairy Tale (The Globalist)
Tough Talk On Greece Alone Won’t Boost Ireland, Spain At Home (Reuters)
European Union Showing ‘Signs Of Strain’ (BBC)
China Will End Up Like Japan, Says Observer Who Called It In 1990 (Bloomberg)
Gaddafi’s Cousin Warns Of A ‘9/11 In Europe Within Two Years’ (Independent)
US to Deploy Six National Guard Companies to Ukraine This Week (Sputnik)
Heroes and Villains (Jim Kunstler)
Syrian Conflict Is The World’s First ‘Climate Change War’ (Independent)

Timebomb: who’s going to want to buy anything EU anymore? “..the first test of the EU’s Bank Recovery and Resolution Directive, which takes full effect across the bloc next year..”

Heta Senior Bonds Plunge as Austria Cuts Off Aid to Bad Bank (Bloomberg)

Senior bonds of Heta Asset Resolution tumbled to record lows after Austria said it won’t pump more money into the “bad bank,” the first test of European legislation designed to ensure investors pay for bank failures. Austria’s decision to cut funding to the vehicle that’s winding down assets of the failed Hypo Alpe-Adria-Bank International AG is the first test of the EU’s Bank Recovery and Resolution Directive, which takes full effect across the bloc next year. The rules, which Austria implemented earlier than most EU member states, give regulators the power to impose losses on both shareholders and creditors in the event of a bank collapse. The EU enacted the bank-resolution law last year in a bid to end taxpayer bailouts that prevailed in the financial crisis.

The bloc granted €661 billion for recapitalization and asset-relief measures from 2008 to 2013, according to European Commission data. Member states had to transpose the directive into national law by the end of 2014 and have until Jan. 1, 2016 to apply all rules. Heta’s €2 billion of 4.375% notes maturing in January 2017 plunged 19 cents on the euro to 46 cents, according to data compiled by Bloomberg. The company’s €450 million of floating-rate notes due March 6 slumped 37 cents to 46 cents on the euro, the data show. Austria cut support for Heta, which has already cost taxpayers about €5.5 billion in aid, after it notified the government it had a capital shortfall of as much as €7.6 billion, the Austrian Finance Ministry said in a statement on Sunday.

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No more steam.

The Great Global Monetary Easing of 2015 May Be Done by Midyear (Bloomberg)

The rush began in Tashkent, capital of Uzbekistan, on Jan. 1. The former Soviet state enacted the first interest-rate reduction of 2015. Since then, the cuts have come thick and fast, with the People’s Bank of China on Saturday becoming the 17th central bank of 57 monitored by Bloomberg News to pare its benchmark. By the end of this week, the list will probably include Poland. Some economists also forecast Australia and Canada will act for the second time this year. Norway, Hungary and Thailand will all join the party this month, followed by South Korea in April, according to JPMorgan economists led by Bruce Kasman.

Out of room on rates, the European Central Bank is set to begin its €1.1 trillion bond-buying program. And that may be that. For all the fireworks, the rate cutting may be over by the middle of the year as deflation worries ebb. Oil appears to be finding a bottom around $60 a barrel and global growth is firming. In the developed world, a measure of inflation expectations based on bond yields rose in January and February to 1.28% on Feb. 27, ending an eight-month slump, data compiled by Bank of America show. That backdrop has JPMorgan predicting the Federal Reserve will raise interest rates in June for the first time since 2006 and, in doing so, end the international easing cycle.

On the other hand, Goldman Sachs. and Morgan Stanley predict docile inflation will persuade the Fed to hold off. New-York based JPMorgan sees the average interest rate for the world bottoming at 2.46% this month before rising to 2.59% by the end of the year. The measure for developed economies will more than double to 0.58% from 0.22%, led by the Fed. “A deflationary wave is about to break,” Kasman wrote last week. So, what began in Uzbekistan may end in the U.S.

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You’ve been warned.

Fed Ushers In A New Era Of Uncertainty On Rates (Hilsenrath at FT)

Investors these days are obsessing over when the Federal Reserve will start raising short-term interest rates. Drawing less scrutiny is where rates will end up in the long run and how they’ll get there. But it’s time to start paying attention. Fed officials have made clear they expect to begin raising short-term interest rates from near-zero this year, though not before midyear. After that, there is great uncertainty at the central bank and in the markets about the future path of interest rates. The long-run outlook for rates has consequences for everyone. For households, it will determine payments on mortgages and car loans; for businesses, on corporate bonds; and for the government, on the $13 trillion in debt held by the public. A disconnect between the Fed and the market over the long-run rate outlook also could be a source of market turbulence in the months ahead.

Central-bank policy makers on average see rates going nearly twice as high as futures markets indicate in coming years, for a variety of reasons. If the Fed is wrong, it might make a mistake on interest rates that jars the economy. If the market is wrong, it might be setting itself up for a tumble if rates go higher than expected. The Fed’s latest forecasts show that nine of 17 policy makers see the central bank’s benchmark interest rate—the federal funds rate—at 1.13% or higher by year-end. The median estimates—meaning half are above and half below—reach 2.5% for the end of 2016 and 3.63% for the end of 2017. On the other hand, in fed funds futures markets, where traders buy and sell contracts based on expected rates, the expected fed funds rate is 0.50% on average in December 2015, 1.35% in December 2016 and 1.84% in December 2017.

One reason for the disparity: Futures prices reflect investors’ calculations that there is some probability rates will return to near-zero after a few increases and stay there. This happened in Sweden after its central bank raised rates in 2010 and in Japan after 2006. In both cases, the central banks had to reverse course and cut rates after economic shocks and deflation pressures crippled their economies. A survey by the New York Fed of Wall Street bond dealers in January showed they attached a 20% probability to U.S. short-term rates returning to zero within two years after liftoff. A return to zero isn’t the Fed’s expected outcome, so it doesn’t show up in its rate forecasts.

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From a Syriza MP. Good cop bad cop.

To Beat Austerity Greece Must Break Free From The Euro (Costas Lapavitsas)

The agreement signed between Greece and the EU after three weeks of lively negotiations is a compromise reached under economic duress. Its only merit for Greece is that it has kept the Syriza government alive and able to fight another day. That day is not far off. Greece will have to negotiate a long-term financing agreement in June, and has substantial debt repayments to make in July and August. In the coming four months the government will have to get its act together to negotiate those hurdles and implement its radical programme. The European left has a stake in Greek success, if it is to beat back the forces of austerity that are currently strangling the continent. In February the Greek negotiating team fell into a trap of two parts.

The first was the reliance of Greek banks on the European Central Bank for liquidity, without which they would stop functioning. Mario Draghi, president of the European Central Bank, ratcheted up the pressure by tightening the terms of liquidity provision. Worried by developments, depositors withdrew funds; towards the end of negotiations Greek banks were losing a billion euros of liquidity a day. The second was the Greek state’s need for finance to service debts and pay wages. As negotiations proceeded, funds became tighter. The EU, led by Germany, cynically waited until the pressure on Greek banks had reached fever pitch. By the evening of Friday 20 February the Syriza government had to accept a deal or face chaotic financial conditions the following week, for which it was not prepared at all.

The resulting deal has extended the loan agreement, giving Greece four months of guaranteed finance, subject to regular review by the “institutions”, ie the European Commission, the ECB and the IMF. The country was forced to declare that it will meet all obligations to its creditors “fully and timely”. Furthermore, it will aim to achieve “appropriate” primary surpluses; desist from unilateral actions that would “negatively impact fiscal targets”; and undertake “reforms” that run counter to Syriza pledges to lower taxes, raise the minimum wage, reverse privatisations, and relieve the humanitarian crisis.

In short, the Syriza government has paid a high price to remain alive. Things will be made even harder by the parlous state of the Greek economy. Growth in 2014 was a measly 0.7%, while GDP actually contracted during the last quarter. Industrial output fell by a further 3.8% in December, and even retail sales declined by 3.7%, despite Christmas. The most worrying indication, however, is the fall in prices by 2.8% in January. This is an economy in a deflationary spiral with little or no drive left to it. Against this background, insisting on austerity and primary balances is vindictive madness.

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Bluff and bluster.

Greece Eyes Last Central Bank Funds To Avert IMF Default (AEP)

Greece is preparing to tap its final pension reserves at the country’s central bank if needed to avert a devastating default to the IMF and keep the government going over the next two weeks. The Greeks must pay the IMF €1.5bn in a series of deadlines this month, starting with €300m as soon as Friday. No developed country has ever defaulted to the IMF in the history of the Bretton Woods financial system. Such a move would shatter confidence and reduce Greece to a financial pariah in motley company with Zimbabwe. George Stathakis, the economy minister, said the government still has hidden reserves to keep operations going for a few more weeks, brushing aside warnings that the state could run out of cash within 10 days. “These stories are exaggerated. We have various buffers, including €3bn or €4bn at the Bank of Greece,” he told The Telegraph.

It is understood that the central bank deposits are mostly part of Greece’s social security and pension system. Analysts say it is far from clear whether the government can legitimately tap this money without breaching other fiduciary obligations. “We think the funds are already down to €1.8bn. If they draw on this, how are they going to meet their pension bills next month?” said one banker. A senior Greek official opened the door last week to a possible “delay” in repayments to the IMF, perhaps for a month or two, setting off alarm bells among investors and bank depositors. It was taken as an admission that the country is now desperate as capital flight runs at €800m a day. Yanis Varoufakis, the finance minister, sought to silence such talk over the weekend, telling AP that a default to the IMF was out of the question, even if a halt in payments to the EU institutions remains a serious threat.

“We are not going to be the first country not to meet our obligations to the IMF. We shall squeeze blood out of stone if we need to do this on our own, and we shall do it,” he said. The IMF deadlines are not rock hard. The Fund usually allows some grace period. There is a procedure for arrears if a country genuinely wishes to pay. “The clock starts ticking. It is another matter if they start saying they won’t pay for six months,” said one expert. Syriza officials are aware that the IMF will be their last safeguard if Greece is ultimately blown out of the euro, although it is far from clear what would happen in such circumstances. Greece has already exhausted its IMF borrowing quota in earlier EU-IMF Troika bailouts, and patience is wearing thin among the Asian and Latin American representatives on the IMF board.

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Futile.

Mixed Messages On Third Greek Bailout Talks (Reuters)

Eurozone countries are discussing a third bailout for Greece worth €30 billion to €50 billion, Spain’s economy minister said on Monday, but EU officials said there were no such talks. Speaking at an event in Pamplona, northern Spain, Economy Minister Luis de Guindos said the new rescue plan would set more flexible conditions for Greece, which had no alternative other than European support. But the spokeswoman for Jeroen Dijsselbloem, who chairs the euro zone finance ministers’ group, said there was no discussion of a third bailout and senior euro zone officials concurred. “Euro zone finance ministers are not discussing a third bailout,” spokeswoman Simone Boitelle said. Greek leftist Prime Minister Alexis Tsipras used a televised address on Friday to deny his country would need another international program.

Greece has acute and immediate funding problems to overcome, despite the four-month extension to its existing bailout it negotiated with the euro zone last month. To win that, Tsipras had to give up on key pledges made during his election campaign. The extension averted a banking meltdown. But Greece still faces a steep decline in revenues and is expected to run out of cash by the end of March, possibly sooner. The new government in Athens sought to assure it can cover its funding needs this month, including repaying a €1.5 billion loan to the IMF. “The Greek government has been exploring solutions … to ensure there won’t be a single problem with repaying the IMF loan, or its funding obligations in March,” government spokesman Gabriel Sakellaridis told Greek radio.

Most of Greece’s options appear to have been shut off, for now at least. A request for €1.9 billion in profits the ECB made on buying Greek bonds will not be granted until Greece has completed promised reforms. Athens has also sought permission to issue more short-term treasury bills, having reached a cap of €15 billion set by its lenders. The euro zone has made clear it does not want to see that limit lifted. Dutch Finance Minister Dijsselbloem offered a potential escape route. He told the Financial Times that Greece’s international creditors could pay part of the €7.2 billion remaining in its bailout pot as early as this month if Athens started enacting necessary reforms. “There are elements that you can start doing today. If you do that, then somewhere in March, maybe there can be a first disbursement. But that would require progress and not just intentions..”

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“Europe has transformed into a giant bank and its people are divided into lenders or borrowers..”

Greeks in the Crisis: ‘We Need To Explain Ourselves’ (Spiegel)

With tensions between Greece and Berlin having been significant in recent weeks, SPIEGEL decided to invite six prominent Greeks to a roundtable discussion at Katzourbos tavern in Athens’ Pankrati neighborhood. The state minister is the first to arrive, 10 minutes early. Alekos Flambouraris, 72, wears a black suit, no tie and the kind of open-collared shirt made fashionable by the governing Syriza party in recent weeks. Flambouraris is a close confidant of Prime Minister Alexis Tsipras. “We need to keep up our contacts with the Germans. We want to explain ourselves,” he says. Athens’ politically independent mayor, Georgios Kaminis, 60, arrives shortly thereafter on foot — an inconspicuous man wearing a corduroy suitcoat.

The others are: Natassa Bofiliou, 31, a famous Greek pop star who has been threatened by supporters of Golden Dawn because of her vocal opposition to the party; Christos Ikonomou, 44, whose book “Just Wait, Something’s Happening,” is a compilation of short stories about everyday life in Greece during the crisis; entrepreneur Aggeliki Papageorgiou, 50, the owner of a small ice cream spoon factory that is on the verge of shutting down; and journalist Xenia Kounalaki, 44, who writes for the center-right newspaper Kathimerini and has been disappointed thus far by Syriza’s behavior in Europe. The guests conduct their discussion in Greek and the event is moderated by SPIEGEL editors Manfred Ertel and Katrin Kuntz as well as co-moderator Angelos Kovaios, a journalist with the weekly newspaper To Vima. They spent three hours discussing developments in the country over Greek wine and Cretan cuisine.

SPIEGEL: What are we drinking to here – Syriza’s election victory, the compromise reached in Brussels or German-Greek relations?
The Minister: I’m drinking to the welfare of all people in Europe. Our negotiations and the compromise in Brussels also shows that this isn’t just a problem for the Greeks. Democracy is also at stake, with the standard of living declining in many countries. I’m drinking to better days.

SPIEGEL: That sounds rather florid. The debt crisis is about hard figures. It’s our impression that the governments and the finance ministers in the euro zone haven’t yet found a common language.
The Minister: With the compromise, we have established a foundation we can build on – and also common language. Still, the media and government in German also has a duty to properly inform the German people about our country. [..]

SPIEGEL: How bad do you think Greek-German relations really are?
The Entrepreneur: I have the feeling that the Germans view us with distrust, but there’s no reason for it. We work hard and we have a clear conscience.
The Author: We can’t view the Greek-German relationship isolation. I’m worried about developments in Europe. It appears to me that Europe has transformed into a giant bank and its people are divided into lenders or borrowers. The Irish, the Finns and the Belgians say: The Greeks owe us money and it can’t be allowed to disappear. This is a bad development. Germany is the leader of this policy and it has always viewed Europe as the garden behind its own house. I don’t think that is going to change in the future. The agreement in Brussels means that we Greeks can relax a little bit more, but we will be having the same discussion again come June. [..] I am dismayed that Europe is being equated with the euro today. It’s purely about money, debts, bonds and loans. We are viewed as an economic unit, not as people. That’s disappointing and it’s taking away my hope of a European future.

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Low ballin’.

Investor Survey Shows 38% Chance Of Eurozone Break-Up In 12 Months (Reuters)

Investor expectations of the euro zone breaking apart have risen to their highest level in two years, a survey showed on Tuesday, even after Greece agreed a financial lifeline with its euro zone partners. The sentix Euro Break-up Index (EBI) gave its highest reading since March 2013, with 38% of respondents expecting the bloc to break-up in the next 12 months, up from 24.3% in January. The current poll was conducted between Feb. 26-28, 2015, and surveyed 980 mainly German-based individual and institutional investors. Greece won approval for a four-month extension to its bailout on Feb. 24, after tense negotiations between Athens and its international creditors.

“The new aid program for the country does not seem to be convincing, rather a ‘grexit’ is now bound to be a constant topic among investors for the months to come,» said Sebastian Wanke, a senior analyst at sentix. Expectations of Greece leaving the euro in the next year rose to 37.1% from 22.5%, the survey said. A Reuters poll of economists in mid-February gave a one-in-four chance of Greece leaving the currency area in 2015. The EBI hit a high of 73% in July 2012, and touched its low at 7.6% in July 2014. The last time the reading was this high came after inconclusive elections in Italy and a banking crisis in Cyprus which saw the country become the fourth member state to be bailed out.

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Next domino.

French Factory Decline Even Worse Than Greece (Telegraph)

The economic divide between Europe’s largest economies widened in February, as a closely-watched survey showed manufacturing output in France contracted at a faster rate than Greece, despite the weakening euro. Output at French factories fell for a ninth consecutive month in February, as new orders dried up and overseas demand fell. This led to a further fall in employment, Markit said, as it described general demand in France as “lacklustre”. By contrast, a stronger rise in new business helped output at German manufacturers expand for the 22nd consecutive month in February. Markit described the latest rise as “broad-based”, but said growth was “weak by historical standards”. Despite an 8pc decline in the euro against the dollar since the start of the year, Markit’s French manufacturing PMI fell to 47.6 in February, from 49.2 in January. This was well below the 50 level that divides growth from contraction, and also worse than economists’ expectations of a decline to 47.7.

This also means output in France contracted at a faster rate than in Greece last month, where the decline steadied to 48.4. Germany’s PMI rose to 51.1 in February, up marginally from January’s reading of 50.9. Jack Kennedy, senior economist at Markit, said French manufacturing was in a “funk”. Chris Williamson, Markit’s chief economist, added: “France, Greece and Austria are the slow lane stragglers [in Europe], with all three seeing their manufacturing economies contract again in February. France is the most worrying, not just because it trails behind all other countries, but it is also the only country seeing a steepening downturn.” Ireland was the eurozone’s bright spot last month, as the country recorded the joint-fastest rate of job creation on record. Output rose to the highest level in 15 years, which helped to keep overall eurozone manufacturing output steady in February. The eurozone manufacturing PMI was unchanged, at 51.

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“Catalonia would probably be comparable to Denmark. Denmark has more or less the same population, and Austria too.”

Spain To Split? Snap Vote On Catalan Independence (CNBC)

The president of the Spanish region of Catalonia in Spain looks set to strain further relations with the country’s political establishment by calling a snap vote on independence as a general election approaches in September. Artur Mas, the president of Catalonia, told CNBC Monday that a referendum was needed to see if the majority of Catalonians still wanted independence. The region has long pushed for independence from the rest of Spain and, despite being dealt a blow when Scotland chose to remain a part of the U.K. last year, Mas is still confident an independent Catalonia would prosper. “Catalonia would probably be comparable to Denmark. Denmark has more or less the same population, and Austria too.

Both those countries are outstanding from the economic point of view and Catalonia could be at the same level,” Mas told CNBC. “It could have an open economy, a foreign-market oriented economy (and a) cutting edge research and innovation system”, he said, speaking to CNBC on the sidelines of the Mobile World Congress (MWC) in Barcelona, the “capital” of Catalonia. Mas and other separatist movement has tried to negotiate with the Spanish government to allow it to hold a referendum on the matter but has been refused. It has also been blocked by the Constitutional Court to hold “non-binding” consultations on the matter, Mas said, meaning that there was only one way forward: elections.

“So now we have only one way: elections. Snap elections. So that’s what I’m going to do. (I’m going ) to call snap elections in Catalonia in September this year to know the opinion of Catalan people about the independence process.” Holding a referendum in an election year is bound to go down badly with the Spanish government led by Prime Minister Mariano Rajoy, embattled as it already is by the rise of the popular anti-austerity party Podemos. There are concerns that the drive for independence is creating more political uncertainty in Spain ahead of the general election, which in turn could damage the economy , which is only just starting to recover from a housing market and banking collapse during the financial crisis.

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Rinse and repeat.

Portugal’s Successful Turnaround? A Fairy Tale (The Globalist)

Even a brief glance at the facts suffices. Portugal is no less bankrupt than Greece. The country’s government debt, at 124% of GDP, might be lower than in Greece. However, government debt is just one – even though important – part of the full debt picture. On an aggregate level, Portugal’s overall debt level – at 381% of GDP when also including private households and non-financial corporations — is well above Greece’s total debt level (286% of GDP). So while Greece’s problems mainly manifest themselves via government debt, Portugal suffers from too much debt in all three sectors of the economy. At the same time, debt continues to grow much faster than the Portuguese economy. Between 2008 and 2013, aggregate debt grew by 69 percentage points.

In order to stop the debt growing faster than the country’s economy, the government sector alone would have to improve its fiscal position by 3.6% of GDP. Given the overall status of the Portuguese economy and the debt problems of the private sector, that improvement is an impossible task. Trying to achieve it would push the economy into outright depression. Given all these facts, it is all the more astonishing that the German Bundestag voted unanimously in favor of Portugal’s proposal to pay back loans from the IMF earlier. Bundestag members did so with great pleasure. Why? Amidst the fraught negotiations in Brussels with the new Greek government about the extension of the Greek program, it was a welcome opportunity to claim that the European approach to the crisis with austerity and reform was indeed working.

For Portugal, it was a good deal, because it could replace relatively costly money from the IMF carrying interest around 4% with cheaper loans from the capital market. But Portugal’s refinancing itself in the markets is not really a sign of the success of the policy mix in Europe. Given that the country’s creditors are mainly foreigners, Portugal cannot inflate the debt away. It is also in no position to grow out of its debt problem. Assuming a current account surplus of 0.9% (as achieved in 2013), it would take 128 years just to pay back all foreign debt. Debt aside, Portugal faces other quite extraordinary challenges: It has the lowest birth rate in the Eurozone, has to contend with an exodus of the young people to other countries, the lowest overall level of qualifications of its population in Europe, as well as low productivity levels.

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All dead in the water.

Tough Talk On Greece Alone Won’t Boost Ireland, Spain At Home (Reuters)

Europe’s tough treatment of Greece’s new government has eased some immediate anti-austerity pressure in Ireland and Spain, but it may take a lot more than that to put Dublin and Madrid’s ruling parties’ re-election prospects back on track. Elected months apart in 2011 as financial crises enveloped their own countries, the two centre-right led governments’ hopes of winning a second term risk being upset by anti-austerity opponents aligned to Greece’s Syriza, among other challenges. They both toed the line with Germany in demanding that Greece stick to its bailout commitments – a blow to Athens, which had hoped for some support from countries that also suffered badly in the debt crisis. That was underlined on Saturday when Greek Prime Minister Alexis Tsipras accused Spain and Portugal of leading a conservative conspiracy to topple his government because they feared the rise of anti-austerity forces in their own countries. Madrid and Lisbon complained about the accusation to the European Commission.

Ireland avoided Alexis Tsipras’ ire, but it has taken one of the hardest lines with Greece. Unlike Portugal, it faces an anti-austerity challenge similar to Syriza in Greece and Spain’s anti-establishment Podemos party. It comes from left-wing Sinn Fein. After the new Greek government was unable to end the EU/IMF bailout it was elected to dismantle and was instead forced into a climbdown, Ireland, fresh from its own bailout, was among the first to exploit the retreat. “In 2016, the people will have a clear choice: between stable and coherent government; or chaos and instability,” Irish Prime Minister Enda Kenny told his Fine Gael party’s annual conference last month, a shot at its closest poll rivals Sinn Fein. Kenny awoke the next day to a Sunday Times editorial that proclaimed ‘Sinn Fein’s Greek tragedy is a win for Fine Gael’.

After wielding painful austerity measures, the Spanish and Irish governments’ election hopes rely largely on voters feeling the benefits of recovering economies. Ireland’s is forecast to be the fastest growing in Europe again this year at almost 4% with Spain’s, six times as big, close by on 2.4%. For now, the Greek parallel has served to underscore early campaign messages by Spanish Prime Minister Mariano Rajoy, who took veiled swipes at Podemos, the anti-establishment movement that has painted itself as Syriza’s sister party. But the tough rhetoric could equally backfire for the two governments, some analysts say. Neither can afford to push Greece over the edge for fear of the economic impact. Setbacks for Syriza – while limiting the risk of emboldening Sinn Fein and Podemos – may also not necessarily translate into a boost for Fine Gael or Rajoy’s People’s Party (PP). Elections are due in Spain around November and, at most, five months later in Ireland.

Both the PP and Fine Gael still face big challenges at home. Nearly one in four Spaniards is out of work while frustration over Ireland’s uneven recovery last year spilled into the first major street protests in years. That has left many voters keen for political renewal, most acutely in Spain, as they blame local leaders for their woes, even if like Greece the two countries took international bailouts, in the case of Spain for its ailing banks. “The anger is more with the two big parties (in Spain) than with Germany,” said Jose Ignacio Torreblanca, senior fellow at the European Council on Foreign relations, referring to the PP and opposition Socialists being overtaken by Podemos in polls. Another new party, centre-right Ciudadanos, is also starting to gain traction, eating into the PP’s own turf.

Meanwhile, a wretched 2014 has left Kenny open to charges that little had changed in Irish politics since the crisis and has propelled independent candidates into first place in most opinion polls. But the status quo shake up may not be as deep in Ireland where the ruling coalition is making a tentative recovery. “There was a lot of anger in 2011 but we got the same old, same old. I don’t think we’ll see a massive change,” said David Farrell, professor of politics at University College Dublin “The conservative Irish voter is just a phenomenon that we have to recognise.”

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Nice article, but that’s what I’m working on as I saw this. Well, better of course… 😉

European Union Showing ‘Signs Of Strain’ (BBC)

In 1998 Austria held the rotating presidency of the European Union for the first time since becoming a member of the club and I was a fresh-faced reporter for Austrian radio’s English-language service. “Our aim is to bring Europe closer to its people,” announced Wolfgang Schuessel, then Foreign Minister of Austria. And he meant business, using that press conference to wave aloft a pair of limited edition running shoes. They had been commissioned in the national colours to demonstrate the government’s intent to get out and about, addressing all issues pertinent to European voters. The shoes didn’t get very muddy in the end, but they sprang to mind as I sat down to write my first blog post as Europe editor. Over the years, I’ve heard the same promise made over and over again in EU circles. But far from getting closer to people and appearing ever more relevant to them, the European project is showing signs of strain.

Back in 1998 the EU had 15 member states. Now there are 28. The European Parliament is one of the biggest in the world. It represents around half a billion people. But a record number of them chose to vote for populist, eurosceptic politicians in parliamentary elections last year. Many in Europe don’t want the EU to get any closer. They feel EU bureaucracy already invades their personal – and national sovereign – space too much. Those in favour of the EU argue just as vociferously that in our globalised world, acting as a bloc in terms of trade, commerce, security and more is imperative. The debate is a heated one and nowhere more so than in the UK which, depending on general election results this May, looks likely to organise an in/out referendum on EU membership.

Nobody can argue Europe is at a pivotal moment in its history. There are a number of front-page issues blazing concurrently across the continent. Political and economic problems are present in terms of the EU and the eurozone. But there is also a humanitarian crisis and an immigration debate, sparked by record numbers of people desperate enough to flee war and oppression at home, often in the Middle East, to attempt the perilous journey to European shores. Europe’s southern seas, traditionally associated with summer fun in the sun, are increasingly becoming horrific watery graves. The continent faces a stark security threat too, the greatest in more than a decade. As many as 5,000 Europeans have joined fighting in Syria, posing a risk to their homelands. The Charlie Hebdo attacks have left people across Europe wondering whether their city might be next.

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Typical Bloomberg ‘reporting’, but the gist of it is, I think, very accurate.

China Will End Up Like Japan, Says Observer Who Called It In 1990 (Bloomberg)

Forecasts for China to surpass the U.S. as the world’s main economic power are misplaced. So says an observer who foresaw Japan’s eventual demise a year before its land-price bubble began to burst. “The vulnerabilities in China today are very similar to the vulnerabilities in Japan,” said Roy Smith, 76, who was a Goldman Sachs partner when he wrote a column saying Japan’s rise as a financial hegemon was done. “Nobody agrees with me. But they didn’t agree with me in 1990, so at least I have one right.” Among the risks: bad loans, overpriced stocks and a frothy property market are flashing danger for China’s economy and putting pressure on a fragile financial system – similar to conditions that triggered Japan’s fall, said Smith, a finance professor at New York University’s Stern School of Business.

A further parallel is the burden of an aging population, with mounting pension and health-care costs, he says. While China probably will avoid prolonged Japan-style stagnation, a major crisis could expose weaknesses that aren’t apparent now, according to Smith. “Most people today are talking about China displacing the United States as the great power of the 21st century,” he said in a telephone interview last week. “My view is that it is more likely to end up like Japan — that is, the status of a former would-be superpower that isn’t.” China surpassed Japan as the world’s No. 2 economy by gross domestic product in 2010 after three decades of rapid growth, fueled by the largest urbanization in history. It is tipped by many forecasters eventually to overtake the U.S. in output. By other measures, such as GDP per person, China is further behind the U.S.

On a per-capita basis, China’s GDP in 2013 was still just half of where Japan was in 1960, according to World Bank data. That leaves plenty of scope to catch up to rich-world peers, more optimistic observers say. “The key difference I see between China now and Japan in 1990 is that China is at a much lower stage of development,” said Louis Kuijs at RBS in Hong Kong. Even so, China’s progress has confronted mounting challenges in recent years. In 2014, the economy expanded at the slowest full-year pace in almost a quarter century. The slowdown has thrown a spotlight on a mounting debt pile that includes souring loans to local government financing vehicles, or LGFVs, which funded a boom in construction. Doubts about the creditworthiness of LGFV debt deepened last year. China’s total debt pile, including borrowing by households, banks, governments and companies, ballooned to 282% of national output in mid-2014 from 121% in 2000, according to an estimate by McKinsey.

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Better take him serious.

Gaddafi’s Cousin Warns Of A ‘9/11 In Europe Within Two Years’ (Independent)

Colonel Gaddafi’s cousin has warned of a “9/11 in Europe within two years”, as fighters from the Islamic State join the tens of thousands of migrants crossing the Mediterranean to European shores. Ahmed Gaddafi al-Dam, one of the late dictator’s most trusted security officers, predicted at least half a million migrants would set sail from Libya to Europe this year as Isis gained a stronger foothold in the country. “There are many terrorists among them, between 10 and 50 in every thousand,” he told MailOnline. “They are going all throughout Europe. Within one year, two years, you will have another September 11.”

While alarmist, his warning will chime inside the chambers of some Western governments. After January’s murder of 21 Coptic Christians by Isis militants in Sirte, there is growing recognition of the threat an unstable Libya is posing the West in the fight against Isis. Militants loyal to the extremist group have made gains in Libya in recent weeks, and are thought to be in control of three towns including Sirte. Mr Gaddaf al-Dam also claims that militias loyal to ISIS in Libya are likely to be in possession of more than 6,000 barrels of uranium that were previously under the guard of the government’s army in the desert outside the south-western town of Sabha.

“The uranium I think they already have it, ISIS, because they control this territory,” he said. “They are not stupid anymore. They know how to make money. They will try and sell it.” The Gaddafi family has kept a low profile since the 2011 uprising in which the leader was killed, ending 42 years of one-man rule. Rival armed groups have since battled for power, pushing the internationally-recognised government from the capital and raising fears of a full-scale civil war.= The former security official was speaking from Cairo where he has since fled.

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War party parties on.

US to Deploy Six National Guard Companies to Ukraine This Week (Sputnik)

The United States will deploy personnel by the end of this week to train the Ukrainian national guard, US 173rd Airborne Brigade Commander Colonel Michael Foster said at the Center for Strategic and International Studies in Washington, DC on Monday. “Before this week is up, we’ll be deploying a battalion minus… to the Ukraine to train Ukrainian forces for the fight that’s taking place,” Foster stated. “What we’ve got laid out is six United States companies that will be training six Ukrainian companies throughout the summer.” The training will take place at the level of US and Ukrainian national guard companies, Foster explained, adding that “we have nothing above battalion staff level” engaged in the military training. The Ukrainian nationalist Aidar battalion was officially disbanded and reorganized as the 24th Separate Assault Battalion of the Ukrainian Ground Forces.

The current plan is for US forces to stay six months, he said, and noted there have been discussions about how to increase the duration and the scope of the training mission. The current channels for military training set up between Ukraine and the United States would not be used for transferring defensive lethal aid if the United States decided to provide arms to Ukraine, Foster told Sputnik on Monday. “It would go through something separate… We would not funnel the lethal aid or arms through that [training] event, we would use a secondary method for that,” Foster said, adding that a completely separate process is preferable. The United States and NATO have been engaged in military training exercises with Ukraine since the fall of 2014, according to NATO press releases. UK Prime Minister David Cameron announced last week that the UK will also be sending military advisors to Ukraine.

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Snowden and Putin. And a bunch of empty suits.

Heroes and Villains (Jim Kunstler)

The more interesting hero to me is Snowden. The purity of his name alone kind of says it all. The documentary movie about his brush with history, Citizen Four (by Laura Poitras, also a hero), is now showing on cable TV. It follows Snowden during the days of spring 2013 when he went rogue on the National Security Agency and revealed to the public the extent to which the American government was prying and worming its way into everybody’s electronic life — ignoring the pain-in-the-ass constitutional limits on such mischief, and setting the USA up to be a police state beyond the frontiers of anything George Orwell dreamed about in his darkest nights of the soul. It is more than ironic that Snowden was also Mr. Ed, because if you take his comportment on film at face value, never was there such an exemplary and seemingly normal American young man.

His heroism resided largely in his amazing composure under the strain of events. He spoke English clearly and calmly, and reacted to the weighty events he set in motion with startling equanimity. He appeared to know exactly what he was doing, and with quiet, unshakable moral commitment. And then he disappeared down the gullet of America’s modern times nemesis, Russia, where he continues to taunt with his very existence, the NSA gameboys, lizard-lawyers and puppet-masters who cordially invite him back home to face, ho-ho, our vaunted justice system. Of course any six-year-old understands that they would love to jam Snowden down some federal supermax memory hole as an example to any other waffling NSA code-jockey having second thoughts about reading your grandpa’s phone records.

And then, strangest of all to relate, there is Putin. Our guys are moving heaven and earth to jam him into a red-hot Satan suit but it’s not working. The pitchfork they want him to brandish looks strangely like a sword of justice. Even Americans of modest intelligence, when not locked into the Kardashian trance, can detect something false in all our official handwringing over Ukraine — the made-in-the-USA failed state now eating itself alive on Russia’s border.

Before February 2014, Ukraine was just a struggling, marginal demi-nation still economically dependent on Russia, of which it had effectively been a province for centuries. Mr. Obama and his haircut-in-search-of-a-brain Secretary of State, Mr. Kerry, thought it would be a good idea to make Ukraine our client state instead. They couldn’t have botched the operation more completely. I have to say, Vlad Putin’s composure in the face of this perfidious idiocy is really something to behold, regardless of the roughness of the polity he rules. Our guys, in contrast, look like something less than sheer clueless rogues. They look like empty suits.

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We have a winner!

Syrian Conflict Is The World’s First ‘Climate Change War’ (Independent)

Climate change was a key driver of the Syrian uprising, according to research which warns that global warming is likely to unleash more wars in the coming decades, with Eastern Mediterranean countries such as Jordan and Lebanon particularly at risk. Experts have long predicted that climate change will be a major source of conflict as drought and rising temperatures hurt agriculture, putting a further strain on resources in already unstable regimes. But the Syria conflict is the first war that scientists have explicitly linked to climate change. Researchers say that global warming intensified the region’s worst-ever drought, pushing the country into civil war by destroying agriculture and forcing an exodus to cities already straining from poverty, an influx of refugees from war-torn Iraq next door and poor government, the report finds.

“Added to all the other stressors, climate change helped kick things over the threshold into open conflict,” said report co-author Richard Seager, of Columbia University in New York. “I think this is scary and it’s only just beginning. It’s going to continue through the current century as part of the general drying of the Eastern Mediterranean – I don’t see how things are going to survive there,” Professor Seager added. Turkey, Lebananon, Israel, Jordan, Iraq and Afghanistan are among those most at risk from drought because of the intensity of the drying and the history of conflict in the region, he says. Israel is much better equipped to withstand climate change than its neighbours because it is wealthy, politically stable and imports much of its food. Drought-ravaged East African countries such as Somalia and Sudan are also vulnerable along with parts of Central America – especially Mexico, which is afflicted by crime, is politically unstable, short of water and reliant on agriculture, Prof Seager said.

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Mar 022015
 
 March 2, 2015  Posted by at 10:01 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


Christopher Helin Flint auto, Ghirardelli Square, San Francisco 1924

Austria On Track to Bail in Heta Creditors After Aid Stop (Bloomberg)
‘What Is Desirable For The Eurozone May Not Be Feasible’ (Reuters)
David Stockman Warns ‘It’s One Of The Scariest Moments In History’ (Zero Hedge)
Are Central Banks Creating Deflation? (Zero Hedge)
Negative Yields: What Could Go Wrong? (CNBC)
Greek Debt Becoming Less Sustainable (Kathimerini)
German Finance Chief Schaeuble Softens Tough Tone Against Greece (Telegraph)
Greece Is Being Forced Into Purgatory To Save The Euro (Telegraph)
How Jeroen Dijsselbloem Did The Deal To Extend The Greece Bailout (FT)
Alexis Tsipras Comes Under Fire From Spanish Prime Minister (Guardian)
Catalonia Prepares To Set Up Own Foreign Missions, Tax System (RT)
ECB Braces For QE As Others Shift Rates (Reuters)
Merkel’s Bavarian Allies Criticise EU Exception For French Deficit (Reuters)
Bells Toll For Europe’s Largest Gas Field (Reuters)
Ukrainian Economy Starts to Buckle Behind Cloak of Calm in Kiev (Bloomberg)
Ex-Guerrilla, Champion Of The Poor: Uruguay President Steps Down (RT)
Documentary on Air Pollution Grips Over 30 Million Chinese in 1 Day (NY Times)

Once this gets started, it’ll be hard to stop it from spreading.

Austria On Track to Bail in Heta Creditors After Aid Stop (Bloomberg)

Austria won’t give fresh capital to Heta Asset Resolution making the “bad bank” of failed Hypo Alpe-Adria-Bank the first case under new European Union rules imposing losses on bank bondholders. Austria cut off support for Heta, which has already cost Austrian taxpayers about €5.5 billion in aid, after Heta notified the government it may need as much as €7.6 billion euros on top of that, the Finance Ministry said in a statement on Sunday. The Finanzmarktaufsicht regulator put Heta into resolution and ordered an immediate debt moratorium. “The decision was triggered by information from Heta’s management about the first results of an asset review,” the ministry said.

“Because of that dramatic change of the asset evaluation, the ministry together with the entire government decided not to invest any more tax money into Heta.” Heta’s predecessor Hypo Alpe was nationalized in 2009 after it was close to collapse because of bad loans in the western Balkans and shareholders led by Bayerische Landesbank walked away from the bank. Its rescue and wind-down has been complicated by a string of court cases and by the fact that a large part of its debt is guaranteed by the Carinthia province, a former owner of the bank. The FMA is taking over the wind-down of Heta, which kept around €18 billion of Hypo’s assets when it was set up last year.

While it works out a resolution plan it won’t repay Heta’s liabilities under an Austrian law that came into force Jan. 1 to implement the EU Bank Recovery and Resolution Directive, the authority said in a statement. The immediate debt moratorium means €950 million of bonds due March 6 and March 20 won’t be repaid. It affects €9.8 billion in outstanding bonds, supplementary capital and Schuldschein loans, €1.24 billion debt to Pfandbriefbank, a bank that handles bond issues for Austrian provinvial banks, as well as loans from BayernLB, according to the FMA’s decree published on its website.

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“Austerity has fueled radical forces of political protest and may be running out of democratic road..”

‘What Is Desirable For The Eurozone May Not Be Feasible’ (Reuters)

The latest episode of Greece’s debt crisis has revived doubts about the long-term survival of the euro, nowhere more so than in London, Europe’s main financial center and a hotbed of Euroskepticism. The heightened risk of a Greek default and/or exit comes just as there are signs that the euro zone is turning the corner after seven years of financial and economic crisis and that its perilous internal imbalances may be starting to diminish. To skeptics, the election of a radical leftist-led government in Athens committed to tearing up Greece’s bailout looks like the start of an unraveling of the 19-nation currency area, with southern countries rebelling against austerity while EU paymaster Germany rebels against further aid.

A last-ditch deal to extend Greece’s bailout for four months after much kicking and screaming between Athens and Berlin did little to ease fears that the euro zone’s weakest link may end up defaulting on its official European creditors. U.S. economist Milton Friedman’s aphorism – “What is unsustainable will not be sustained” – is cited frequently by those who believe market forces will eventually overwhelm the political will that holds the euro together. Countries that share a single currency cannot devalue when their economies lose competitiveness, as occurred in southern Europe in the first decade of the euro’s existence. There is no mechanism for large fiscal transfers between member states.

So the only option has been a wrenching “internal devaluation” by countries on the periphery of the euro area, involving real wage, pension and public spending cuts and mass unemployment that has caused deep social distress. Austerity has fueled radical forces of political protest and may be running out of democratic road – not just in Greece – but none of the alternative ways out of the euro zone’s economic divergence dilemma looks remotely plausible. “The history of the gold standard tells us that an asymmetric adjustment process involving internal devaluation in debtor countries, with no corresponding inflation in the core, is unlikely to be economically or politically sustainable,” economic historians Kevin O’Rourke and Alan Taylor wrote in the Journal of Economic Perspectives in 2013. “What is desirable for the euro zone may not be feasible.”

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Can’t say it enough: “Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets.”

David Stockman Warns ‘It’s One Of The Scariest Moments In History’ (Zero Hedge)

“The Fed is out of control,” exclaims David Stockman – perhaps best known for architecting Reagan’s economic turnaround known as ‘Morning in America’ – adding that “people don’t want to hear the reality and the truth that we’re facing.” The following discussion, with Harry Dent, outlines their perspectives on the looming collapse of free market prosperity and the desctruction of American wealth as policymakers “take our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that’s been built up and created by the American people over decades and decades.” The Fed, Stockman concludes, “is a rogue institution,” and their actions have led us to “one of the scariest moments in our history… it’s a festering time-bomb and we’re not sure when it will explode.”[..]

David Stockman: People don’t want to hear the reality and the truth that we’re facing. But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say the fed is out of control. Its balance sheet is exploded. It’s printing money like never before. Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets. I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt.

I’m an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it’s 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that’s been built up and created by the American people over decades and decades. So people don’t want to hear the warning. They don’t want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must.

(Click link for video)

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That would be a yes: “David Stockman: … massive money printing by central banks on a worldwide basis is inherently deflationary..”

Are Central Banks Creating Deflation? (Zero Hedge)

Last week we noted that with the start of Q€ just around the corner, the ECB finds itself in a rather absurd situation. In what we called the ultimate easy money paradox (or the ultimate Keynesian boondoggle), Mario Draghi and crew are doomed to trip over their own policies as they (literally) attempt to monetize twice the net supply of eurozone fixed income this year. The problem is two-fold: 1) the central bank’s adventures in NIRP-dom mean anyone willing to sell their EGBs would face the truly silly prospect of sending the proceeds right back where they came from, except at a cost of 20 bps (negative deposit facility rate), and 2) because the central bank’s easy money policies have compressed credit spreads, sellers who wanted to reinvest the cash they would theoretically receive for their EGBs would have to do so at ridiculously low rates, a scenario that would compound QE’s already negative effect on NIM for banks and would be absolutely untenable for insurers.

So what we have “is one deflation-fighting policy stymying another [and] the central bank’s previous efforts to drive down rates thwarting its current plans to … drive down rates.” Now, courtesy of Citi’s Matt King, it’s our distinct pleasure to present yet another wonderfully ridiculous paradox inadvertently created by central banks who apparently aren’t capable of understanding when they’re just pushing on a string: manufactured deflation or, more poignantly, just what the doctor did not order. Here’s Citi:

It’s that linkage between investment (or the lack of it) and all the stimulus which we find so disturbing. If the first $5tn of global QE, which saw corporate bond yields in both $ and € fall to all-time lows, didn’t prompt a wave of investment, what do we think a sixth trillion is going to do? Another client put it more strongly still. “By lowering the cost of borrowing, QE has lowered the risk of default. This has led to overcapacity (see highly leveraged shale companies). Overcapacity leads to deflation. With QE, are central banks manufacturing what they are trying to defeat?”

Ultimately, the question is whether the ceaseless printing of money is actually creating any demand, and for King, the answer is pretty clearly “no”: “QE, and stimulus generally, is supposed to create new demand, improving capacity utilization, not reducing it. But … it feels ever more as though central bank easing is just shifting demand from one place to another, not augmenting it.”

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A lot.

Negative Yields: What Could Go Wrong? (CNBC)

Some central banks have cut interest rates into negative territory in an effort to eke out some economic growth, but the step could spur unintended, counterproductive outcomes. “Negative rates could backfire,” Francesco Garzarelli, co-head of macro markets research at Goldman Sachs, said in a note Friday. “At least some segments of the population could feel poorer, and less secure,” he said. “Rather than lifting consumption and borrowing, ultra-loose monetary policy could perversely lead to an increase in precautionary savings and a slower economic recovery.” In an effort to ward off potential deflation and bolster nearly flat-lined economic growth, some central banks – including the ECB, the Swiss National Bank and central banks in Sweden and Denmark – have cut rates into negative territory.

A big chunk of the government bond market has gone negative: JPMorgan estimated that in January, around $3.6 trillion worth of developed market government bonds—or 16% of its Global Bond Index—was at a negative yield. That’s something that can spur new problems, Goldman said, noting concerns that pension funds and insurance companies may struggle to meet guaranteed payouts. “Today’s very low or even negative fixed income yields often are not large enough to match future liabilities,” Goldman said, noting insurance companies are generally assuming forward rates will be positive and above current rates. If low or negative yields persist, making guaranteed products work will become increasingly difficult, it said. In addition, if banks’ profitability takes a hit from negative rates, it could actually discourage bank lending, hurting efforts to revive economic activity, Goldman said.

There’s also the risk of asset bubbles forming, Garzarelli said, adding the risk is especially high for “high duration” assets such as technology stocks and high-dividend-paying stocks, which already have “eye-watering” valuations. Others also believe ZYNY, or zero-yield to negative-yield, may not follow the theoretical playbook in the real economy. “Traditional economic theory suggests that low interest rates will encourage households to borrow more, both to acquire housing and also to favor present consumption over future consumption,” Michala Marcussen at SocGen said in a note dated Sunday. But in practice, it may not work as households are already relatively highly indebted, labor markets remain fragile and regulations have become more demanding, she said. “Indeed, households may even opt to save more to compensate for low yields, and all the more so in ageing populations,” Marcussen said.

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Ironically, Ukrainians are spending like crazy just so they have things, and not a rapidly falling currency, in their hands. The Greeks do the opposite: they spend even less.

Greek Debt Becoming Less Sustainable (Kathimerini)

The agreement between the Greek government and its lenders, which was sanctioned by the Eurogroup last Tuesday, appears to be more of a respite and less of a sea change in the relationship between the two sides. The apparent confidence gap is bound to aggravate economic conditions and undermine talks on debt relief unless it is bridged fast. Refraining from adversarial statements is the least they can do at this point, especially some ministers. According to the latest revision of gross domestic product data, based on seasonally adjusted figures, the Greek economy shrank by a revised 0.4% in the last quarter of 2014 compared to the previous quarter as opposed to a 0.2% drop in the flash estimate. This brought the real GDP growth rate to 0.75% for the whole year, still better than earlier forecasts, ranging between 0.4 and 0.6%.

Political uncertainty appears to have taken its toll as households and businesses cut back on spending. Unfortunately, businessmen and others think this trend has continued in the first months of 2015. If they are right, real GDP will dip again in the first quarter of this year, compared to the last one in 2014. This will make it unlikely to reach the budget goal of 2.9% annual growth in 2015. Moreover, international investment banks and others are downgrading this year’s economic growth forecasts, ranging between 0.6 and 2%. With the consumer price index continuing to decline, the prospects for an end to deflation do not look promising at this point. In the 12-month period from February 2014 to January 2015, average prices as measured by the CPI decreased by 1.4% year-on-year.

Even if deflation settles closer to a 1% average decline, nominal GDP is likely to be little changed and may even shrink, assuming real economic activity disappoints. This is not a good omen for the sustainability of the Greek public debt, bankers and others point out. This is even more the case if one thinks the country’s official creditors will accept the government’s arguments and economic reality, lowering the target of the primary budget surplus to 1.5% of GDP for 2015. Readers are reminded that the surplus target has been set at 3% of GDP in the program for this year and 4.5% next year. The country is projected to pay about 6 billion euros, or more than 3% of GDP, in interest payments to its creditors in 2015. In other words, interest payments will exceed the likely primary budget surplus, adding to the public debt stock.

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Merkel told him to.

German Finance Chief Schaeuble Softens Tough Tone Against Greece (Telegraph)

German finance minister Wolfgang Schaeuble has softened his hard-line attitude towards Greece, saying its new Left-wing Syriza government needs “a bit of time” but appears to be able to work towards resolving its debt crisis. “The new Greek government has strong public support,” Mr Schaeuble told German newspaper Bild am Sonntag. “I am confident that it will put in place the necessary measures, set up a more efficient tax system and in the end honour its commitments. You have to give a little bit of time to a newly elected government,” he told the Sunday paper. “To govern is to face reality.” Mr Schaeuble added that his Greek counterpart, Yanis Varoufakis, despite their policy clashes, had “behaved most properly with me” and had “the right to as much respect as everyone else”.

It was an abrupt change in tone for Mr Schaeuble, who has repeatedly exchanged jibes with Mr Varoufakis since the Greek election in January brought in an anti-austerity government. Ahead of Friday’s crucial parliamentary vote in Germany, where MPs voted overwhelmingly to extend Greece’s existing financial aid programme until June, Mr Schaeuble had warned that Greece would not receive “a single euro” until it meets the pledges of its existing €240bn bail-out programme. “If the Greeks violate the agreements, then they have become obsolete,” a visibly angry Mr Schaeuble said at a meeting on Friday to persuade German MPs to support the deal ahead of the parliamentary vote. “Mr Varoufakis had not done anything to make our lives easier,” he added. After German MPs voted for the four-month bail-out extension, which Mr Schaeuble insisted was not a new finance deal for the troubled country, Greece pledged to implement reforms and savings.

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Nothing can save the euro.

Greece Is Being Forced Into Purgatory To Save The Euro (Telegraph)

The nickname for the IMF in the markets is “It’s mostly fiscal”, reflecting the IMF’s view that when a country gets into trouble, the manifestation is a huge government budget deficit. And the cure involves spending cuts and higher taxes. That is exactly what happened in Greece. But there was a difference. In most cases, the traditional IMF medicine counter-balances fiscal tightening with a devaluation of the exchange rate. The idea is that as the fiscal tightening squeezes domestic demand and threatens to cause higher unemployment, then a more competitive currency encourages net exports. Essentially, exports fill the hole left by the retreating government But this was not possible in the Greek case because the country does not have its own currency – because it joined the euro.

The only way of compensating for this absence was to allow domestic deflation of prices to produce an “internal devaluation”. What a laugh! We learned in the 1930s that this does not work. Deflation is extremely slow and painful and, even if it succeeded in improving competitiveness, it would worsen the debt ratio because it reduces the money value of GDP (the denominator of the ratio). The result is that Greece is on the road to misery, with no obvious escape. Why don’t the Germans understand the logic of this argument? They tend to look at matters with regard to debt – and economic policy more generally – moralistically. The Greek public sector has been wasteful in the extreme and Greek taxpayers have treated paying tax as near-voluntary. Accordingly, they have had it coming to them.

When they reform themselves, then the economy will bounce back. I am speechless at this attitude. Yes, the Greek public sector has been appallingly wasteful and making it less so is an important part of boosting Greece’s sustainable growth rate. But the current priority is not that, but boosting Greece’s actual growth rate now – and that is all about demand. There is no such thing as a free spending cut. Even tax evaders and under-employed public servants go shopping. Why do the IMF and the other lenders persevere with this destructive path? The answer is IMP: “It’s mostly political.” That is to say, it is driven by the overriding will to keep the euro on the road. By now you should know my answer. Greece should come out of the euro and allow its new currency to depreciate sharply, perhaps by 30pc to 40pc.

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Curious how several parts of the ‘EU’ act independently from each other.

How Jeroen Dijsselbloem Did The Deal To Extend The Greece Bailout (FT)

A first eurogroup meeting to start the process broke up in acrimony. Mr Dijsselbloem tried again five days later but the ensuing bust-up proved even more spectacular: Mr Varoufakis marched out of the session accusing the Dutchman of reneging on a deal Athens had struck with Pierre Moscovici, the European Commission s economic chief. Mr Dijsselbloem blames the commission, which has typically been more lenient towards Greece than its other creditors, saying its intervention had short-circuited proper procedure and that he had been kept in the dark. The Greeks then thought they had an agreement, Mr Dijsselbloem said. I was not involved in that, and that s not very smart.

If you want to get an agreement with the eurogoup, it would help to inform me of what you re trying to do. Instead, Mr Dijsselbloem issued his own, far tougher proposal, which quickly leaked to the press. He put his head in his hands to mimic his reaction upon learning of the leak, presumably orchestrated by Mr Varoufakis. I know in politics it’s all about the frame and who gets to frame first, he said. But if you’re in such a delicate process, trying to rebuild trust, trying to get a process going, to then .. walk into the press room and say: Oh, these guys can’t be trusted, look what they re trying to push down our throats. That was just not very helpful.

A third and final eurogroup session was held the day after Athens finally sent its request for an extension, and Mr Dijsselbloem changed strategy. The key players in the debate were all present: the three institutions that monitor Greece s bailout (the commission, the European Central Bank and the International Monetary Fund) along with the Greeks and the Germans, to put it quite bluntly , Mr Dijsselbloem said. Each was brought in for pre-meeting negotiations. But instead of dealing with Mr Varoufakis, Mr Dijsselbloem spoke only to Mr Tsipras over the phone. I didn’t see Varoufakis at all that morning, he said. I didn’t speak to him. I said to Tsipras, this had to be it. And I think after 15 minutes he called me back, and there was one more word we managed to change. And that was it.

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Nice scuffle…

Alexis Tsipras Comes Under Fire From Spanish Prime Minister (Guardian)

Greece’s anti-austerity government has denied that it sees Europe through the prism of “hostile and friendly countries” as the Spanish prime minister Mariano Rajoy hit back at accusations that Spain and Portugal had deliberately tried to topple the new leftist-led administration. The war of words erupted when Greek premier Alexis Tsipras attacked the sabotage tactics that had, he said, been employed by Lisbon and Madrid in an effort to scupper the chances of a successful end to the negotiations over the eurozone’s extension of the Greek bailout programme. He accused the Iberian partners of deliberately taking a hard line in the talks because they feared the rise of radical forces in their own countries.

“We found opposing us an axis of powers … led by the governments of Spain and Portugal which, for obvious political reasons, attempted to lead the entire negotiations to the brink,” Tsipras told party members on Saturday. “Their plan was, and is, to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries… And mainly before the elections in Spain.” Rajoy responded angrily on Sunday, saying that Spain had stood by Greece in solidarity by contributing to the debt-stricken country’s €240bn bailout. “We are not responsible for the frustration generated by the radical Greek left that promised the Greeks something it couldn’t deliver on,” he said.

Aides close to Tsipras insisted that Athens had little desire to “seek enemies abroad,” but the leftist leader had a duty to disclose the details of last month’s dramatic negotiations with creditors to keep the bankrupt country afloat. “Prime minister Alexis Tsipras was obliged to relate in detail to the Greek people the hard negotiations at the crucial eurogroup that led to the agreement,” said the insiders. “The attitude [shown by] governments towards the deal isn’t a secret – after all such views had become publicly known from the first moment, which is only right.”

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More threats for Rajoy. Beware, the Spanish army stands ready to occupy Barcelona.

Catalonia Prepares To Set Up Own Foreign Missions, Tax System (RT)

Catalonia is preparing its own tax system, and creating a network of foreign missions as it prepares for a snap regional vote on independence. Recently Spain’s top court ruled that the region’s symbolic referendum vote in November was unconstitutional. Nationalist leaders in the northeastern region have urged a snap local vote on the issue of independence on September 27, AFP reported. Catalan president Artur Mas and his government are reportedly working on tax, diplomacy, and social security restructuring in case Catalonia becomes an independent state. The focus is on taxation as the Catalan authorities now collect only 5% of the taxes raised in the region.

Last November, Catalan president Artur Mas organized a symbolic vote on independence, with 80% voting in favor. However, the turnout was only 40%. Catalonia has 7.5 million residents (16% of Spain’s population), and represents some 20% of the country’s GDP. Alone, the region could collect €100 billion in taxes yearly, much more than Catalonia would need if it becomes independent, said Joan Iglesias, a former Spanish tax inspector, who is now behind the Catalan tax reform. “Everyone knows that Catalonia would be viable economically. It is the most economically productive territory in Spain,” Iglesias told AFP. Apart from the tax reform, Catalonia would need to establish its own central bank, upgrade computer systems and employ more civil servants.

Also, the region says it needs to open more foreign offices. Currently, Catalonia is represented in the UK, France, Germany, the US, Belgium and has recently set up missions in Austria and Italy. In February, Mas set up a commission responsible for carrying out the tasks essential for an independent state. Plus, he ordered a study into the steps Catalonia needs to take to make sure the services like telecommunications would function in case of secession. However, “work is advancing too slowly,” Catalan lawmaker with the separatist Esquerra Republicana de Catalunya (ERC) party, Lluis Salvador, told AFP. “We need to streamline our efforts so we arrive at the elections in September at a much more advanced state.”

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The ECB QE will be the worst central bank failure in a long time.

ECB Braces For QE As Others Shift Rates (Reuters)

Greek funding and quantitative easing in Europe, an expected rate cut in Australia and the buoyant U.S. labor market are set to be the focus of an economic week dominated by a host of central bank meetings. Greece may have secured an extension of its bailout last week, but it remains reliant on emergency funding.The European Central Bank’s Governing Council convenes in Cyprus on Thursday and may take a decision on whether to accept Greek government bonds as collateral for its direct ECB funding, which it stopped doing at the start of February.If the ECB does not – and it most likely will not – it could be forced to prolong the provision of Emergency Liquidity Assistance (ELA) to the Greek central bank.

“The Greek question will be a hot topic,” said ING Chief Eurozone Economist Peter Vanden Houte. “(Greek Finance Minister Yanis) Varoufakis has been saying the country is counting on the ECB for finances over the next few months.”ECB President Mario Draghi is also expected to provide further details on the bank’s €1 trillion government bond buying program, which begins in March. He may face questions about the program’s ability to reach its target, such as how the ECB intends to convince domestic banks to sell their government debt, with the prospect of then parking the money with the ECB at a negative interest rate. The ECB will also release new economic forecasts. Chief Economist Peter Praet said last week that it was likely to revise upward its expectations for growth in the euro zone, with low oil prices and a weak euro helping.

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Yeah! Let’s go after France.

Merkel’s Bavarian Allies Criticise EU Exception For French Deficit (Reuters)

A leading member of German Chancellor Angela Merkel’s conservative allies in Bavaria has criticised the European Commission’s decision to give France two extra years to cut its deficit, a letter seen by Reuters shows. On Wednesday Brussels said it would give France until 2017 to bring its deficit below the EU limit of 3% of GDP, sparing Paris a fine and giving it a new grace period after it missed a second deadline to put its finances in order. The decision has been condemned by some euro zone policymakers, who said it undermines the credibility of EU budget rules which were tightened in recent years to prevent overspending and a future sovereign debt crisis. Gerda Hasselfeldt, head of the Christian Social Union (CSU) parliamentary group, wrote to European Commission President Jean-Claude Juncker in a letter dated Feb. 27 to say that the timing of Brussels’ decision left a “bad aftertaste”.

Hasselfeldt wrote: “Right now, at a time when we’re facing big challenges in our responsibility for the European Union and the euro zone and when we’re working on the principle of solidarity in return for solidity, it’s extremely important not to allow any exceptions.” She said the euro zone was vehemently urging Athens to stick to rules set by the Eurogroup of euro zone finance ministers despite significant domestic resistance, and that while she did not want to compare Greece with France, “stringent action” was the only way to ensure Europe and the euro zone remain credible. “We should not create the dangerous impression that we want to apply double standards,” Hasselfeldt said, adding that the same rules needed to apply to all countries whatever their size.

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Scary story. Since I spent the better part of the past two years in Holland, I’ve heard a lot about it.

Bells Toll For Europe’s Largest Gas Field (Reuters)

Dutch church bells that for centuries have tolled to warn of floods across the low-lying countryside are sounding the alarm for a new threat: earthquakes linked to Europe’s largest natural gas field. “Money can buy a lot of things, but a building like this cannot be replaced,” said Jur Bekooy, a civil engineer with the Groningen Old Churches Association, pointing to cracks in the ceiling and walls of the 13th-century Maria Church in the village of Westerwijtwerd. Long ignored, voices like Bekooy’s are being heard as elections loom this month and following a damning report from the independent Dutch Safety Board. It accused the government and the field’s operators, Shell and Exxon Mobil, of ignoring the threat of earthquakes linked to the massive Groningen gas field for years.

There are now questions about the future exploitation of the field that lies under the northern province of Groningen, with implications that reach well beyond its significance for Dutch state coffers. Lessons from Groningen, which lies far from any natural fault line, feed into a debate over the threat posed by hydraulic fracturing in the United States, China, Britain and elsewhere. The world’s 10th largest gas field, Groningen is expected to supply the bulk of the Netherlands’ annual gas needs of 20-30 billion cubic meters (bcm) until the mid-2020s. The Dutch also have contracts to sell 40-60 bcm annually to buyers in Germany, Britain, Italy, Belgium and France. In all, Groningen and a few smaller Dutch fields supply 15% of Europe’s gas consumption, providing one alternative to Russian supply. When Economic Affairs Minister Henk Kamp recently ordered production at Groningen cut by 16%, gas prices jumped across Western Europe.

Groningen has been in continuous production since 1963. As far back as 1993 small quakes were definitively linked to its output. But in the late 2000s, they suddenly became more frequent and stronger. With government finances under pressure from the 2008 financial crisis, production at Groningen had been ramped up from around 30 bcm in 2007 to more than 50 bcm by 2010. The money generated helped the Dutch cushion the blow of austerity policies championed by the Cabinet. As Prime Minister Mark Rutte publicly pressed southern European governments to bring their spending under control, Dutch government gas revenues of €15 billion by 2013 were about the size of the national deficit.

Without gas, the deficit that year would have doubled from 2.5% to 5%, violating eurozone budget rules. But on Aug. 16, 2012, an earthquake with its epicenter under the town of Huizinge marked the beginning of the end for aggressive output from Groningen. It registered 3.6 on the Richter scale, larger than any predicted by engineers at NAM, the joint venture field operator between Shell and Exxon. “Until the Huizinge earthquake, we had 1,100 damage claims in 20 years,” said NAM spokesman Sander van Rootselaar. “After the quake we had more than 30,000.” Earthquakes caused by gas production are usually small, unless they happen near a fault line and can trigger a larger natural quake. But in Groningen they occur close to the surface, damaging stone and brick buildings never designed to withstand shaking. Of the 50 churches located above the field, some 40 have been affected, said Bekooy.

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Getting worse fast.

Ukrainian Economy Starts to Buckle Behind Cloak of Calm in Kiev (Bloomberg)

Ukrainians are seeing signs the economy is cracking under the weight of war and the risk of default. While restaurants and cafes are bustling and shelves are full in Kiev, a city of 3 million, a recession stretching into a second year is igniting angst about the return of the disarray unleashed by the Soviet Union’s collapse in 1991. Especially outside the capital, that era of food shortages, hyperinflation and mass unemployment doesn’t seem so far away.= “My business is about to close and there are many more like it,” said Valentyna Lozova, a 65-year-old accountant in Kiev. “Salaries aren’t rising, inflation is galloping and the hryvnia’s in freefall. I’m afraid of the future.”

It’s becoming harder for Ukrainians, mindful of the thousands who’ve died in a 11-month insurgency near the nation’s border with Russia, to put a brave face on their economic woes. With much of the country’s industrial base in ruins and a looming debt restructuring, the effect may be felt for years. The economy is set to plunge 12% in 2014-15 and the inflation rate jumped to 28.5% in January, the world’s second-highest behind Venezuela. As the economy deteriorated, the hryvnia has sunk 70% in the past year, the most in the world, sparking panic in some towns. “I see people every day in supermarkets buying sacks of flour and cereals as prices grow,” said Iryna Lebiga, a 31-year-old mother of three who’s struggling to find a buyer for her unprofitable sheep farm in Poltava, a 350-kilometer (220-mile) drive east of Kiev. “People don’t have money. Someone approached us last year but my husband thought he offered too little. Now, nobody offers even half of that.”

Even in Kiev, some people were spooked into stocking up on staples after the central bank banned foreign-currency trading for one day last week and the hryvnia’s street price plunged. The Silpo supermarket chain rearranged delivery to its outlets to keep up with growing demand, its press office said in an e-mail. While the recession isn’t yet as deep as the last one in 2009, this contraction is longer-lasting and Ukraine entered it after two years of almost zero-growth. The scale of the malaise risks triggering disquiet among some Ukrainians who helped unseat their Russian-backed leader last year with the hope of rebuilding the nation, according to Citibank in Moscow.

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More on this great man.

Ex-Guerrilla, Champion Of The Poor: Uruguay President Steps Down (RT)

Uruguay’s president, Jose “Pepe” Mujica, a former guerrilla who lives on a farm and gives most of his salary to charity, is stepping down after five years in office, ending his term as one of the world’s most popular leaders ever. Mujica, 79, is leaving office with a 65% approval rating. He is constitutionally prohibited from serving consecutive terms. “I became president filled with idealism, but then reality hit,” Mujica said in an interview with a local newspaper earlier this week, according to AFP. Some call him “the world’s poorest president.” Others the “president every other country would like to have.” But Mujica says “there’s still so much to do” and hopes that the next government, led by Tabare Vazquez (who was elected president for a second time last November) will be “better than mine and will have greater success.”

Mujica said he succeeded in putting Uruguay on the world map. He managed to turn the cattle-ranching country, home to 3,4 million people, into an energy-exporting nation, Brazil being Uruguay’s top export market (followed by China, Argentina, Venezuela and the US.) Uruguay’s $55 billion economy has grown an average 5.7% annually since 2005, according to the World Bank. Uruguay has maintained its decreasing trend in public debt-to-GDP ratio – from 100% in 2003 to 60% by 2014. It has also managed to decrease the cost of its debt, and reduce dollarization – from 80% in 2002 to 50% in 2014. “We’ve had positive years for equality. Ten years ago, about 39% of Uruguayans lived below the poverty line; we’ve brought that down to under 11% and we’ve reduced extreme poverty from 5% to only 0.5%,” Mujica told the Guardian in November.

After Latin America’s anti-drug war proved a failure, the South American country became the first in the world to fully legalize marijuana, with Mujica arguing that drug trafficking is in fact more dangerous than marijuana itself. One of the most progressive leaders in Latin America. Muijica also legalized abortion and same-sex marriage and agreed to take in detainees once held at the notorious Guantanamo Bay. Six former US detainees, who were never charged with a crime, came to Uruguay in December as refugees. The six included four Syrians, a Palestinian and a Tunisian. Although they were cleared for release back in 2009, the US was not able to discharge them until the Uruguayan President offered to receive them. Mujica, a former leftist Tupamaro guerrilla leader, spent 13 years in jail during the years of Uruguay’s military dictatorship. He survived torture and endless months of solitary confinement. Majica said he never regretted his time in jail, which he believes helped shape his character.

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“But when you carry a life in you, what she breathes, eats and drinks are all your responsibility, and then you feel the fear.”

Documentary on Air Pollution Grips Over 30 Million Chinese in 1 Day (NY Times)

Millions of Chinese, riveted and outraged, watched a 104-minute documentary video over the weekend that begins with a slight woman in jeans and a white blouse walking on to a stage dimly lit in blue. As an audience looks on somberly, the woman, Chai Jing, displays a graph of brown-red peaks with occasional troughs. “This was the PM 2.5 curve for Beijing in January 2013, when there were 25 days of smog in that one month,” explains Ms. Chai, a former Chinese television reporter, referring to a widely used gauge of air pollution. Back then, she says, she paid little attention to the smog engulfing much of China and affecting 600 million people, even as her work took her to places where the air was acrid with fumes and dust.

“But,” Ms. Chai says with a pause, “when I returned to Beijing, I learned that I was pregnant.” She has said her concerns about what the filthy air would mean for her infant daughter’s health prompted her to produce the documentary, “Under the Dome.” It was published online Saturday, and swiftly inspired an unusually passionate eruption of public and mass media discussion. The newly appointed minister of environmental protection even likened the documentary to “Silent Spring,” Rachel Carson’s landmark exposé of chemical pollution. “I’d never felt afraid of pollution before, and never wore a mask no matter where,” Ms. Chai, 39, says in the video. “But when you carry a life in you, what she breathes, eats and drinks are all your responsibility, and then you feel the fear.”

By early Monday morning, “Under the Dome” had been played more than 20 million times on Youku, a popular video-sharing site, and it was also being viewed widely on other sites. Tens of thousands of viewers posted comments about the video, many of them parents who identified with Ms. Chai’s concern for her daughter. Some praised her for forthrightly condemning the industrial interests, energy conglomerates and bureaucratic hurdles that she says have obstructed stronger action against pollution. Others lamented that she was able to do so only after leaving her job with the state-run China Central Television.

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