bail-in Archives - The Automatic Earth

Chinese shares led losses in Asia on Tuesday, as nerves over China’s struggling economy and a deadly bomb explosion in Thailand sent investors scrambling for safety. A positive handover from Wall Street did little to help sentiment; the tech-heavy Nasdaq led gains with a 0.9% rise overnight, as investors scooped up battered biotech plays, while the Dow Jones Industrial Average and the S&P 500 notched up 0.4 and 0.5%, respectively, on the back of positive homebuilder data. China’s Shanghai Composite index widened losses to 5.2%, hitting a more than one-week low, as concerns over the yuan eclipsed data which showed monthly home prices up for a third straight month in July, indicating that country’s all-important property sector may be finally bottoming.

Prior to the market open, the People’s Bank of China (PBOC) set the midpoint rate at 6.3966 per dollar, firmer than the previous fix of 6.3969. However, the yuan fell against the greenback, slipping 0.2% to last change hands at 6.4086. Among the mainland’s other indexes, the blue-chip CSI300 and the smaller Shenzhen Composite plummeted 4.9 and 5.7%, respectively. Hong Kong’s Hang Seng index tracked the losses in its mainland peers to move down 0.9%. [..] utilities and industrial sectors were among the hardest-hit, with China Shipbuilding and China Shenhua Energy being two of the biggest drags on the index despite news that Beijing may be close to announcing broad plans to reform its state-owned enterprises (SOEs) this month.

From the same Ambrose who mere days ago was quite upbeat on world trade.

• World Shipping Slump Deepens As China Retreats (AEP)

World shipping has fallen into a deep slump over the late summer, dashing hopes of a quick recovery from the global trade recession earlier this year and heightening fears that the six-year economic expansion may be on its last legs. Freight rates for container shipping from Asia to Europe fell by over 20pc in the second week of August, even though trade volumes should be picking up at this time of the year. The Shanghai Containerized Freight Index (SCFI) for routes to north European ports crashed by 23pc in five trading days. The storm in the shipping industry comes as the New York state manufacturing index for July plummeted to a recessionary low of minus 14.9, the lowest since the Great Recession and one of the steepest one-month drops ever recorded.

The new shipments component fell to -13.8, and new orders to -15.7. A similar drop occurred in 2005 and proved to be a false alarm but the latest fall comes at a delicate moment for the world economy. There is now a full-blown August storm sweeping through global markets. The Bloomberg commodity index dropped to a fresh 13-year low on Monday and the MSCI index of emerging market equities touched depths not seen since August 2009. A closely-watched gauge of emerging market currencies has fallen for the eighth week – the longest run of unbroken declines since the beginning of the century – led by the Malaysian Ringgit, the Russian rouble and the Turkish lira. China’s surprise devaluation last week continues to send after-shocks through skittish global markets, already on edge over a likely rate rise by the US Fed in September – though this is now in doubt.

The currency move was widely taken as a warning that the Chinese economy is in deeper trouble than admitted so far, a menacing prospect for exporters of raw materials and for trade competitors in Asia. It threatens to transmit a fresh deflationary impulse through the global system. The great worry is that companies in emerging markets will struggle to service $4.5 trillion of US dollar debt taken out in the boom years when quantitative easing by the Fed flooded the world with cheap money, much of it at irresistible real rates of 1pc. This is up from $1 trillion in 2002. The monetary cycle has gone into reverse since the Fed ended QE in October 2014 and cut off the flow of fresh liquidity. While the first rate rise in eight years has been well-telegraphed, nobody knows for sure what will happen once tightening starts in earnest.

This stress-test could prove even more painful if China really has abandoned its (crawling) dollar peg and is seeking to protect export margins by driving down its currency. The yuan has risen by 60pc against the Japanese yen and 105pc against the rouble since mid-2012. Yet China nevertheless has a trade surplus of 6pc of GDP. Data from the Port of Hamburg released on Monday show much damage this currency surge may be doing to Chinese companies. Axel Mattern, the port’s chief executive, said a 10.9pc drop in trade with China was the chief reason why volumes of container cargoes passing through the port fell 6.8pc in the first six months.

Abenomics was always only a huge failure.

• Japan Exports Its Way to Irrelevance (Pesek)

There’s a difference between bad economic news and the devastating variety that Japan received Monday. Prime Minister Shinzo Abe might have been able to weather the second-quarter data showing a drop in Japanese consumption and a 1.6% decline in annualized growth. But it’s not clear his government can recover from the latest news about sputtering exports, which fell 4.4% from the previous quarter. An export boom, after all, was the main thing Abenomics, the prime minister’s much-heralded revival program, had going for it. The yen’s 35% drop since late 2012 made Japanese goods cheaper, companies more profitable and Nikkei stocks more attractive. But China is spoiling the broader strategy.

The economy of Japan’s biggest customer is slowing precipitously, which has imperiled earnings outlooks for Toyota, Sony, and trading houses like Mitsui. But Abe needs to recognize, as China already has, that this is only the latest sign of a broader reality: Asia’s old export model of economic growth no longer works. China’s devaluation last week raised fears of a return of the currency wars that devastated Asia in the late 1990s. That’s a reach, considering that exports are playing less and less of a role in China. McKinsey, for example, found that as far back as 2010, net exports were contributing only between 10% and 20% of Chinese GDP. The services sector is growing in size and influence to rebalance the economy – not fast enough, perhaps, but change is nevertheless afoot.

If any major country has been relying too much on exports it’s Japan. As yet another recession beckons, the Bank of Japan will likely respond with yet more easing to extend the yen’s declines and save giant exporters. No matter how cheap the yen gets, though, China will still be slowing. All the stimulus BOJ Governor Haruhiko Kuroda can muster won’t change the worsening trajectory of the region’s most-populous nation. That’s why Abe needs to take a page from Beijing and focus more on creating new industries at home. Tokyo seldom acknowledges it can learn anything from Beijing. Japan wrote the book on exporting your way to prosperity, one followed to great effect from South Korea to Vietnam, and eventually even China. But recent years have seen the student (China) surpass the teacher in moving past that simplistic growth strategy.

Abenomics, meanwhile, has proven to be a time machine endeavoring to return Japan to the export boom times of 1985. But even with additional BOJ stimulus, says Diana Choyleva of Lombard Street Research, exports don’t offer Japan a path to sustainable growth. Europe is still limping, the U.S. consumer isn’t the reliable growth engine it was a decade ago, and China’s relatively modest devaluation (about 3.5% in total) still means the yen’s value will rise on a trade-weighted basis.

Better find an alternative to the term “emerging”.

• China’s Currency Move Rattles African Economies (WSJ)

The shock waves from China’s surprise yuan devaluation are ricocheting through African economies, sending currencies tumbling and stoking anxiety that the continent’s biggest trading partner might be losing its appetite for everything from oil to wine. In South Africa, the rand hit a 14-year low of 12.94 to the dollar on Monday, extending a 2% drop since Aug. 10 and a 12% slide this year. Currencies in other African countries with close ties to China, like Angola’s kwanza and Zambia’s kwacha, are also down sharply after Beijing unexpectedly cut the yuan’s value by 2% against the dollar last Tuesday. China’s demand for Angolan oil, Zambian copper and South African gold has fueled a steep increase in trade, helping fuel rapid growth but leaving economies exposed to policy shifts in Beijing.

In 2013, Africa’s trade with China was valued at $211 billion, the African Development Bank said in June, more than twice the continent’s trade with the U.S. By contrast, 15 years ago, the U.S. traded three times as much with Africa as China did. Now, a weaker yuan is stoking fears in some African treasury departments and boardrooms that China’s buying power will be eroded—and that the world’s second-biggest economy may be slowing even more than official statistics suggest. Razia Khan, chief Africa economist at Standard Chartered bank, said China’s move was happening at a difficult moment for many African economies, which have been buffeted by volatility that has sent many regional currencies lower this year as oil prices dropped and the dollar surged. “Countries…with narrow export bases will be substantially disadvantaged,” she said.

“..although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable..”

• The Great Emerging-Market Bubble (BIll Emmott)

Officially, Chinese growth is rock-steady at 7% per year, which happens to be the government’s declared target, but private economists’ estimates mostly range between 4% and 6%. One mantra of recent years has been that, whatever the twists and turns of global economic growth, of commodities or of financial markets, “the emerging-economy story remains intact.” By this, corporate boards and investment strategists mean that they still believe that emerging economies are destined to grow a lot faster than the developed world, importing technology and management techniques while exporting goods and services, thereby exploiting a winning combination of low wages and rising productivity.

There is, however, a problem with this mantra, beyond the simple fact that it must by definition be too general to cover such a wide range of economies in Asia, Latin America, Africa, and Eastern Europe. It is that if convergence and outperformance were merely a matter of logic and destiny, as the idea of an “emerging-economy story” implies, then that logic ought also to have applied during the decades before developing-country growth started to catch the eye. But it didn’t. The reason why it didn’t is the same reason why so many emerging economies are having trouble now. It is that the main determinants of an emerging-economy’s ability actually to emerge, sustainably, are politics, policy and all that is meant by the institutions of governance. More precisely, although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable and a country needs to change course.

“..if there is ever a dispute between what the bond market is saying and what the stock market is saying, the bond market is usually right..”

• Bonds Signal Trouble Ahead As Equities Keep Calm (FT)

Confidence levels in corporate bond and equity markets have diverged to an extent not seen since the financial crisis as fixed income traders signal rougher times ahead to their stock market peers. Investment-grade bond yields and equity volatility, measures of investor sentiment in their respective markets, have moved further apart than at any time since March 2008, according to Bank of America Merrill Lynch analysts. US equities tumbled for the rest of that year as the financial crisis intensified. “Somebody has to be wrong here,” said Hans Mikkelsen, credit strategist at BofA. The contrast between equities and bonds comes as many economists expect the US Federal Reserve to increase overnight borrowing costs next month, the first rate rise in almost a decade.

“If I was an equity investor I would pay close attention to what’s going on in the corporate bond market, probably more than they are currently,” said Mr Mikkelsen. The broad S&P 500 has largely traded sideways this year, and briefly turned negative last week, while implied volatility, as measured by the CBOE Vix index, remains quiescent. The Vix has eased below 13, after a brief rise above 20 in July, a threshold that in the past has signalled an escalation of investor anxiety over equities. According to the BofA corporate bond index, the gap between yields on investment-grade corporate bonds and US government bonds has moved to 164 basis points.

This takes the difference between credit spreads per point of equity volatility to 10.26bp, BofA calculates, its highest level in more than seven years. “It’s a signal, but not necessarily a timing tool,” said Jack Ablin, chief investment officer at BMO Private Bank. He agreed that equity investors should be concerned by pessimism in the bond markets. “In my experience, if there is ever a dispute between what the bond market is saying and what the stock market is saying, the bond market is usually right,” he added.

“We call Dijsselbloem’s solution a bail-up: part bail-out, part bail-in and part cock-up.” But that’s not the whole story (see article below this one).

• Greek Senior Bank Bonds Fall on Dijsselbloem Bail-In Comment (Bloomberg)

Senior bonds of Greek banks tumbled after Euro-area finance ministers protected depositors from any losses in the nation’s €86 billion bailout. While Greece’s third bailout will spare depositors in any restructuring of the nation’s financial system, senior bank bondholders may not be so lucky, according to comments from Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem. The bondholders will be in line for losses if Greek lenders tap into any of the financial stability funds set aside in the new bailout. “Bondholders were overly optimistic because bail-in of senior bonds was not explicitly mentioned before,” said Robert Montague, a senior analyst at ECM Asset Management in London. “Today they were brought back down to earth with a bump.”

Under the bailout terms, as much as €25 billion will be made available in a fund to recapitalize the Greek banks, including €10 billion as a first installment. Greek stocks rose and government bond yields dropped on the deal, though senior unsecured bank bonds fell. “The bail-in instrument will apply for senior bondholders, whereas the bail-in of depositors is explicitly excluded,” Dijsselbloem said at a press conference in Brussels on Friday. Greece’s euro-area creditors made adoption of the EU’s Bank Resolution and Recovery Directive, or BRRD, a precondition of the bailout. The directive, which makes it easier to impose losses on senior creditors, should rank senior unsecured bondholders and depositors equally, said Olly Burrows at brokerage firm CRT Capital.

By protecting deposits, Greece is walking a different path to neighboring Cyprus, which imposed a levy on uninsured depositors as part of a rescue package in 2013. “It is not clear how they will make it possible to bail-in bonds while excluding deposits, but as we have seen in other problematic situations, where there is a will there will be a way,” Burrows said. “We call Dijsselbloem’s solution a bail-up: part bail-out, part bail-in and part cock-up.”

No bail-in for deposits?! Here’s the real story.

• Greek Deposits Become Eligible For Bail-In On January 1, 2016 (Zero Hedge)

Europe’s eagerness to promise depositor stability is transparent: the finmins will do everything in their power to halt the bank run from banks which will likely be grappling with capital controls for months if not years. Still, absent some assurance, there is no way that the depositors would be precluded from withdrawing all the money they had access to, which in turn would assure that the €86 billion bailout of which billions are set aside for bank recapitalization, would be insufficient long before the funds are even transfered. According to an Aug. 14 Eurogroup statement an asset quality review of Greek banks will take place before the end of the year,

“We expect a comprehensive assessment of the banks – so-called Asset Quality Review and Stress Tests – by the ECB/SSM to take place first,” EC spokeswoman Annika Breidthardt tells reporters in Brussels. “And this naturally takes a few weeks.” In other words Europe is stalling for time: time to get more Greeks to deposit their cash in the bank now, when deposits are “safe” and while everyone is shocked with confusion at the nonsensical financial acrobatics Europe is engaging in. But once Jan.1, 2016 rolls around, it will be a vastly different story. This was confirmed by the very next statement: “I must also stress that, depositors will not be hit” in this year’s review, she says. In this year’s, no. But the second the limitations from verbal promises of deposit immunity expire next year, everyone who is above the European deposit insurance limit becomes fair game for bail-in.

Dijsselbloem concluded on Friday that “Depositors have been excluded from the bail-in because in the first place it’s concerning SMEs and private persons. But it is only concerning depositors with more than 100,000 euros and those are mainly SMEs. That would again lead to a blow to the Greek economy. So the ministers said we will exclude them explicitly, it would bring damage the Greek economy.” Right, exclude them… until January 1, 2016. And only then impair them because Greece will never again be allowed to escape a state of permanent “damage” fo the economy. As for Greeks and local corporations whose funds are parked in a bank and who are wondering what all this means for their deposits, here is the answer: for the next 4.5 months, your deposits are safe, which under the current capital control regime doesn’t much matter: it’s not as if the money can be withdrawn in cash and moved offshore.

However, once January 1, 2016 hits and Greece becomes subject to a bank resolution process supervised and enforced by the BRRD, all bets are off. Which likely means that as the Greek bank balance sheet is finally “rationalized”, any outsized deposits will be promptly Cyprused. For our part, we tried to warn our Greek readers about the endgame of this farcical process since January of this year: we will warn them again – capital controls or not, pull whatever money you can in the next few months because once 2016 rolls around, all the rules change, and those unsecured bank liabilities yielding precisely nothing, and which some call “deposits” will be promptly restructured to make the Greek financial balance sheet at least somewhat remotely viable.

Sounds more dramatic than it is. In Greece, democracy works. In Germany, differences are much less pronounced.

• Greek Government On Its ‘Last Legs’, Merkel Faces Growing Rebellion (Telegraph)

Greek MPs are poised to hold a vote of confidence in the government of Alexis Tsipras after Leftist party rebels deserted the prime minister over the punishing terms of a third international bail-out agreement. Syriza’s energy minister Panos Skourletis said it was now “self evident” that parliamentarians would decide on whether or not to continue supporting the government after a “deep wound” had been inflicted on the ruling coalition. Lawmakers voted to ratify a 30-page “Memorandum of Understanding” to keep the country in the eurozone for the next three years on Friday. But the terms of the deal, which roll back a number of key pledges from the anti-austerity government, have split the ruling party. Mr Tsipras failed to get the backing of at least 120 of his own MPs, a constitutional threshold that could oblige him to trigger a vote in his leadership.

In a detailed evisceration of the austerity measures, former rebel finance minister Yanis Varoufakis denounced the agreement as encapsulating “the Greek government’s humiliating capitulation”. “Greek sovereignty is being forfeited wholesale” he said. “Not since the Soviet Union has wishful thinking, unsupported by anything tangible, posed as policymaking.” Support for the ruling coalition has becoming vanishingly thin. Greece’s two main opposition parties – which have so far voted to keep the country in the euro – vowed to pull the plug on the embattled premier should a vote be called in the coming weeks. Pasok, the much depleted socialist opposition, joined the conservative New Democracy in refusing to endorse Mr Tsipras and his junior coalition partner, led by defence minister Panos Kammenos.

[..] Chancellor Angela Merkel is facing the biggest domestic rebellion in her 10 years in office over the aid package. More than 60 of her Christian Democrat MPs rejected restarting talks over a new Greek rescue in an initial vote in July. This insurrection is set to mount when the package is put before a final parliamnetary vote on Wednesday, according to a key ally of the German premier. Michael Fuchs, deputy chairman of the CDU, said he had yet to decide whether or not he would back the bail-out as doubts over the involvement of the IMF continue to hang over Berlin. “There might be some changes by tomorrow, even,” said Mr Fuchs in an interview with Bloomberg.

A broad summit sounds like the by far best idea available.

• Leftist Veteran Glezos Appeals To Syriza Leadership To ‘Come To Senses’ (Kath.)

Leftist veteran Manolis Glezos, a former SYRIZA MEP, called on the party leadership to “come to your senses” and hold a broad summit, saying that the country’s third bailout “binds the Greek people hand and foot and enslaves them for entire decades.” “Let’s not allow the Left to become a seven-month parenthesis,” Glezos said in a statement. Describing the government’s strategy as “fickle and faltering,” he accused the party’s leadership of “erasing and destroying hopes and dreams.” “Finally come to your senses, fellow fighters and comrades of the leadership of the United Party,” Glezos wrote. “Before it is too late and before rushed initiatives are taken, listen to the voice of the people, of SYRIZA’s organizations and call a broad summit,” Glezos wrote, adding that “despite the intense dialogue that will take place, a solution will be found.”

“.. the Greek retreat is not the last word for the simple reason that the crisis will hit again..[..]..The task of the Syriza government is to get ready for that moment..”

• Thanks To The EU’s Villainy, Greece Is Now Under Financial Occupation (Zizek)

When my short essay on Greece after the referendum “The Courage of Hopelessness” was republished by In These Times, its title was changed into “How Alexis Tsipras and Syriza Outmaneuvered Angela Merkel and the Eurocrats”. Although I effectively think that accepting the EU terms was not a simple defeat, I am far from such an optimist view. The reversal of the NO of referendum to the YES to Brussels was a genuine devastating shock, a shattering painful catastrophe. More precisely, it was an apocalypse in both senses of the term, the usual one (catastrophe) and the original literal one (disclosure, revelation): the basic antagonism, deadlock, of the situation was clearly disclosed.

Many Leftist commentators (Habermas included) got it wrong when they read the conflict between the EU and Greece as the conflict between technocracy and politics: the EU treatment of Greece is not technocracy but politics at its purest, a politics which even runs against economic interests (as it was clearly stated by IMF, a true representative of cold economic rationality, which declared the bailout plan unworkable). If anything, it was Greece which stood for economic rationality and EU which stood for politico-ideological passion. After the Greek banks and stock exchange reopened, there was a tremendous flight of capital and fall of stocks which were not primarily a sign of the distrust of the Syriza government but of the distrust of the imposed EU measures a clear brutal message that (as we are used to put it in today s animistic terms) capital itself does not believe in the EU bailout plan.

(And, incidentally, most of the money given to Greece goes to the Western private banks, which means that Germany and other EU superpowers are spending taxpayers money to save their own banks which made the mistake of giving bad loans. Not to mention the fact that Germany profited tremendously from the escape of the Greek capital from Greece to Germany.) When Varoufakis justified his vote against the measures imposed by Bruxelles, he compared the deal to the Versailles treaty which was unjust and harboured a new war. Although his parallel is correct, I would prefer another one, with the Brest-Litovsk treaty between Soviet Russia and Germany at the beginning of 1918, in which, to the consternation of many of its partisans, the Bolshevik government ceded to Germany’s outrageous demands.

True, they retreated, but this gave them a breathing space to fortify their power and wait. And the same goes for Greece today: we are not at the end, the Greek retreat is not the last word for the simple reason that the crisis will hit again, in a couple of years if not earlier, and not only in Greece. The task of the Syriza government is to get ready for that moment, to patiently occupy positions and plan options. Keeping political power in these impossible conditions nonetheless provides a minimal space for preparing the ground for future action and for political education.

“The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules.”

• A New Approach to Eurozone Sovereign Debt (Yanis Varoufakis)

Greece’s public debt has been put back on Europe’s agenda. Indeed, this was perhaps the Greek government’s main achievement during its agonizing five-month standoff with its creditors. After years of “extend and pretend,” today almost everyone agrees that debt restructuring is essential. Most important, this is true not just for Greece. In February, I presented to the Eurogroup (which convenes the finance ministers of eurozone member states) a menu of options, including GDP-indexed bonds, which Charles Goodhart recently endorsed in the Financial Times, perpetual bonds to settle the legacy debt on the ECB’s books, and so forth. One hopes that the ground is now better prepared for such proposals to take root, before Greece sinks further into the quicksand of insolvency.

But the more interesting question is what all of this means for the eurozone as a whole. The prescient calls from Joseph Stigltiz, Jeffrey Sachs, and many others for a different approach to sovereign debt in general need to be modified to fit the particular characteristics of the eurozone’s crisis. The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need.

One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP. Another is the treaty’s “no bailout” clause. Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages. The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.

Here, then, is an idea (part of A Modest Proposal for Resolving the Euro Crisis, co-authored by Stuart Holland, and James K. Galbraith) aimed at re-calibrating the rules, enhancing their spirit, and addressing the underlying economic problem. In brief, the ECB could announce tomorrow morning that, henceforth, it will undertake a debt-conversion program for any member state that wishes to participate. The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules. Thus, in the case of member states with debt-to-GDP ratios of, say, 120% and 90%, the ECB would service, respectively, 50% and 66.7% of every maturing government bond.

He’s not done yet by any means.

• Yanis Varoufakis: Bailout Deal Allows Greek Oligarchs To Maintain Grip (Guardian)

Greece’s former finance minister Yanis Varoufakis has accused European leaders of allowing oligarchs to maintain their stranglehold on Greek society while punishing ordinary people in a line-by-line critique of the country’s €86bn bailout deal. Varoufakis said the Greek parliament had pushed through an agreement with international creditors that would allow oligarchs, who dominate sections of the economy, to generate huge profits and continue to avoid paying taxes. The outspoken economist published an annotated version of the deal memorandum on his website on Monday, arguing throughout the 62-page document that most of the measures imposed on Greece would make the country’s dire economic situation worse.

His first insertion makes clear his dismay at the dramatic events of last month, when the Greek prime minister, Alexis Tsipras, was forced to accept stringent terms for a new bailout amid calls from Germany for Greece’s temporary exit from the eurozone. Varoufakis, who resigned from his post in June, said: “This MoU [memorandum of understanding] was prepared to reflect the Greek government’s humiliating capitulation of 12 July, under threat of Grexit put to Tsipras by the Euro summit.” Folllowing the July summit, Athens agreed a three-year memorandum of understanding last week that will release €86bn of funds, much of it to repay debts related to two previous rescue deals. In exchange, Athens will implement wide-ranging reforms including changes to the state pension system and selling off government assets.

But Varoufakis said a reform programme overseen by the troika of lenders would only enslave ordinary workers and families by imposing tough welfare cuts while letting foreign companies grab domestic assets cheaply through privatisations. He said billionaire business owners in Greece would also escape scrutiny. In the memorandum it says: “Fiscal constraints have imposed hard choices, and it is therefore important that the burden of adjustment is borne by all parts of society and taking into account the ability to pay. Priority has been placed on actions to tackle tax evasion.” In answer, Varoufakis said: “As long as it is not committed by the oligarchs in full support of the troika through their multifarious activities.”

Reforming the EU is a dead end street.

• The Future of Europe (James Galbraith)

On June 8th, I had the honor of accompanying then-Greek finance minister, Yanis Varoufakis, to a private meeting in Berlin with the German finance minister, Wolfgang Schäuble. The meeting began with good-humored gesture, as Herr Schäuble presented to his colleague a handful of chocolate Euros, “for your nerves.” Yanis shared these around, and two weeks later I had a second honor, which was to give my coin to a third (ex-)finance minister, Professor Giuseppe Guarino, dean of constitutional scholars and the author of a striking small book (called The Truth about Europe and the Euro: An Essay, available here) on the European treaties and the Euro. Professor Guarino’s thesis is the following:

“On 1st January 1999 a coup d’état was carried out against the EU member states, their citizens, and the European Union itself. The ‘coup’ was not exercised by force but by cunning fraud… by means of Regulation 1466/97… The role assigned to the growth objective by the Treaty (Articles 102A, 103 and 104c), to be obtained by the political activity of the member states… is eliminated and replaced by an outcome, namely budgetary balance in the medium term.” As a direct consequence: “The democratic institutions envisaged by the constitutional order of each country no longer serve any purpose. Political parties can exert no influence whatever. Strikes and lockouts have no effect. Violent demonstrations cause additional damage but leave the predetermined policy directives unscathed.”

These words were written in 2013. Can there be any doubt, today, of their accuracy and of their exact application to the Greek case? It is true that Greek governments in power before 2010 governed badly, entered into the euro under false premises and then misrepresented the country’s deficit and debt. No one disputes this. But consider that when austerity came, the IMF and the European creditors imposed on Greece a program dictated by the doctrines of budget balance and debt reduction, including (a) deep cuts in public sector jobs and wages; (b) a large reduction in pensions; (c) a reduction in the minimum wage and the elimination of basic labor rights; (d) large regressive tax increases and (e) fire-sale privatization of state assets.

Pretty brutal assessment.

• Brutish, Nasty And Not Even Short: The Ominous Future Of The Eurozone (Streeck)

Now the dust has temporarily settled over the ruins of Greece’s economy, it is worth asking if there wasn’t a brief moment when the actors had found a way to cut the eurozone crisis’s Gordian knot. At some point in July German finance minister, Wolfgang Schäuble, appeared to have realised that his dream of a “core Europe” with a Franco-German avant-garde would vanish into thin air if Greece was allowed to remain in the economic and monetary union. Rewriting the rules of the union to accommodate the Greeks, Schäuble realised, would pull the euro southwards, and France, Italy and Spain with it – forever breaking up the European core.

His Greek equivalent Yanis Varoufakis, for his part, may have learned from his encounters of the third kind with the Eurogroup that the only role there was for Greece in the Europe of monetary union was that of an underfed and overregulated welfare recipient. Not only was this incompatible with Greek national pride; more importantly, what the governors of Europe would be willing to offer the Greeks by way of “European solidarity” would, at best, be too little to live on. The deal Schäuble offered in the last hour of July’s battle of the euro might have been worth exploring: a voluntary exit (an involuntary one not being possible under the current treaties) that gave Greece the freedom to devalue its currency and return to an independent monetary and fiscal policy, plus emergency assistance and some restructuring of the national debt, outside of the monetary union to avoid softening its rules by creating a precedent.

A generous golden handshake might have also been an idea, protecting Germany from being blamed for having plunged the Greeks into misery or driven them into the arms of Vladimir Putin. Politics can make strange bedfellows, but sometimes just for a one-night stand. In the end Varoufakis was overruled by Alexis Tsipras and Schäuble was overruled by Angela Merkel. The latter, displaying truly breathtaking political skills, managed within a day or two to redefine the resounding no of the Greek people to their creditors’ demands into a yes to “the European idea”, defined as a common currency – allowing him to sign on to even harsher conditions than had been rejected in the referendum (called, it seems, at the suggestion of Varoufakis, who was sacked on the very evening the results were in).

Afraid of the unimaginable economic disaster publicly imagined by fear-mongering euro supporters, and perhaps encouraged by informal promises by Brussels functionaries of future injections of other peoples’ money, Tsipras was ready to split his party and govern with those who had for decades let Greece rot in clientelism and corruption, offering the parties of Samaras and Papandreou an opportunity to regain legitimacy as pro-European supporters of “reform”.

Little people from little countries get to have their say in the press. And they get off on that.

• Greece To Trouble Eurozone For Decades, Says Finland’s Soini (Reuters)

Greece will be a headache for the eurozone for decades, Finland’s eurosceptic foreign minister said, and called for the IMF to participate in the Greece’s new bailout package. “Unfortunately, this problem will be in front of us for decades, I would say, if the eurozone stays together,” foreign minister Timo Soini said in an interview with public broadcaster YLE on Monday. IMF’s participation in the new bailout is uncertain because the fund demands debt reliefs to ease the burden on Greece. “An absolute debt cut, I think, is out of question, Germany too is against it … On other issues (maturities, interest rates) we must negotiate,” Soini said.

“IMF’s participation would also strengthen the expertise in the package, so that the programs will actually be carried out by Greece.” The Finnish parliament’s grand coalition last week approved the bailout deal. Soini’s nationalist the Finns party is known for opposing eurozone bailouts but had to support the new Greek deal to be able to keep a seat in the coalition government which it joined in May for the first time. “I still think bailout policy is bad policy … But in politics, one must make unpleasant decisions,” he said.

If governments and regulatirs won’t do it…

• Banks Braced For Billions In Civil Claims Over Forex Rate Rigging (FT)

Global banks are facing billions of pounds-worth of civil claims in London and Asia over the rigging of currency markets, following a landmark legal settlement in New York. Barclays, Goldman Sachs, HSBC and Royal Bank of Scotland were among nine banks revealed last Friday to have agreed a $2bn settlement with thousands of investors affected by rate-rigging in a New York court case. Lawyers warned the victory opens the floodgates for an even greater number of claims in London, the largest foreign exchange trading hub in the world, in a sign that the currency manipulation scandal is far from over. Banks could be hit as early as the autumn with claims in London’s High Court from corporates, fund managers and local authorities, according to lawyers working on the cases.

In addition, investors are expected to bring cases in Hong Kong and Singapore, which are also home to large foreign exchange markets. The US settlement comes just months after a record $5.6bn fine was slapped on six banks by regulators for manipulating the $5.3tn-a-day foreign exchange markets. “There will be more claims in London than in New York because it’s a bigger forex market,” said David McIlroy, a barrister at Forum Chambers. A settlement in London could amount to “tens of billions of pounds”, he said. Analysts said it would be extremely difficult to assess the financial impact on banks at this stage. “We’ve put in some element of civil fines for all the banks we cover, but it’s difficult to be specific because there aren’t that many clear precedents,” said one analyst.

“We looked at this one last week with interest, but the range of outcomes [from civil suits] is still quite wide.” Lawyers at US firm Hausfeld who worked on the class action said the recent settlement was “just the beginning”. Anthony Maton, a managing partner at Hausfeld, said: “There is no doubt that anyone who traded FX in or through the London or Asian markets — which transact trillions of dollars of business every day — will have suffered significant loss as a result of the actions of the banks. “Compensation for these losses will require concerted action in London.”

Make that more.

• US Graft Probes May Cost Petrobras Record $1.6 Billion Or More (Reuters)

Brazil’s Petrobras may need to pay record penalties of $1.6 billion or more to settle U.S. criminal and civil probes into its role in a corruption scandal, a person recently briefed by the company’s legal advisors told Reuters. State-run Petroleo Brasileiro, as the company is formally known, expects to face the largest penalties ever levied by U.S. authorities in a corporate corruption investigation, according to the person, who has direct knowledge of the company’s thinking. The settlement process could take two-to-three years, this person said. To date, the largest settlement of corporate corruption charges with the U.S. Department of Justice and the U.S. Securities and Exchange Commission was a 2008 agreement with Siemens, the German industrial giant.

It agreed to pay the U.S. $800 million to settle charges related to its role in a bribery scheme, and paid about the same amount to German authorities. The person told Reuters the legal advisors said they believed Petrobras faced fines that could be as large as, or more than, the $1.6 billion in combined U.S. and German penalties that Siemens faced. Two other sources with direct knowledge of Petrobras’ plans also said that any settlement, while several years away, would likely be “large,” but declined to give a specific estimate. All three sources requested anonymity, and cautioned that any estimates for the size of possible fines are very preliminary. Petrobras has not yet begun settlement talks with U.S. authorities, whose investigations are believed to be in an early phase, they said.

In November, the SEC sent a subpoena to Petrobras requesting information about the widening corruption investigations that have ensnared top company executives, major private contractors and senior politicians in Brazil. According to people familiar with the matter, the DOJ, which can bring criminal charges, is also investigating the company.

“They’re terrified of 1937..” Hmm. Don’t forget that certain people made a killing post-1937.

• Ron Paul: Fed May Not Hike Because ‘Everything Is Vulnerable’ (CNBC)

China’s move to devalue its currency roiled the markets last week, and stoked new fears about the health of the world’s third largest economy. However, according to former Rep. Ron Paul, the move may have given Federal Reserve Chair Janet Yellen the cover she needs to not raise rates later this year, as many market participants expect. “She’s going to be more hesitant to raise rates because she sees how fragile the global economy is,” Paul told CNBC’s “Futures Now” on Thursday. “She’s under the gun,” he added. “I could be wrong, but I don’t think they are going to raise interest rates.” According to the former Republican presidential candidate, a rapidly slowing Chinese economy adds just another headwind for an already struggling U.S. economy.

“I think there’s going to be enough problems existing, whether it’s the Chinese precipitating some crisis, or whether it’s our economy breaking down,” he said. Currently, markets expect the Fed will begin tightening monetary policy at its meeting in September. Gauges like closely watched fed fund futures contracts are pricing in a 45% chance of a September rate hike, while other analysts see the odds as higher. Yet institutions like the IMF have warned that a rate hike might imperil a fragile global recovery. In June, the IMF’s deputy director warned about potential risks of a Fed tightening. By Paul’s reasoning, the Fed is too scared to raise interest rates in the middle of an already weak recovery and risk sending the U.S. economy back into recession, or worse.

“They’re terrified of 1937,” said Paul, who has long called for a “day of reckoning” that will lead to the collapse of both the fixed income and equity markets. The Fed chief “does not want to be responsible for the depression that I think we’ve been in the midst of all along,” Paul added.

The entire oil industry will try to keep smiling all the way to bankruptcy.

• Junk-Rated Offshore Drillers Headed into Bankruptcy (WolfStreet)

After fracking, offshore drilling. At the leading edge is rig-contractor Hercules Offshore. In March 2014, before the oil price collapsed, it had the temerity to sell for 100 cents on the dollar $300 million in junk bonds. Since then, its shares have collapsed to near zero. Its bonds have collapsed too. And on Thursday last week, it and a whole gaggle of related companies filed for Chapter 11 bankruptcy. It won’t be the only junk-rated offshore driller with that fate, according to Fitch Ratings. Investors are going to get their pockets cleaned. “This is the lowest level of demand we have seen since the early days of the offshore industry,” Hercules CEO John Rynd had told investors in a quarterly conference call on April 29.

Hercules had already cut its global workforce – about 1,800 employees at the end of 2014 – by nearly 40%, he said. Offshore drillers have been buffeted from two directions: the collapse of drilling activity and the collapse in the daily rates they can charge for their offshore drilling rigs. So fewer rigs, and less money for each of the fewer rigs: Hercules’ revenues in the second quarter plunged 67% from a year ago! And junk-rated companies like Hercules that need new money to stay afloat and service their debts are finding out that their burned investors have shut off the spigot. “A leading indicator of further bankruptcies among other challenged high yield (HY) offshore drillers,” is what Fitch Ratings calls Hercules.

In the prepackaged bankruptcy, Hercules swaps four senior bond issues totaling $1.2 billion for 96.9% of the company’s equity. So how do these bondholders fare? The recovery rate for senior noteholders would be 41%, the company said in its disclosure statement. According to S&P Capital IQ LCD’s highyieldbond.com, “the range of reorganized equity value implies a recovery rate of 32-47.8%.” Meanwhile, the notes are quoted in the “low” 30-cents-on-the-dollar range. So for now, nearly a 70% haircut. Stockholders get the remaining 3.1% of the equity, plus warrants. Mere crumbs. To finish construction of the Hercules Highlander rig and to stay afloat a while longer, the company will also get $450 million in new money for 4.5 years, at LIBOR +9.5% per year, with a 1% floor. No more cheap money, even after bankruptcy, though it dramatically deleveraged the balance sheet at the expense of investors.

The poor are expendable here too.

• How Money, Race and Religion Determine the Fate of Europe-Bound Migrants (WSJ)

As Europe grapples with the biggest wave of migration since World War II, the fates of those crossing the Mediterranean are increasingly being determined by class systems based on money, ethnicity and religion. On these transnational trails, migrants tell of a fast-developing market for human cargo, where cash or creed can ensure a safer trip, more resources and better treatment. The discrimination starts at the beginning of migrants’ journeys at the hands of smugglers looking to maximize profits, and it ends with European authorities scrambling to handle the overwhelming numbers of people arriving and prioritizing them by nationality. In Greece this weekend, authorities deployed a 3,000-capacity passenger ferry to the island of Kos to host Syrian refugees arriving in record numbers.

Thousands of other asylum seekers on the island from Iraq and Afghanistan have been left without shelter, and with only sporadic access to food and a much longer wait to get their documents processed. Syrians are prioritized because the United Nations High Commissioner for Refugees has advised governments that they are so-called prima facie refugees, meaning they should be granted instant humanitarian protection because they are fleeing a war zone. EU countries recently agreed to resettle some 32,000 refugees from Greece and Italy, but said they would only do that for Syrian and Eritrean nationals, both designated as prima facie refugees by the U.N.

First reception procedures should be the same for everyone, said Barbara Molinario, a spokeswoman for the U.N. agency. Syrians are considered prima facie refugees, but “people from other countries might also have valid refugee claims, and generalizations should be avoided,” she said. On Kos, many locals view Syrians—who are almost neighbors across the Aegean Sea—as culturally similar to them. “Syrians are more civilized and they show more respect,” said Lefteris Kefalianos, a Kos resident who sells construction materials.

Debt Rattle August 15 2015

Aug 152015

August 15, 2015 Posted by Raúl Ilargi Meijer at 11:02 am Finance Tagged with: bail-in, China, Germany, Greece, IMF, milk, oil, privatization, refugees, revolt, Tsipras Comments Off

Lewis Wickes Hine 12-year-old newsie, Hyman Alpert, been selling 3 years, New Haven CT 1909

• A. Gary Shilling: “Oil Is Headed For $10 To $20 A Barrel” (Bloomberg)

• US Credit Traders Send Warning Signal to Rest of World Markets (Bloomberg)

• The Great China Ponzi – An Economic And Financial Trainwreck (David Stockman)

• China Says Plunge Protection Team Will Prop Up Stocks “For Years To Come” (ZH)

• Hundreds Of Chinese Cities In Precarious Financial State (NY Times)

• Euro Ministers Give Blessing To Greek Bailout, Wooing IMF On Debt (Reuters)

• EU Aims To Lure Greek Deposits Back To Banks With Bail-In Shield (Bloomberg)

• Greek PM Alexis Tsipras Faces Biggest Party Revolt Yet (Reuters)

• Germany’s Hypocrisy Over Greece Water Privatisation (Guardian)

• Germany Proves Russia’s Most Loyal Gas Customer as Price Plunges (Bloomberg)

• Eurozone Economy Sputters As China Risks Loom (Reuters)

• How the IMF Failed Greece (Subramanian)

• Market Liquidity Is Not “Invariably Beneficial” (Perry Mehrling)

• Misery On The Farm: Milk Price Slump Raises Spectre Of Ruin (NZ Herald)

• Economics Jargon Promotes A Deficit In Understanding (James Gingell)

• European Entrepreneurs Launch StartupBoat To Address Refugee Crisis (TC)

“The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance..”

• A. Gary Shilling: “Oil Is Headed For $10 To $20 A Barrel” (Bloomberg)

If crude’s slump back to a six-year low looks bad, it’s even worse when you reflect that summer is supposed to be peak season for oil. U.S. crude futures have lost 30% since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986. It even surpasses the decline of 2011, when prices fell as much as 21% over the summer as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi.

WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc. “Summer is when refineries are all running hard, so actual demand for crude is as good as it gets,” Seth Kleinman at Citigroup said. OPEC’s biggest members are pumping near record levels to defend their market share and U.S. production is withstanding the collapse in prices and drilling. The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance,” Kleinman said. Oil demand usually climbs in the summer as U.S. vacation driving boosts purchases of gasoline and Middle Eastern nations turn up air-conditioning.

Crude has sunk this year even U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels a day last month, according to U.S. Department of Energy data. Crude could fall to $10 a barrel as OPEC engages in a “price war” with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday. “OPEC is basically saying we’re not going to cut production, we’re going to see who can stand lower prices longest,” Shilling said. “Oil is headed for $10 to $20 a barrel.”

“..conditions in the high grade credit market are currently very unusual.”

• US Credit Traders Send Warning Signal to Rest of World Markets (Bloomberg)

Credit traders have an uncanny knack for sounding alarm bells well before stocks realize there’s a problem. This time may be no different. Investors yanked $1.1 billion from U.S. investment-grade bond funds last week, the biggest withdrawal since 2013, according to data compiled by Wells Fargo. Dollar-denominated company bonds of all ratings have lost 2.3% since the end of January, even as the Standard & Poor’s 500 index gained 5.7%. “Credit is the warning signal that everyone’s been looking for,” said Jim Bianco. “That is something that’s been a very good leading indicator for the past 15 years.”

Bond buyers are less interested in piling into notes that yield a historically low 3.4% at a time when companies are increasingly using the proceeds for acquisitions, share buybacks and dividend payments. Also, the Federal Reserve is moving to raise interest rates for the first time since 2006, possibly as soon as next month, ending an era of unprecedented easy-money policies that have suppressed borrowing costs. All of this has corporate-bond investors concerned enough that they’re demanding 1.64 percentage points above benchmark government rates to own investment-grade notes, the highest since July 2013, Bank of America Merrill Lynch index data show.

That’s also the biggest premium relative to a measure of equity volatility since March 6, 2008, 10 days before Bear Stearns was forced to sell itself to JPMorgan, according to Bank of America analysts in an Aug. 13 report. “Unlike the credit market, the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis,” the analysts wrote. “While we are not predicting another financial crisis, we believe it is important to keep highlighting to investors across asset classes that conditions in the high grade credit market are currently very unusual.” So if you’re very excited about buying stocks right now, just beware of the credit traders out there who are sending some pretty big warning signs.

Great take down by Stockman.

• The Great China Ponzi – An Economic And Financial Trainwreck (David Stockman)

There is an economic and financial trainwreck rumbling through the world economy. Namely, the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles. But here’s the Wall Street meme that is stupendously wrong and that engenders blind complacency with respect to the impending upheaval. To wit, the same folks who brought you the myth of the BRICs miracle would now have you believe that China is undergoing a difficult but doable transition – from an economy driven by booming exports and monumental fixed asset investment to one based on steady as she goes US-style consumption and services.

There may well be some bumps and grinds along the way, we are cautioned, such as the recent stock market and currency turmoil. But do not be troubled – the great locomotive of the world economy will come out the other side better and stronger. That’s because the wise, pragmatic and powerful leaders and economic managers who deftly guide China’s version of capitalism have the capacity to make it all happen. No they don’t! China is not a clone-in-the-making of America’s $18 trillion consume till you drop economy – even if that model were stable and sustainable, which it is not. China is actually sui generis – a historical freak accident that has no destination other than a crash landing. It’s leaders are neither wise nor deft economic managers.

In fact, they are a bunch of communist party political hacks who have an iron grip on state power because China is a crude dictatorship. But their grasp of the fundamentals of economic law and sound finance can not even be described as negligible; it’s non-existent. Indeed, their reputation for savvy and successful economic management is an unadulterated Wall Street myth. The truth is, the 25 year growth boom in China is just a giant, credit-driven Ponzi. Any fool can run a central bank printing press until it glows white hot. At the end of the day, that’s all the Beijing suzerains of red capitalism have actually done. They have not created any of the rudiments of viable capitalism. There are no honest financial markets, no genuinely solvent banks, no market driven allocation of capital and no financial discipline which comes from the right to fail as well as succeed.

“..China acted as is if forced lending to a state-run stock buying entity represented real, organic growth in demand for credit.”

• China Says Plunge Protection Team Will Prop Up Stocks “For Years To Come” (ZH)

Perhaps it’s a case of something getting lost in translation (so to speak), but Chinese authorities have a remarkable propensity for saying absurd things in a very straightforward way as though there were nothing at all odd or amusing about them. For example, here’s what the CSRC said on Friday about the future for China Securities Finance (aka the plunge protection team): “For a number of years to come, the China Securities Finance Corp. will not exit (the market).” For anyone who hasn’t followed the story, Beijing transformed CSF into a trillion-yuan state-controlled margin lender after a harrowing unwind in the half dozen or so backdoor leverage channels that helped inflate Chinese equities earlier this year caused stocks to plunge 30% in the space of just three weeks.

CSF has since become something of an international joke, as the vehicle, along with an absurd effort to halt trading in nearly three quarters of the country’s stocks, came to symbolize the epitome of market manipulation – and that’s saying something in a world where everyone is used to rigged markets. And because Beijing wanted to get the most manipulative bang for their plunge protection buck (err… yuan) the PBoC went on to count loans made to CSF by banks towards total loan growth in July. In other words, China acted as is if forced lending to a state-run stock buying entity represented real, organic growth in demand for credit. Now, apparently, the practice of using CSF to “stabilize” stocks and artificially prop up loan “demand” will become standard procedure. Here’s more from AFP:

China’s market regulator on Friday vowed to stabilise the volatile stock market for a “number of years”, saying a state-backed company tasked with buying shares will have an enduring role. “For a number of years to come, the China Securities Finance Corp. will not exit (the market). Its function to stabilise the market will not change,” the China Securities Regulatory Commission (CSRC) said in a statement on its official microblog. The China Securities Finance Corp. (CSF) has played a crucial role in Beijing’s stock market rescue, which was launched after Shanghai’s benchmark crashed 30% in three weeks from mid-June.

The regulator’s comments were the first time it has given any indication of how long it would intervene to support equities. Authorities gave the CSF huge funding to buy shares and subsequent speculation the government was preparing to withdraw from the stock market has spooked investors. The statement added the CSF will only enter the market during times of volatility. “When the market drastically fluctuates and may trigger systemic risk, it will continue to play a role to stabilise the market in many ways,” said the statement, which quoted CSRC spokesman Deng Ge.

From last weekend, but an important additional headache for Beijing. How are they going to control hundreds of cities heavily indebted to shadow banks?

• Hundreds Of Chinese Cities In Precarious Financial State (NY Times)

Although the country escaped the worst of the global financial crisis six years ago, it did so on the back of a borrowing binge by local governments, which spent heavily on new but often unprofitable infrastructure projects. Now, many local governments are mired in debt. In Weifang, a city known for seafood processing and an annual kite-flying festival, rapid urbanization over the last decade has saddled the local government with debts totaling 88.4 billion renminbi, or $14.2 billion, as of June 2013, the most recent data available. Since 2007, China’s overall local government debt has risen at an annual rate of 27%. It now totals almost $3 trillion, according to estimates from the consulting firm McKinsey & Company.

Companies, too, have gorged on cheap credit in recent years. Altogether, China’s total debt stands at 282% of its gross domestic product — a high level that raises the risk of a financial crisis should borrowers prove unable to repay and a wave of defaults ensue. It has created a conundrum for the country. China’s leaders want to wean the country from this debt-fueled growth model. But they also need to continue stimulating the economy, particularly at a time when growth is slowing. Part of Beijing’s solution has been to help local governments lower their borrowing costs through refinancing. Local government-controlled companies that are struggling to pay bonds are being encouraged to exchange them for new loans at lower interest rates from state-run banks.

China’s Ministry of Finance recently expanded this local government debt refinancing program to 3 trillion renminbi, or nearly $500 billion, up from 1 trillion renminbi just a few months ago. China has also begun a national campaign to encourage private investment in local infrastructure projects. In May, the nation’s top economic planning agency released a list of more than 1,000 projects worth 2 trillion renminbi that local governments across the country are seeking to finance with outside investment. Analysts estimate that is on top of roughly 1,500 other projects worth 3 trillion renminbi that had been previously announced by the local authorities.

A decade ago, the MTR Corporation, the Hong Kong subway operator, was an investor in Beijing’s fourth metro line. Beijing had won the right to host the 2008 Summer Olympics and was expanding its transport network at a blinding pace. By the time it opened in 2009, passenger flows on the new line were much higher and revenue much lower than either party had forecast. This prompted huge subsidy payments from the Beijing government to the MTR, which did not sit well with local officials. So city officials simply rewrote the contract. The new terms reduced subsidy payments to the MTR, and were on balance more favorable to the city government. MTR, as the minority shareholder, had little room to object.

Still far from over.

• Euro Ministers Give Blessing To Greek Bailout, Wooing IMF On Debt (Reuters)

Finance ministers from the eurozone gave their final blessing to lending Greece up to €86 billion after the parliament in Athens agreed to stiff conditions overnight. After six hours of talks in Brussels, ministers said in a statement: “The Eurogroup considers that the necessary elements are now in place to launch the relevant national procedures required for the approval of the ESM financial assistance.” Assuming final approval next week by the German and some other national parliaments, an initial tranche of €26 billion would be approved by the European Stability Mechanism next Wednesday. Of that, €10 billion would be reserved to recapitalise Greek banks ravaged by economic turmoil and the imposition of capital controls in June, and €13 billion would be in Athens on Thursday to meet pressing debt payment obligations.

Some issues still need to be ironed out following a deal struck with Greece on Tuesday by the EC, ECB and IMF. They include keeping the IMF involved in overseeing the new eurozone programme while delaying satisfying the Fund’s calls for debt relief for Greece until a review in October. IMF Managing Director Christine Lagarde, who took part in the meeting by telephone, said in a statement that the Fund believed Europe would need to provide “significant” debt relief as a complement to reforms Athens is taking to put Greece’s finances on a sustainable path. “I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” she said.

There’s no way back now for Brussels. They can’t un-promise to leave depositors’ money alone. Big move for Greek banks.

• EU Aims To Lure Greek Deposits Back To Banks With Bail-In Shield (Bloomberg)

Euro-area finance ministers shielded Greek bank depositors from any losses resulting from the restructuring of the nation’s financial system, as part of Friday’s deal on an€ 86 billion bailout. Senior bank bondholders will be in the crosshairs if Greek lenders tap into any of the financial stability funds set aside in the new bailout. Euro-area finance ministers agreed to a deal that would next week place €10 billion in Greece’s bank recapitalization fund, with another €15 billion available if needed. “Bail-in of depositors will be explicitly excluded” from EU rules to make private investors share the cost of fixing troubled banks, Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem told reporters after the six-hour meeting in Brussels.

By shielding all depositors, the euro area will protect small and medium-sized enterprises who have more than 100,000 euros in their accounts and aren’t covered by government deposit insurance, Dijsselbloem said. This prevents “a blow to the Greek economy” that ministers wanted to avoid, he said. Instead, the focus will turn to bond investors. “When so much money must be invested in banks, in the first place, banks must take part of the risks,” Dijsselbloem said. Alpha Bank AE’s €400 million of 3.375 percent notes due 2017 traded at 70.5 cents on the euro Friday to yield 25.4 percent. Those securities are up from a low this year of 27.5 cents in July.

At the start of the new aid program, the bank funds will be placed in a designated account at the European Stability Mechanism, the currency bloc’s firewall fund. Bank supervisors can tap the money as required once Greece’s banks have gone through stress tests and an asset-quality review. After Greece’s lenders are recapitalized, the subsequent bank holdings will be transferred to the nation’s planned privatization fund, which will then be able to sell off the stakes and use the proceeds to pay back bailout funds. By shielding deposits, account holders won’t have “anything to worry about,” Greek Finance Minister Euclid Tsakalotos told reporters. “The process of reversing the negative effects of capital controls will start very quickly and will speedily return the banks to where they were before and hopefully on a far firmer footing.”

I still think he knows he needs this.

• Greek PM Alexis Tsipras Faces Biggest Party Revolt Yet (Reuters)

Greek Prime Minister Alexis Tsipras faced the widest rebellion yet from his leftist lawmakers as parliament approved a new bailout programme on Friday, forcing him to consider a confidence vote that could pave the way for early elections. After lawmakers bickered for much of the night on procedural matters, Tsipras comfortably won the vote on the country’s third financial rescue by foreign creditors in five years thanks to support from pro-euro opposition parties. That cleared the way for euro zone finance ministers to approve the deal. This they did on Friday evening, albeit with stringent conditions. The vote laid bare the anger within Tsipras’s leftist Syriza party at the austerity measures and reforms which he accepted in exchange for the bailout loans.

Altogether 43 lawmakers – or nearly a third of Syriza deputies – voted against or abstained. The unexpectedly large contingent of dissenters, including former finance minister Yanis Varoufakis, heaped pressure on Tsipras to clear the rebels swiftly from his party and call early elections in the hope of locking in popular support. Tsipras remains hugely popular in Greece for trying to stand up to Germany’s insistence on austerity before relenting under the threat of a euro zone exit. He would be expected to win again if snap polls were held now, given an opposition that is in disarray. “I do not regret my decision to compromise,” Tsipras said in parliament as he defended the bailout from euro zone and IMF creditors. “We undertook the responsibility to stay alive over choosing suicide.”

But the vote left the government with support from within its own coalition below the threshold of 120 votes in the 300-seat chamber, the minimum needed to command a majority and survive a confidence vote if others abstain. In response, government officials said Tsipras was expected to call a confidence vote in parliament after Greece makes a debt payment to the ECB on Aug. 20 – a move that could trigger the government’s collapse and snap elections. Still, some of those who rebelled on Friday could still opt to support the government in a confidence vote, as could other pro-European parties such as the centrist Potami and the centre-left PASOK, leaving the final outcome unclear.

Friday’s vote was only the latest in a series of events highlighting the rift within Syriza, which stormed to power this year on a pledge to end austerity once and for all, before Tsipras accepted the new bailout to avoid a banking collapse. The leader of Syriza’s far-left rebel faction, former energy minister Panagiotis Lafazanis, took a step toward breaking away from the party by calling for a new anti-bailout movement. “Syriza accepted a new, third bailout – austerity that goes against its programme and pledges,” Lafazanis told Efimerida Ton Syntakton newspaper, adding that this “will open the way for a mutation of Syriza with an uncertain ending”. Syriza would be weakened by the departure of the faction led by Lafazanis.

“It’s clear that the model of privatisation of water has failed all around the world..”

• Germany’s Hypocrisy Over Greece Water Privatisation (Guardian)

Greek activists are warning that the privatisation of state water companies would be a backward step for the country. Under the terms of the bailout agreement approved by the Greek parliament today, Greece has pledged to support an existing programme of privatisation, which includes large chunks of the water utilities of Greece’s two largest cities – Athens and Thessaloniki. There is an ongoing debate about water privatisation and the role of business. Across Europe a wave of austerity-driven privatisation proposals have led to protests in Ireland, Italy, Greece and Spain. At the same time, some of northern Europe’s largest cities, including Paris and Berlin, are buying back utilities they sold just last decade.

President of the Thessaloniki water company trade union George Argovtopoulos said a move to a for-profit model would raise prices for consumers and degrade services. “It’s not any more a democracy or equality in the European Union. It’s a kind of business,” he said, adding that austerity measures that require water privatisation smacked of a “do as I say, but not as I do” approach from Germany. “We know that in Berlin, just two years ago they remunicipalised the water there, although they paid just under €600m to Veolia [to buy back its stake]. It’s clear that the model of privatisation of water has failed all around the world,” he said.

Deputy finance minister Jens Spahn told German breakfast television on Tuesday that sell offs of the electricity and rail sectors had benefited Germans. “Privatisation isn’t just about raising money, it’s about changing parts of the economy,” he said. The new bailout requires Greece to sell off €50bn worth of public assets. Manuel Schiffler, a former project manager for the World Bank and author of the book Water, Politics and Money, said privatisation only made sense where there was a need to improve efficiency. In the case of Thessaloniki in particular, he said, the water system was already quite well run. “I think it’s a privatisation for the wrong reasons. It’s only for fiscal reasons and not in order to improve the services provided by the utility,” he said.

Maude Barlow, the chair of Food & Water Watch said that years of experimentation with privatisation in developing countries had shown: “The best answer to bad government is good government. Don’t hold out for privatisation. It’s not a perfect system and I know Greece has it’s problems, but privatising their water systems is not a good answer to the crisis there.”

“Germany was the only nation among Gazprom’s key clients that increased Russian gas purchases in the first half.”

• Germany Proves Russia’s Most Loyal Gas Customer as Price Plunges (Bloomberg)

Russia boosted natural gas supplies to Germany by almost 50% in the second quarter as prices plunged, while the world’s largest natural gas exporter struggled with weaker demand from its former Soviet allies. Gazprom’s deliveries to Germany jumped to 11.7 billion cubic meters compared with 7.8 billion a year earlier, the highest quarterly level since at least 2010, according to data on the Moscow-based exporter’s website. Gazprom’s average gas price at the German border fell 36% this year as crude plunged. The European Union, which gets about 30% of its gas from Russia, may be Gazprom’s only growing market this year, the government in Moscow said last month. Gazprom has boosted fuel sales to the 28-nation bloc since the end of May as Brent crude slumped 21%.

Most of the company’s gas contracts are linked to the price of oil. “Germany has been a loyal customer for Russia for years,” said Alexander Kornilov, an oil and gas analyst at Alfa Bank in Moscow. “Such relationships stay in place, though volumes depend on a price – business is business.” Gazprom’s price to Germany fell to $6.68 per million British thermal units in July, the lowest level since December 2009, according to the IMF. Germany is importing almost all of its gas from Russia now, energy broker Marex Spectron said in a July 29 note. Germany was the only nation among Gazprom’s key clients that increased Russian gas purchases in the first half.

The company’s total shipments of the fuel fell 10% to 222.8 billion cubic meters through June, mainly because of lower sales in Italy, Turkey, Central Europe, Ukraine and Russia, Gazprom said in its earnings report under Russian accounting standards on Friday. Gazprom cut its 2015 output forecast for at least the third time this year, reducing its outlook to 444.6 billion cubic meters, according to the report. That’s only 0.1% higher than last year’s record-low output. Russia’s Economy Ministry predicted last month the gas company would cut output to 414 billion cubic meters for 2015.

Beware France.

• Eurozone Economy Sputters As China Risks Loom (Reuters)

Germany enjoyed robust if unspectacular growth in the second quarter while the French economy stagnated, leaving policymakers looking at a fragile euro zone recovery and risks from volatile Chinese markets. The German economy, Europe’s largest, grew by 0.4% on the quarter – a slight acceleration from 0.3% in the first three months of the year but below expectations for a 0.5% expansion as weak investment acted as a drag. In France, a jump in exports was not strong enough to offset the impact of weak consumer spending and changes in inventories and growth came to a standstill after a strong first quarter.

The readouts from the euro zone’s two largest economies came a day after the minutes of the ECB’s last meeting showed it was concerned that volatility in Chinese markets may have more impact than expected on the euro zone. China has seen a run of weak economic data. The ECB described the recovery in the 19-country euro zone as moderate and gradual, a trend it called “disappointing”, and said an increase in U.S. interest rates might slow the upturn. Private sector economists are also concerned that Germany, Europe’s powerhouse economy, is not growing faster despite favorable conditions.

“The fact that record low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth,” said Carsten Brzeski at ING. “Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case.” Germany’s Federal Statistics Office said weakness in investment and a marked drop in inventories weighed on growth in the second quarter, while the weaker euro helped support exports.

“.. the emergence of a new institution: a truly International Monetary Fund, in place of today’s Euro-Atlantic Monetary Fund.”

• How the IMF Failed Greece (Subramanian)

The reason why an assisted Grexit was never offered seems clear: Greece’s European creditors were vehemently opposed to the idea. But it is not clear that the IMF should have placed great weight on these concerns. Back in 2010, creditor countries were concerned about contagion to the rest of the eurozone. If Grexit had succeeded, the entire monetary union would have come under threat, because investors would have wondered whether some of the eurozone’s other highly indebted countries would have followed Greece’s lead. But this risk is actually another argument in favor of providing Greece with the option of leaving. There is something deeply unappealing about yoking countries together when being unyoked is more advantageous.

More recently, creditor countries have been concerned about the financial costs to member governments that have lent to Greece. But Latin America in the 1980s showed that creditor countries stand a better chance of being repaid (in expected-value terms) when the debtor countries are actually able to grow. In short, the IMF should not have made Europe’s concerns, about contagion or debt repayment, decisive in its decision-making. Instead, it should have publicly pushed for the third option, which would have been a watershed, for it would have signaled that the IMF will not be driven by its powerful members to acquiesce in bad policies. Indeed, it would have afforded the Fund an opportunity to atone for its complicity in the creditor-driven, austerity-addled misery to which Greeks have been subject for the last five years.

Above all, it would have enabled the IMF to move beyond being the instrument of status quo powers – the United States and Europe. From an Asian perspective, by defying its European shareholders, the IMF would have gone a long way toward heralding the emergence of a new institution: a truly International Monetary Fund, in place of today’s Euro-Atlantic Monetary Fund. All is not lost. If the current strategy fails, the third option – assisted Grexit – remains available. The IMF should plan for it. The Greek people deserve some real choices in the near future.

“..economics quite regularly adopts the simplifying assumption that all markets are fully liquid, so that supply always exactly equals demand and markets always clear.”

• Market Liquidity Is Not “Invariably Beneficial” (Perry Mehrling)

The recently released PwC “Global Financial Markets Liquidity Study”, sounds a warning. Financial regulation, while perhaps well-intentioned, has gone too far. Banks may be safer but markets are more fragile. At the moment, this fragility is masked by the massive liquidity operations of world central banks. But it will soon be revealed as, led by the Fed, central banks attempt to exit. Now, before it is too late, additional regulatory measures under consideration should be halted (Ch. 5). And existing regulations should be urgently revisited with an eye to achieving better balance between two social goods, financial stability and market liquidity, rather than the current focus on stability at the expense of liquidity (Ch. 3).

The bulk of the report consists of market-by-market empirical documentation of the reduction in market liquidity in past years (Ch. 4). Pretty much all markets have been affected, even sovereign bond markets, but especially markets that were already not so liquid. “There is clear evidence of a reduction in financial markets liquidity, particularly for less liquid areas of the financial markets, such as small and high-yield bond issues, longer-term FX forwards and interest rate derivatives. However, even relatively more liquid markets are experiencing declining depth, for example US and European sovereign and corporate bonds” (p. 104) “Bifurcation”, meaning widening difference between vanilla markets now supported by central clearing and everything else, is a repeated watchword, as well as “liquidity fragmentation” across different jurisdictions.

Both are taken to be obvious bads. But are they? The central analytical frame of the report is that market liquidity is always and everywhere a good thing, and that more of it is always and everywhere better than less. “We consider market liquidity to be invariably beneficial” (p. 8, 17). “We consider market liquidity to be beneficial in both normal times and times of stress. For this study we therefore work on the premise that market liquidity is invariably beneficial” (p. 23). Accept this premise, and everything else follows. But why accept the premise? To be sure, economics quite regularly adopts the simplifying assumption that all markets are fully liquid, so that supply always exactly equals demand and markets always clear. (On page 17, the report cites the venerable Varian microeconomics text as authority.)

It’s a good assumption if you are concerned about something other than market liquidity. It is a terrible assumption, and a terrible premise, if you are concerned exactly about market liquidity. In fact, the idealization of full liquidity in every market is logically impossible in a world where market liquidity is provided by profit-seeking market makers. In such an ideal world, market-making profit would be zero, so no market-maker would be willing to participate! The idealization thus makes most sense as a world where liquidity is provided for free by government. It is thus quite inappropriate as a measure of how far current reality falls short of optimum.

The stop to Europe’s milk quota reverbs around the world. New Zealand is THE obvious victim.

• Misery On The Farm: Milk Price Slump Raises Spectre Of Ruin (NZ Herald)

“There’s nothing more depressing than knowing when those big tankers come on to your farm you are paying Fonterra to take your milk away.” Depression is not a word New Zealanders associate with dairy farming, but Farmers of NZ operations director Bill Guest is stating the obvious. Fonterra’s price signal for the coming year of $3.85 per kg of milksolids is nearly $2/kg short of what the average dairy farmer needs to cover costs. On an average-size farm with annual costs of around $900,000, that’s an operating deficit of $260,000, Dairy NZ estimates. For most, that spells increased borrowing but that option won’t be there for the heavily indebted. “I would say people with $1 million of debt are not going to survive,” Guest says.

There will scarcely be a profitable dairy farm in New Zealand this year in cashflow terms and the effects of farmer belt-tightening will ripple through service industries and provincial towns and on to the Government’s coffers. The Government may play down the effects – Finance Minister Bill English says the dairy sector accounts for only 20% of exports; Dairy NZ says it’s 29% – but some analysts predict a $1.5 billion fall in GDP. That’s similar to the effect of the one-in-50-year drought that hit rural New Zealand in 2013. Right now, though, all the weight is being borne by dairy farmers as banks ponder the balance sheet implications of another year of low incomes and associated declines in stock and land values.

It’s the lowest farmgate price since 2002, and some analysts say Fonterra will struggle to make the $3.85 forecast. Dairy NZ is estimating $3.65. Last year’s payments were well below recent norms, although the blow was cushioned by deferred payments from the record 2013/14 price. But in July, for the first time, farmers received no retrospective payments – meaning no income until milking gears up. While only a few dairy farms are now on the block, many more farmers are expected to attempt an “orderly exit” from the industry in the coming months – before they are forced out.

“If you can’t explain something simply, you don’t understand it well enough.”

• Economics Jargon Promotes A Deficit In Understanding (James Gingell)

Whether it’s discussion of debt, or the argument for austerity, it’s hard to find good economics communication, where the language is rinsed free of jargon. Take this as an example, from an excited Telegraph journalist describing the Greek financial crisis: “Late on Wednesday night, the governing council of the ECB decided that it would no longer accept Greek sovereign debt as collateral for its loans. Greece’s junk-rated bonds had been the subject of a “waiver”, where the central bank accepted sovereign and bank debt as security in return for cheap ECB funding.” I’m a fairly intelligent man. I am deeply interested in foreign affairs. Yet I have only the vaguest sense of what the above means.

Does “sovereign debt” or “junk-rated bonds” or, in this context, “collateral” mean much to the average person? Have any of these phrases truly entered the public consciousness? I would argue not. A recent survey of 1,500 University of Manchester students would agree with me. Only 40% of them could even properly define GDP. Politicians aren’t much better. Here’s George Osborne presenting his latest budget: “While we move from deficit to surplus, this [new fiscal] charter commits us to keeping debt falling as a share of GDP each and every year – and to achieving that budget surplus by 2019-20 … Only when the OBR judge that we have real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis, will that surplus no longer be required.” Eh?

You could argue that because the Telegraph example featured in its finance pages, some of its technical language could be forgiven on the basis of audience suitability. But Osborne’s budget announcement was to the country. The whole country. The whole country whose lives his decisions profoundly influence. Yet he makes no attempt whatsoever to remove the jargon in order to effectively relay what is essentially a generation-defining message. It’s simply not good enough. So why does he, and many of his establishment peers, do this? Some of the answer can be found in the old Einsteinian cliche: “If you can’t explain something simply, you don’t understand it well enough.”

Economics is clearly very difficult and solving its problems is an extremely demanding task, particularly for someone with no formal training like our dear chancellor. In Osborne’s defence, it seems to me that if the answers were obvious, then more people would agree on them. But because he – like many of his colleagues in Westminster – doesn’t really understand what he is talking about, he simply can’t describe his economic policies in simple enough terms. And into this vacuum of insight George pumps his jargon, which gives him an air of understanding that is just about convincing enough to maintain power. The other part of the explanation is that politicians deliberately use jargon to diffuse our ire and frustrations.

They pitch their speeches and briefings at a level most of us will never understand in order to limit public scrutiny. Their reasoning is thus: if we can’t understand what they’re talking about then how can we possibly begin to question them? Advertisers do the same thing when they use pseudoscience to market their products. They say things like “the pentapeptides in our anti-ageing cream are the active ingredient” or “our makeup remover contains micellar water to give you a fresher look”. Although this is complete drivel, the advertisers know that many of us are happy to accept the claims as fact because we don’t have the capacity to challenge them.

Again: what the EU should be doing. It’s about morals, because it’s about human lives.

• European Entrepreneurs Launch StartupBoat To Address Refugee Crisis (TC)

While many in Europe are sunning themselves on beaches, a group of young tech entrepreneurs and investors have grouped together to address the crisis of refugees, many from Syria, which have come to European shores in wave after wave this Summer. The initiative was started by Paula Schwarz, an entrepreneur based in Berlin, who’s family owns a house on the the Greek island of Samos where thousands of refugees have landed in the last few weeks. Up to 800 people land in Samos every day, according to the island’s mayor Michaelis Angelopoulos. Schwarz brought together people from startups from Germany, Greece and South Africa to tackle the refugee crisis with a typical startup approach, forming a group called Startupboat, to come up with new ideas.

The idea was to conduct research on the status quo of political refugees on Samos Island and “develop tools to improve the status quo of irregular migrants on Greek islands” Web site, Twitter, Facebook). She put out the call to her network and was joined by 20 others, including venture capitalist David Rosskamp, formerly with Earlybird Capital in Berlin and Franziska Petersen, the German client manager for Facebook’s European headquarters in Dublin, Ireland. Rosskamp told me: “People were from Facebook, Saving Global (and formerly Index Ventures), Wings University, other VC funds, Academia, the Lufthansa Innovation Hub, McKinsey and Entrepreneurs from Greece, Berlin and South Africa. We wanted to understand the situation and human tragedy, show civil engagement and think about local help.

On top of this, we feel that the European public is clearly missing a transparent discussion of the issue. Most refugees here are from Syria, they are well educated and could actually be ‘us’.” “We are on Samos as the island is seeing close to 800 refugees per day. They arrive through Turkey and are taken out of the water by the Coast Guards or strand on remote rocks somewhere on the island. From here, their journey through Europe begins. We have followed their odyssey over the island and have organized ad hoc support, including the involvement of local authorities and press to raise awareness and dialogue. We have also set up information websites for both migrants and the Samos public. He says the StartupBoat group is a private initiative. “We saw what was happening on the European borders and got together a set of people equally concerned.”

But the ideas morphed into action as the people — normally used to chatting about business models and innovation — toured the refugee camps and realized they had to do something practical as well. They’ve now launched a website called First-contact. This explains to refugees arriving on Samos what do to do when they arrive, as many of the refugees have cell phones and can go online, according to Schwarz. They’ve ben supplying them with food, speaking to officials and organizing an “awareness walk” through the capital (led by the mayor of the island). [..] Christian Umbach, one of Startupboat’s members who works for Lufthansa Innovation Hub in Berlin, believes the EU should address the issue head on, and also lobby to stop the war in Syria. Quoted in an article in Handelsblatt, Umbach said: “After meeting these people, you start to understand that they don’t come here because they want to benefit economically from us,” he said. “They come here because they are under fire and bomb attacks at home.”