bailout Archives - Page 4 of 5 - The Automatic Earth

Property sales in Beijing rose 64.8% in 2015, boosted by more favorable housing policies, according to a real estate white paper released by the city’s government. Increased government stimulus sparked a sharp reversal in the market after sales volumes fell 30% in 2014, the white paper said. The benchmark interest rate for housing loans also dropped to its lower level in almost a decade, after several interest rate cuts, the paper noted. “The country’s housing credit and tax policies have been at their most favorable levels in recent years,” the paper said.

The number of newly-built commercial homes and existing stock sold in Beijing increased 26% and 90.7% respectively year-on-year in 2015, according to the paper published by Beijing Municipal Commission of Housing and Urban-Rural Development. China reported slightly stronger-than-expected economic growth in the second quarter as the housing boom and a government infrastructure building spree boosted demand for materials from cement to steel. But recent data has also indicated that property investment growth is cooling. Some of the country’s biggest cities have had to impose curbs on property purchases as sharp price rises raise fears of possible asset bubbles.

This bubble is popping, though.

• How a Chinese Highway Became a Boulevard of Broken Dreams (WSJ)

A highway project here that is four years behind schedule and hundreds of millions of dollars over budget helps explain why Beijing s effort to raise infrastructure spending is an increasingly ineffective way to boost the economy. When construction on the Chang An Expressway began in 2008 it seemed a sure bet. Its private partners stood to collect decades of lucrative toll revenue. The economy and the environment would benefit by slashing three hours off a four-hour trip. But the project, in central Hunan province, has been beset by financial problems, resident protests and a corruption probe, issues that also have hindered hundreds of other projects in China.

Such setbacks are hurting Beijing s efforts to halt a decline in economic growth that is rippling across the globe and threatening political stability at home. China also is drawing less benefit from the infrastructure projects it completes. After a 15-year period in which the country built thousands of roads, airports, bridges and buildings, the economic benefit of adding even more is decidedly less valuable. Local governments’ heavy debt loads from prior stimulus efforts are further obstructing China’s efforts to stimulate the economy with infrastructure spending. More of their borrowed money is going to pay back previous loans. Many of these projects lose money, adding still more debt.

The upshot: China needed twice as much investment per unit of growth in 2015 as it did in 2010, official data show. This hasn’t stopped Beijing from doubling down on infrastructure spending as exports, manufacturing and other growth engines sputter. The government plans to spend $749 billion on transport projects over the next three years, compared with $171 billion worth built last year.

Crackdown? Only in name. China is addicted to the shadows.

• China Shadow Banking Assets Grew 30% In 2015 (R.)

Shadow banking activity in China has expanded further and now accounts for nearly a third of the total banking sector assets, raising financial risks in the world’s second-largest economy, rating agency Moody’s Investor Service said on Wednesday. Shadow banking assets in China increased by 30% last year, reaching almost 54 trillion yuan (6.17 trillion pounds), according to Moody’s estimates. That is equivalent to about 78% of China’s total economic output and 27.6% of its banking assets. In 2011, shadow banking products accounted for 17.2% of total banking assets, and the share grew to 24.3% in 2014. China’s crackdown on risky practices in the thinly regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults, and as policymakers appear worried about the risks of relying on too much debt-fuelled stimulus.

Despite this, shadow banking’s share in bank loans and total bank assets has expanded rapidly, as sectors and firms reeling from overcapacity and poor credit profiles turn to other sources of funding, and investors hunt for higher yields. “The rise in overall leverage and further expansion of shadow banking activity are pushing up financial risks,” said the Moody’s report, adding the growth highlights “spillover risks” to the financial system due to its interconnectedness. Years of breakneck growth for China’s top insurers have been partly fuelled by a splurge on shadow banking-linked products that could punch multi-billion-dollar holes in their balance sheets, a Reuters analysis showed.

Mid-tier Chinese banks are also increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on balance sheets, masking the scale and risks of the slowing economy. The takeover tussle embroiling top Chinese developer China Vanke has also showed how local banks are increasingly exposed to highly volatile domestic stock markets through shadow lending products. “The increasing size of the shadow banking system means that during a disorderly contraction, banks could have difficulty replacing shadow banking credit, leaving borrowers who rely on such financing at risk of a credit crunch,” Moody’s said.

Shadow banking comes in many different guises.

• An Auction House Learns the Art of Shadow Banking (BBG)

A year before he got caught up in a U.S. money-laundering investigation, Malaysian financier Jho Low was looking to borrow more than $100 million without having to answer all the nosy know-your-customer questions required by U.S. banks such as JPMorgan Chase. “Prefer the boutique banks that can move fast vs the large ones like JPM,” Low wrote on March 13, 2014, to an employee of a private art dealership that had sold him a painting by Claude Monet for $35 million a few months earlier. The lender “can take all the art no problems,” he wrote the next day. “All in Geneva free port. Speed is the most important and one with a fairly quick and relaxed kyc process.”

Low got his money a month later, not from a bank but from Sotheby’s, an auction house that isn’t subject to the same money-laundering scrutiny by regulators. He pledged 17 works of art, valued between $191.6 million and $258.3 million, to secure a $107 million loan, according to a U.S. Justice Department complaint filed July 20 in an effort to seize more than $1 billion of assets allegedly siphoned from a Malaysian state fund. As prices for art skyrocketed, Sotheby’s and other firms have become shadow banks, making millions of dollars of legal loans outside the regulated financial system and raising concerns that such financing could facilitate money laundering. Sotheby’s tripled lending to $682 million over the four years ended in 2015.

Last year it almost doubled, to $1 billion, a revolving credit facility provided by banks including JPMorgan and HSBC that it can use to make loans. “One way to launder is to use art as a security for a loan,” said David Hall, who spent 10 years as a special prosecutor for the Federal Bureau of Investigation’s Art Crime Team and is now a partner at law firm Wiggin & Dana. Hall, who wouldn’t comment about Sotheby’s or the Low case, said the aim is to use ill-gotten funds to purchase assets that can be used as collateral for a loan. “The level of scrutiny you’ll receive from a bank is much higher than you will receive from an auction house.”

It’s everybody’s real problem, but even more so for Japan.

• Japan’s Real Problem Is Too Much Debt (720G)

The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.” Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.

The Japanese economy has been fighting weak growth and deflationary forces for over 25 years. Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since. Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work. Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem. The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand. Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt.

That incentive is produced via lower interest rates. If demand really is the problem, however, then some version of these policies should have worked, but to date they have not. If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnoses and resulting ill-designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem.

Not much choice.

• Can the World Deal With a New Bank Crisis? (Satyajit Das)

As Europe braces for the release of its bank stress tests on Friday, the world could be on the verge of another banking crisis. The signs are obvious to all. The World Bank estimates the ratio of non-performing loans to total gross loans in 2015 reached 4.3%. Before the 2009 global financial crisis, they stood at 4.2%. If anything, the problem is starker now than then: There are more than $3 trillion in stressed loan assets worldwide, compared to the roughly $1 trillion of U.S. subprime loans that triggered the 2009 crisis. European banks are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy. The IMF estimates that risky loans in China also total $1.3 trillion, although private forecasts are higher. India’s stressed loans top $150 billion.

Once again, banks in the US, Canada, UK, several European countries, Asia, Australia and New Zealand are heavily exposed to property markets, which are overvalued by historical measures. In addition, banks have significant exposure to the troubled resource sector: Lending to the energy sector alone totals around $3 trillion globally. Borrowers are struggling to service that debt in an environment of falling commodity prices, weak growth, overcapacity, rising borrowing costs and (in some cases) a weaker currency. To make matters worse, the world’s limp recovery since 2009 is intensifying loan stresses. In advanced economies, low growth and disinflation or deflation is making it harder for companies to pay off what they owe. Many European firms are suffering from a lack of global competitiveness, exacerbated by the effects of the single currency.

Greece should sue him over this.

• Wolfgang Schäuble Bails Out Spain, Portugal (Pol.)

Ahead of Wednesday’s meeting of the EU’s 27 commissioners, Spain and Portugal looked to be headed for the eurozone’s version of politically embarrassing fiscal purgatory. There was no question that the Iberian duo’s budget deficits were in blatant breach of the single currency zone’s rules. Momentum was growing for the Commission to impose, for the first time ever, a fine totaling in the millions of euros. Even Jean-Claude Juncker, the Commission chief, had seemingly changed his previously skeptical views on sanctions, pushing his colleagues in recent weeks to enforce the rules and shore up Brussels’ credibility on eurozone governance. Then salvation arrived from an unlikely source: Wolfgang Schäuble.

The German finance minister, curmudgeonly fiscal hawk and scourge of spendthrift southern Europeans, broke with public type in a concerted, last-minute campaign to stop the sanctions, according to people familiar with his actions. Over the past weeks and days, Schäuble worked the phones and used personal encounters, pressing commissioners on the fence, mostly from his own center-right political block, to cancel the threatened fine. The behind-the-scenes intervention was driven by political considerations particular to this moment that trumped Schäuble’s long-standing demands for the eurozone nations to keep their budgets in order and abide by commonly agreed rules.

[..] As the consensus grew against a fine, Juncker urged the participants to make clear to the outside world why Brussels ducked, once again, imposing sanctions on rule breakers. “We must not be more Catholic than the Pope, but please make it known that the Pope wanted a fine of zero,” Juncker said, speaking in French at the closed-door meeting, according to a source in the room.

And now Schäuble can save Italy too.

• Households on the Hook for Italy’s Next Bailout (BBG)

While the stability of Italy’s banks has been a front-burner issue for policy makers since the first tremors of the global financial crisis, the result of stress tests on Friday could usher in the final stage of solving their predicament. Retail investors own almost half of the most vulnerable securities, a legacy of banks using their customers as a piggy bank for cheap funding. UniCredit declined to comment on Imperatore’s recollection. The bank’s subordinated bonds available to retail investors trade close to par, indicating investors don’t expect to suffer losses. The bank is considering raising as much as €5 billion from shareholders and selling its entire stake in Poland’s Bank Pekao to raise capital, people familiar with the matter said on Wednesday.

At the zenith of the financial crisis, between July 2007 and June 2009, 80% of Italian banks’ bonds were sold to retail investors, according to regulator Consob. Through savers, banks funded themselves at a similar cost to the Italian government, whereas they gave professional money managers an extra%age point in debt interest, the 2010 report found. The channel of selling junior bonds to savers has virtually shut this year. So far in 2016, only one Italian bank, Mediobanca, has sold subordinated debt with an initial investment designed to attract small-scale investors – selling €200 million of junior bonds with a minimum denomination of €1,000. In the same period last year 10 banks sold €1.4 billion of notes with the same minimum subscription size.

Still, Italian savers held €31 billion of subordinated bank bonds as of October, more than double the €13 billion in the hands of foreign investors, according to the Bank of Italy. That translates to about €1,260 of the junior bank debt for every household in Italy. Banca Monte dei Paschi di Siena, which has more than €27 billion of toxic loans on its books and needs to be recapitalized, has about €5 billion of junior debt.

“..if yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan’s 40-year would lose a quarter of its value..”

• Buying Longer Bonds Holds Danger (WSJ)

Investors in Japan’s 40-year bond have lost 24 years of coupon income in just three weeks as the rush into long-dated safe government paper went into sharp reverse. At one level, the 10% fall in the price of the longest-dated Japanese government bond is just a correction after this year’s extraordinary rally, which delivered returns of more than 50% before the pullback. At another, it highlights something dangerous at work in today’s markets: the scale of the risks investors are willing to take as they try to avoid anything that depends on economic growth. Japan’s bond selloff was worse than other markets’, as investors prepared for next week’s ¥28 trillion ($268 billion) spending and tax-cut package and a possible further Bank of Japan stimulus this Friday.

U.S., U.K. and German bond prices have also dropped since early July, though by less, as global demand weakened for long-duration assets. The demand for safe assets with a long duration—a proxy for how long it takes an investor to get his money back—was mirrored in stocks and corporate bonds. Rather than search out the highest-yielding assets, investors looked for those with secure yield, even if it was lower. So this year, triple-A-rated corporate bonds have outperformed double-A or single-A bonds, according to Barclays data. The same applied for junk bonds, with the higher ratings outperforming lower ones. (An exception was bonds close to or already in default, which were mainly energy companies and so were boosted by the rising oil price.)

[..] if yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan’s 40-year would lose a quarter of its value, equal to 63 years of coupons. Has the long-run economic outlook really changed so much since January?

Excuse me? That post is already taken: “..The Clinton campaign shot back that Trump was posing a possible national security threat..”

• Trump Draws Ire After Urging Russia To Find ‘Missing’ Clinton Emails (R.)

Republican Donald Trump on Wednesday invited Russia to dig up tens of thousands of “missing” emails from Hillary Clinton’s time at the U.S. State Department, vexing intelligence experts and prompting Democrats to accuse him of urging foreigners to spy on Americans. “Russia, if you’re listening, I hope you’re able to find the 30,000 emails that are missing,” Trump, the Republican presidential nominee, told reporters. Trump made the remark at a testy news conference at his Doral golf resort in Florida that allowed him to steal some of the limelight from the Philadelphia convention where Clinton on Thursday will accept the Democratic presidential nomination for the Nov. 8 election.

The Clinton campaign shot back that Trump was posing a possible national security threat by encouraging a foreign power to conduct espionage in the United States. Some intelligence experts said the comments raised questions about Trump’s judgment. A spokesman for Trump, Jason Miller, tried to tamp down the storm of protest, saying Trump did not urge Russia to hack Clinton’s emails. Trump said on Twitter that if anyone had Clinton’s emails, “perhaps they should share them with the FBI!” The criticism of Trump’s comments reverberated at the Democratic National Convention where speakers brought up the episode to try to intensify Democratic support for Clinton, who is running neck and neck with Trump in the polls.

“Donald Trump today once again took Russia’s side. He asked the Russians to interfere in American politics,” longtime Clinton supporter and former CIA Director Leon Panetta said. “Donald Trump … is asking one of our adversaries to engage in hacking or intelligence efforts against the United States of America to affect the election.” Another speaker, retired U.S. Rear Admiral John Hutson, said of Trump: “This morning, he personally invited Russia to hack us. That’s not law and order, that’s criminal intent.”

You ain’t helping, Mikey…

• In Clash Of Billionaires, Bloomberg Calls Trump White House Race ‘A Con’ (R.)

New York media mogul Michael Bloomberg assailed fellow billionaire Donald Trump on Wednesday, calling his U.S. presidential race a “con” and ripping into his history of bankruptcies and lawsuits. “Trump says he wants to run the nation like he’s running his business? God help us,” Bloomberg told the Democratic National Convention in Philadelphia to roaring applause. “I’m a New Yorker and I know a con when I see one.” Formerly a Republican and now an independent, Bloomberg was for the most part greeted warmly by the audience in the Wells Fargo Center arena where he threw his support behind the Democrats’ presidential nominee, Hillary Clinton.

The owner of the Bloomberg media empire and a former New York City mayor, Bloomberg was an odd choice for a speaker at the Democratic conclave, where many party progressives have railed against the influence of billionaires in politics. “Let me thank all of you for welcoming an outsider here, to deliver what will be an unconventional convention speech,” he said when he took the stage, eliciting cheers. “I am not here as a member of any party. I am here for one reason: to explain why I believe it is imperative that we elect Hillary Clinton as the next president of the United States.” Bloomberg had considered running for the White House as an independent this year but dropped the idea in March, saying it could increase the chances Trump would win.

Bloomberg has known Trump casually for years and twice appeared on Trump’s reality TV show “The Apprentice.” But since Trump entered the race for president in June 2015, Bloomberg has taken issue with him, lashing out at his policies and fiery rhetoric, especially his call to ban Muslims from entering the country and his promise to wall off the Mexican border and deport millions of undocumented foreigners.

If they can get the FBI to stop, what good would the IRS be?

• IRS Launches Investigation Of Clinton Foundation (DC)

IRS Commissioner John Koskinen referred congressional charges of corrupt Clinton Foundation “pay-to-play” activities to his tax agency’s exempt operations office for investigation, The Daily Caller News Foundation has learned. The request to investigate the Bill, Hillary and Chelsea Clinton Foundation on charges of “public corruption” was made in a July 15 letter by 64 House Republicans to the IRS, FBI and Federal Trade Commission (FTC). They charged the foundation is “lawless.” The initiative is being led by Rep. Marsha Blackburn, a Tennessee Republican who serves as the vice chairwoman of the House Committee on Energy and Commerce, which oversees FTC. The FTC regulates public charities alongside the IRS.

The lawmakers charged the Clinton Foundation is a “lawless ‘pay-to-play’ enterprise that has been operating under a cloak of philanthropy for years and should be investigated.” Koskinen’s July 22 reply came only a week after the House Republicans contacted the tax agency. It arrived to their offices Monday, the first opening day of the Democratic National Convention in Philadelphia. “We have forwarded the information you have submitted to our Exempt Organizations Program in Dallas,” Koskinen told the Republicans. The Exempt Organization Program is the division of the IRS that regulates the operations of public foundations and charities.

It’s the same division that was led by former IRS official Lois Lerner when hundreds of conservative, evangelical and tea party non-profit applicants were illegally targeted and harassed by tax officials. Blackburn told TheDCNF she believes the IRS has a double standard because, “they would go after conservative groups and religious groups and organizations, but they wouldn’t be looking at the Clinton Foundation for years. It was as if they choose who they are going to audit and question. It’s not right.” Blackburn said she and her colleagues will “continue to push” for answers on the Clinton Foundation’s governing policies, including its insular board of directors. She said they also will examine conflicts of interest and “follow the money trail.”

No schools, no papers, no TV. How does that country run?

• Turkey Shuts Down 45 Newspapers, 16 TV Stations (AP)

Turkey’s state run news agency says close to 1,700 officers have been formally discharged from the military following the country’s failed coup. Anadolu Agency also says the government has decided to close down dozens of media organizations, including 45 newspapers and 16 television stations. The government says a U.S.-based Muslim cleric is behind the failed uprising by a faction within the military that led to some 290 deaths on July 15. Thousands have been detained for suspected links to the coup, including Calgary’s Davud Hanci, an imam for the Correctional Service Canada and the Alberta correctional services who went to Turkey with his family on July 7 to visit his ailing father.

Hanci was detained and accused of working for U.S.-based cleric Fethullah Gulen, who Turkey alleges orchestrated the failed July 15 military coup. Gulen has repeatedly denied the claims. Hanci’s friends and family say he is innocent and they fear for his safety. Tens of thousands in Turkey have also been purged from state institutions. Earlier, authorities issued warrants for the detention of 47 former executives or senior journalists of Turkey’s Zaman newspaper for alleged links to Gulen. Such detentions have raised concerns that people could be targeted simply for criticizing the government. The media watchdog Reporters Without Borders condemned Turkey’s purges of journalists, saying they have assumed “increasingly alarming proportions.”

“Apple and its massive $181.1 billion overseas stash, a $70 billion increase from the prior year.”

• Taxes On Apple’s Offshore Assets Would Cover Most Of US Education Budget (MW)

The amount of money stashed overseas by U.S. multinationals has exploded in recent years, doubling between 2008 and 2014 to more than $2 trillion. For some perspective on the numbers, cost-estimating website HowMuch.net crunched the most recent data and created a telling interactive chart. Topping the list: Apple and its massive $181.1 billion overseas stash, a $70 billion increase from the prior year.

That total corresponds to $59.2 billion in deferred taxes, which is enough to cover more than two-thirds of the federal budget for education, training and employment, according to the 2014 numbers compiled by Citizens for Tax Justice last October. Elsewhere, General Electric’s taxes could take care of almost 5% of our Social Security costs, while taxes from Microsoft had it kept its money in the U.S., could have covered a fifth of all federal spending on veteran’s benefits. According to estimates, the prevalence of offshore tax havens causes the U.S. to lose out on $90 billion in federal income taxes each year. That’s no small chunk.

“The average person checks their phone 150 times a day. Why do we do this? Are we making 150 conscious choices?”

• The Slot Machine in Your Pocket (Spiegel)

When we get sucked into our smartphones or distracted, we think it’s just an accident and our responsibility. But it’s not. It’s also because smartphones and apps hijack our innate psychological biases and vulnerabilities. I learned about our minds’ vulnerabilities when I was a magician. Magicians start by looking for blind spots, vulnerabilities and biases of people’s minds, so they can influence what people do without them even realizing it. Once you know how to push people’s buttons, you can play them like a piano. And this is exactly what technology does to your mind. App designers play your psychological vulnerabilities in the race to grab your attention. I want to show you how they do it, and offer hope that we have an opportunity to demand a different future from technology companies.

If you’re an app, how do you keep people hooked? Turn yourself into a slot machine. The average person checks their phone 150 times a day. Why do we do this? Are we making 150 conscious choices? One major reason why is the number one psychological ingredient in slot machines: intermittent variable rewards. If you want to maximize addictiveness, all tech designers need to do is link a user’s action (like pulling a lever) with a variable reward. You pull a lever and immediately receive either an enticing reward (a match, a prize!) or nothing. Addictiveness is maximized when the rate of reward is most variable.

Does this effect really work on people? Yes. Slot machines make more money in the United States than baseball, movies, and theme parks combined. Relative to other kinds of gambling, people get “problematically involved” with slot machines three to four times faster according to New York University professor Natasha Dow Schüll, author of “Addiction by Design.”

Debt Rattle July 11 2016

Jul 112016

July 11, 2016 Posted by Raúl Ilargi Meijer at 8:24 am Finance Tagged with: Abenomics, bailout, Brexit, helicopter, housing, media, Merkel, NIRP, oil, Orwell 7 Responses »

G.G. Bain Auto polo, somewhere in New York 1912

• Will Merkel Hand Over The Keys To The Helicopter? (Napier)

• Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)

• 70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)

• Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)

• China Pension Readies $300 Billion Warchest for Stock Market (BBG)

• Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)

• Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)

• Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)

• Bank Born Out of Black Death Struggles to Survive (BBG)

• Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)

• The Great New Zealand Housing Down-Trou (Hickey)

• The Media Against Jeremy Corbyn (Jacobin)

• How the Corporate Food Industry Destroys Democracy (Hartmann)

• 10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

Either Draghi gets to fly the chopper, or the EU falls to bits. Wait, it’ll do that anyway. So why give him the keys?

• Will Merkel Hand Over The Keys To The Helicopter? (Napier)

Now only one question matters for global investors – Wo ist der Hubschrauber? (Where is the helicopter?). The decline of European commercial bank share-prices before Brexit made it clear that a monetary reflation of Europe was failing. The collapse in these same share-prices post-Brexit means that even the politicians now realise that the ECB acting alone cannot stabilize the European economy. Indeed, given the evident political strains in the European Union, saving the economy from recession is now key to saving the European political union project itself. So, will Mrs Merkel abolish fiscal austerity across Europe and permit each of the states of the European political union expand their debt mountains at the same time that the ECB is buying that debt?

Are the keys to der Hubschrauber to be handed over? To save the European political union Germany must now confront its greatest fear and enfranchise the political union’s central bank to conduct outright monetary financing of all its constituent governments. Investors need to remain very cautious indeed as it is in no way clear that Mrs Merkel will hand over the keys to der Hubschruaber. Should she do so, however, major changes in investment allocation are necessary as helicopter money will be raining from the skies in Japan, the Eurozone, the UK and even in the USA if President Clinton also wins the House and the Senate.

This form of reflation will likely work and in due course work too much. Few things are binary in investment, but this huge decision to be taken in Berlin is the biggest binary event for investors this analyst has yet come across. The repercussions will reverberate throughout this century. This analyst would like to present you with a firm forecast as to the possibility of ‘helicopter money’ coming to the European political union. However, it is too close to call. Even if that assertion is correct, this is truly dire news for financial markets.

What? “..the global yield grab is raising questions about whether rates can prove reliable economic indicators.” That’s an actual question?

• Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. The ever-widening rush for yield could create problems if interest rates snap back, which would cause losses on investors’ low-yielding portfolios, or if credit quality falls. And the global yield grab is raising questions about whether rates can prove reliable economic indicators. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries.

Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to nearly a record, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds. Yields move in the opposite direction of price. As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt. “What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly at Standard Life Investments. “The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

Self-fulfilling perversity.

• 70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)

Back in April of 2015, we warned that the biggest risk facing the ECB is running out of eligible securities which the central bank can monetize. Draghi’s recent launch of the CSPP, in which the ECB has been buying not only investment grade but also junk bonds, is an indirect confirmation of that. A direct one comes courtesy of a Bloomberg calculation according to which following a seventh straight week of gains in German bunds, the yields on securities of all maturities has plunged to unprecedented lows, which has left about $801 billion of debt out of the statutory reach of the ECB. As noted earlier, there is now $13 trillion of global negative-yielding debt. That compares with $11 trillion before the Brexit vote.

The surge in sovereign debt since Britain’s vote to exit the European Union last month has pushed yields on about 70% of the securities in the $1.1-trillion Bloomberg Germany Sovereign Bond Index below the ECB’s -0.4% deposit rate, making them ineligible for the institution’s quantitative-easing program. For the euro area as a whole, the total rises to almost $2 trillion. As Bloomberg adds, following a rush for safety and a scramble for capital appreciation ahead of more ECB debt purchases, the yield on German 10-year bunds to a record-low, and those on securities due in up to 15 years below zero, even though – paradoxically – the rush to buy these bonds has made them no longer eligible for direct ECB purchases as they now have a yield lower than the ECB’s deposit rate threshold.

Or rather, they are ineligible for the time being. As a result, the rally has boosted the same concerns we warned about for the first time in the summer of 2014, namely that the ECB’s Public Sector Purchase Programme could run into scarcity problems well before its completion date of March 2017, prompting speculation policy makers may tweak their plan.

“..the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field..”

• Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)

The boys and girls on Wall Street are now riding their bikes with no hands and eyes wide shut. That’s the only way to explain Friday’s lunatic buying spree in response to another jobs report that proves exactly nothing about an allegedly resurgent economy. When the S&P 500 first hit 2130 back in May 2015, reported LTM earnings were $99.25 per share, and that was already down 6.4% from the cyclical high of $106 per share in September 2014. Thus, stocks were being valued at a nosebleed 21.5X in the face of falling earnings. During the four quarters since then, reported LTM earnings have slumped by a further 12.3% to $87 per share. So that brings the “cap rate” to 24.5X earnings that have shrunk by 18% over the last six quarters. Wee!

You have to use the parenthetical because the casino is not capitalizing anything rational. It’s just drifting higher in daredevil fashion until something big and nasty stops it. That something would be global deflation and US recession. Both are racing down the pike at accelerating speed. Needless to say, when these lethal economic forces finally hit home, the puppy pile-up on Wall Street is going to be one bloody mess. But that’s the price you pay when you have destroyed honest price discovery entirely, and have transformed the money and capital markets into robo-machine driven venues of rank speculation. Janet Yellen and the other 100 clowns who run the world’s central banks, of course, have no clue as to the financial doomsday machine they have enabled. Indeed, they apparently think efficient pricing and allocation of capital doesn’t matter.

After all, their entire modus operandi is to peg the price of money, bonds and the yield curve sharply below market-clearing levels – so that households and business will borrow and spend more than otherwise. Likewise, they aim to goose stock prices to ever higher levels. That’s so the top 10% and the top 1%, who own the preponderant share of equities, will feel the wealth(effects) and then spend-up and invest-up a storm. But the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field. Short-sellers and contrarians heading south were to intercept the lemmings of greed heading north before they reached the edge of the cliff. Now there is nothing but cliff.

The idea is that simply because pensions buy stocks, these will go up in ‘value’. Yeah, that should work.. For a week.

• China Pension Readies $300 Billion Warchest for Stock Market (BBG)

China’s pension funds are about to become stock investors. The country’s local retirement savings managers, which have about 2 trillion yuan ($300 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund, which will oversee their investments in securities including equities. The organization will start deploying the cash in the second half, according to China International Capital and CIMB Securities. Chinese policy makers announced the change last year in a bid to boost yields for a pension system that has long suffered low returns by limiting its investments to deposits and government bonds.

For the nation’s equity markets – which are dominated by retail investors and among the world’s worst performers this year – the state fund’s presence is even more valuable than its cash, said Hao Hong, chief China strategist at Bocom International Holdings. The NCSSF has “such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong,” said Hong, who had predicted the start and peak of China’s equity boom last year. “It’s almost like Warren Buffett saying he is buying a stock.” The NCSSF, which oversees 1.5 trillion yuan in reserves for China’s social security system, has returned an average 8.8% a year since 2000, the Securities Daily reported earlier this year, citing official data. The larger pension system, on the other hand, has been locally managed and made just 2.3% annually through 2014, the newspaper said.

Is someone overestimating demand perhaps?

• Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)

A massive global stockpile of oil could mean trouble ahead for the global crude market, according to Barclays. Crude oil prices dropped to a two month low on Thursday, after the Energy Information Administration reported a smaller-than-expected decrease in oil stockpiles. That may be a canary in the coalmine, a top energy market watcher explained. “For the last 6 quarters there’s been this discrepancy between global supply and global demand,” Michael Cohen, head of energy commodities research at Barclays, said last week on CNBC’s “Futures Now.” Cohen said Barclays is bearish on oil for the next six to eight months, because the current stockpile could increase in an economic downturn, likely to drive prices lower.

In the summer months, increased travel often increases the demand for gasoline, and drags up crude oil by default. Yet once that season ends, inventory levels may continue to rise. Looking at a chart of the expected crude oil supply compared with the current amount, Cohen said the disconnect is staggering. The chart accounts for oil supply from the 38 countries in the Organization for Economic Cooperation and Development (OECD), which includes the U.S., U.K., France, Germany and Canada, among others. During the recent financial crisis, crude production overhang was 138 million barrels. Now, the overhang is twice that, at 383 million barrels among the OECD, Cohen said.

Given what a disaster Abenomics is, one wonders: how inept can Japan’s opposition be? Abe wins a two-thirds majority?! Can also change the constitution so Japan can go back to war.

• Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)

Japanese Prime Minister Shinzo Abe’s conservative coalition scored a convincing upper house election win, putting it on course for a two-thirds majority that would allow Abe to press ahead with plans to revise the country’s pacifist constitution. The Liberal Democratic Party secured 56 of the 121 seats in contention, public broadcaster NHK said, while junior coalition partner Komeito had 14. Alongside others who support Abe’s view on constitutional revision, plus uncontested seats, the prime minister is set for a super majority, it said. The results raise questions over whether Abe will switch his focus to altering the postwar U.S.-imposed constitution, a potentially time-consuming process that could expend his political capital and distract the government from its economic program.

Abe vowed during the campaign to focus on policies aimed at expanding the size of the economy to 600 trillion yen ($6 trillion) from 500 trillion yen. “If Prime Minister Abe’s coalition scores a hot, two-thirds majority on Sunday, it might be tempted to pass constitutional changes, draining political capital away from urgently needed economic reforms,” Frederic Neumann at HSBC in Hong Kong, wrote in an e-mailed note before the election. Tokyo shares headed for their biggest gain in almost three months after the upper house election result and as jobs data eased concerns over the U.S. economy. The Topix index added 2.8% to 1,243.93 at 9:43 a.m. in Tokyo.

“Abe said he’ll continue to put together his economic policy package, so that optimism is going to continue to support Japanese shares,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center. Abe’s coalition, which previously held 136 of the 242 seats in the chamber, fended off a challenge from opposition parties that had sought to unify the anti-government vote by avoiding running candidates against one another in many districts. “I think this means I am being told to accelerate Abenomics, so I want to respond to the expectations of the people,” Abe told TBS television after early results were announced.

But EU demands bail-ins these days?

• Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)

The cards have been tipped, and it appears Italy’s Prime Minister may have been right. In the aftermath of Brexit, much of the investing public’s attention has turned to Italian banks which are in desperate need of a bailout as a result of €360 billion in bad loans growing worse by the day (and not a bail-in, as European regulations mandate, as that would lead to an immediate bank run) to avoid a freeze and/or collapse of Italy’s banking sector. This has pushed stock prices – and default risk – on Italian banks to record levels. So far Italy’s bailout requests have mostly fallen on deaf ears, as Germany’s political leaders have resisted Renzi’s recurring pleas for a taxpayer funded rescue.

However, as we have alleged, and as the Italian Prime Minister admitted last week, the core risk for Europe is not just the Italian banking sector but the biggest bank of all in Europe: Deutsche Bank. Recall last Thursday, when Matteo Renzi said other European banks had much bigger problems than their Italian counterparts. “If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said. He was, of course, referring to the tens of trillions of derivatives on Deutsche Bank’s books. Today, we got the most definitive confirmation yet that the noose is tightening not only around Italy, but Germany itself [..], when none other than David Folkerts-Landau, the chief economist of Deutsche Bank, has called for a multi-billion dollar bailout for European banks.

Speaking to Germany’s Welt am Sonntag, the economist said European institutions should get fresh capital for a recapitalization following a similar bailout in the US. What he didn’t say is that the US bailout took place nearly a decade ago, in the meantime Europe’s financial sector was supposed to be fixed courtesy of “prudent” fiscal and monetary policy. It wasn’t. As Landau says the US helped its banks with $475 billion dollars, and such a program is now needed in Europe, especially for Italian banks. In other words, just because the US did it, now it’s Europe’s turn to ask for more of the same.

“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a “dangerous” deflation. “Europe is seriously ill and needs to address very quickly the existing problems, or face an accident,” said the chief economist.

Good read. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street..”

• Bank Born Out of Black Death Struggles to Survive (BBG)

Siena, the medieval city renowned for its Palio horse races, is home to the world’s oldest bank. Within its aging walls lies a distinctly 21st-century tale of devastation wrought by local politicians and global financiers. Banca Monte dei Paschi di Siena, Italy’s third-largest lender, is struggling to survive as it seeks to repay a second bailout or face nationalization. Its downfall proved a boon to global investment banks. They offered merger and investment advice to executives beholden to politicians that helped wipe out 93 percent of Monte Paschi’s value. Then they sold it complex derivatives that hid, even worsened the losses. Efforts to rescue the 541-year-old lender have cost Italian taxpayers €4.1 billion.

The investment banks, including Merrill Lynch, JPMorgan and Deutsche Bank, earned more than $200 million in fees from 2008 through 2011, filings and deal memos show. “These international banks come to exploit, and Italy is vulnerable,” said former Senator Elio Lannutti, who heads Adusbef, a consumer group for Italian bank customers. “On one side, there’s the local incompetence, and on the other side the bad faith of the international investment banks.” Franco Debenedetti, a former CEO of Olivetti, was even blunter. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street,” said Debenedetti, now chairman of Italy’s Bruno Leoni Institute, a pro-free-market research group in Turin.

[..] ..the heritage of a bank with 2,300 branches and 28,500 employees that traces its origins to combating excessive loan rates. Siena officials founded Monte Paschi in 1472, after the Black Death wiped out more than half the city’s population. They modeled it on the pawnshops Franciscan monks had set up to counter usury. As it grew, the lender helped fuel the Renaissance in Tuscany that pulled Europe from the Middle Ages.

Well, they did it. Congrats! Young people can’t afford to live in their own communities any more. Is there a govenment responsibility here somewhere?

• Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)

First-home buyers are now at their lowest levels in more than a decade, data released on Monday shows. As a proportion of all home buyers, first-home buyers dropped to 13.9% in May, according to housing finance data released by the Australian Bureau of Statistics. Down from 14.4% in April, this latest result is the lowest since 2004. At that time, the proportion fell to a record low 12.8% as grants for first-home buyers came to an end. For first-home buyers to make a significant return prices would have to fall, BIS Shrapnel senior manager of residential Angie Zigomanis said. “A drop in prices of some sort is needed, but we’ll also need a reduction in expectations in terms of what [first-home buyers] are looking for,” Mr Zigomanis said.

“At some point they have to come back, in theory … but for now the market is tough.” And a slowdown might be on the cards. While month-to-month figures can be volatile, overall lending figures are slowing from the frenzied levels of 2015, HSBC chief economist Paul Bloxham said. “We’re seeing a pullback in [housing finance] that has been going on since late last year, which is consistent with the idea that the housing market is set to cool,” he said. “[It’s a result of] tighter prudential settings and is also a sign that the exuberance has come out of the market … there was concern that strong activity from investors was overheating the market.”

Same in Kiwiland: “The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent.”

• The Great New Zealand Housing Down-Trou (Hickey)

Former Reserve Bank Chairman Arthur Grimes essentially undressed our politicians in front of us this week when he challenged them to embrace a 40% fall in Auckland house prices. He exposed them as emperors without clothes. “What I do is whenever I find a politician who says they want affordable housing, I ask them a very simple question: ‘How much do you want house prices to fall by overall?’ “And not one of them has been able to answer that very simple question,” Grimes said this week. He was talking about the extraordinary response to his suggestion 150,000 houses be built in six years to push Auckland prices down. Prime Minister John Key’s response was immediate – and betrayed where he stands on the issue of using a supply shock to make housing affordable.

It was “crazy”, would leave people in the market with huge losses and put pressure on developers. So there we have it. The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent. Despite years of saying the only way to improve housing affordability is to increase supply, his position is any increase in supply that hurts the investors who have bought in the past couple of years is out of the question. The Prime Minister who boasts his Government is aspirational had this to say about going for a really big response to the challenge: “Where you’d get 150,000 homes from overnight, I don’t know.”

Key said he hoped house-price inflation could be slowed by the Government’s measures, with the implication affordability would somehow creep up on everyone with wage increases. The Treasury forecasts wages will rise by an average of 2.2% over the next six years. It also forecasts house prices will rise by an average of 5.7% over the same period. The Government’s own forecasts show this magical affordability catch-up is not going to happen – and is expected to get much worse. Auckland houses cost nearly 10 times household income. That’s double what it was in the early 2000s and almost double the rest of the country. The accepted model for affordability around the world is closer to three times income.

British media are anti-journalism.

• The Media Against Jeremy Corbyn (Jacobin)

The British media has never had much time for Jeremy Corbyn. Within a week of his election as Labour Party leader in September, it was engaging in a campaign the Media Reform Coalition characterized as an attempt to “systematically undermine” his position. In an avalanche of negative coverage 60% of all articles which appeared in the mainstream press about Corbyn were negative with only 13% positive. The newsroom, ostensibly the objective arm of the media, had an even worse record: 62% negative with only 9% positive. This sustained attack had itself followed a month of wildly misleading headlines about Corbyn and his policies in these same outlets. Concerns about sexual assaults on public transport were construed as campaigning for women-only trains.

Advocacy for Keynesian fiscal and monetary policies was presented as a plan to “turn Britain into Zimbabwe.” An appeal to reconsider the foreign policy approach of the last decade was presented as an association with Putin’s Russia. In the months which followed the attacks continued. Particularly egregious examples, such as the criticism of Corbyn for refusing to “bow deeply enough” while paying his respects on Remembrance Day, stick in the memory. But it is the insidious rather than the ridiculous which best characterizes the British media’s approach to Corbyn. One example of this occurred in January when it was revealed that the BBC’s political editor Laura Kuenssberg had coordinated the resignation of a member of Corbyn’s shadow cabinet so that it would occur live on television. Planned for minutes before Corbyn was due to engage in Prime Minister’s Questions, it was a transparent attempt to inflict the maximum damage possible to his leadership.

“..political bribes aren’t free speech and corporations aren’t persons.”

• How the Corporate Food Industry Destroys Democracy (Hartmann)

On July 1, Vermont implemented a law requiring disclosure labels on all food products that contain genetically engineered ingredients, also known as genetically modified organisms or GMOs. Wenonah Hauter, executive director of Food and Water Watch, hailed the law as “the first law enacted in the US that would provide clear labels identifying food made with genetically engineered ingredients. Indeed, stores across the country are already stocking food with clear on-package labels thanks to the Vermont law, because it’s much easier for a company to provide GMO labels on all of the products in its supply chain than just the ones going to one state.”

What that means is that the Vermont labeling law is changing the landscape of our grocery stores, and making it easier than ever to know which products contain GMOs. And less than a week later after that law went into effect, it is under attack. Monsanto and its bought-and-paid-for toadies in Congress are pushing legislation to override Vermont’s law. Democrats who oppose this effort call the Stabenow/Roberts legislation the “Deny Americans the Right to Know” Act, or DARK Act. This isn’t the first time that a DARK Act has been brought forward in the Senate, and one version of the bill was already shot down earlier this year. The most recent version of the bill was brought forward by Michigan Democratic Sen. Debbie Stabenow and Kansas Republican Sen. Pat Roberts, both recipients of substantial contributions from Big Agriculture.

Stabenow has received more than $600,000 in campaign contributions since 2011 from the Crop Production and Basic Processing Industry, and Pat Roberts has received more than $600,000 from the Agricultural Services and Products industry. When Senator Stabenow unveiled the industry-friendly legislation, she boasted that, “For the first time ever, consumers will have a national, mandatory label for food products that contain genetically modified ingredients.” Which sounds great, and it would be great, if it were true. But the fact is, the DARK Act would set up a system of voluntary labeling that would overturn Vermont’s labeling law and replace it with a law that’s riddled with so many loopholes and exemptions that it would only apply to very few products, and there’s no enforcement mechanism and no penalties or consequences of any kind for defying the bill.

[..] If our democracy actually worked, this bill never would have seen the light of day, because people overwhelmingly want to know what’s in their food and support GMO labeling. But our democracy doesn’t work, because our lawmakers are bought and paid for by special interests like Monsanto. If we want our lawmakers to pass popular laws that actually work, we need to get money out of politics, we need to overturn Citizens United and we need to amend the Constitution to make it clear that political bribes aren’t free speech and corporations aren’t persons.

” It’s not the independence of Britain from Europe, but the independence of Europe from the USA.”

• 10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

In the wake of all of the Brexit vote, a chilling blurb made headlines and it went largely unnoticed and uncommented upon. The line was couched within comments made by Boris Titov, an economic policy maker for Russia’s Kremlin. Actually all of the following merits attention, but one line stands out. The source for this excerpt is a Facebook post by Titov. Here it is: “…it seems it has happened — UK out!!! In my opinion, the most important long-term consequence of all this is that the exit will take Europe away from the anglo-saxons, meaning from the USA. It’s not the independence of Britain from Europe, but the independence of Europe from the USA. And it’s not long until a united Eurasia — about 10 years.”

This is a very revealing post to show how unfavorably the past 50 years of post-World War II American imperialism has been viewed. The tipping point, as mentioned in a previous article was the outright 180º that George H.W. Bush pulled on Mikhail Gorbachev: the promise of NATO membership upon reunification of the two Germany’s and the dissolution of the Soviet Union, and then not fulfilling that promise.

The American corporate interests inserted themselves, as the communist government shattered, leaving in its wake oligarchs, the Russian mafia, and a “Wild West” environment within Russia proper and the ex-SSR’s, the former Soviet satellite nations. A tremendous amount of chaos occurred for a decade that was both enabled and further fostered by the United States. The perception in Russia even before the Soviet Union came into being was that Russians were in an economic war with Great Britain, and the United States was looked upon as an “extension” of Britain: a country with language, law, and cultural parallels,especially in terms of expansion.

As of the past several years, the United States has been encroaching upon Russian territory and economic interests. That encroachment has intensified into a U.S.-created “Cold War Resurrection” stance with the bolstering of NATO forces in the Baltic states. The U.S. is virtually thumbing its nose at Russia with the distribution of the “anti-ballistic missile systems” emplaced in places such as Moldova. As Putin pointed out, it takes not even a sneeze and a couple of hours to convert those platforms into use for Tomahawks with nuclear capability. The Russians did not exercise “en passant” with such an opener, and are placing missiles of their own to face the U.S. assets.

Debt Rattle 4th of July 2016

Jul 042016

July 4, 2016 Posted by Raúl Ilargi Meijer at 8:23 am Finance Tagged with: arms, bailout, Brexit, crash, crisis, Ebay, Greece, Lehman, oil, recession 3 Responses »

Walker Evans “Sidewalk scene in Selma, Alabama.” 1935

• China Bank Bailout Calls Go Mainstream (BBG)

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

• Brexit Is a Lehman Moment for European Banks (BBG)

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

• Where Have Those Nice Britons Gone? (G.)

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

• German Arms Exports Almost Doubled In 2015 (R.)

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

• Europe Puts Greece On Ebay (G.)

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

“Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion)..” “..CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year..” That would be well over $2 trillion….

• China Bank Bailout Calls Go Mainstream (BBG)

Predictions of a Chinese banking system bailout are going mainstream. What was once the fringe view of permabears and short sellers is now increasingly being adopted by economists at some of the world’s biggest banks and brokerages. Nine of 15 respondents in a Bloomberg survey at the end of last month, including Standard Chartered and Commonwealth Bank of Australia, predicted a government-funded recapitalization will take place within two years. Among those who provided estimates of the cost, a majority said it will exceed $500 billion. While a bailout of that size would be a far cry from the $10 trillion forecast of U.S. hedge fund manager Kyle Bass in February, the responses reflect widespread concern that Chinese lenders will struggle to cope as bad loans surge.

Even as some analysts said a state recapitalization would put the banking system on a stronger footing, 80% of respondents predicted news of a rescue would weigh on Chinese markets – dragging down bank stocks and the yuan while pushing up government borrowing costs and credit risk. “A recapitalization will happen after the Chinese government comes clean with the true nonperforming loan figure,” said Kevin Lai at Daiwa Capital Markets. “That will require a lot of money creation.” [..] Chinese lenders are grappling with a growing mountain of bad debt after flooding the financial system with cheap credit for years to prop up economic growth.

Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion), or 1.75% of the total, according to government data. The figures are widely believed to understate the true scale of the problem, with CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year.

Reading the yield curve.

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

Over the weekend, following the latest collapse in long-term yields to new all time lows, Deutsche Bank looked at what implied recession odds are if one once-again adjust for Fed intervention. What it found, in the words of Deutsche Bank’s Dominic Konstam, is “worrisome.” From Deutsche Bank:

Since the UK referendum the US yield curve has flattened to new post-crisis lows. The 3m10y spread is now 115 bps compared to 210 bps at the start of the year, and the 2y10y spread is just 85 bps versus 120 bps on January 1. This relentless flattening of the curve is worrisome. Given the historical tendency of a very flat or inverted yield curve to precede a US recession, the odds of the next economic downturn are rising. In our probit model, the probability of a recession within the next 12 months has jumped to 60%, the highest it’s been since August 2008.

The model adjusts the 3m10y spread by the historically low level of short rates and it suggests that on an adjusted basis the curve has already appeared to be inverted for some time. The yield curve had successfully signaled the last two recessions when the model output rose above 70%. If 10y yields rally to 1.00% and the 3m rate is unchanged, the implied recession probability from our model will reach that number. At current market levels, the market is just 40 bps from that distinct possibility.

In other words, while the Fed is terrified of killing the recovery by “tightening” financial conditions, all that will take for the next recession to arrive is for the Fed and its central bank peers to ease just that much more to send the long end 40 bps lower, something which as we reported yesterday may happen even sooner than expected, now that pension funds are ready to throw in the towel and start buying 10Y and 30Y Tsys with wreckless (sic) abandon.

“One of the best indicators showing how healthy is the economy is the velocity of circulation of money.”

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

Brexit referendum pushed financial markets into turmoil. Even if this is only the beginning of tough times the main reason behind this is definitely not the result of the UK referendum. What we see today is merely a result of financial markets being disconnected from the real condition of the global economy. The red flags signalling overpriced markets (especially in the case of the US) now are raised not only from statistical data but also from experienced investors having a good forecasting record.

From the start, I would like to focus on aforementioned statistical data. They can give us clear picture of the US economy and what happened after previous crisis until now. The financial situation of the US is crucial because it is the American stock exchange that delivers 44% of the global capitalisation of financial markets. American financial sector is responsible for setting trends and today those trends are pointing south. Developing markets are falling right behind the trendsetter. One of the best indicators showing how healthy is the economy is the velocity of circulation of money. The better the economy, the more money people and other participants of the economy spend – this increases money circulation.

At first glance, you can see that after 2008-09 crisis situation worsened. During official ‘post-crisis recovery’ velocity was slightly above 1.7 while during the first quarter of 20016 it fell below 1.5 (for comparison – before the crisis it around 2.0). The above chart is not the only data point. Low money velocity means also less consumption – this is visible in higher inventory-to-sales ratio. Below you can see a record of it. Today this indicator is above the Lehman level. What is more, it soon can match the levels of the worst phase of the 2008 meltdown. This clearly shows how American society is getting poorer.

Low prices, but falling demand.

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

American drivers’ seemingly insatiable thirst for gasoline is running into a flood of supply. Refineries across the nation are operating full-out and imports are pouring into the East Coast, boosting gasoline supplies to a record. At the same time, consumption has turned out to be less robust than thought. That’s weighed on prices, threatening to stem oil’s rebound from a 12-year low. “Earlier this year there was a lot of hope that gasoline would lead crude higher,” said John Kilduff, partner at Again Capital, a New York hedge fund focused on energy. “That’s not turned out to be the case and gasoline will soon be a weight on the market.”

The Energy Information Administration said in a monthly report on June 30 that demand in April was 9.21 million barrels a day, down from 9.49 million seen in weekly data. “The monthly data for April raises doubts about the idea that we have reliably robust gasoline demand to support the entire complex,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Gasoline stockpiles along the East Coast, which includes New York Harbor, the delivery point for U.S. futures contracts, surged to a record 72.5 million barrels in week ended June 24, EIA data show. Imports to the region jumped to a six-year seasonal high. Production climbed to a record in the previous week, as refiners typically run harder in the second quarter to meet summer peak driving season.

“When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong.”

Italy’s efforts at aiding its banks risk leading to a big problem with Germany, but Brexit makes the latter hesitant. But it can’t give in, it would set a precedent the EU can’t handle. So is Italy the next Greece?

• Brexit Is a Lehman Moment for European Banks (BBG)

European banks are undergoing a real-life stress test in the wake of Britain’s vote to leave the European Union. Their share prices were already down 20% this year; since the referendum result was announced, they’ve doubled that decline. If the rot isn’t stopped soon, Europe will have found a novel solution to the too-big-to-fail problem — by allowing its banks to shrink until they’re too small to be fit for purpose. The answer is found in the adage never let a good crisis go to waste. The current situation should be both a motivation and an excuse to do what Europe failed to do after the 2008 collapse of Lehman Brothers brought the financial world to its knees: fix its banking system. Here’s a snapshot of this year’s drop in value of some of the region’s biggest institutions:

Deutsche Bank, which once had pretensions to be Europe’s contender on the global investment banking stage, is now worth just €17 billion. When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong. No wonder the billionaire investor George Soros was betting against Deutsche Bank shares this month. Greece has recapitalized its banks three times, to almost no effect. Piraeus Bank, for example, is worth less than €1.5 billion, down from €4 billion in December after the last cash injection, and as much as €40 billion just two years ago.

UniCredit, Italy’s biggest bank, has suffered particularly badly this year. It has a market capitalization of just €12 billion, dwarfed by its non-performing loans worth €51 billion. Italian banks as a whole have non-performing debts worth €198 billion, a total that’s been rising ever since the financial crisis and is illustrative of Europe’s failure to tackle its banking problems. Add in so-called “sofferenze,” Italian for doubtful loans, and the total value of Italian debt at risk of non-payment rises to about €360 billion. That explains why Italy has seized upon Brexit to justify trying to shovel €40 billion of state aid into its banking system, much to the annoyance of Germany, which views the move as contravening rules on state aid.

The end of the ever closer union.

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

Angela Merkel could move to oust Europe’s federalist chief Jean-Claude Juncker ‘within the next year’, a Germany government minister has said, in a sign of deepening European divisions over how to respond to Britain’s Brexit vote. The German chancellor’s frustration with the European Commission chief came as Europe split over whether to use the Brexit negotiations as a trigger to deepen European integration or take a more pragmatic approach to Britain as it heads for the exit door. “The pressure on him [Juncker] to resign will only become greater and Chancellor Merkel will eventually have to deal with this next year,” an unnamed German minister told The Sunday Times, adding that Berlin had been furious with Mr Juncker “gloating” over the UK referendum result.

Mr Juncker’s constant and unabashed calls for “more Europe”, as well as his reported drinking problem has led to several of Europe other dissenting members – including Poland, Hungary and the Czech Republic – to lay some of the blame for Brexit at his door. Since the June 23 vote both the Czech and Polish foreign ministers have called publicly for Mr Juncker to resign – moves that one senior EU official dismissed last week as “predictable”. However, the rumblings from Berlin now represent a much more serious threat to Mr Juncker’s tenure. The split also offers a glimmer of hope for British negotiators who are preparing for fractious EU-UK divorce talks and are desperate to avoid a repeat of February’s failed negotiations which – controlled as they were by Mr Juncker and the Commission – left David Cameron without enough ‘wins’ to avoid Brexit.

“Everyone is determined that this negotiation is handled in the European Council – i.e. between the 27 heads of government – and not by the Commission, the eurocrats and the EU ‘theologians’ in Brussels,” a senior UK source told The Telegraph. In a signal that battle has partly already been won, Mrs Merkel pointedly met with French and Italian leaders in Berlin last week, excluding Mr Juncker from the conversation. The Commission has also declined to fight the Council for the role of “chief negotiator”. British strategists hope that creating a much broader negotiation that includes the UK’s role in keeping Europe geopolitically relevant through its deep Nato ties, defence contributions and links to Washington, they can avoid a narrow tit-for-tat negotiation on trade where the UK has only very limited leverage.

The problem with the end of the ever closer union is who will then decide. And that can only be Germany. The quintessential EU conundrum is unsolvable.

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

Finance Minister Wolfgang Schaeuble signaled that Germany wants national governments to set the pace for future cooperation within the European Union, saying in a newspaper interview that they should sidestep the European Commission in Brussels if needed. Schaeuble’s comments to Welt am Sonntag outline the emerging response by Chancellor Angela Merkel’s government to the U.K. referendum on June 23 to leave the EU. It signals a looming clash with advocates of EU integration such as European Commission President Jean-Claude Juncker. EU countries must seek to reach agreements even if not all of the 27 non-U.K. members want to participate and should circumvent the commission, the EU’s executive arm, if it isn’t willing to cooperate, the newspaper quoted Schaeuble as saying.

“Now is the time for pragmatism,” Schaeuble told the newspaper. “If not all 27 want to pull together from the beginning, then we’ll just start with a few. If the Commission isn’t along, then we’ll take matters into our own hands and solve problems between governments.” Schaeuble expressed frustration that EU officials in Brussels took too long to respond to the refugee crisis last year. Many people’s dissatisfaction with the EU is because rules weren’t respected, including by the European Commission in its response to the sovereign-debt crisis, he was quoted as saying. The U.K. and the EU have a shared interest in starting exit talks quickly to limit the fallout and because “market pressure” may rise the longer it takes, Schaeuble told the newspaper.

Another sociopath striving for power.

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

Scruples be damned. The dust has barely settled on the June 23 British vote to take the U.K. out of the European Union, and the French Economy Minister Emmanuel Macron is claiming the euro-clearing business for Paris. Speaking Sunday in a Bloomberg interview, Macron laid out why the French capital is a contender for the business as other euro-area cities from Frankfurt to Dublin gear up for a battle for transactions currently done in London, Europe’s largest financial center. German officials have said Paris is dreaming if it thinks it can beat out Frankfurt, the home of the ECB and Deutsche Boerse’s Eurex operations. “On clearing, we will have a full discussion on a series of issues,” the 38-year-old French minister said.

“We have many more players now in Paris than in Frankfurt, and a much deeper market place.” London’s role in clearing trades in the $493 trillion derivatives market has returned as an issue since Britain voted to exit the 28-nation bloc. EU courts blocked a previous ECB effort to bring clearing under its regulatory control by shifting it to a euro-area country. But that was before the Brexit vote. While echoing President Francois Hollande’s insistence last week that euro-clearing won’t remain in London, Macron went further, saying that Paris may be the best place to move the process.

ECB Executive Board member Benoit Coeure warned his French compatriots to cool down on the prospect, insisting that London’s status as the biggest executor of euro financial transactions will depend on the kind of separation agreement the U.K. negotiates with the remaining 27 countries in the EU. “It is premature to have this type of discussion,” he said in Aix-en-Provence Saturday. “Everything will depend on the legal framework. This landscape, will it change? It depends on the relationship between the U.K. and the single market. Right now, we have no idea.” Separately, Macron also said he doesn’t rule out running for president next year, even though he insisted it was too early to declare.

Hi hi. “The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.”

• Where Have Those Nice Britons Gone? (G.)

Who are you and what have you done with those Britons I used to know and like so much? Have you no idea how disruptive uncertainty is for our countries, for business? Forgive me, of course you do – it’s you British who taught us that. The single market, for heaven’s sake, the EU’s largest and most formidably lucrative business venture, was very much down to you. It was your Lord Cockfield who worked out a plan, and if your then prime minister Margaret Thatcher had not used all her force to push it through in the face of reluctant protectionists on the continent, it might never had happened. Trade is your thing, after all and here it was: full freedom of movement for capital, goods, services and people. Yes, for people, including for eastern Europeans, not long after the Berlin Wall came down.

That happened because you British insisted on uniting the whole of Europe, the sooner, the better, while the French, the Italians and others all held back for as long as they could. They were so worried that the eastern European workers would come storming in their millions to the west, taking our jobs, pushing our wages down. But you insisted. Openness, inclusiveness, freedom – we have come to associate that with you. And you have, or had, such a way with words. You’re so gifted at persuasion, winning us over with your thoroughly prepared and elegant arguments. In the end, all agreed to do the enlargement your way. Except for the instant freedom of movement for all. The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.

You also have such a way with people. Your politicians are well schooled in parliament, aspiring to hold their own in any heated debate with their opponents. For decades, you have applied the brakes in the EU and watered down proposals to suit you. (Thanks by the way. You have never been an easy partner but the less-than-perfect compromise that is the EU has been improved by your hard work in Brussels.) And your Foreign Office comes better prepared than anyone else with numbers and facts, closely following what is going on in other countries, and sometimes managing diplomatic acrobatics that stun others into a deal. How on earth did Thatcher talk the others into giving one of the richest countries billions of pounds’ worth of a rebate to its EU fee? Permanently!

Amen.

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

The most striking thing about Britain’s break with the EU is this: it’s the poor wot done it. Council-estate dwellers, Sun readers, people who didn’t get good GCSE results (which is primarily an indicator of class, not stupidity): they rose up, they tramped to the polling station, and they said no to the EU. It was like a second peasants’ revolt, though no pitchforks this time. The statistics are extraordinary. The well-to-do voted Remain, the down-at-heel demanded to Leave. The Brexiteer/Remainer divide splits almost perfectly, and beautifully, along class lines. Of local authorities that have a high number of manufacturing jobs, a whopping 86% voted Leave. Of those bits of Britain with low manufacturing, only 42% did so.

Of local authorities with average house prices of less than £282,000, 79% voted Leave; where house prices are above that figure, just 28% did so. Of the 240 local authorities that have low education levels — i.e. more than a quarter of adults do not have five A to Cs at GCSE — 83% voted Leave. Then there’s pay, the basic gauge of one’s place in the pecking order: 77% of local authorities in which lots of people earn a low wage (of less than £23,000) voted Leave, compared with only 35% of areas with decent pay packets. It’s this stark: if you do physical labour, live in a modest home and have never darkened the door of a university, you’re far more likely to have said ‘screw you’ to the EU than the bloke in the leafier neighbouring borough who has a nicer existence.

Of course there are discrepancies. The 16 local authorities in Scotland that have high manufacturing levels voted Remain rather than Leave. But for the most part, class was the deciding factor in the vote. This, for me, is the most breathtaking fact: of the 50 areas of Britain that have the highest number of people in social classes D and E – semi-skilled and unskilled workers and unemployed people – only 3 voted Remain. Three. That means 47 very poor areas, in unison, said no to the thing the establishment insisted they should say yes to. Let’s make no bones about this: Britain’s poor and workless have risen up. And in doing so they didn’t just give the EU and its British backers the bloodiest of bloody noses. They also brought crashing down the Blairite myth of a post-class, Third Way Blighty, where the old ideological divide between rich and poor did not exist, since we were all supposed to be ‘stakeholders’ in society.

Amoral.

• German Arms Exports Almost Doubled In 2015 (R.)

German arms exports almost doubled last year to their highest level since the beginning of this century, a German newspaper said on Sunday, citing a report from the Economy Ministry that is due to be presented to the cabinet on Wednesday. Newspaper Welt am Sonntag said the value of individual approvals granted for exporting arms was €7.86 billion last year compared with €3.97 billion worth of arms exports in 2014. It said the Economy Ministry had pointed to special factors that boosted arms exports such as the approval of four tanker aircraft for Britain worth €1.1 billion.

It also pointed to the approval of battle tanks and tank howitzers along with munitions and accompanying vehicles worth €1.6 billion for Qatar – a controversial deal that the report said was approved in 2013 by the previous government. In February German Economy Minister Sigmar Gabriel said preliminary figures showed that Germany had given approval for around €7.5 billion worth of arms shipments in 2015. The Federal Office for Economics and Export Control (Bafa), a subsidiary of the economy ministry, is responsible for licensing arms export deals and Gabriel had promised to take a much more cautious approach to licensing arms exports, especially with regard to the Middle East. Germany is one of the world’s main arms exporters to EU and NATO countries and has been cutting its sales of light weapons outside those states.

This happens everywhere: pensions being moved into risky and/or politically driven ‘assets’. That will be the end of pensions.

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

Poland is considering diverting funds from the country’s $35 billion pension industry and piling them into government-backed projects, ruling party leader Jaroslaw Kaczynski said. Poland’s privately run pension funds, set up in 1999 to provide long-term financing for the nation’s companies and make Warsaw into a regional capital hub, own a fifth of the shares traded on the Warsaw stock exchange. The proposed shift of money from the funds could help the eight-month-old government fulfill its election promises, including higher social benefits, cheap housing as well as state-backed investments into industries ranging from ship building to the production of coal and electric buses.

“We must think what to do with the money in the pension funds, there are already proposals,” Kaczynski, who was reappointed as head of the Law & Justice party on Saturday, said at the party’s congress. “That money is now losing its value,” while it could be the “basis for new, important investments, that will help build strong economic policy and support millions of Polish households.” Kaczynski said his party seeks to implement a new “economic order,” one based on redistributing wealth and rejection of free-market reforms. The Law & Justice government imposed the European Union’s highest levies on banks, rolled out unprecedented child benefits and is in a stand-off with the EU over democratic standards, which triggered the country’s first-ever credit rating downgrade and spooked investors.

From May 30. Just loved the Simpsons’ image.

• Europe Puts Greece On Ebay (G.)

In Greece today, government power comes with few trappings. Unable to tap capital markets and dependent wholly on international aid, the debt-stricken country’s senior officials are acrobats in a tightrope act. They are placating creditors, whose demands at times seem insatiable, and citizens, whose shock is never far away. Few know this better than Stergios Pitsiorlas, the head of Greece’s privatisation agency. The agency’s asset portfolio – readily available online – goes some way to explaining why. A catalogue of beaches, islands, boutique hotels, golf courses, Olympic venues and historic properties in Plaka on the slopes beneath the ancient Acropolis, it could be a shopping list for the scenery in a movie – rather than a list of possessions that Athens is under immense pressure to offload.

In the coming months, the list will grow as the contours of a “super fund” – established to expedite the sale of ailing utilities and state-owned properties – take shape. The fund, the product of last week’s agreement to disburse an extra €10.3bn (£7bn) in bailout loans in return for further reforms, takes the divestment of state holdings to new heights. More than 71,000 pieces of public property will be transferred to the umbrella entity in what will amount to the biggest privatisation programme on the continent of Europe in modern times. Seven years into Greece’s seemingly unstoppable financial crisis, lenders are not taking any chances. The EU and IMF, which to date have poured more than €250bn into Greece in the form of three bailouts, have demanded that the organisation operates for 99 years.

Greeks have reacted with anger and derision, viewing the fund as the lowest point in the country’s epic struggle to remain anchored to the eurozone. For many, it is the ultimate depredation, another dent to their dignity at a time of unprecedented unemployment, poverty and suffering. If this is the way, they say, then only the Acropolis will retain a patina of Greekness about it. “There is nothing we are not giving up,” splutters Maria Ethymiou, a small business owner encapsulating the mood. “The Germans are going to take everything. I hear that even beaches are up for sale. Is this the Europe that we want? Is this the united Europe of our dreams?”

Absolutely right and horribly mistaken at the same time. Arthur Grimes is former chief economist of the Reserve Bank.

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

In March 2016, the REINZ Auckland median house price reached $820,000. Four years previously, it was $495,000 – that’s a 66% increase in 4 years. What’s more alarming is that in 2012, many people considered that house prices were already getting of reach for most people. That was particularly the case for young people and low income earners. That extraordinary increase – coupled with the already high level in 2012 – was behind my call to a recent Auckland Conversations event that policy-makers should strive to cause a 40% collapse in house prices to bring the median back to around $500,000.

My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house. Others may have a different value judgement to mine – but rarely do they make such a judgement explicit. Or, they may argue that such a collapse would cause financial instability given banks’ loans to mortgage-holders. Luckily, New Zealand’s banks are well-capitalised and stress tests have shown that they can survive a large fall in house prices – mostly because the bulk of their loans pertain to older mortgages with plenty of equity behind them.

For those who share my wish to bring house prices back to a level at which ordinary people can afford, what is to be done? One possibility is to try and stem the demand. Many Aucklanders seem to want their city to remain something like a rural town. In world terms, however, Auckland is a smallish city; while in Australasian terms, it is a mid-sized city sitting between Adelaide and Perth in size, and well behind the big three (Sydney, Melbourne, Brisbane). If New Zealand is to have one city of moderate size where head offices, R&D facilities and other wealth-generating activities reside, Auckland needs to be that city. To curb its growth is tantamount to saying that development should take place in Australia, not here. I favour Auckland being competitive in attracting high-value activities at least within the Australasian context. So I am not in favour of curbing Auckland’s growth.

Debt Rattle May 24 2016

May 242016

May 24, 2016 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: bailout, China, debt, derivatives, Deutsche, Greece, iron, NIRP, refugees, SOE, yen, yuan Comments Off

Lewis Hine A heavy load for an old woman. Lafayette Street below Astor Place, NYC 1912

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

• China Takes Back Control Over Yuan (WSJ)

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

• Iron Ore Price Falls 27% In Past Month (BI)

• Deutsche Bank Ratings Cut by Moody’s (BBG)

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

• Austerity Means Privatizing Everything We Own (G.)

• US Court Opens Door Over Libor Claims (FT)

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Selling vehicles to vehicles: “The WMPs [wealth management product] used to be predominantly sold to the public, but now they’re increasingly being sold to banks and other WMPs.”

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy. Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity. She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.

The former Fitch Ratings analyst uses a top-down approach to calculating China’s bad-debt levels as the credit to GDP ratio worsens, requiring more credit to generate each unit of GDP. She’s on the bearish side of the debate about the outlook for China and has sounded warnings since the nation’s credit binge began in 2008. “China’s debt problems are large and severe, but in some respects a slow burn. Over the near term, we think the biggest risk is banks’ WMP [wealth management product] portfolios. The stock of Chinese banks’ off-balance-sheet WMPs grew 73% last year. There is nothing in the Chinese economy that supports a 73% growth rate of anything at the moment.

Regardless of all of the headlines and announcements about the authorities cracking down on WMPs, they have done very little, really, and issuance continues to accelerate. “We call off-balance-sheet WMPs a hidden second balance sheet because that’s really what it is – it’s a hidden pool of liabilities and assets. In this way, it’s similar to the Special Investment Vehicles and conduits that the Western banks had in 2008, which nobody paid attention to until everything fell apart and they had to be incorporated on-balance-sheet. “The mid-tier lenders is where these second balance sheets are very large. China Merchants Bank is a good example. Their second balance sheet is close to 40% of their on-balance-sheet liabilities. Enormous.”

“Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending..”

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

Chinese banks are looking down the barrel of a staggering RMB 8 trillion – or $1.7 trillion – worth of losses according to the French investment bank Societe Generale. Put another way, 60% of capital in China’s banks is at risk as authorities start the delicate and dangerous process of reining in the debt-bloated and unprofitable state-owned enterprise (SOE) sector. Disturbingly though, debt is not only not shrinking, it is accelerating, making the eventual reckoning far worse. China’s overall non-financial debt grew by 15.2% in 2015 to RMB 167 trillion ($35 trillion) or almost 250% of GDP. That is up from 230% of GDP the year before and the 130% it was eight years ago before the global financial crisis hit.

The problem is largely centred on China’s 150,000 or so SOEs, which suck-up an entirely disproportionate amount of the nation’s capital. “Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending (RMB 37 trillion) and more than 80% of corporate bond financing (RMB 9.5 trillion),” Societe Generale found. “While the inefficiency of SOEs is gradually dragging down economic growth, recognising even a small share of SOEs’ non-performing debt would easily overwhelm the financial system.” Despite their moribund financial performance, the SOEs still enjoy a considerable advantage in access to funding through the banking system than the private sector.

“To put things into perspective, a quarter of SOEs’ loans and bonds are equivalent to the entire capital base of commercial banks plus their loan-loss reserves, equivalent to 23% of GDP,” Societe Generale’s China economist Wei Yao said. On the bank’s figures, if just 3% of loans to SOEs sour, commercial banks’ non-performing loans would double.

Wanting to control the yuan exchange rate is a threat to reserves.

• China Takes Back Control Over Yuan (WSJ)

Behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the People’s Bank of China to stop fighting the financial markets and let the value of the nation’s currency fall. They got nowhere. “The primary task is to maintain stability,” said one central-bank official, according to previously undisclosed minutes of the meeting reviewed by The Wall Street Journal. The meeting left little doubt China’s top leaders have lost interest in a major policy shift announced in a surprise move just nine months ago. In August 2015, the PBOC said it would make the yuan’s value more market-based, an important step in liberalizing the world’s second-largest economy.

In reality, though, the yuan’s daily exchange rate is now back under tight government control, according to meeting minutes that detail private deliberations and interviews with Chinese officials and advisers who spoke with The Wall Street Journal about the country’s currency policy. On Jan. 4, the central bank behind closed doors ditched the market-based mechanism, according to people close to the PBOC. The central bank hasn’t announced the reversal, but officials have essentially returned to the old way of adjusting the yuan’s daily value higher or lower based on whatever suits Beijing best. The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy.

For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats. Re-emphasizing the yuan’s stability would also bring a sigh of relief to trading partners who worried a weaker currency would boost Chinese exports at the expense of those produced elsewhere. Freeing the yuan, the biggest overhaul of China’s currency policy in a decade, was meant to empower consumers and help invigorate the economy. The negative reaction, from financial markets world-wide and Chinese who sped their efforts to take money out of the country, was so jarring that the top leadership, headed by President Xi Jinping, began to have second thoughts.

At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting. To the central bank, there was only one possible interpretation: Step on the brakes.

Turns out, it can still get worse.

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

Japanese banks reluctant to pay for the privilege of lending are opting out by using derivatives. The options set a floor on rates used to determine interest on loans, and the holder will be paid if the rates fall below that level, according to Aozora Bank and Tokyo Star Bank. The benchmark three-month Tokyo interbank offered rate has plunged to a record low of 6 basis points since the Bank of Japan announced it would start charging fees on some lenders’ reserves in January. Options with floors at zero% or minus rates have been traded recently, according to Aozora Bank. “There’s a need to hedge against money-losing lending that could happen if the Tibor falls to negative levels,” said Tetsuji Matsuka, the head of the ALM planning treasury department at Tokyo Star Bank.

“We think demand will increase” for such products, he said. Japanese banks are getting hurt as the negative-rate policy compresses their lending margins, with the top-three firms including Mitsubishi UFJ Financial forecasting this month that net income will fall a combined 5.2% in the year started April 1. The BOJ’s radical stimulus has already dragged yields on more than 70% of Japanese government bonds to below zero, meaning that investors will have to effectively pay a fee to hold such debt to maturity. In the yen London interbank offered rate market, where some rates are already below zero, options have been traded with floors as low as minus 1%, according to Nobuyuki Takahashi, the general manager of the derivatives sales division at Aozora Bank.

The three-month yen Libor was at minus 0.02% on Friday. Companies that borrow at floating rates may also be able to use floor options to ensure that interest-rate swaps they use to hedge against rising rates don’t end up costing them due to negative rates, Takahashi said. Actual trades of such derivatives are still not that common because the contracts are expensive to buy now, he said. “It will be hard to price these options unless we get more liquidity,” said Tateo Komatsu, a deputy general manager of global markets at Sumitomo Mitsui Trust Bank Ltd. “It will take time for the market to get used to minus rates.”

Roller coaster in a casino.

• Iron Ore Price Falls 27% In Past Month (BI)

The iron ore price is imploding. Following the ugly lead provided by Chinese futures on Monday, the spot iron ore price followed suit, suffering one of the largest declines seen in years. According to Metal Bulletin, the spot price for benchmark 62% fines fell by 6.69%, or $3.67, to $51.22 a tonne, leaving it down 27.3% from the multi-year peak of $70.46 a tonne struck on April 21. The decline was the third-largest in percentage terms in the past two years, and left the price at the lowest level seen since March 3 this year. The losses in physical and futures markets followed news that Chinese iron ore port inventories swelled to over 100 million tonnes last week, leaving them at the highest level seen since March last year.

That followed the revelation that Chinese crude steel output contracted in April after hitting a record high in March, declining marginally according to figures released by the China Iron and Steel Association (CISA). Given the increasing correlated relationship between the two, it’s also clear that an unwind of speculative positioning in Chinese iron ore futures is also impacting prices in the physical iron ore market. After watching prices in many bulk commodity futures rally more than 50% in less than two months, regulators at both the Dalian Commodities Exchange and Shanghai Futures Exchange introduced measures in recent weeks to discourage excessive levels of speculation in these markets.

Slow death?!

• Deutsche Bank Ratings Cut by Moody’s (BBG)

Deutsche Bank had its credit rating cut by Moody’s Investors Service, which said the German lender faces mounting challenges in carrying out its turnaround. The bank’s senior unsecured debt rating was lowered to Baa2 from Baa1, Moody’s said Monday in a statement. That left the grade two levels above junk. The firm’s long-term deposit rating fell to A3 from A2. “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm,” Moody’s said in the statement. CEO John Cryan’s planned overhaul of the bank, laid out in October, ran into an industrywide slump in trading and investment banking, as well as interest rates that have gone from low to negative in parts of Europe and Asia.

Net income fell 61% in the first quarter, leaving the company at risk of a second straight annual loss this year as it tries to resolve legal cases. Results so far and the challenges ahead, including a chance of further slumps in retail and market-linked businesses, will probably force Deutsche Bank to balance restructuring costs with the need to amass capital for stiffened regulatory requirements, Moody’s wrote. “The plan they’re trying to execute is a good plan for the bondholder in the long run, but they face some pretty challenging headwinds when you look at the current operating environment,” Peter Nerby, a senior vice president at Moody’s, said in a phone interview. “They’re working on it, but it’s tougher than it was.”

“A whole generation will have been consigned to the scrapheap.”

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

The IMF has just released its latest Debt Sustainability Analysis (DSA) for Greece. It makes grim reading. Greece is never going to grow its way out of debt. And the 3.5% primary surplus to which the Syriza government seems hell-bent upon committing is frankly unbelievable: the IMF thinks sustaining even 1.5% would be a stretch. Banks will need another €10bn (on top of the €43bn the Greek government has already borrowed to bail them out). Asset sales are a lost cause, mainly because the banks – which were a large proportion of the assets up for sale – won’t be worth anything for the foreseeable future. Like it or not, debt relief will be necessary. If there is no debt relief, by 2060 debt service will soar to an impossible 60% of government spending. Of course, Greece would default long before that – but that would make the situation in Greece even worse.

None of this is news. The IMF has been saying for nearly a year now that Greece will need debt relief. This latest DSA is designed to shock the Europeans into giving it serious consideration. It is not surprising, therefore, that the debt sustainability projections are significantly worse than in previous DSAs. No doubt the European creditors will disagree with them, the Syriza government will side with the Europeans because the only alternative is Grexit, and the European Commission will claim there is “progress” when all that is really happening is that a very battered can is being kicked once again. But buried in the IMF’s report are some very unpleasant numbers indeed – the IMF’s projections for population and employment out to 2060. And I think the world should know about them. Here is what the IMF has to say about the outlook for Greek unemployment:

Demographic projections suggest that working age population will decline by about 10 percentage points by 2060. At the same time, Greece will continue to struggle with high unemployment rates for decades to come. Its current unemployment rate is around 25%, the highest in the OECD, and after seven years of recession, its structural component is estimated at around 20%. Consequently, it will take significant time for unemployment to come down. Staff expects it to reach 18% by 2022, 12% by 2040, and 6% only by 2060. So even if the Greek economy returns to growth and its creditors agree to debt relief, it will take 44 years to reduce Greek unemployment to something approaching normal. For Greece’s young people currently out of work, that is all of their working life. A whole generation will have been consigned to the scrapheap.

Think Britain is bad? Try Greece.

• Austerity Means Privatizing Everything We Own (G.)

Almost everyone who gives the matter serious thought agrees that George Osborne and David Cameron want to reshape Britain. The spending cuts, the upending of the NHS, even this month’s near-miss over the BBC: signs lie everywhere of how this will be a decade, maybe more, of massive change. Yet even now it is little understood just how far Britain might shift – and in which direction. Take austerity, the word that will define this government. Even its most astute critics commit two basic errors. The first is to assume that it boils down to spending cuts and tax rises. The second is to believe that all this is meant to reduce how much the country is borrowing. What such commonplaces do is reduce austerity to a technical, reversible project.

Were it really so simple all we would need to do is turn the spending taps back on and wash away all traces of Osbornomics. Austerity is far bigger than that: it is a project irreversibly to transfer wealth from the poorest to the richest. It’s doing the job very nicely: while the typical British worker is still earning less after inflation than he or she was before the banking crash, the number of UK-based billionaires has nearly quadrupled since 2009. Even while he slashes benefits, Osborne is deep into a programme to hand over much of what is still owned by the British public to the wealthiest. Privatisation is the multibillion-pound centrepiece of Osborne’s austerity – yet it rarely gets a mention from either politicians or press. The Queen mentioned it in her speech last week, but the headline writers ignored it.

And if you don’t know that this Thursday is the closing date for consultation on the sale of the Land Registry, our public record of who owns what property, that’s hardly your fault – I haven’t spotted it in the papers, either. But without getting rid of prize assets, Osborne’s austerity programme falls apart. At a time when tax revenues are more weak stream than healthy flood, those sales bring much-needed cash into the Treasury and make his sums add up. The independent Office for Budget Responsibility has ruled that the only reason the chancellor met his debts target last year was because he flogged off our public assets. And what a fire sale that was, with everything from our last remaining stake in the Royal Mail to shares in Eurostar shoved out the door in the biggest wave of privatisations of any year in British history.

And maybe sometime in the next century something will be done. But they’re all still too big to fail.

• US Court Opens Door Over Libor Claims (FT)

A US appeals court has opened the door for more claims against the big banks for rigging benchmark interest rates, by overturning a three-year-old ruling which threw out a host of private antitrust-related lawsuits. Monday’s decision by the 2nd US Circuit Court of Appeals in Manhattan could be a setback for the likes of Bank of America, JPMorgan Chase and Citigroup, which had hoped that most of the wave of post-crisis litigation was behind them. The decision reverses a lower court decision from 2013, in which US District Judge Naomi Reice Buchwald dismissed claims on the grounds that the plaintiffs had failed to plead antitrust injury.

The lawsuits had accused 16 major banks of collusion in manipulating the London interbank offered rate, or Libor, which approximates the average rate at which a select group of banks can borrow money. Beginning in 2007, the plaintiffs argued, the banks engaged in a horizontal price-fixing conspiracy, with each submitting an artificially low cost of borrowing US dollars in order to drive Libor down. At the time of her rejection, Judge Buchwald reasoned that the Libor-setting process was co-operative rather than competitive, and so any attempt to depress the rate did not cause investors to suffer anti-competitive harm. At best, she said, investors had a fraud claim based on misrepresentation.

But the appeals court on Monday disagreed and sent the case back to the lower court for further proceedings. A three-judge panel found that price-fixing was an antitrust violation in itself, and therefore needed no separate plea of harm. “The crucial allegation is that the banks circumvented the Libor-setting rules, and that joint process thus turned into collusion,” the panel said. The private suits are separate from the criminal and civil probes into Libor rigging, which have ensnared banks and traders around the world and drawn about $9bn so far in penalties.

Do we even still notice?

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

Italian vessels have helped rescue more than 2,600 migrants from boats trying to reach Europe from North Africa in the last 24 hours, the coastguard said on Monday, indicating that numbers are rising as the weather warms up. Some 2,000 migrants were rescued off the Libyan coast from 14 rubber dinghies and one larger boat in salvage operations by the Italian navy and coastguard, the medical charity Medecins Sans Frontieres and an Irish navy vessel, the coastguard said. Another 636 migrants were rescued from two boats in Maltese waters, in operations involving Maltese and Italian vessels, it said. It gave no information about the nationalities of those saved. More than 31,000 migrants have reached Italy by boat so far this year, slightly fewer than in the same period of 2015.

Humanitarian organizations say the sea route between Libya and Italy is now the main route for asylum seekers heading for Europe, after an EU deal on migrants with Turkey dramatically slowed the flow of people reaching Greece. Officials fear the numbers trying to make the crossing to southern Italy will increase as conditions improve in warmer weather. More than 1.2 million Arab, African and Asian migrants fleeing war and poverty have streamed into the European Union since the start of last year. Most of those trying to reach Italy leave the coast of lawless Libya on rickety fishing boats or rubber dinghies, heading for the Italian island of Lampedusa, which is close to Tunisia, or toward Sicily.

Peaceful until now.

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Greek police started moving migrants and refugees out of a sprawling tent camp on the sealed northern border with Macedonia on Tuesday where thousands have been stranded for months trying to get into western Europe. Reuters witnesses saw several bus loads of migrants leaving the makeshift camp of Idomeni early on Tuesday morning, with about another dozen buses lined up. It appeared to be mainly families who were on the move. Greek authorities said they planned to move individuals gradually to state-supervised facilities further south in an operation expected to last several days. “The evacuation is progressing without any problem,” said Giorgos Kyritsis, a government spokesman for the migrant crisis.

A Reuters witness on the Macedonian side of the border said there was a heavy police presence in the area but no problems were reported as people with young children packed up huge bags with their belongings. Media on the Greek side of the border were kept at a distance and a group of people dressed as clowns waved balloon hearts and animals as the buses drove past. “Those who pack their belongings will leave, because we want this issue over with. Ideally by the end of the week. We haven’t put a strict deadline on it, but more or less that is what we estimate,” Kyritsis told Reuters. At the latest tally, 8,199 people were camped at Idomeni after a cascade of border shutdowns throughout the Balkans in February barred migrants and refugees from central and northern Europe. More than 12,000 lived in the camp at one point.

Debt Rattle May 5 2016

May 052016

May 5, 2016 Posted by Raúl Ilargi Meijer at 9:23 am Finance Tagged with: bailout, Brexit, coma, debt, derivatives, Erdogan, Fort McMurray, FX, refugees, retail sales, TTIP 5 Responses »

Lewis Wickes Hine Boys working in Phoenix American Cob Pipe Factory 1910

• FX Market Truce Looks Increasingly Fragile (BBG)

• The ‘Ostrich Approach’ Ignores Real Global and National Debt Figures (SM)

• Easy Money Isn’t the Answer for Japan (BBG)

• Japan’s Coma Economy Is A Preview For The World (GS)

• Eurozone Retail Sales Fall More Than Expected In March (R.)

• Kyle Bass Sees 30% To 40% Losses On Chinese Investments (BBG)

• Hong Kong Cracks Down On Fake Trade Invoices From China (R.)

• Regulators Want to Slow Runs on Derivatives (BBG)

• Brexit, Like Grexit, Is Not About Economics (WSJ)

• Even ‘Small Crisis’ Enough To Tear EU Apart, Moody’s Warns (Tel.)

• Let The TTIP Die If It Threatens Parliamentary Democracy (AEP)

• Turkey In Political Freefall As Erdogan Grabs More Power, PM To Resign (MEE)

• Study: Bailouts Went To Banks, Only 5% To Greeks (Hand.)

• The Terrible News From Fort McMurray, And The Hope That Remains (G&M)

• ‘Omega Block’ Behind Searing Heat Inflaming Fort McMurray Wildfire (WaPo)

• UN Envoy Warns of New Wave of 400,000 Refugees From Syria (WSJ)

A truce that never stood a chance. Some may have believed in it, though.

• Foreign-Exchange Market Truce Looks Increasingly Fragile (BBG)

The foreign exchange market is notorious for overshooting. A currency that starts moving in a particular direction as economic fundamentals change will often end up at a rate that can’t be justified by the data. So trying to nudge the matrix of currency values is akin to policy makers attempting to steer a Ouija board pointer – which is exactly what seems to have happened since their February Group of 20 meeting in Shanghai produced a tacit truce in the currency war. Suspicions that finance ministers had agreed in February to stop talking their currencies down seemed confirmed by the dollar’s decline of more than 6% from its Jan. 20 peak.

China’s recent moves to boost the yuan’s reference rate to its highest levels this year also backed the impression of a suspension of hostilities. But while U.S. manufacturers worried that a too-strong dollar would threaten their exports and profits, the recent reversal, and gains for the euro and the yen, pose bigger risks to the struggling economies of Europe, and Japan. The euro, for example, pierced $1.16 on Tuesday, reaching its highest level since August:

The yen, meanwhile, has breached 106 to the dollar, down from as weak as 122 in January:

Those are the kinds of moves that make central banks uncomfortable – especially when, like the ECB and the BOJ, they’re already struggling to avert deflation. Australia’s surprise decision to cut interest rates overnight, driving its currency lower against all 31 of its major trading peers, is a sign that skirmishes might be breaking out again. Marcus Ashworth, a strategist at Haitong Securities in London, said in a research note: The rumor mill has been incessant (despite official denials) that the so-called Shanghai G-20 accord to pacify markets and quell unrest between the members has actually served to make international relations as toxic as they have been for many years.

The Shanghai deal was to stop the negative feedback loop and thereby prevent a sharp devaluation of the yuan; however, it was meant to curtail the rise of the dollar, not sharply reverse it. [..] It’s clear the Treasury doesn’t want the dollar to resume its ascent. But it’s also clear that trying to steer the currency market into stasis has failed, and that the inflation outlooks in both the euro zone and Japan are deteriorating. The environment looks ripe for hostilities to break out again, providing yet another reason to be pessimistic about the prospects for a global economic recovery.

Much more in the article.

• The ‘Ostrich Approach’ Ignores Real Global and National Debt Figures (SM)

According to Hoisington and Hunt, the ratio of nonfinancial debt-to-GDP rose to 248.6% at the end of 2015, higher than the previous record of 245.5% set in 2009 and well above the average of 167.5% since this figure started to be tracked in 1952. They also point out that since 2000 it has taken $3.30 of debt to generate $1.00 of GDP compared with $1.70 in the 45 years prior to 2000. This points to the fact that a greater proportion of new debt is devoted to unproductive uses. Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today.

U.S. government debt is growing to unsustainable levels. Gross debt (excluding off-balance sheet items) reached $18.9 trillion at the end of 2015, equal to 104% of GDP (considerably higher than the 63-year average of 55.2%). Government debt increased by $780.7 billion in 2015, or $230 billion more than the nominal or dollar rise in GDP. This actual debt increase is considerably larger than the budget deficit of $478 billion reported by the government because many spending items were shifted off-budget. Readers should remember this the next time The WSJ editorial page trumpets that the deficit dropped significantly from the four consecutive years of $1 trillion+ deficits between 2009 and 2012. And these figures don’t even touch upon the $60 trillion of unfunded liabilities (calculated on a net present value basis) for Social Security and other entitlement programs.

Globally, the debt picture is more disturbing. Total public and private debt/GDP is 350% in China, 370% in the U.S., 457% in Europe and 615% in Japan, respectively. Those numbers should speak for themselves.

It isn’t the answer for anyone, certainly not today when everyone’s debts are through the roof.

• Easy Money Isn’t the Answer for Japan (BBG)

Strolling through Tokyo on a Sunday afternoon, it’s hard to tell Japan’s economy is a mess. Deflation has returned, while growth hasn’t. But Shibuya Crossing remains as packed with diners, bag-toting shoppers and gawking tourists as ever. Nearby, a line of more than 50 people stretches outside a restaurant selling overpriced burgers. Lost decades be damned! Japan had the good fortune to have become wealthy before entering its years of stagnation. Some Japanese are now suffering in an economy that’s endured four recessions in eight years; the poverty rate has reached 16%, its highest level on record. But for many, especially in big cities such as Tokyo, life hasn’t so much deteriorated as frozen in time. GDP per capita, on a nominal basis, is little different now than in 1992.

And though the quality of many jobs has waned due to the increase of temporary work, joblessness remains a rarity. The unemployment rate is an enviable 3.2%. The Shibuya crowds raise serious and uncomfortable questions about the direction of Tokyo’s economic policy. Even as some analysts urge the Bank of Japan to double down on its monetary easing program and the government to ramp up its own spending in an effort to boost inflation, there’s a good argument to be made that the approach of Japan’s policymakers has been dead wrong, and for a very long time. The thrust of Japanese policies since the bursting of its gargantuan asset-price bubble in the early 1990s has been to spur growth with lots and lots of cash, whether from the government or the BOJ.

Since 2013, Prime Minister Shinzo Abe has dramatically pumped up that strategy – running large budget deficits, delaying taxes and encouraging the BOJ to print money on an ever grander scale. Arguably, however, Japan’s main focus should be to preserve the wealth it’s already accumulated. With a population that’s aging and shrinking, Japan can get richer on a per capita basis even if GDP remains perfectly flat. In that sense, deflation – long considered the scourge of Japan’s economy – is actually a boon: Falling prices raise the future value of savings, helping the elderly and others on fixed incomes. In constant terms, Japan’s GDP per capita is 17% higher than in 1992, thanks to deflation.

“When you fly to Australia, you land in 2000, to China you land in 2016, Japan you land in 1989.”

• Japan’s Coma Economy Is A Preview For The World (GS)

The 1980s were the apex of Japanese culture and economic might. Back then, Japan’s economy was growing so fast, it was thought they would overtake the US. But that all came to a screeching halt. Truth is, Japan’s meteoric rise was fueled by an epic lending bubble. Similar to the Roaring 20s in America. And when the bubble popped, the government launched massive and misguided measures that set Japan back decades. Their economy hasn’t expanded since. They are stuck in the 1980s. There’s been no growth for 30 years. And as you’ll hear about this in this special bonus video, the United States could be going down the same path. Imagine, if we are stuck in the 2000s for the next couple decades. How will you ever be able to retire?

Deflation.

• Eurozone Retail Sales Fall More Than Expected In March (R.)

Euro zone retail sales fell more than expected in March against February as consumers cut purchases of food, drinks and tobacco, the EU’s statistics office said on Wednesday. Retail sales, a proxy for household spending, decreased 0.5% in March month-on-month in the 19-country currency union, Eurostat said. Economists polled by Reuters had forecast a much smaller decrease of 0.1%. Yearly figures were also lower than expected, with sales up 2.1%, below market forecasts of a 2.5% rise. The fall in March sales was partly offset by an upward revision of data for February.

Eurostat said on Wednesday that in February sales rose 0.3% on a monthly basis and 2.7% year-on-year. It had previously estimated an increase of 0.2% monthly and 2.4% yearly. On a monthly basis, retail sales of food, drinks and tobacco products dropped 1.3% in March, the biggest fall among all the categories. Sales of non-food products, excluding automotive fuels, went down 0.5% month-on-month. Purchases of fuel for cars also dropped 0.4% on a monthly basis. Among the largest euro zone economies, Germany posted a 1.1% monthly drop of retail sales and France recorded a decrease of 0.7%. In Spain, sales increased 0.4% on a monthly basis in March.

Conservative.

• Kyle Bass Sees 30% To 40% Losses On Chinese Investments (BBG)

Kyle Bass, founder of Hayman Capital Management, said investors wouldn’t be investing in China if they realized how vulnerable its banking system is. “Common sense will tell you that they are going to have a loss cycle,” he said at the Milken Institute Global Conference in Beverly Hills, California, on Wednesday. “So if you think about how precarious that system is, you wouldn’t be allocating money to China.” Bass, a hedge fund manager famed for betting against U.S. subprime mortgages, is predicting losses for China’s banks and raising money to start a dedicated fund for bets in the nation. Bass said investors putting money in Asia should ask if they can handle 30 to 40% writedowns in Chinese investments.

Or so we’re supposed to think.

• Hong Kong Cracks Down On Fake Trade Invoices From China (R.)

Hong Kong is conducting a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally. Hong Kong’s central bank told Reuters it has beefed up its scrutiny of banks’ trade financing operations, while customs officials are doing more random checks on shipments crossing border posts and conducting raids on warehouses to ensure the authenticity of goods, senior officials working in shipping, logistics and banking said. The head of a logistics company said surprise customs inspections at Hong Kong border posts had doubled. The sources[..] said the increased efforts began this year and reflected concerns about billions of dollars in illicit cash authorities suspect are being channeled through Hong Kong following a stock market crash in China last year.

“Examinations and investigations reflect one of the strongest trends we are seeing now in the financial sector,” said Urszula McCormack, a partner at law firm King & Wood Mallesons, which helped co-author a report published by The Hong Kong Association of Banks in February that highlighted shipping as a sector where fake invoicing can thrive. “(Hong Kong) regulators are now in enforcement mode.” China has become increasingly concerned about capital outflows since the middle of last year when Chinese rushed to get money offshore for safekeeping or to invest following the stock market slump and unexpected yuan devaluation. Hong Kong is the most popular route, analysts say, because of its proximity to China.

Until counterparties start raising their voices?!

• Regulators Want to Slow Runs on Derivatives (BBG)

Nobody quite knows what it means for a bank to be “too big to fail,” so the regulators in charge of solving the problem have an understandable focus on tidiness. A bank that fails tidily, sensibly, in neat little compartments, probably won’t do much damage to anyone else. A bank whose failure is sprawling and incomprehensible might well turn out to be catastrophic. So the preferred mechanism for winding up a possibly too-big-to-fail bank these days is largely about compartmentalization. You put all of the important, messy stuff into subsidiaries – put the deposits in a bank subsidiary, the repurchase agreements and derivatives in a broker-dealer subsidiary, etc. – and put those subsidiaries under a “clean” bank holding company with a fairly large amount of capital and long-term debt.

Then if things go horribly wrong, the holding company’s shareholders and bondholders are the ones who lose money, shielding the people who have messier and more systemic claims on the subsidiaries. The regulators swoop in and recapitalize the holding company, or just sell the subsidiaries to other, healthier banks, in any case without ever interrupting service at the systemic subsidiaries. All the bad stuff happens at the holding company, all the important stuff happens at the subsidiaries, and you try to avoid mixing the two. Then all you have to do is make sure that the holding company has enough equity and long-term debt to shield the subsidiaries against any plausible bad outcome. But to make this work you really need to keep things in their boxes. Derivatives have a tendency to want to jump out of their boxes.

In particular, if bad things are happening at a large and systemically important bank holding company, there isn’t a lot of reason for the bank’s derivatives counterparties and repo creditors to stick around. Repo is meant to be a super-safe place to park your money overnight; if it looks like a repo counterparty might default, then you look for a different counterparty. And derivatives are just supposed to work: If Bank A owes you money under an interest-rate swap, and you owe Bank B money under an offsetting swap, and Bank A defaults, then all of a sudden you have an unanticipated unhedged risk. So if your derivatives or repo counterparty gets in trouble, you bail immediately to protect yourself. (Also there is always the possibility of making a lot of money on the unwind.) But while this is individually rational, it is systemically bad. As Janet Yellen put it yesterday:

“The crisis underscored that when a large financial institution gets into trouble, its failure can destabilize other firms. This is because large banking organizations are connected with each other by the business they do together and through the contracts that result from that business. Indeed, in the 21st century, a run on a failing banking organization may begin with the mass cancellation of the derivatives and repo contracts that govern the everyday course of financial transactions. When these contracts, known collectively as Qualified Financial Contracts or QFCs, unravel all at once at a failed large banking organization, an orderly resolution of the bank may become far more difficult, sparking asset firesales that may consume many firms.”

So yesterday U.S. banking regulators proposed new rules to prevent that from happening. The rules basically say that a bank subsidiary’s derivatives and repo contracts can’t be cancelled for 48 hours after the bank’s holding company files for bankruptcy or otherwise enters resolution proceedings. This gives the regulators two days to swoop in and conduct the neat resolution of the bank before its derivatives spill out everywhere and create a mess.

Not only about economics. But if the economy were growing like crazy, the Brexit risk would be much more subdued.

• Brexit, Like Grexit, Is Not About Economics (WSJ)

Britain’s flirtation with leaving the European Union is as puzzling as Greece’s stubborn desire to stay. After all, Britain’s economy has done quite well inside the bloc while Greece’s has been decimated. What explains both sentiments is that the European project has always been about more than economics. It also seeks “an ever closer union among the peoples of Europe,” as the Treaty of Rome, its founding charter, declared in 1957. “Closer union” with Europe deeply appeals to Greeks, whose own state has failed them so badly. But it repels many Britons, whose state works just fine and who want no part of a European political union. For them, the quagmire of the euro, which Britain hasn’t adopted, is a cautionary tale of what such a union could bring.

How they decide between the economic benefits and political risks of staying could determine whether Britain votes to leave the EU in a June 23 referendum. Greece joined the European Economic Community, the EU’s predecessor, in 1981, in search of shelter from foreign invaders, domestic coups, and its own dysfunctional government. Economics actually argued against membership: EEC technocrats said Greece wasn’t ready, but were overruled by political leaders worried about geopolitical instability on the Continent’s southern flank. The same logic brought Greece into the euro in 2001 when its debts and deficits should have disqualified it. Greece’s underdeveloped, overprotected economy was poorly prepared for life inside the EU.

A study led by Nauro Campos of Brunel University concluded only Greece was poorer in 2008 for having joined the EU; Britain, they reckon, was 24% richer. Eurozone membership initially brought down Greek interest rates and unleashed a borrowing binge but resulted in crisis and a six-year depression. Yet Greeks still don’t want to give up the euro. “Anglo Saxons think the euro is only an economic and financial project,” said Yannis Stournaras, governor of the Greek central bank, in an interview. “It’s political as well. It’s a means to an identity. We feel safer in the euro.” British considerations were just the opposite. A Conservative government took Britain into the EEC in 1973 largely for its trade benefits, a decision voters overwhelmingly approved in a 1975 referendum.

You don’t say.

• Even ‘Small Crisis’ Enough To Tear EU Apart, Moody’s Warns (Tel.)

Fresh turmoil in the EU risks triggering the disintegration of the entire bloc, according to Moody’s. In a stark warning, the rating agency said the “painful adjustment” faced by some countries in the eurozone meant the collapse of the single currency area and wider EU was believed by some to be a question of “when” not “if”. Moody’s said that even a “small crisis” threatened to set off an uncontrollable chain of events that would “threaten the sustainability” of the EU and its institutions. The rating agency praised the “significant political progress” made since the crisis in putting the foundations in place for a banking union and creating a eurozone rescue fund. However, it said endless austerity demands in return for bail-outs had fuelled deep resentment across the region, especially in countries weighed down by sky-high unemployment.

“Significant vulnerabilities” facing the bloc such as a British exit from the EU also remained, which would fuel support for “anti-establishment and anti-EU parties elsewhere”, it warned in a report. Colin Ellis, Moody’s chief credit officer for Europe, said a British exit could spark an “existential moment” for the bloc. “Even if the EU survives its current challenges largely unscathed, even a ‘small’ future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments,” the report said. “This can create the impression that the question is when the system breaks, rather than if.”

It came as Mervyn King, the former governor of the Bank of England, warned that the eurozone faced four “unpalatable choices” as policymakers struggle to lift the bloc out of its economic malaise. Lord King said the single currency area would have to choose between an economic “depression” in the south, higher inflation in northern states like Germany, permanent fiscal transfers or a “change of composition of the euro area”. However, he told an audience in Frankfurt that there was “a limit to the economic pain that can be imposed in pursuit of a federal Europe without risking a political reaction. “There are no empires in Europe any more and our leaders would do well not to try to recreate one.”

Ambrose votes Brexit?!

• Let The TTIP Die If It Threatens Parliamentary Democracy (AEP)

Unloved, untimely, and unnecessary, the putative free trade pact between Europe and America is dying a slow death. The Dutch people have amassed 100,000 signatures calling for a referendum on this Transatlantic Trade and Investment Partnership, or TTIP. The number is likely to soar after Greenpeace leaked 248 pages of negotiation papers over the weekend. The documents do not exactly show a “race to the bottom in environmental, consumer protection and public health standards” – as Greenpeace alleges – but they do raise red flags over who sets our laws and who holds the whip hand over our eviscerated parliaments. Dutch voters have already rebuked Brussels once this year, throwing out an association agreement with Ukraine in what was really a protest against the wider conduct of European affairs by an EU priesthood that long ago lost touch with economic and political reality.

French president François Hollande cannot hide from that reality. Faced with approval ratings of 13pc in the latest TNS-Sofres poll, a TTIP mutiny within his own Socialist Party, and electoral annihilation in 2017, he is retreating. “We don’t want unbridled free trade. We will never accept that basic principles are threatened,” he said. In Germany, just 17pc now back the project, and barely half even accept that free trade itself a “good thing”, an astonishing turn for a mercantilist country that has geared its industrial system to exports. The criticisms have struck home. The Dutch, Germans, and French, have come to suspect that TTIP is a secretive stitch-up by corporate lawyers, yet another backroom deal that allows the owners of capital to game the international system at the expense of common people.

Weighty principles are at stake. The Greenpeace documents show that the EU’s ‘precautionary principle’ is omitted from the texts, while the rival “risk based” doctrine of the US earns a frequent mention. Clearly, the two approaches are fundamentally incompatible. It is a heresy in our liberal age – a sin against Davos orthodoxies – to question to the premises of free trade, but this tissue rejection of the TTIP project in Europe may be a blessing in disguise. You can push societies too far. [..] The European Commission’s Spring forecast this week has an eye-opening section on the rise of inequality. Without succumbing to the fallacy of ‘post hoc, propter hoc’, it is an inescapable fact that the pauperisation of Europe’s blue collar classes corresponds exactly with the advent of globalisation.

Let’s sign another set of deals with them.

• Turkey In Political Freefall As Erdogan Grabs More Power, PM To Resign (MEE)

News that Turkish Prime Minister Ahmet Davutoglu, after meeting President Recep Tayyip Erdogan, is to announce the holding of a party congress on Thursday, effectively signifying his resignation, has sent shockwaves through the country. The value of the Turkish Lira dropped from 2.79 to the dollar earlier in the day to 2.94. Davutoglu is expected to make the announcement at 1100am local time. After 14 years in power, the ruling Justice and Development Party (AKP) may be coming apart at the seams. But far more threatening than the unravelling of a political party are fears about the direction in which the country is headed. Both domestic and international critics have for years pointed to the growing authoritarianism and strong-man tactics employed by Erdogan. The fact that he can so easily dismiss the prime minister, a man he rapidly promoted through the ranks, is sending shivers down the spines of many.

“This is a palace coup,” said Yusuf Kanli, a veteran commentator on Turkish politics. “The president wanted the prime minister to step down and that’s it. Now we will have a party convention in May or early June,” Kanli told Middle East Eye. Rumours of tensions within the party have been rife for almost a year, but not even the AKP’s worst enemies had imagined a split could occur on such a scale. Unconfirmed reports suggest the AKP will convene a party congress within 60 days and that Davutoglu will not stand as a candidate. “Events today show that the AKP will move to consolidate Erdogan’s aspirations of becoming a super president. Whether they will succeed remains to be seen. These are very fine political calculations,” Kanli said. The party congress elects the party chairman, who automatically becomes their choice for prime minister.

Now confirmed by another study.

• Study: Bailouts Went To Banks, Only 5% To Greeks (Hand.)

After six years of ongoing bailouts amounting to more than €220 billion, or $253 billion in loans, Greece just cannot get out of crisis mode. It is tempting to blame those who refused to reform the country’s pensions and labor markets for the latest calamity. But a study by the European School of Management and Technology, a copy of which Handelsblatt has obtained exclusively, gives another perspective. The aid programs were badly designed by Greece’s lenders, the ECB, the EU and the IMF. Their priority, the report says, was to save not the Greek people, but its banks and private creditors. This accusation has been around for a long time. But now, for the first time, the Berlin-based ESMT has compiled a detailed calculation over 24 pages.

Their economists looked at every individual loan instalment and examined where the money from the first two aid packages, amounting to €215.9 billion, actually went. Researchers found that only €9.7 billion, or less than 5% of the total, ended up in the Greek state budget, where it could benefit citizens directly. The rest was used to service old debts and interest payments. The report comes as the EU and the Greek government prepare to hold negotiations about further debt relief. E.U. Economics Commissioner Pierre Moscovici said he hoped all sides could reach an agreement at a special meeting of the Eurogroup of euro-zone finance ministers next Monday. Extensions of credit repayment periods, deferments and freezing interest rates are all being discussed. This “debt relief light” would not affect private investors – just the loans from Europeans.

At the moment, German Chancellor Angela Merkel and her colleagues are not inclined to listen to the Greek prime minister, Alexis Tsipras, as he asks for a new multi-billion euro aid package. It is easy to understand why. The chancellor must feel she has seen it all before. She has experienced many near state bankruptcies since early 2010 when she put together the first bailout for Greece. But Jörg Rocholl, president of the European School of Management and Technology said that his institute’s research shows that the biggest problem lies with the way the bailout packages were designed in the first place. “The aid packages served primarily to rescue European banks,” he said. For example, €86.9 billion were used to pay off old debts, €52.3 billion went on interest payments and €37.3 billion were used to recapitalize Greek banks.

Of course, the servicing of debts and interest payments is a major source of expenditure in any state budget – so the Greek state did benefit from it indirectly, as it had also spent the loan money beforehand. But the new calculations do throw doubts on whether the aid programs were sensibly constructed: The loans were used to service debt, although Greece has been de facto bankrupt since 2010.

Apart form the obvious human tragedy, I don’t know why, but nobody talks about this being the end of the tar sands industry. That’s a real possibility, though. Nearly all workers live in the town. And so oil prices are up a bit for the moment.

• The Terrible News From Fort McMurray, And The Hope That Remains (G&M)

On Monday, residents of Fort McMurray watched anxiously as wildfires burned southwest of the northern Alberta city. Fort Mac’s streets are carved out of the boreal forest at the spot where the Clearwater River flows into the Athabasca. Backyards in the residential neighbourhoods in the west and northwest run up against walls of pine and spruce. Forest fire is always a threat, but on Monday the smoke and flames appeared to be far enough away to allow for hope that the city was safe. On Tuesday, the worst happened. The winds came up and the wildfires flanked the city. The two oldest residential developments, Abasands and Beacon Hill, have been decimated. Thickwood, Timberlea and Parsons Creek, the newest and by far the largest residential developments, where there are modern schools and shopping malls and a beautiful ravine park, were on the verge of being overrun by the flames.

The destruction by fire of an entire Canadian city of more than 80,000 people is suddenly a possibility. Fort McMurray is a remarkable place. People from across Canada and the world have built lives there. In grocery stores, you’ll find halal meats displayed alongside cod tongues. Muslim and Christian children mix easily at the new Roman Catholic high school. Fort Mac is often maligned as a transient, wild west town and a symbol of oil extraction at all costs, but it is in fact a tolerant, diverse and progressive city – a very Canadian boomtown. Not perfect, but doing its best to be a durable home for oil sands workers in spite of the capriciousness of oil prices, the isolation and the long winters.

The focus now is on the logistics of caring for 89,000 evacuees – a staggering challenge. Government officials at all levels and in all provinces, along with private industry and the many native bands around Fort McMurray, are offering aid. Residents are safe and, miraculously, no one has been reported killed or injured. But many, or even perhaps all, may not have homes to return to.

Temperature anomalies keep spreading.

• ‘Omega Block’ Behind Searing Heat Inflaming Fort McMurray Wildfire (WaPo)

Unseasonably hot weather in Alberta, Canada, is fueling the worst wildfire disaster in the country’s history. An extreme weather pattern, known as an omega block, is the source of the heat. An omega block is essentially a stoppage in the atmosphere’s flow in which a sprawling area of high pressure forms. This clog impedes the typical west-to-east progress of storms. The jet stream, along which storms track, is forced to flow around the blockage. At the heart of the block in Canadian’s western provinces, the air is sinking and much warmer than normal. Such a clog can persist for days until the atmosphere’s flow is able to break it down and flush it out.

Centers of storminess form on both sides of the block, and the resulting jet stream configuration takes on the likeness of the Greek letter omega. In this case, cool and unsettled weather is affecting the eastern Pacific Ocean and eastern North America, including much of the U.S. East Coast. As the Fort McMurray wildfire rapidly spread Tuesday, temperatures surged to 90 degrees (32 Celsius), shattering the daily record of 82 degrees set May 3, 1945. Dozens of other locations in Alberta also had record high temperatures. More records are likely to fall today. Temperatures are forecast to climb well into the 80s today at Fort McMurray, about 30 degrees warmer than normal. The average high is in the upper 50s.

This is very far from over.

• UN Envoy Warns of New Wave of 400,000 Refugees From Syria (WSJ)

A top United Nations official warned of a new tide of refugees from Syria if world powers didn’t succeed in calming an outbreak of hostilities in and around the northern Syrian city of Aleppo. Staffan de Mistura, the U.N.’s special envoy for Syria, said after meeting with European diplomats and Syrian opposition officials Wednesday that the priority in moving forward with a peace process for Syria was to stop the fighting around what was once Syria’s most populous city. “The alternative is truly quite catastrophic,” Mr. de Mistura said. “We could see 400,000 people moving toward the Turkish border.” The talks in Berlin centered on ways to return to talks in Geneva on Syria’s political future. The opposition’s High Negotiations Committee, headed by Riad Hijab, pulled out of those talks on April 18 as a cessation of hostilities agreed to in February disintegrated.

Debt Rattle August 14 2015

Aug 142015

August 14, 2015 Posted by Raúl Ilargi Meijer at 10:42 am Finance Tagged with: bailout, China, currency war, Eurogroup, Greece, junk bonds, refugees, steel, subprime, water, yuan Comments Off

G. G. Bain Katherine Stinson, “the flying schoolgirl,” Sheepshead Bay Speedway, Brooklyn 1918

• Greek Parliament Approves Bailout Deal (Guardian)

• Greek Bailout On A Tightrope – Again (CNBC)

• China Halts Yuan Devaluation With Slight Official Rise Against US Dollar (AFP)

• The Economic Wizards Of Beijing Have Feet Of Clay After All (Guardian)

• China Denies Currency War As Global Steel Industry Cries Foul (AEP)

• China and the Danger Of An Open Currency War (Paul Mason)

• China’s Devaluation Becomes Japan’s Problem (Pesek)

• Why The Yuan May Deck Singapore Property Stocks (CNBC)

• Greece Creditors Raise ‘Serious Concerns’ About Spiralling Debt (Guardian)

• Greece To Get €6 Billion In Bridge Loans If No Agreement At Eurogroup (Reuters)

• Greece Crisis Proves The Need For A Currency Plan B (John Butler, Cobden)

• Greeks Taste Breadth Of Bailout In Loaf And Lotion Rules (Guardian)

• European Union Backs IMF View Over Greece – Then Ignores It (Guardian)

• Total U.S. Auto Lending Surpasses $1 Trillion for First Time (WSJ)

• Surge in Global Commercial Real-Estate Prices Stirs Bubble Worries (WSJ)

• Glencore: World Of Big Mining Agog At Huge Fall (Guardian)

• The Junk Bond Market ‘Is Having A Coronary’: David Rosenberg (CNBC)

• ‘I Will Leave Politics And Return To Comedy’: Beppe Grillo (Local.it)

• World without Water: The Dangerous Misuse of Our Most Valuable Resource (Spiegel)

• Greece Sends Cruise Ship To Ease Kos Migrant Crisis (Guardian)

• Mediterranean: Saving Lives at the World’s Most Dangerous Border (Spiegel)

Talk about a Pyrrhic victory.

• Greek Parliament Approves Bailout Deal (Guardian)

After a tumultuous, often ill-tempered and at times surreal all-night debate, Greek MPs voted early on Friday to approve a new multibillion euro bailout deal aimed at keeping their debt-stricken country afloat. With his ruling leftist Syriza party apparently heading for a formal split over the €85bn package, prime minister Alexis Tsipras needed the support of the opposition to win parliament’s backing for the bill in a 9.45am vote which the government eventually won by a comfortable margin. But controversial former finance minister Yanis Varoufakis voted against the punishing terms of the deal, along with a large number of Syriza rebels angered by what they said was a sell-out of the party’s principles and a betrayal of its promises, leaving Tsipras severely weakened.

Tsipras told MPs before the vote that the rescue package was a “necessary choice” for the nation, saying it faced a battle to avert the threat of a bridge loan – which he called a return to a “crisis without end” – that Greece may be offered instead of a full-blown bailout. The draft bailout must now be approved by other eurozone member states at a meeting of finance ministers in Brussels on Friday afternoon, and ratified by national parliaments in a number of countries – including Germany, which remains sceptical – before a first tranche can be disbursed that will allowing Greece to make a crucial €3.2bn payment to the ECB due on 20 August. The Athens parliament did not start debating the 400-page text of the draft bailout plan until nearly 4am after parliamentary speaker Zoe Konstantopoulou, a Syriza hardliner, ignored Tsipras’s request to speed up proceedings and instead raised a lengthy series of procedural questions and objections.

[..] On the left, former energy minister Panayiotis Lafazanis, who leads a rebel bloc of around a quarter of Syriza’s 149 MPs, pledged to “smash the eurozone dictatorship”, while in her concluding pre-vote remarks, Konstantopoulou announced: “I am not going to support the prime minister any more.” Earlier, the government spokeswoman, Olga Gerovasili, conceded divisions within the leftist party, which swept to victory in January’s elections on a staunch anti-austerity platform, were now so deep that a formal split was probably inevitable. Tsipras could call fresh elections as early as next month.

Time for Dijsselbloem to screw up one last time.

• Greek Bailout On A Tightrope – Again (CNBC)

Greece’s third bailout is back in the hands of euro zone finance ministers, who are meeting Friday to discuss whether to go ahead with the deal – or delay it. The baton has been passed on to Brussels after the Greek government, which had debated the reforms that need to be introduced to secure the much needed funds through the night, secured enough votes to pass the bailout bill. However, further uncertainty was heaped on the bailout process with reports from Reuters that left-wing prime minister Alexis Tsipras seeking a vote of confidence from the parliament after August 20. The Eurogroup of finance ministers will be meeting in Brussels to debate the latest developments.

“It’s obvious we have to sign (a bailout deal) and we have to implement this agreement,” Kostas Chrysogonos, a Syriza member of the European parliament (MEP) told CNBC Friday following the Greek vote, saying that he hoped a deal would be completed at the Eurogroup meeting later today. A confidence vote was the last thing Greece needed right now, he added, so soon after Tsipras was elected in January. “I’m hopeful that many of the dissenters will resign their parliamentary seats…and the confidence vote will be enough to gain the confidence of the parliament for this government. It’s obvious that the last thing that we need right now is a general election, a country that stands at the edge of default cannot afford the luxury of having a second general election within eight months.”

Although the country and its international lenders and those overseeing the program have agreed technical details, a political agreement in the euro zone by member state governments is now necessary before any aid is release. But that is easier said than done with tensions running high both in Greece and Germany, Greece’s largest euro zone lender, over the bailout. This raises the possibility that the bailout deal could be delayed and Greece issued a bridging loan to tide it over. In Greece, members of parliament debated the third bailout package through the night after a long delay to the proceedings due to procedural objections saw the plenary session only get underway at 2am local time (midnight London time).

The vote on the bailout deal finally started at 7.30 London time with the government securing enough votes – 222 votes to 64 – to get the bailout approved. Tensions were running high in the Greek parliament, with high profile members of the ruling Syriza party, including former finance minister Yanis Varoufakis and parliamentary speaker Zoe Konstantopoulou, opposing the deal which involves more austerity, spending cuts and reforms. After the bailout was voted through the Greek parliament, Reuters, quoting a government official, said that Tsipras will seek a confidence vote in the Greek parliament after the August 20 deadline for payment to the ECB. A government spokesman told CNBC that he could not confirm the Reuters report but was expecting a statement shortly.

Wait till Monday.

• China Halts Yuan Devaluation With Slight Official Rise Against US Dollar (AFP)

China’s central bank has raised the value of the yuan against the US dollar by 0.05%, ending three days of falls in a surprise series of devaluations. The daily reference rate was set at 6.3975 yuan to $1.0, from 6.4010 the previous day, the China Foreign Exchange Trade System said. That was also slightly stronger than Thursday’s close of 6.3982 yuan. The higher fixing for the yuan came after the People’s Bank of China (PBoC) sought to reassure financial markets by pledging to seek a stable currency after a shock devaluation of nearly 2% on Tuesday.

The cut, and two subsequent reductions, rattled global financial markets – raising questions over the health of the world’s second-largest economy and sparking fears of a possible currency war. Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan, also known as the renminbi (RMB). Previously authorities based the rate on a poll of market-makers, but will now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies. The yuan is still only allowed to fluctuate up or down 2% on either side of the reference rate.

“Currently there is no basis for the renminbi exchange rate to continue to depreciate,” PBoC assistant governor Zhang Xiaohui said on Thursday. “The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level,” she said. Speaking earlier this week another PBoC official said the central bank could directly intervene in the market, after reports it bought yuan on Wednesday to prop up the unit. “The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market,” PBoC economist Ma Jun said.

“..the deputy governor of its central bank was forced to hold a press conference at which he insisted this was all part of a grand plan.”

• The Economic Wizards Of Beijing Have Feet Of Clay After All (Guardian)

The economic wizards of Beijing have feet of clay after all. That’s the growing sense after China’s currency fell for a third day and the deputy governor of its central bank was forced to hold a press conference at which he insisted this was all part of a grand plan. Zhang Xiaohui didn’t quite say “devaluation, what devaluation?” just as Jim Callaghan never quite said “crisis, what crisis?” during the Winter of Discontent. Both men were intent on showing that their governments were fully in control even though they were not. For UK politicians in the 1970s this was a familiar sensation; for China’s mandarins it is an entirely new experience. Over the past 30 years, the technocrats in Beijing have attained an almost mythical status.

Decade after decade of rapid growth has transformed China into the world’s second biggest economy, slashing poverty at the same time. There was much admiration – and not a little envy – in the west for the way in which communist party officials quickly lifted China out of recession following the financial crisis of 2008. The fact that policymaking was so opaque added to the mystique. But those golden days are now over. Beijing wanted to rebalance the Chinese economy, to make growth less focused on exports and more reliant on consumer spending. It wanted slower but more sustainable growth that gradually took the heat out of overvalued property and share prices.

This is proving difficult. Official figures understate the speed at which the economy is slowing. As fears of a hard landing have increased, policymakers have started to panic. Beijing botched attempts at shoring up the stock market, a move that was unnecessary given that the fall of 30% had been preceded by a rise of 150%. Now the attempts to reduce the value of the yuan are being conducted in an equally ham-fisted fashion. It won’t really wash that the events of this week are a carefully thought-out liberalisation plan that will persuade the IMF to include the yuan in its reserve assets known as special drawing rights.

“China’s share of global steel output has rocketed from 10pc to 50pc over the last decade.” American and European steel industries can say goodbye.

• China Denies Currency War As Global Steel Industry Cries Foul (AEP)

Chinese steelmakers are preparing to flood the global market with cut-price exports as they take advantage of this week’s shock devaluation of the yuan, setting off furious protests from struggling competitors in Europe and the US. It is the first warning sign of a deflationary wave of cheap products from China after the central bank, the People’s Bank of China, abandoned its exchange rate regime, letting the currency fall in the steepest three-day drop since the country emerged as an economic powerhouse. The yuan has fallen 3.3pc against the dollar. Steel mills in the Chinese industrial hub of Hebei have already begun to trim prices of rebar mesh-wires used for building by between roughly $5 and $10 to $295, citing the devaluation as a fresh chance to offload excess stocks of steel.

Europe’s steel lobby Eurofer warned that there would be “very real competitiveness impacts” for European steel firms, already battling for their lives with wafer-thin margins. America’s United Steelworkers accused China of predatory practices.”It is time for China to live by the rules or face the consequences,” said the union’s international president, Leo Gerard. The US steel group Nucor called the devaluation the “latest attempt to support Chinese industry at the expense of producers in the rest of the world who have to earn their cost of capital to survive.” Indian tyre-makers have issued their own warnings, fearing a fresh rush of cheap imports from China. They are already grappling with a 100pc surge in shipments over the last year as the recession in China’s car industry displaces excess supply.

The anger is a foretaste of what China may face if this week’s devaluation is the start of a concerted effort to gain market share in a depressed global economy. Yet it is far from clear whether Beijing really has such an intention. The People’s Bank of China insisted on Thursday that the drop in the yuan was a one-off effect as the country shifts to a more market-friendly exchange regime, essentially a managed float. It described the sudden drop as “irrational” and said reports of a plot to drive down the yuan by 10pc were “nonsense”. China’s share of global steel output has rocketed from 10pc to 50pc over the last decade. It has installed capacity of 1.1bn tonnes a year that it cannot possibly absorb as the Chinese economy shifts away from heavy industry.

It now has 340m tonnes of excess capacity, which has driven down global steel prices by 40pc since early 2014. “This overcapacity alone is more than double the EU’s steel demand, and China is now exporting record quantities to Europe as a result,” said Eurofer.

“..another way of looking at QE is as an undeclared currency war – which is exactly how China sees it.”

• China and the Danger Of An Open Currency War (Paul Mason)

China has stunned the world by devaluing its currency twice in two days. Or rather it has stunned that naive part of the world that believed China’s economy was okay, that its Communist Party was en route to being some kind of team player in the global economy, and that the words “currency war” were just scaremongering. Here’s what’s happened, and why it matters. China’s economy, which grew at 9% and above per year in the period of rapid industrialisation in the 2000s, has slowed to 7%. Because the entire control system of the conomy is based on one bureaucrat lying to/competing with another, nobody really knows whether the Chinese growth figures are correct – but there’s been a clear slowdown.

That, in turn, caused a stock market slump last month – after more than a year of ordinary Chinese people pouring money into shares. So the government tried to contain by ordering state owned stockbrokers to buy RMB 120bn worth of shares, setting a stock market “target level” reminiscent of the old Soviet grain targets. Now, with growth continuing to falter, the Chinese government has devalued its own currency again in a bid to boost exports. At the same time – as a concession to its trade rivals – it has promised to “take more notice of the markets” when setting interest rates in future. Since it re-entered the global economy, China has pegged its currency, the renminbi, against the dollar – refusing to let it trade freely and to find a market rate.

Under pressure from America and Japan, which say China’s currency is too cheap and gives it an unfair trade advantage, China allowed the RMB gradually to rise against other currencies. This was seen as a first step towards the RMB becoming convertible, and ultimately emerging as a rival global currency to the dollar. Now that policy has been reversed. The context is, first, the tit-for-tat stimulus measures that the world’s major economies have been taking. Europe has launched a massive programme of quantitative easing; Britain’s QE programme remains in place and Japan is reliant on more and more dollops of printed money to buy state debt and keep the economy going. When states or currency unions print money on this scale the side effect is to weaken the value of their currency and boost exports. So another way of looking at QE is as an undeclared currency war – which is exactly how China sees it.

Abenomics can still get uglier than it already was.

• China’s Devaluation Becomes Japan’s Problem (Pesek)

Among the clearest casualties of China’s devaluation is the Bank of Japan. The chances were never high that Governor Haruhiko Kuroda was going to be able to unwind his institution’s aggressive monetary experiment anytime soon. But the odds are now lower than even skeptics would have previously believed. The real question, though, is what China’s move means more broadly for Abenomics. A sharply devalued yen, after all, is the core of Prime Minister Shinzo Abe’s gambit to end Japan’s 25-year funk. Abenomics is said to have three parts, but monetary easing has really been the only one. Fiscal-expansion was neutered by last year’s sales-tax hike, while structural reform has arrived only in a brief flurry, not the avalanche needed to enliven aging Japan and get companies to raise wages.

China’s devaluation tosses two immediate problems Japan’s way. The first is reduced exports. As Beijing guides its currency even lower, as surely it will, the yen will rise on a trade-weighted basis. And Bloomberg’s Japan economist Yuki Masujima points out that trade with China now contributes 13% more to Japanese GDP than the U.S., traditionally Tokyo’s main customer. “Given China’s rise to prominence, the yen-yuan exchange rate now has far greater influence on Japan than the yen-dollar rate,” Masujima says. The other problem is psychological. Japanese households have long lamented their rising reliance on China, a developing nation run by a government they widely view as hostile.

But the BOJ was glad to evoke China’s 7% growth – and the millions of Chinese tourists filling shopping malls across the Japanese archipelago – to convince Japanese consumers and executives that their own economy was in good shape. Now, the perception of China as a growth engine is fizzling, exacerbating the exchange-rate effect. “To the extent that the depreciation reflects weakness in China, then that weakness – rather than the depreciation per se – is a problem for Japan,” says Richard Katz, who publishes the New York-based Oriental Economist Report. It’s also a problem for Abe, whose approval ratings are now in the low 30s thanks to his unpopular efforts to “reinterpret” the pacifist constitution to deploy troops overseas. The prospect that Abe will enrage Japan’s neighbors by watering down past World War II apologies at ceremonies this weekend marking the 70th anniversary of the end of the wary is further damping support at home.

The worsening economy, which voters hoped Abe would have sorted out by now, doesn’t help. Inflation-adjusted wages dropped 2.9% in June, a sign Monday’s second-quarter gross domestic product report for the may be truly ugly. It’s an open question whether such an unpopular leader can push painful, but necessary, structural changes through parliament. “Already,” Katz says, “Abe has backpedaled on many issues to avoid further drops.” After 961 days, all Abenomics has really achieved is a sharply weaker yen, modest steps to tighten corporate governance and marketing slogans asking companies to hire more women.

Think leverage, shadow banking, and fill in the blanks.

• Why The Yuan May Deck Singapore Property Stocks (CNBC)

Singapore’s property shares, already on the back foot from expectations of rising interest rates, have taken a beating since China devalued its currency on Tuesday and more pain may be on the cards. “Given that the majority of property stocks with China exposure do not hedge the currency exposures of their incomes and balance sheets, a weaker renminbi suggests that both asset values and earnings/dividends would be negatively affected,” analysts at JPMorgan said in a note Wednesday. “Book values and dividend per unit (DPU) would be affected.” Singapore real-estate investment trusts (S-REITs) are also likely to take a hit as the moves Tuesday and Wednesday by the People’s Bank of China to push down the Chinese currency also caused the Singapore dollar to weaken.

“The weakening Singapore dollar would result in upward pressure on interest rates,” it said, estimating that every 100 basis point rise in interest rates pushes S-REITs’ DPU down by 2.7% because of increased costs. Singapore property shares with China exposure based on earnings and assets under management include CapitaLand Retail Trust China, Global Logistic Properties, CapitaLand and City Developments, JPMorgan noted. Those shares are down 1.2-5.5% so far this week, after a bit of a recovery Thursday. Singapore may not be alone in feeling property pain from China. In Hong Kong, Wharf, Cheung Kong Property and Hang Lung all have significant China exposure, noted Patrick Wong at BNP Paribas.

The spiralling debt is a direct consequence of the conditions those same creditors force upon Greece.

• Greece Creditors Raise ‘Serious Concerns’ About Spiralling Debt (Guardian)

Greece’s European creditors have underlined the temporary nature of the country’s surprise return to growth by warning that they have “serious concerns” about the spiralling debts of the eurozone’s weakest member. The economic news came as Greece’s parliament met in emergency session on Thursday to ratify a new bailout deal, although it was unclear whether the multibillion-euro agreement had the vital backing of Germany. The three European institutions negotiating a third bailout package with the government in Athens said that the Greek economy had plunged into a deep recession from which it would not emerge until 2017. According to an analysis completed by the EC, the ECB and the eurozone bailout fund, Greece’s debts will peak at 201% of GDP in 2016.

The study says that Greece’s debt burden can be made more bearable by waiving payments until the economy has recovered and then giving Athens longer to pay. However, it opposes the idea of a so-called “haircut” – or reducing the size of the debt. It is a course of action the International Monetary Fund, which joined the three European institutions in negotiating the latest bailout, thinks may be necessary for Greece’s debts to become sustainable.

“The high debt to GDP and the gross financing needs resulting from this analysis point to serious concerns regarding the sustainability of Greece’s public debt,” said the analysis, adding that far-reaching reforms were needed to address the worries. It forecasts that the Greek economy will contract by 2.3% this year and a further 1.3% in 2016 before returning to 2.7% growth in 2017. Greece’s debt to GDP ratio will peak next year but will still be 175% in 2020 and 160% in 2022. The IMF views a debt to GDP ratio above 120% as unsustainable.

Greece doesn’t want a bridge loan.

• Greece To Get €6 Billion In Bridge Loans If No Agreement At Eurogroup (Reuters)

Greece could get €6.04 billion in bridge financing if euro zone finance ministers cannot agree on the planned third bailout for Athens when they meet on Friday, according to German newspaper Bild, citing a European Commission proposal for the meeting. That proposal says the bridge loans should run for a maximum of three months, Bild said in an advance copy of an article due to be published on Friday. Eurozone finance ministers are due to meet in Brussels on Friday to discuss a third financial rescue that Greece has negotiated with its creditors.

Greek Finance Minister Euclid Tsakalotos expressed his opposition on Thursday to Greece taking another temporary loan to meet its immediate debt repayments, calling on lawmakers to approve a new, three-year bailout deal. “I think whatever everyone’s stance on the euro and on whether this is a good or bad accord, there must be no one who is working towards a bridge loan,” he told a parliamentary committee. Athens must make a €3.2 billion debt payment to the ECB on Aug. 20.

Cobden Partners was proposed to Varoufakis right after the January election as an advisor. Syriza opted for Lazard instead.

• Greece Crisis Proves The Need For A Currency Plan B (John Butler, Cobden)

The recent Greek capitulation under pressure from other euro member countries, led by Germany, demonstrates that euro members have de facto ceded sovereignty over fiscal policy to the EU. While this arrangement may be acceptable to some countries, perhaps even Greece, it will be resisted by others. However, as the Greek failure also demonstrates, any eurozone country wishing to restore fiscal sovereignty, or restructure some of their debt, or implement any policy or set of policies that runs afoul of the preferences of certain Eurogroup finance ministers will have near-zero negotiating leverage if they fail to plan, credibly and in advance, for the introduction of a viable alternative currency.

Without this critical card to play, the country in question will be held hostage by the now politicised ECB. Its domestic banking system and financial markets will be shut down, the economy will grind to a halt and the government will face either a humiliating retreat or full capitulation. Former Greek finance minister Yanis Varoufakis has now revealed much of the detail of the recent negotiations, capitulation and attempts to vilify him personally for acting insubordinately or even in a treasonous manner at the 11th hour. However, it is entirely understandable that, once Varoufakis became aware of the degree to which his country’s banks and national finances had been taken hostage by the ECB and EU institutions, he sought some flexibility in order to strengthen Greece’s negotiating position.

Alas, this was much too little, and way too late. In retrospect, it is now obvious that Varoufakis and his colleagues should have set about developing a credible alternative currency plan prior to entering into any negotiations around either debt reduction or fiscal reforms. Had they done so, when the ECB suspended further increases in the ELA, forcing the banks and financial markets to close, Greece would have been able to roll out a temporary plan which, in the event that subsequent negotiations were indeed to fail, could easily have become permanent. Moreover, the very existence of such a plan would have greatly strengthened Greece’s hand to the point where negotiations may well have succeeded.

Summary: Foreign corporations will take over everything.

• Greeks Taste Breadth Of Bailout In Loaf And Lotion Rules (Guardian)

Vouldis, 33, whose bakery was founded 22 years ago by his parents in the southern Athens suburb of Kallithea, and is one of 15,000 local bakeries in Greece, said: “If a supermarket can call itself a bakery and present frozen loaves as fresh, that’s cheating customers . And if we sell by the kilo – which we’ve been supposed to be doing since Easter, actually, but no one does – customers will end up spending more on their bread. Bakers will have far more opportunity to play around with their prices. “Neighbourhood bakeries are the heart of a community; it’s wrong to make things harder for them than they already are. And it’s unacceptable to have international institutions saying, you’re stupid, you don’t know how to run your business, here’s how you must do it.”

Stefanidi meanwhile was concerned at the bailout powers’ insistence that anyone should be allowed to own a pharmacy: at present, Greek law limits their ownership to pharmacists. The way the OECD and the international creditors saw it, far too many laws protected Greece’s 11,000 pharmacies – a quantity, per head of the population, about double that for France or Spain, and more than 15 times Denmark’s total. Many of the rules were scrapped last year despite a European court upholding Greece’s view that it was perfectly entitled to legislate on the matter since its supreme court had ruled that pharmacies were not pure commercial enterprises but also fulfilled a vital social function.

The rule that no district can have more than one pharmacy per 1,000 people will stay. But the regulation stipulating that over-the-counter medicines may only be sold at licensed pharmacies is soon to be scrapped; and the ownership restriction could be gone next week if the bailout package is approved. “It’s crazy,” said Konstantinos Lourantos, president of the Panhellenic Pharmaceutical Association, in his pharmacy in the Athens suburb of Nea Smyrni. “Anyone will be able to open a pharmacy now. Anyone. In all Europe, only in Slovenia and Hungary is this allowed. Even in Germany, a licensed pharmacist must own at least 51% of a pharmacy.”

There will be no real debt relief, not if Germany has its way. It’ll just be toying with margins, unacceptable for the IMF.

• European Union Backs IMF View Over Greece – Then Ignores It (Guardian)

The good news for the IMF, which has been saying for ages that Greece’s debts are unsustainable, is that European lenders now seem to agree. There are “serious concerns” about the sustainability of the country’s debts, the three European institutions negotiating the latest bailout said on Thursday. They think Greece’s debts will peak at 201% of GDP in 2016, which is roughly what the IMF said a month ago when it projected a high “close to 200% of GDP in the next two years”. So what should be done? Unfortunately, that is where unanimity seems to break down.

The IMF’s view of the options in July was blunt. First, there could be “deep upfront haircuts” – in other words, a portion of Greece’s debts to eurozone lenders would be written off, which, reading between the lines, seemed to be the IMF’s first preference. Second, there was the politically-impossible policy of eurozone partners making explicit transfers to Greece every year. Or, third, Greece could be given longer to repay, an approach likely to be more palatable to European leaders. But this option came with a heavy qualification from the IMF: “If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance.”

Is Europe ready to be “very dramatic,” as the IMF defined it? Almost certainly not – at least not in Germany. Thursday’s European report spoke about extending repayment schedules but it seems highly unlikely that 30 years would be acceptable in Berlin. If that’s correct, the IMF’s willingness to cough up its €15bn-€20bn contribution to the latest €85bn rescue package must be in serious doubt. The fund’s guidelines say loans can only be advanced when there is a clear path back to debt sustainability, usually defined as borrowings being less than 120% of GDP. On Thursday’s European analysis, Greece would still be at 160% even in 2022.

Subprime is all America has left.

• Total U.S. Auto Lending Surpasses $1 Trillion for First Time (WSJ)

With the recession now six years behind in the nation’s rearview mirror, lending for automobiles has sharply accelerated: Around $119 billion in auto loans were originated in the second quarter of this year, a 10-year high, according to figures from the Federal Reserve Bank of New York released Thursday. Auto lending has climbed steadily during the past four years, helping sales of U.S. autos and light trucks completely recover their losses from the recession. In May, consumers purchased vehicles at an annual pace of 17.6 million, the highest since June 2005. Americans have now racked up more than $1 trillion in both auto-loan debt and student-loan debt, which surpassed $1 trillion for the first time in 2013.

The overall indebtedness of U.S. borrowers remains lower than before the recession, owing to declines in home-loan and credit-card balances. But with low gas prices, a growing number of jobs, and an aging automotive fleet, many people have found it an opportune time to get a new vehicle. “A lot of the gain we’ve seen is from light trucks, SUVs, cross-overs, minivans and pickup trucks,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio. “Because gasoline prices have come down, it makes it less expensive to run the vehicles that use more fuel” and frees up consumers’ budgets to put toward more cars or higher car loan payments. Auto lending and credit-card lending used to trade spaces as the second- and third-largest categories of U.S. household debt, after mortgages.

Both were surpassed by student loans in 2010. Since 2011, auto loans have rapidly outgrown credit cards. Today, household credit-card balances stand at $703 billion, about the same as four years ago. Auto lending and mortgages offered a study in contrast over the past five years. Both types of debt fell in the recession; from 2008 to 2010 the total stock of auto loans declined by more than $100 billion. Mortgage balances dropped by more than $800 billion. “There was some tightening in auto-loan standards after the financial crisis, but by many measures it’s returned basically to where it was pre-recession,” said Wilbert van der Klauw, a New York Fed economist. “That’s quite a contrast to mortgage underwriting, which remains significantly tighter than before the recession.”

Spot the zombie.

• Surge in Global Commercial Real-Estate Prices Stirs Bubble Worries (WSJ)

Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating. The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year, on a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics. Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier to $225.1 billion, ahead of the pace set in 2006, according to Real Capital. In Europe, transaction values shot up 37% to €135 billion ($148 billion), the strongest start to a year since 2007.

Low interest rates and a flood of cash being pumped into economies by central banks have made commercial real estate look attractive compared with bonds and other assets. Big U.S. investors have bulked up their real-estate holdings, just as buyers from Asia and the Middle East have become more regular fixtures in the market. The surging demand for commercial property has drawn comparisons to the delirious boom of the mid-2000s, which ended in busts that sunk developers from Florida to Ireland. The recovery, which started in 2010, has gained considerable strength in the past year, with growth accelerating at a potentially worrisome rate, analysts said. “We’re calling it a late-cycle market now,” said Jacques Gordon at LaSalle Investment.

While it isn’t time to panic, Mr. Gordon said, “if too much capital comes into any asset class, generally not-so-good things tend to follow.” Regulators are watching the market closely. In its semiannual report to Congress last month, the Federal Reserve pointed out that “valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly.” Historically low interest rates have buoyed the appeal of commercial real estate, especially in major cities where economies are growing strongly. A 10-year Treasury note is yielding about 2.2%. By contrast, New York commercial real estate has an average capitalization rate—a measure of yield—of 5.7%, according to Real Capital.

By keeping interest rates low, central banks around the world have nudged income-minded investors into a broad range of riskier assets, from high-yield or “junk” bonds to dividend-paying stocks and real estate. Lately money has been pouring into commercial property from all directions. U.S. pension funds, which got clobbered in the aftermath of the crash, now have 7.7% of their assets invested in property, up from 6.3% in 2011, according to alternative-assets tracker Preqin. Foreign investors also have been stepping on the gas. China’s Anbang Insurance in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. Another Chinese insurer, Sunshine Insurance in May purchased New York’s glitzy Baccarat Hotel for more than $230 million, or a record $2 million per room.

Big Mining is in for a Big Surprise.

• Glencore: World Of Big Mining Agog At Huge Fall (Guardian)

How do you make a £2bn fortune from commodities? Answer: start with a £6bn fortune. Ivan Glasenberg, chief executive of Glencore, won’t be laughing. Those numbers are the value of his shareholding in the mining and commodity-trading company at flotation in 2011 and now. Yes, Glencore’s share price really has fallen by two-thirds, from 530p to 180p, since it came to market with a fanfare. Among London’s big miners, only Anglo-American has done worse. This week alone the fall has been 10% as the China-inspired rout has run through commodity markets and mining stocks. Glencore is being whacked harder than the likes of BHP Billiton and Rio Tinto for a simple reason – relative to earnings, it has a lot more debt.

Analysts predict borrowings will stand at about $48bn when the company reports half-year numbers next week, which is a hell of a sum even for a business making top-line (before interest and tax) earnings of $10bn-$12bn. Bold borrowings aren’t quite what they seem, it should be said, because Glencore’s marketing division holds a stockpile of commodities as inventories that can be turned into cash. Viewed that way, net debt might be nearer $30.5bn at year-end, estimates JP Morgan Cazenove.

But here’s the rub: Glencore might have to go ahead and turn some of that stock into cash if its wants to save its BBB credit rating. “At spot commodity prices, we calculate net debt needs to fall $16bn by year-end 2016 to safeguard Glencore’s BBB credit rating,” says JP Morgan. Preservation of BBB is a financial priority, Glencore said in March, for the sound reason that a healthy rating is vital to keep funding costs low in the trading-cum-marketing division. It’s a financial challenge caused by the plunge in prices that is undermining profits on the other side of Glencore – the mining operation concentrated on the old Xstrata assets, which are skewed towards copper and coal.

All ‘markets’ are about to have one of those.

• The Junk Bond Market ‘Is Having A Coronary’: David Rosenberg (CNBC)

The biggest trouble sign for stocks may be bonds. High-yield bonds, specifically, often are seen as an effective proxy for movements in the equity market. If that’s the case, trends in junk are pointing to a rocky road ahead. Average yields for low-rated companies have jumped to 7.3% and spreads between such debt and comparable duration Treasurys have widened dramatically, according to David Rosenberg at Gluskin Sheff. History suggests that fallout in stocks is not far behind. “If you think the equity market is heading for a spot of trouble here, the high-yield bond market is having a coronary,” Rosenberg said in his daily market analysis Thursday.

Rosenberg points out that the average yield is the highest since mid-December and has risen 120 basis points—1.2 percentage points—just since June. Spreads are at 580 basis points, a level hit only twice in the last three years. His caution on junk reflects sentiment heard from a number of other market analysts who believe the troubles in the high-yield market, which has led fixed income performance with 7% annualized returns over the past 10 years, are a bad sign. Since the most recent lows in June, spreads have widened a full percentage point. “In other words, this move in high-yield spreads is on par with what we have seen when we have previously had a 9% correction in equities or what would be about the same as the S&P 500 now correcting to 1,910,” he said.

“I am going to withdraw from the movement because I’m very old and I have a large family.”

• ‘I Will Leave Politics And Return To Comedy’: Beppe Grillo (Local.it)

Beppe Grillo, the leader of Italy’s anti-establishment Five Star Movement (M5S), said he plans to leave politics and return to his old job as a comedian. In a TV interview with La7 on Tuesday afternoon, Grillo said: “I am going to withdraw from the movement because I’m very old and I have a large family.” Grillo has distanced himself from the party recently, with some of its members seen as rising political stars. Luigi Di Maio, who at 29 is the youngest deputy president of the lower house in Italian history, is quickly becoming the new face of the Five Star Movement. While Grillo said that he’s “here for now” and that “the movement is my life”, he hinted that the party perhaps no longer needed to use his personality as a springboard for media coverage.

“Once people understand that I am not the undisputed leader of M5S, that I am not in charge and that they are not voting for Grillo but for an idea that I have been part of – then I can return to my job, which is making people laugh and showing them things they don’t know,” he said. The Five Star Movement’s leader has not yet given any clear indications as to when he will be stepping down. His spokesperson told The Local that the leader has not resigned. The comedian is working on a new show that he hopes to launch at the end of this year, after delaying it because of political commitments. A return to TV might also be on the cards. Reports last week suggested he could return to Italy’s national broadcaster Rai, but Grillo was uncertain. “I don’t know, I’m open to anything,” he said.

Drill baby drill 2.0.

• World without Water: The Dangerous Misuse of Our Most Valuable Resource (Spiegel)

California’s rivers and lakes are running dry, but its deep aquifers are also rapidly disappearing. The majority of the 40 million Californians are already drawing on this last reserve of water, and they are doing so with such intensity and without restriction that sometimes the ground sinks beneath their feet. The underground reservoir collapses. This in turn destabilizes bridges and damages irrigation canals and roads. This groundwater is thousands of years old, and it is not replenishing itself. Those who hope to win the race for the last water reserves are forced to drill deeper and deeper into the ground. The Earth may be a blue planet when seen from space, but only 2.5% of its water is fresh. That water is wasted, polluted and poisoned and its distribution is appallingly unfair.

The world’s population has almost tripled since 1950, but water consumption has increased six-fold. To make matters worse, mankind is changing the Earth’s climate with greenhouse gas emissions, which only exacerbates the injustices. When we talk about water becoming scarce, we are first and foremost referring to people who are suffering from thirst. Close to a billion people are forced to drink contaminated water, while another 2.3 billion suffer from a shortage of water. How will we manage to feed more and more people with less and less water? But people in developing countries are no longer the only ones affected by the problem. Droughts facilitate the massive wildfires in California, and they adversely affect farms in Spain.

Water has become the business of global corporations and it is being wasted on a gigantic scale to turn a profit and operate farms in areas where they don’t belong. “Water is the primary principle of all things,” the philosopher Thales of Miletus wrote in the 6th century BC. More than two-and-a-half thousand years later, on July 28, 2010, the United Nations felt it was necessary to define access to water as a human right. It was an act of desperation. The UN has not fallen so clearly short of any of its other millennium goals than the goal of cutting the number of people without this access in half by 2015. The question is whether water is public property and a human right. Or is it ultimately a commodity, a consumer good and a financial investment?

They should send it to an English port.

• Greece Sends Cruise Ship To Ease Kos Migrant Crisis (Guardian)

The Greek government has chartered a cruise ship to help deal with the refugee crisis on Kos, a day after more than 2,000 mainly Syrian refugees were locked inside a stadium on the island for more than a day with limited access to water. The vessel, which can fit up to 2,500 people, will function as a floating registration centre. Officials hope its presence will speed up the processing of about 7,000 refugees who are stranded on Kos after making the short boat journey from Turkey, and to whom the authorities have been previously unable to provide paperwork or housing. The move follows a disastrous attempt to register refugees inside an old stadium on Tuesday and Wednesday, which led to up to 2,500 mainly Syrian migrants trapped in the stadium grounds.

For more than 12 hours, much of it in temperatures of about 35C, migrants were without access to water or toilets. This led some to faint at a rate of one every 15 minutes, according to Médecins Sans Frontières, an aid agency providing medical support outside the stadium. By dawn on Thursday, the last migrants were finally released in calm circumstances witnessed by the Guardian, but some were literally bruised by the experience after clashes broke out on Wednesday between confused refugees and panicking police officers. Youssef, a 29-year-old Syrian banker, criticised the undignified nature of the process after being released early on Thursday morning. “I have a bachelor’s degree in accounting and an MBA,” he said. “It’s a shame to treat us like this.”

Registered migrants like Youssef are still stuck on Kos, with up to 5,000 others yet to be processed. The situation has led the Greek government to send a cruise liner, the Eleftherios Venizelos, to mitigate the fallout – as hundreds more refugees arrive every day. Kos’s mayor, Giorgos Kyritsis, who made the decision to use the stadium, denied that the ship would simply be yet another place of limbo for refugees. Kyritis said: “It’s not going to be used as a camp. As soon as it is filled with migrants, the ship with depart and another ship will come.”

Médecins Sans Frontières is forced to do what Europe should be doing.

• Mediterranean: Saving Lives at the World’s Most Dangerous Border (Spiegel)

The Mediterranean has become a crisis region, one where more than 2,000 people have died this year already – more than have lost their lives in attacks in Afghanistan. But of course that figure is misleading. It reflects only the number of recorded deaths. Who knows how many people have drowned without a trace? Nevertheless, no aid agencies are active in the region. They all wait on shore for the survivors to arrive. The business of saving lives is left to those who are the least prepared: navies and merchant vessels. Meanwhile, more and more refugees are embarking on the perilous journey across the Mediterranean – 188,000 so far this year. It’s hard to believe that a crisis area of this magnitude is empty of aid workers – unthinkable, Doctors Without Borders, or Médecins Sans Frontières, thought.

It is the biggest, best organized medical relief organization in the world. An army of survival. They are professionals for natural catastrophes and civil wars, and they are engaged in the fight against HIV, Ebola and measles. With a budget of €1.066 billion in 2014, MSF’s 2,769 international employees and 31,000 local helpers undertook some 8.3 million treatments. They calculate the need for help based on mortality rates – a cold, precise measurement. An emergency situation is considered acute when there is one death per day for every 10,000 people. Last year, at least 3,500 refugees died in the Mediterranean while 219,000 made it to Europe. That’s a mortality rate of around 10 per day, or one in 63. MSF, until now a land-based operation, has decided to set sail.

Never has the organization’s name been more fitting than right now, as it carries out its mission in a vast sea that has developed into the world’s deadliest border. Three boats have been in action since early summer. The Dignity 1, the Bourbon Argos and MY Phoenix, the smallest of the fleet. Together they have room for 1,400 refugees. It is the only real private rescue mission in the Mediterranean, and it is almost entirely funded by donations. Operating costs have already topped €10 million this year. Of that, Phoenix, jointly funded by MOAS, has cost €1.6 million thus far this year. MSF has rescued more than 10,000 people so far. By mid-2015, the mortality rate in the Mediterranean was one in 76. A small victory, but a victory nonetheless.

An estimated 15 to 20 boats carrying around 3,000 people set sail from Libya’s beaches every day. After a few hours, they call a contact person in Italy or they get in touch with the Maritime Rescue Coordination Centre (MRCC) in Rome directly. That’s if a navy vessel or a cargo ship doesn’t stumble across them first. Whoever is close by is obligated to come to the rescue. But what if no one is nearby to save them?

Debt Rattle August 1 2015

Aug 012015

August 1, 2015 Posted by Raúl Ilargi Meijer at 11:22 am Finance Tagged with: bailout, Calais, Cecil, coal, gold standard, Greece, IMF, oil, Plan B, refugees, Tsipras, Varoufakis Comments Off

Harris&Ewing “Congressional baseball game. President and Mrs. Wilson.” 1917

• Coal Mine Worth $624 Million Three Years Ago Sold for $1 (Bloomberg)

• Carlyle Fund Walloped in Commodities Rout (WSJ)

• Raoul Pal, Who Called Dollar Rally, Sees -German- Catastrophe Ahead (CNBC)

• Why 99% Of Trading, Worth $32 Trillion, Is Pointless (MarketWatch)

• OPEC Shale War Leaves Big Oil Companies as Surprise Victims (Bloomberg)

• Who Really Benefits From Bailouts? (Ritholtz)

• The Euro, Like The Gold Standard, Is Doomed To Fail (Ann Pettifor)

• Tsipras Survives for Now as Party Rebels Blast Greece Rescue (Bloomberg)

• Greek PM Defends Varoufakis and Controversial ‘Plan B’ (Reuters)

• Alexis Tsipras: I Ordered Varoufakis To ‘Defend Greece’ (Telegraph)

• Greek Stock Market To Reopen Monday, With Restrictions (CNN)

• Greek Bailout Is Far From Being A Done Deal (Andrew Lilico)

• Unaccompanied Refugee Minors Find A Home Away From Home in Athens (Kath.)

• Prosecutor Summons Ex-PM Samaras’ Aide Over €5.5million HSCB Bank Account (KTG)

• Italian Youth Unemployment Rises to its Highest Level Ever (Bloomberg)

• People Smuggling: How It Works, Who Benefits, How It Can Be Stopped (Guardian)

• David Cameron To Send Dogs And Fences To Quell Calais Migrant Crisis (Guardian)

• We Can’t Stop The Flow Of Migrants To Europe, Only Rehouse Them (Guardian)

• As World Mourned Cecil The Lion, 5 Endangered Elephants Slain in Kenya (WaPo)

• Climate Models Are Even More Accurate Than You Thought (Guardian)

“Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday [..] It was valued at $7.3 billion in 2008.”

• Coal Mine Worth $624 Million Three Years Ago Sold for $1 (Bloomberg)

The destructive force of a collapse in world coal prices has been underscored by the sale of a mine valued at A$860 million ($631 million) three years ago for just a dollar. Brazilian miner Vale and Japan’s Sumitomo sold the Isaac Plains coking-coal mine in Australia to Stanmore Coal Ltd., the Brisbane-based company said Thursday in a statement. Sumitomo bought a half stake for A$430 million in 2012. A slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.

Isaac Plains in Queensland “was one of the most exciting coal projects in Australia,” Investec Plc analysts said in a note to investors on Friday. The site has a resource of 30 million metric tons, according to Stanmore. “The outlook for coal is still very difficult,” Roger Downey, Vale’s executive director for fertilizers and coal, said on Thursday after Stanmore announced the sale. “We see even in Australia mines that are still in the red and at some point that has to change. We have quite adverse and challenging markets.” Coal’s demise is just part of a broader slump in commodity prices, which fell to the lowest in 13 years this month. The benchmark price for coking coal exported from Australia has slumped 24% this year to $85.40 a ton on Friday, according to prices from Steel Business Briefing. The quarterly benchmark price peaked at $330 a ton in 2011.

More Poof! Now you see it….

• Carlyle Fund Walloped in Commodities Rout (WSJ)

Three years after private-equity giant Carlyle Group touted its purchase of a hedge-fund firm, a rout in raw materials has helped drive down holdings in its flagship fund from about $2 billion to less than $50 million, according to people familiar with the matter. The firm, Vermillion Asset Management, suffered steep losses and a wave of client redemptions in its commodity fund after a string of bad bets, including one tied to the price of shipping of dry goods, such as iron ore, coal or grains. At one point, two of Carlyle’s co-founders, David Rubenstein and William Conway, put tens of millions of dollars of their own money in the fund and left it in amid the losses and redemptions, according to people familiar with the matter.

Vermillion is in the midst of a restructuring, its co-founders left at the end of June, and it is pulling back from trading in several markets. A collapsing market for raw materials is spreading pain well beyond commodities specialists to some of the heaviest hitters on Wall Street. This week alone, commodity-trading firms Armajaro Asset Management and Black River Asset Managemen, a unit of agricultural conglomerate Cargill, said they are closing funds. Several other firms that managed billions of dollars already have closed their doors, including London-based Clive Capital and BlueGold Capital Management. Large money managers including Brevan Howard Asset Management and Fortress Investment Group have wound down commodity strategies.

Assets under management at commodity hedge funds have fallen 15%, to $24.1 billion, since their peak in 2012, and nearly 30 firms out of 250 have shut down since that year, according to industry consultant HFR Inc. Commodity firms lost money for three years in a row before 2014, HFR said. Commodities are one of the most challenging markets to invest in, because of their complexities and penchant for volatility. Some of the biggest hedge-fund blowups have involved commodity trading, such as the 2006 collapse of Amaranth Advisors after sustaining more than $5 billion in losses on natural-gas trades.

As the US economy weakens, the USD will come home, leaving the rest of the world a lot poorer.

• Raoul Pal, Who Called Dollar Rally, Sees -German- Catastrophe Ahead (CNBC)

Former hedge fund manager and Goldman Sachs alumnus Raoul Pal isn’t one to shy away from making bold predictions. Back in November 2014, Pal, who is currently the publisher of the Global Macro Investor newsletter and the founder of Real Vision TV, said the U.S. dollar index was poised to make a move the likes of which hadn’t been seen in “many, many years.” Now, after the dollar index surged 10%, Pal is out with a new prediction, and it could spell trouble for global equities. “I think the dollar will go up for another few years from here, so I’m expecting to see, by the end of this year, the dollar up maybe 20%,” said Pal on CNBC’s “Fast Money” this week. “So we’ve got another 10-12% or so to go this year alone, and then next year something similar,” he added.

If true, those predictions could have dire consequences for the global market. According to Pal, a rapidly accelerating bull market for the dollar could lead oil prices to “come back down into the 20s” in the not-so-distant future. “As the dollar gets stronger, global growth is falling and global export growth is falling, and that means generally that commodity prices should fall as well,” he explained. Pal said the slowdown in global growth, spurred by an ever-strengthening dollar, could have deleterious effects on one country in particular. “Germany is the big exporting nation of Europe, and I see them slowing down,” he said. Pal explained that a weaker U.S. economy will bleed into Europe and further impact German growth.

“The first half of this year is the weakest first half since the recession” for the United States, he said. “Europe lags the U.S, so I think that won’t help Germany at all because obviously the U.S. is buying less goods from Germany.” By Pal’s logic, a slowdown in Germany could eventually put all of Europe in harm’s way. “I think Germany is at risk of leading Europe into a recession, which is against everybody else’s opinion.”

Circle jerk keeps brokers alive.

• Why 99% Of Trading, Worth $32 Trillion, Is Pointless (MarketWatch)

An astonishing $32 trillion in securities changes hands every year with no net positive impact for investors, charges Vanguard Group Founder John Bogle. Meanwhile, corporate finance — the reason Wall Street exists — is just a tiny slice of the total business. The nation’s big investment banks probably could work for less than a week and take the rest of the year off with no real effect on the economy. “The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings,” Bogle told Time in an interview. “What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.”

It’s a lot of money, $32 trillion. Nearly double the entire U.S. economy moving from one pocket to another, with a toll-taker in the middle. Most people refer to them as “stock brokers,” but let’s call them what they are — toll-takers and rent-seekers. Rent-seeking as an occupation is as old as the hills. In exchange for working to build up credentials and relative fluency in the arcane rules of an industry, one gets to stand back from actual work and just collect money. Ostensibly, the job of a financial adviser is to provide advice. Do you actually get that from your broker? It is worth anything? Research shows, over and over, that stock brokers can’t do much of anything demonstrably valuable. They don’t know which stocks will go up or down and when.

They don’t know which asset classes will outperform this year or next. Nobody knows. That’s the point. If you’re among that small cadre of extremely high-level traders who can throw loads of cash at a short-term fluke, fantastic. If you have a mind for numbers like Warren Buffett that allows you to buy companies on the cheap and hold them forever, excellent. If you’re a normal retirement investor trying to get from A to B and retire on time, well, you have a really big problem to face: The toll-taker wants your money.

Surprise? Really?

• OPEC Shale War Leaves Big Oil Companies as Surprise Victims (Bloomberg)

When OPEC started a price war last November, driving oil down to its current $65 a barrel, U.S. shale drillers looked doomed. Six months later, it’s the world’s largest oil companies that are emerging as the unexpected casualties. The reason: the multibillion-dollar projects at the heart of the oil majors’ strategy need prices closer to $100 to make them economically feasible. “Big Oil is today squeezed by two low-cost producers: OPEC and U.S. shale,” said Michele Della Vigna at Goldman Sachs. “Big Oil needs to re-invent itself.” The new period of cheap oil and ample supplies raises a prospect unthinkable as recently as a few months ago – that the world no longer needs all the big, expensive projects planned by companies such as Shell, Chevron. and Total.

Rising supplies from Saudi Arabia, Iraq and perhaps Iran combined with a more efficient shale industry could deliver the bulk of new production. Big Oil will continue to play a significant role, particularly as field developments sanctioned in the era of $100 a barrel come to fruition – but new projects will suffer. Only six months ago, the industry’s thinking was very different. The view then was that shale firms could only survive with $100 oil. The expected wave of bankruptcies never came about, however, and shale output has continued growing as drillers cut costs in response to low prices. Ryan Lance, CEO of ConocoPhillips, said in Vienna on Wednesday that the industry now accepted that the U.S. shale drillers were far more resilient than expected. “They are reducing the cost and restoring the margins that we enjoy at $80 to $90 to get those at $60 to $70,” Lance said in an interview. “That is how resilient the opportunity set is.”

“Our moral compass informs us that bailouts shouldn’t work to the benefit of the reckless and irresponsible. Reality teaches us a very different lesson.”

• Who Really Benefits From Bailouts? (Ritholtz)

I always find it amusing whenever someone expresses surprise that the financial bailouts for Greece haven’t benefitted Greek citizens. “Bailout Money Goes to Greece, Only to Flow Out Again” in the New York Times is just the latest example. “The cash exodus is a small piece of a bigger puzzle over why – despite two major international bailouts — the Greek economy is in worse shape and more deeply in debt.” Unfortunately, this is a feature of bailout, not a bug. A plethora of financial rescues during the past decades has proven quite convincingly that this isn’t an aberration. Follow the money instead of following the headlines. That’s how you learn who profits from a bailout.

Look around the world – Japan, Sweden, Brazil, Mexico, Ireland, the U.S. and now Greece to learn who is and isn’t helped by these enormous government-backed bailouts. No, it isn’t the Greek people, nor even their banks. They never were the intended beneficiaries of the bailouts, nor were Irish citizens in that bailout. Indeed, homeowners in the U.S. were little more that incidental recipients of aid as a%age of total rescue spending. You probably learned the phrase “moral hazard” during the financial crisis. In short, what it means is that the bailouts rescued leveraged, reckless speculators from the results of their unwise professional folly and gave them an incentive to do it all over again. They were and the intended rescuees.

Do you think I am exaggerating? Consider the U.S. bailout in its manifold forms, from TARP to ZIRP to QE. How many bondholders suffered losses from their poor investment decisions? With the exception of holders of Lehman Brothers’ debt and a handful of banks that weren’t deemed too big to fail, just about every other bondholder was made whole, 100 cents on the dollar. Thanks to rescue plans such as the Trouble Asset Relief Program, holders of bonds from a diverse assortment of failed and failing companies suffered literally no losses. AIG? Zero losses. Fannie Mae and Freddie Mac? Zero losses. Citigroup and Bank of America? Zero losses. Morgan Stanley, Merrill Lynch, Goldman Sachs, Bear Stearns? Zero losses.

History teaches us that when companies fail, they file either a reorganization or liquidation in a bankruptcy court. The exceptions are when well-placed executives are friendly with Congress (Chrysler 1980) or members of the Joint Chiefs of Staff (Lockheed 1972) or Treasury secretaries (all of Wall Street except Dick Fuld in 2008-09). Having well-connected corporate executives on your board or in senior management sure comes in handy during an emergency.

[..] In the case of Greece, the money flows in large part from European governments and the IMF through Greece, and then to various private-sector lenders. We all call it a Greek bailout, because if it were called the “Rescue of German bankers from the results of their Athenian lending folly,” who would support it? Our moral compass informs us that bailouts shouldn’t work to the benefit of the reckless and irresponsible. Reality teaches us a very different lesson.

A fetish.

• The Euro, Like The Gold Standard, Is Doomed To Fail (Ann Pettifor)

Pierre Werner was appointed by the EU Council of Ministers on 6 March 1970, to chair a committee of experts to design a monetary system for the EU. The key elements of his committee’s recommendations was to be developed subsequently by the Delors Committee of twelve central bankers, which reported in 1989. Both sets of proposals – the Werner Report and the Delors Report – replicated the financial architecture of the nineteenth century gold standard. The parallels between the two systems include the abandonment by governments of control over exchange rates; the loss of a central bank accountable to the state; the initial euphoria as an over-valued exchanged rate cheapens imports & capital mobility encourages reckless lending; subsequent deflationary pressures; the absence of a co-ordinating body to check imbalances across the zone, and finally growing political resistance to the monetary system.

However it is important to note also just how much the two systems differ. The genius of those who designed the European Monetary Union (EMU) was this: unlike the architects of the gold standard, which attempted to remove central bank and state control over the exchange rate – Delors’s bankers simply abolished all European currencies, and replaced them with a new, shared currency, the euro – well beyond the reach of any state. That currency – the euro – not only acts as a store of value and facilitates financial transactions across borders – it also acts as a powerful symbol of European unity.

So in addition to serving the interests of Luxembourg bankers and European financiers – the euro was in part created, and heavily sold to citizens, as a perceived way and a symbol for bringing Europe and Europeans together. Like gold under the gold standard, the currency acquired the status of a fetish for many, both amongst the European elites in Brussels and Frankfurt, but also amongst those in periphery countries.

Tsipras needs the discord. Apparently that is hard to fathom.

• Tsipras Survives for Now as Party Rebels Blast Greece Rescue (Bloomberg)

Greek Prime Minister Alexis Tsipras staved off an immediate challenge to his premiership, though failure to appease his party’s hard-left fringe brought early elections into view. After 12 hours of talks, the central committee of the anti-austerity Syriza party decided in the early hours of Friday to hold an emergency congress in September, in which Tsipras’ move to accept a strings-attached rescue program from international creditors will be put to the vote. Leaders of the party’s Left Platform protested that will be too late to stop the bailout, but failed in their bid to force a party congress this weekend. “We opted for a difficult compromise and a recessionary program, we admit it”

With the government vulnerable, Finance Minister Euclid Tsakalotos meets representatives from international creditors on Friday to discuss the austerity measures his party has long opposed. The quarrel within Syriza, in power since January, means that Tsipras will have to rely on opposition parties’ support to approve measures attached to Greece’s emergency loans, a situation he has said isn’t sustainable. “Tsipras might call an early election as a way to reinforce his mandate,” Roubini analysts wrote in a note to clients. “It cannot yet be known if a new government – or Tsipras’s second mandate – would lead to stronger compliance with the creditors’ terms or would merely be a sign of Tsipras’s intention to push for better terms, including debt reduction.”

Former Energy Minister Panagiotis Lafazanis, who leads the Left Platform, opposed the September confidence vote, arguing the government will have signed a new bailout with creditors by then, and it will be all but impossible to annul bilateral agreements ratified by parliament. Lafazanis led a revolt of more than 30 Syriza lawmakers this month against the upfront actions demanded by European states and the IMF, effectively stripping Tsipras of his parliamentary majority. The central committee’s decision to hold a congress in September, approving a motion by Tsipras, “is a parody,” the Platform said in a statement. In a separate statement posted on the website of government-affiliated Avgi newspaper, 17 members of the central committee said they are resigning from the body, protesting the “transformation” of Syriza into a pro-austerity party.

“If our partners and lenders had prepared a Grexit plan, shouldn’t we as a government have prepared our defense?”

• Greek PM Defends Varoufakis and Controversial ‘Plan B’ (Reuters)

Prime Minister Alexis Tsipras acknowledged on Friday that his government had made covert contingency plans in case Greece was forced out of the euro, but rejected accusations that he had plotted a return to the drachma. Tsipras was forced to respond to the issue in parliament after former finance minister Yanis Varoufakis this week revealed efforts to hack into citizens’ tax codes to create a parallel payment system, prompting shock and outrage in Greece. The disclosure heaped new pressure on Tsipras, who is also battling a rebellion within his Syriza party and starting tough talks with the European Union and International Monetary Fund to seal a third bailout program in less than three weeks.

“We didn’t design or have a plan to pull the country out of the euro, but we did have emergency plans,” Tsipras told parliament. “If our partners and lenders had prepared a Grexit plan, shouldn’t we as a government have prepared our defense?” He compared the plan to a country preparing its defenses ahead of war, saying it was the obligation of a responsible government to have contingency arrangements in place. He did not directly refer to Varoufakis’ disclosure of plans to hack into his ministry’s software to obtain tax codes. But Tspiras said the idea of a database giving Greeks passwords to make payments to settle arrears was hardly “a covert and satanic plan to take the country out of the euro”.

Tsipras also defended his embattled former finance minister, who has continued to create headaches for the government since being ousted earlier this month. “Mr. Varoufakis might have made mistakes, as all of us have … You can blame him as much as you want for his political plan, his statements, for his taste in shirts, for vacations in Aegina,” Tsipras said. “But you cannot accuse him of stealing the money of Greek people or having a covert plan to take Greece to the precipice.”

What about this is not clear?

• Alexis Tsipras: I Ordered Varoufakis To ‘Defend Greece’ (Telegraph)

Greek prime minister Alexis Tsipras launched a staunch defence of his embattled former finance minister on Friday, as he spoke for the first time about the secret “Plan B” he ordered from Yanis Varoufakis. Following almost a week of silence, Mr Tsipras told his parliament he had authorised preparations for a system of “parallel liquidity” should the ECB pull the plug on the Greek banking system. “I personally gave the order to prepare a team to prepare a defence plan in case of emergency,” said Mr Tsipras, who compared Greece’s situation with being on a war footing. “If our creditors were preparing a Grexit plan, should we not have prepared our defences?” But the prime minister said he “did not have, and never prepared, plans to take the country out of the euro”.

Since the airing of the “Plan B” talks, in a recorded conversation between Mr Varoufakis and city investors, two private lawsuits have been brought against the divisive politician, raising the prospect of a criminal prosecution over charges relating to treason. Opposition parties in Greece have also called for the former Essex University economist to have his parliamentary immunity from criminal charges revoked over his role in the clandestine plans. However, the prime minister rejected accusations from some that the blueprint amounted to a “coup d’etat” against his government. “You can blame him as much as you want for his political plan, his statements, for his taste in shirts, for vacations in Aegina.” “But you cannot accuse him of stealing the money of Greek people or having a covert plan to take Greece to the precipice”, said Mr Tsipras.

The four main heads of Greece’s creditor powers met with current finance minister Euclid Tskalatos on Friday, as both sides race to secure an agreement by the second week of August. Greece’s institutions are said to be demanding the government scrap a “solidarity tax” of 8pc on incomes of more than €500,000, a levy which only affects 350 people but which lenders want to abolish to deter tax evasion. They also want Athens’ Leftist government to scrap fuel subsidies and liberalise professions such as ship-building before an agreement for a new €86bn bail-out can proceed. Progress on securing a third international bail-out for Greece hit the rocks on Wednesday night after the IMF said it was unwilling to consider providing any more money until the reforms were agreed and Europe finally granted a programme of debt relief to Greece.

Casino.

• Greek Stock Market To Reopen Monday, With Restrictions (CNN)

The Athens stock exchange will reopen Monday, more than a month after Greece’s financial crisis forced the authorities to suspend all trading. But there will be some restrictions for local investors, the Greek finance ministry said, to prevent more money flooding out of the banking system. They will only be allowed to buy shares with existing holdings of cash, and won’t be able to draw on their Greek bank accounts. Greece’s banks were bleeding cash at a furious pace on fears the country’s debt crisis would force it to abandon the euro. Capital controls were introduced on June 29, including the closure of banks and financial markets. ATM withdrawals were limited to €60 per day.

The banks reopened on July 20, after Europe agreed in principle to a new bailout, but withdrawals remain limited to €420 a week. Some capital controls have been relaxed, so Greek companies could make payments abroad. Shares in the biggest Greek banks were tanking before the market closure – Piraeus Bank lost 57% this year, while Alpha Bank is down 29%. The benchmark Athens index has dropped 32% over the last 12 months. The European Central Bank has approved the reopening of the exchange. The ECB doesn’t control the stock market, but its opinion is crucial because it is keeping the Greek banking system afloat with regular injections of cash.

Getting more undone by the minute.

• Greek Bailout Is Far From Being A Done Deal (Andrew Lilico)

Yesterday everyone learned what those who had been watching closely had realised for some time: the IMF won’t (at least for now) be offering a third loan to Greece. The IMF believes that Greece has not sufficiently stuck to the conditions of previous loans and that its debts after a third bailout would be unsustainably high. That means an IMF loan would not enable Greece to return to financial markets to fund itself (a normal requirement for an IMF loan). It might be added that the IMF would not be confident, either, that Greece could obtain further financing from alternative sources – ie its Eurozone partners, whose patience is clearly spent.

Given that Greece defaulted on an IMF payment only a few weeks ago – an action which placed it in a not-so-elite group of international pariah states that had ever done so – the IMF not wanting to lend to it again should hardly be a surprise. Many commentators appear to assume the Eurozone will simply shrug off IMF non-involvement and cover the difference themselves. After all, back in 2009/2010 when the first Greek bailout was initially mooted, many EU Member States and institutions would have preferred the IMF not to be involved. But the country that was most adamant the IMF had to be in was Germany. And again for the current discussions about a third bailout to be given authority to proceed, the German government promised the Bundestag that the IMF would be in.

So now we have the following stand-off. The Germans insist the IMF must be part of a third bailout; the IMF says it cannot be in unless Greece’s debts are forgiven on a scale that would make them sustainable; the Germans refuse even to contemplate debt forgiveness whilst Greece remains in the euro. Could this derail the whole deal? Yes. Indeed I would assume that this scenario was so obviously likely that some parties to the mid-July talks probably only ever agreed to what they did because they expected it to fall apart in just this way.

Bless you: “The center is a response to intolerance, to the “migrants go home” attitude..”

• Unaccompanied Refugee Minors Find A Home Away From Home in Athens (Kath.)

Next-door neighbor Katerina comes over to the house almost every day to have a coffee in the garden and bring a “little something for the kids.” The Hospitality Center for Unaccompanied Minors in the Athenian neighborhood of Ano Petralona, which went into operation in late May, is currently home to 18 children aged 13-17, and is a hub of social activity. The hostel for young migrants who crossed Greek borders without a guardian is run by the nongovernmental organization Praksis, which took on the responsibility of housing dozens of young refugees from countries including Syria, Afghanistan and Pakistan who were being held at migrant detention centers such as Amygdaleza, north of Athens.

The detention centers were closed down by the then new government as one of its first orders of business, citing “inhuman” living conditions. However, one of the first issues then to rise was what was to happen to the minors. The government was short of cash, prompting Alternate Minister for Immigration Policy Tasia Christodoulopoulou to reach out to the Latsis Foundation for help. “Surprisingly fast for a public organization,” says Latsis Foundation Executive Board secretary Dimitris Afendoulis, the ministry and the foundation created the hostel, which can take in 24 guests at a time, in a house in Ano Petralona within just a few months. There are currently 99 minors still waiting to be placed in similar facilities, while authorities estimate that some 2,500 children make their way through Greece alone every year.

“This center may provide just a small amount of relief for the thousands of children waiting to find shelter in this country but on a symbolic level it is an amazing initiative, particularly as it happened thanks to funding from a private foundation,” says Christodoulopoulou. “We have a funding gap as far as European Union funds are concerned and such initiatives contribute to social solidarity and awareness.” “Caring for and protecting unaccompanied minors brings together all those people who have the capability to contribute,” says Afendoulis, adding that the foundation has also undertaken to cover the hostel’s operating costs until EU funding becomes available.

The center is a response to intolerance, to the “migrants go home” attitude, says Antypas Tzanetos, president of the Praksis board. “It is a response with actions, not words,” he adds.

Lagarde list years later.

• Prosecutor Summons Ex-PM Samaras’ Aide Over €5.5 Million HSCB Bank Account (KTG)

“I wish we had ten Papastavrou!” It was former Prime Minister Antonis Samaras who had praised the morals of his close aide Stavros Papastravou, a lawyer consultant at the Prime Ministry, during a speech in the Greek Parliament. Now, one of the ‘ten’ the real Stavros Papastavrou has been summoned by an Athens financial crimes prosecutor to give explanation about €5.5 million in his accounts at the HSBC Geneva branch. Papastavrou’s name was one of more than 2,000 Greek names on the so-called Lagarde list of wealthy Greek depositors with accounts at HSBC Geneva branch that was ‘stolen’ by former bank employee Herve Falciani in 2009. The Lagarde-List has been in the hands of the Greek authorities since 2010.

“Prosecutor Yiannis Dragatsis called lawyer Stavros Papastavrou to answer questions regarding his suspected involvement in tax evasion and money laundering through an account containing 5.5 million euros that was among hundreds on a list submitted to the Greek authorities in 2010 by then-French Finance Minister Christine Lagarde, currently managing director of the IMF. Papastavrou’s legal counsel requested an extension so that the former prime minister’s adviser can prepare his defense. A new date will be set for his deposition after the August 15th break.” (ekathimerini)

According to several Greek media, Papastavrou claims that the money does not belong to him but to Israeli businessman Sabi Mioni. Papastavrou is reportedly co-holder of the account together with his mother and his father who deceased some years ago. Papastavrou had alleged that he was just managing the bank account. The former aide has to prove through documents that he is telling the truth, but also Mioni has to testify in the case. In his testimony in 2013, Mioni had claimed that he had given access to one of his corporate bank accounts to Papastavrou.

Recovery.

• Italian Youth Unemployment Rises to its Highest Level Ever (Bloomberg)

Italy’s jobless rate unexpectedly rose in June as businesses continue to dimiss workers amid concerns that the country’s exit from recession may not be sustainable. Youth unemployment jumped to a record-high 44.2%. Unemployment increased to 12.7% from a revised 12.5% in May, statistics agency Istat said in a preliminary report in Rome on Friday. The median estimate in a survey of nine analysts called for a rate of 12.3%. Youth unemployment in June rose to the highest rate since the series began in 2004, from 42.4% in May. Employment dropped for a second month in a row, with about 22,000 jobs lost in June alone, according to the report.

Joblessness in the euro area’s third-largest economy has been at 12% or above for more than two years as the record slump deepened before GDP started to rise again at the end of 2014. On Monday, the IMF said in a report that “without a significant pick-up in growth,” it would take Italy “nearly 20 years to reduce the unemployment rate to pre-crisis” levels of about half the current one. Prime Minister Matteo Renzi’s changes to Italy’s labor code showed early results as the number of open-ended contracts taking effect in the first half increased, the government said. Still, executives’ confidence declined this month amid doubts on the outlook for economic recovery and employment.

Bad idea to focus on smuggling. The refugees need the attention.

• People Smuggling: How It Works, Who Benefits, How It Can Be Stopped (Guardian)

One of the most distressing elements of the worldwide migrant crisis is that people who have risked all for a better life should be held to ransom by smugglers. The lines between migration and human trafficking all too easily converge. While migration implies a level of individual choice, migrants are sometimes detained and even tortured by the people they pay to lead them across borders. Following the cash across borders – through a network of kingpins, spotters, drivers and enforcers – is central to understanding how this opaque and complex business works. Everyone agrees there is not enough data. No one knows how many migrants are smuggled. However, enough is known about the money paid – by Eritreans, Syrians, Rohingya, and Afghans, among others – to demonstrate it is a multimillion-dollar business.

As Europe debates measures ranging from military attacks to destroying smugglers’ boats to increasing asylum places, what more can be done to prosecute those profiting at the crossroads of dreams and despair? How much do migrants pay? The cost varies depending on the distance, destination, level of difficulty, method of transport (air travel is dearer and requires fake documents) and whether the migrant has personal links to the smugglers, or decides to work for them. The UN Office on Drugs and Crime (UNODC) says journeys in Asia can cost from a few hundred dollars up to $10,000 (£6,422) or more. For Mexicans wanting to enter the US, fees can run to $3,500, while Africans trying to cross the Mediterranean can pay up to $1,000, and Syrians up to $2,500.

Abu Hamada, 62, a Syrian-Palestinian refugee, reckons he has earned about £1.5m ($2.3m) over six months by smuggling people across the Mediterranean from Egypt. A place on a boat from Turkey to Greece costs between €1,000 and €1,200(£700 and £840), say migrants. Afghans pay between €10,000 and €11,000 to get to Hungary, which includes help from smugglers. The UNODC says smugglers operating from Africa to Europe earn about $150m annually, while those from Latin America to North America are believed to earn roughly $6.6bn a year. Money is often paid in instalments as a migrant moves from one group of smugglers to the next. For example, migrants from Afghanistan often use informal remittance systems, such as hawala. Funds are deposited with a hawaladar in Afghanistan, and on each stage of the journey the migrant will contact that person to release money to other hawaladars in transit countries.

Morons.

• David Cameron To Send Dogs And Fences To Quell Calais Migrant Crisis (Guardian)

Extra sniffer dogs and fencing will be sent to France to help deal with the Calais migrant crisis, and Ministry of Defence land will be used to ease congestion on the UK side of the Channel tunnel, David Cameron has said. Speaking in Downing Street after chairing a meeting of the Cobra emergency committee, the prime minister said the situation was “unacceptable” and that he would be speaking to the French president, François Hollande, later on Friday. Cameron said: “This is going to be a difficult issue right across the summer. “I will have a team of senior ministers who will be working to deal with it, and we rule nothing out in taking action to deal with this very serious problem. “We are absolutely on it. We know it needs more work.”

The Cobra meeting came after another night during which police in France blocked people from reaching the Channel tunnel. About 3,000 people from countries including Syria and Eritrea are camping out in Calais and trying to cross into Britain illegally by climbing on board lorries and trains. France bolstered its police presence. The tunnel was temporarily closed on Friday morning while officials carried out an inspection after more migrants attempted to enter overnight at the entrance in Coquelles. French police attempted to form a ring of steel around the tunnel on Thursday night, prompting an evening of scuffles and standoffs with migrants attempting to breach the terminal in Calais. Up to a hundred migrants attempted to overrun police lines at a petrol station near the Eurostar terminal but were held back by baton-wielding gendarmes and riot vans.

It’ll take a long time and a lot of deaths before people accept this.

• We Can’t Stop The Flow Of Migrants To Europe, Only Rehouse Them (Guardian)

Rarely since 1558, when Queen Mary lost the town to the French, can Calais have ruffled as many British feathers as it has this July. British lorry-drivers, British holidaymakers, and British booze-runners – they’ve all had their journeys wrecked by a recent rise in refugees attempting to break into the Calais end of the Channel tunnel. Without wanting to entirely dismiss their experiences, it is nevertheless useful to remember that the Calais crisis is just a tiny part of a wider one. Of the nearly 200,000 refugees and migrants who have reached Europe via the Mediterranean this year, only 3,000 have made their way to Calais. This means that the migrants at Calais constitute between 1% and 2% of the total number of arrivals in Italy and Greece in 2015.

Far from the UK being a primary target for refugees, the country is much less sought-after than several of its northern European neighbours, notably Sweden and Germany. And while the chaos at Calais may seem unique, many more migrants arrive every week on the shores of Italy and Greece than will reach northern France all year. Debunking this Anglo-centrism is not an academic exercise. It is crucial to understanding how the Calais crisis can be better managed. Britain’s responses to the phenomenon are based on the assumption that it is a local problem. They include building more fences (Theresa May’s proposed recourse), sending in the army (Nigel Farage’s), or clearing the camp entirely (the default reaction in years gone by).

Such solutions presuppose that the crisis is a one-off event peculiar to the British-French border, and that these migrants – once cordoned-off and forgotten about – won’t come back and try again. But such short-termism ignores a vital fact: the migrants at Calais are merely the crest of the biggest global wave of mass migration since the second world war. Others will keep coming in their wake, whether we like it or not. Previous camp clearances over the past decade have ultimately not stopped the flow at Calais. Why would they work now?

[..] For many, the implications of this will be hard to swallow. But the reality is clear: the only logical, long-term response to the Calais crisis is to create a legal means for vast numbers of refugees to reach Europe in safety. This may sound counter-intuitive. But at the current rate, whether we like it or not, 1 million refugees will arrive on European shores within the next four or five years. Whether they set up camps at Calais depends on how orderly we make that process of resettlement.

Time to act?!

• As World Mourned Cecil The Lion, 5 Endangered Elephants Slain in Kenya (WaPo)

While the world mourned Cecil, the 13-year-old lion that was allegedly shot by an American hunter in Zimbabwe, an even more devastating poaching incident was quietly carried out in Kenya. Poachers killed five elephants in Tsavo West National Park on Monday night. The carcasses were recovered by rangers on Tuesday morning — what appeared to be an adult female and her four offspring, their tusks hacked off. While the killing of the lion in Zimbabwe has attracted the world’s attention, the death of the five elephants has received almost no coverage, even though elephants are under a far greater threat from poachers than lions. Their tusks can be sold in Asia for more than $1,000 per pound.

“It’s just devastating,” said Paul Gathitu, a spokesman for Kenya Wildlife Service. “It took us completely by surprise.” Kenyan investigators say the poachers crossed the border from neighboring Tanzania, slaughtered the elephants and then quickly returned to their base, making them difficult to track. Tsavo stretches along the border for more than 50 miles. Rangers heard gunshots ring out on Monday evening. They searched all night through the vast park and discovered the carnage the next morning. There was blood and loose skin where the tusks were cut off. Kenyan authorities say the poachers escaped on motorcycles, carrying their loot.

“..sea surface temperatures haven’t been warming fast as marine air temperatures, so this comparison introduces a bias that makes the observations look cooler than the model simulations.”

• Climate Models Are Even More Accurate Than You Thought (Guardian)

Global climate models aren’t given nearly enough credit for their accurate global temperature change projections. As the 2014 IPCC report showed, observed global surface temperature changes have been within the range of climate model simulations. Now a new study shows that the models were even more accurate than previously thought. In previous evaluations like the one done by the IPCC, climate model simulations of global surface air temperature were compared to global surface temperature observational records like HadCRUT4. However, over the oceans, HadCRUT4 uses sea surface temperatures rather than air temperatures. Thus looking at modeled air temperatures and HadCRUT4 observations isn’t quite an apples-to-apples comparison for the oceans.

As it turns out, sea surface temperatures haven’t been warming fast as marine air temperatures, so this comparison introduces a bias that makes the observations look cooler than the model simulations. In reality, the comparisons weren’t quite correct. As lead author Kevin Cowtan told me,

“We have highlighted the fact that the planet does not warm uniformly. Air temperatures warm faster than the oceans, air temperatures over land warm faster than global air temperatures. When you put a number on global warming, that number always depends on what you are measuring. And when you do a comparison, you need to ensure you are comparing the same things.

The model projections have generally reported global air temperatures. That’s quite helpful, because we generally live in the air rather than the water. The observations, by mixing air and water temperatures, are expected to slightly underestimate the warming of the atmosphere.

The new study addresses this problem by instead blending the modeled air temperatures over land with the modeled sea surface temperatures to allow for an apples-to-apples comparison. The authors also identified another challenging issue for these model-data comparisons in the Arctic. Over sea ice, surface air temperature measurements are used, but for open ocean, sea surface temperatures are used. As co-author Michael Mann notes, as Arctic sea ice continues to melt away, this is another factor that accurate model-data comparisons must account for.

Debt Rattle July 23 2015

Jul 232015

July 23, 2015 Posted by Raúl Ilargi Meijer at 9:52 am Finance Tagged with: Apple, bailout, China, coffee, commodities, Germany, gold, Greece, Tsipras 2 Responses »

Harris&Ewing No caption, Washington DC 1915

• Mining Shares Plunge As Commodities Index Hits 13-Year Low (FT)

• Gold Isn’t Even Close To Being The Biggest Loser Among Commodities (MarketWtch)

• Capital Exodus From China Reaches $800 Billion As Crisis Deepens (AEP)

• A $4 Trillion Force From China That Helped the Euro Now Hurts It (Bloomberg)

• China’s Shoppers May Take 10 Years To Step Up (CNBC)

• Greek Parliament Approves EU Demands in Order to Keep the Euro (Bloomberg)

• Euro’s Resilience During Greece Debt Crisis Belies Damage Done (Bloomberg)

• Awkward Alliance Running Germany Exposed by Greek Crisis (Bloomberg)

• On Reform, Europe Asks Greece To Go Where Many Fear To Tread (Reuters)

• Germany And Greece Need Counselling (Guardian)

• Greece Isn’t The Problem; It’s A Symptom Of The Problem (Simon Black)

• Moving on From the Euro (O’Rourke)

• EU Refuses To Acknowledge Mistakes Made In Greek Bailout (Richard Koo)

• Bank Curbs Hit Greek Charities (Reuters)

• Finns Told Pay Cuts Now Only Way to Rescue Economy From Failure (Bloomberg)

• Catalans Spur the Remaking of Spain With Battle for Independence (Bloomberg)

• Tim Cook’s $181 Billion Headache: Almost 90% Of Apple’s Cash Held Overseas (BBG)

• Ancient DNA Link Between Amazonians and Australasians Traced (NY Times)

• The 97% Scientific Consensus on Climate Change Is Wrong-It’s Even Higher (Hill)

All that’s getting lost is virtual capital. But there’s lots of it.

• Mining Shares Plunge As Commodities Index Hits 13-Year Low (FT)

Billions of dollars of shareholder value was erased from the world’s largest mining companies on Wednesday as an index of commodities prices plumbed a fresh 13-year low. The Bloomberg commodity price index, which tracks a basket of the world’s most commonly used raw materials, fell to 95.5 points, its lowest reading since March 2002. The Bloomberg commodity index has declined by more than 40% since September 2011, with the recent slide intensifying selling of shares in mining companies. The gold price declined by $12 to $1,088 an ounce, marking the third time it has fallen below $1,100 after a bout of panic selling in China erupted on Sunday. “Precious metals appear to be the main driver” of this current outbreak of negative sentiment, said Nic Brown at Natixis.

He added that the commodities sector had been persistently underperforming for several months, with a gradual deceleration in Chinese growth and a stronger dollar contributing to what felt like “the world’s longest hangover”. Shares in Anglo-American, which is heavily invested in iron ore production in Brazil, dropped 5.59% to the bottom of the FTSE 100 index. Glencore’s shares fell 5.4% to the lowest level since it listed in 2009. Shares in BHP Billiton fell 5.7% in London, after the Anglo-Australian diversified miner revealed in a quarterly update that it planned to take a sizeable charge of $350m to $650m on underlying profit, mostly because of weakness in its copper business. A week ago, BHP wrote down the value of its US shale assets by $2bn.

In its update on Wednesday morning, the miner forecast that prices for all of its leading commodities, apart from iron ore, would be lower this financial year than they were in its previous full-year period. Shares in gold miners, which have dropped drastically this month, were relatively unscathed on Wednesday, however. Barrick Gold, of Canada, was 0.7% lower after the first few hours of New York trading. The shares have lost more than 40% of their value since late April, although the company claims its production is low cost, forecasting a maximum AISC (all-in sustaining cost) of $895 per tonne for its current financial year.

The beginning.

• Gold Isn’t Even Close To Being The Biggest Loser Among Commodities (MarketWtch)

Gold’s collapse to five-year lows is dominating headlines, but it has been a rough year so far for commodities in general. Expectations the Federal Reserve will move later this year to raise rates, potentially leading to more strength for the U.S. dollar, gets much of the blame. Most commodities are priced in dollars, making them more expensive to users of other currencies as the greenback strengthens. The ICE dollar index, a measure of the U.S. unit against a basket of six major rivals is up by around 7.8% year-to-date. “The wider commodity market is seeing plenty of downward pressure on the back of an ever-strengthening dollar,” said Craig Erlam, senior market analyst at Oanda, in a note. One thing that might stand out is that while gold has taken it on the chin lately, it isn’t the biggest loser.

By a wide margin, that distinction goes to coffee futures, which are off 23.5% (Only, don’t tell coffee purveyor Starbucks, which is raising the prices of java at its stores). Coffee is feeling the pangs of a weaker Brazilian real currency, favorable harvest conditions in that country, and expectations for a rebound in inventories. Coffee had rallied into the autumn of 2014 on crop worries tied in part to a drought in Brazil. Meanwhile, cocoa futures have outperformed, albeit in highly volatile fashion. Prices of cocoa tumbled early in the year but eventually recovered as worries mounted over the impact of a severe Harmattan wind on harvests in Ivory Coast, the world’s largest producer, and Ghana, which is No. 2, noted analysts at Capital Economics. That rally gave way as fears eased, but renewed concerns over dry weather and low fertilizer use in Ghana eventually sent futures soaring anew, the analysts noted.

Here’s a table looking at the performance since the end of last year through Tuesday afternoon of some of the most traded and closely watched commodities compared with the Bloomberg Commodity Index. This is a non-comprehensive list:

Bloomberg Commodity Index -7.6%
Cocoa (Nymex) +14.7%
Cotton (Nymex) +6.8%
Corn (CBT) +5.2%
Natural gas (Nymex) -0.3%
Brent crude oil (ICE) -0.5%
Soybeans (CBT) -1.9%
WTI crude oil (Nymex) -4.6%
Silver (Comex) -5.2%
Lean hogs (CME) -6.4%
Gold (Comex) -7.2%
Wheat (CBT) -11%
Live cattle (CME) -11.2%
High-grade copper (Comex) -12.3%
Coffee (IFUS) -23.5%
Source: FactSet

“Lombard Street Research says China’s true economic growth rate is currently below 4pc, using proxy measures of output.”

• Capital Exodus From China Reaches $800 Billion As Crisis Deepens (AEP)

China is engineering yet another mini-boom. Credit is picking up again. The Communist Party has helpfully outlawed falling equity prices. Economic growth will almost certainly accelerate over the next few months, giving global commodity markets a brief reprieve. Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”. The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.

Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money. China’s bond sales automatically entail monetary tightening. What we are seeing is the mirror image of the boom years, when the PBOC was accumulating $4 trillion of reserves in order to hold down the yuan, adding extra stimulus to an economy that was already overheating. The squeeze earlier this year came at the worst moment, just as the country was struggling to emerge from recession. I use the term recession advisedly. Looking back, we may conclude that the world economy came within a whisker of stalling in the first half of 2015.

The Dutch CPB’s world trade index shows that shipping volumes contracted by 1.2pc in May, and have been negative in four of the past five months. This is extremely rare. It would usually imply a global recession under the World Bank’s definition. The epicentre of this crunch has clearly been in China, with cascade effects through Russia, Brazil and the commodity nexus. Chinese industry ground to a halt earlier this year. Electricity use fell. Rail freight dropped at near double-digit rates. What had begun as a deliberate policy by Beijing to rein in excess credit escaped control, escalating into a vicious balance-sheet purge. The Chinese authorities have tried to counter the slowdown by talking up an irresponsible stock market boom in the state-controlled media. This has been a fiasco of the first order.

The equity surge had no discernable effect on GDP growth, and probably diverted spending away from the real economy. The $4 trillion crash that followed has exposed the true reflexes of President Xi Jinping. Half the shares traded in Shanghai and Shenzhen were suspended. New floats were halted. Some 300 corporate bosses were strong-armed into buying back their own shares. Police state tactics were used hunt down short sellers. We know from a vivid account in Caixin magazine that China’s top brokers were shut in a room and ordered to hand over money for an orchestrated buying blitz. A target of 4,500 was set for the Shanghai Composite by Communist Party officials.

It’s all about the USD.

• A $4 Trillion Force From China That Helped the Euro Now Hurts It (Bloomberg)

For almost a decade, China’s effort to diversify the world’s biggest foreign-exchange reserves supported the euro. Now, the almost $4 trillion force may be working against the single currency. China’s central bank depleted $299 billion of reserves in the year through June to keep the yuan from falling, offsetting the private sector’s sales of the currency for dollars amid a stock-market rout and faltering economy. The decline in reserves is the longest in People’s Bank of China data going back to 1993. It may mark the end of an era of accumulation that led the bank to buy euros as part of reducing reliance on the dollar. After unloading dollars to bolster the yuan, the central bank may find its reserves out of balance.

That may lead it to replenish holdings of the U.S. currency and dump some euros, according to Credit Suisse. After the dollar, the euro is the most widely used reserve currency for central banks, IMF data show. “There’s a structural change underway,” said Robin Brooks at Goldman Sachs. “This adds to the case in our minds for lower euro-dollar.” China has been limiting yuan moves in recent months to encourage greater global use and keep money from flowing out of the world’s second-biggest economy as it pushes for reserve-currency status at the IMF. While the yuan has gained about 34% since China stopped pegging it to the dollar a decade ago, its appreciation has come to a halt.

The Chinese exchange rate has held within 0.35% of 6.2 per dollar since March, and has moved less than 0.1% every day in July. The euro has slumped about 2.2% against the dollar this month to about $1.0905, and reached the lowest since April. The drop has traders eyeing the euro’s March low of $1.0458, which was the weakest level since January 2003. The shared currency will weaken to $1.05 by year-end, according to the median forecast in a Bloomberg survey. Goldman Sachs projected the euro will decline to 95 U.S. cents in around 12 months and 80 cents in 2017. “Reserve recycling – a factor associated with euro strength in the past – is unlikely to be sizeable for quite some time,” according to Brooks.

That’s the same as saying they never will. China will be a very different place in 10 years.

• China’s Shoppers May Take 10 Years To Step Up (CNBC)

Chinese policymakers are gung-ho to transition their economy away from investment and toward consumption, but that may not happen for another decade, new data shows. “Without a substantial intervention, we believe consumption’s share of China’s economy is unlikely to rise substantially before 2025,” The Demand Institute, a non-profit organization operated by The Conference Board and Nielsen, said in a new report. Private consumption as a share of gross domestic product (GDP) will average 28% from now until 2025, the think-tank said. To be sure, the mainland has long underperformed the global average in this regard as Beijing previously focused on export-led growth.

Consumption as a share of GDP was 37% last year, according to the Brookings Institution, compared with around 70% in the U.S. and 60% in fellow emerging market, India. The indicator has only recently started to stabilize in recent years. Consumption relative to GDP declined 48 %age points from 1952 to 2011, one of the longest and largest drops of any nation on record. Based on an examination of 167 countries between 1950 and 2011, the report found that nations with similar economic characteristics to China saw consumption remain flat relative to GDP for a considerable period following previous declines. China’s desire to rebalance its economy stems from the need to avoid the dreaded “middle-income trap,” in which developing countries are unable to graduate into high-income countries after achieving a certain level of per capita GDP.

While many economists believe the economic transition is already underway, albeit at a gradual pace, they also expect it will take a while before consumption’s share of GDP spikes higher. “Only towards the end of decade, when the economy slows further to 5-6%, consumption’s share of GDP will become more important,” said Jian Chang, China economist at Barclays. “But we have seen investment slow significantly and I think total consumption as a share of GDP could near 50% this year.” Beijing’s strategic vision of boosting consumption was first outlined in 2011’s 12th Five-year Plan and since then, the government has unleashed a slew of measures, including raising wages and slashing import tariffs on high-demand goods.

No riots at all last night.

• Greek Parliament Approves EU Demands in Order to Keep the Euro (Bloomberg)

Greece passed a second bundle of policy measures demanded by the country’s European creditors as Prime Minister Alexis Tsipras urged lawmakers to stop the country being forced out of the euro. Tsipras won the support of at least 151 lawmakers in a televised, public vote in the 300-seat parliament in Athens for a bill that will simplify court decisions and transpose European rules on failing banks. Echoing the rhetoric of the predecessors he once demonized, Tsipras said he’ll implement the creditors’ program even though he thinks the policies being imposed are wrong. He insisted he’ll do everything he can to improve the final deal.

“Conservative forces within Europe still insist on their plans to kick Greece out of the euro,” Tsipras told legislators in the early hours of Thursday. “We chose a compromise that forces us to implement a program we don’t believe in and we will implement it, because the choices we have are tough.” The prime minister is trying to hold together his ad hoc majority long enough to finalize the €86 billion bailout program the country needs to stave off financial collapse. Abandoned by party hardliners, Tsipras is reliant on his political opponents to deliver the measures that creditors have demanded.

The new banking rules will, in theory, shield taxpayers from the cost of bank failures and stipulate that unsecured depositors – those with more than €100,000 with an individual bank – will face losses before the public purse. Shareholders, senior and junior creditors will be in line to take a hit before depositors. However, the law won’t come into effect until the start of 2016 and Finance Minister Euclid Tsakalotos told lawmakers that banks will already have been recapitalized by then. Greek lenders are in line for as much as 25 billion euros of new capital under the outline terms of the new bailout program.

” Europe’s shared currency accounted for 20.7% of global central-bank holdings in the three months ended March 31, the lowest proportion since 2002..”

• Euro’s Resilience During Greece Debt Crisis Belies Damage Done (Bloomberg)

The euro may have avoided the indignity of losing a member, yet the wrangling over Greece has delivered lasting damage to its image in the eyes of investors. Millennium Global and M&G, which manage a combined $413 billion, say the political brinkmanship leading up to last week’s bailout deal exposed the euro zone’s weakness: the lack of a fiscal union. Commerzbank, Germany’s No. 2 lender, warns the ongoing crisis will erode demand for the euro as a reserve currency, which reached a 13-year low in March. “There are cracks in the edifice of the currency union,” said Richard Benson at Millennium Global in London. With or without Greece leaving the euro, “our longer-term view of the euro is diminished because of the political breakdown.”

Because the euro remained resilient as Greece came close to leaving the currency bloc, the pressures it faces show up best in long-term measures such as reserves data and cross-border flows. Those suggest investors are discriminating more between member states. At stake is nothing less than the 19-nation currency’s status as an irrevocable symbol of European unity. The biggest risk for investors, and euro-zone policy makers, is contagion from Greece to other countries in the region’s periphery. Spain and Portugal are often named as countries that may follow if Greece was forced out of the currency bloc. Flows into Spanish and Portuguese companies from mergers and acquisitions total $16.9 billion this year, down 46% from the same period in 2014, data compiled by Bloomberg show.

Evidence of lingering stress can also be found in the nations’ bond yields versus those of benchmark German securities. While they’re a fraction of their highs in 2012, when the region’s debt crisis was at its peak, they remain elevated compared with the euro’s early years through 2007. For Spain, the difference in 10-year yields is about 1.24%age points, compared with the median of 0.01%age point from the start of 2003 to the end of 2006. The stress is less visible in the single currency’s value, which rose to $1.0951 in Tokyo on Thursday after Greek lawmakers voted through a second package of creditors’ demands. The euro is about 2% stronger than three months ago. Europe’s shared currency accounted for 20.7% of global central-bank holdings in the three months ended March 31, the lowest proportion since 2002 and down from 22.1% at the end of last year, IMF data show.

Wait till the real negotiations start.

• Awkward Alliance Running Germany Exposed by Greek Crisis (Bloomberg)

In 2000, Angela Merkel pushed past Wolfgang Schaeuble on her way to the top of the political ladder. As finance minister, he’s won her pledge of a free hand in policy making in exchange for his loyalty. Now the awkward alliance that forms the core of Europe’s financial crisis-fighting effort is under its biggest strain yet. As officials prepare a third Greek bailout, Merkel is holding fast to the view that the 19-member currency union must stay intact. Schaeuble has pushed back, dangling the threat of expulsion to what he considered an untrustworthy government. “Merkel and Schaeuble operate according to different logic,” Andrea Roemmele, a political scientist at the Hertie School of Governance in Berlin, said by phone.

For Merkel, “to some extent it’s about her legacy” as German chancellor at a time of crises, “and that’s something that Schaeuble just doesn’t think about,” she said. The mostly cordial entente between the two has dragged skeptical lawmakers to back bailouts that about half of Germans oppose. The cantankerous Schaeuble has given voice to backbenchers’ doubts, while Merkel has reminded Germany of its unique responsibility in holding the euro together. Ultimately, Germany has provided the biggest share of almost half a trillion euros ($547 billion) of aid offered to five euro-area countries in the past five years. “Merkel and Schaeuble are singing from the same sheet, but they’re singing different melodies,” said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels. “It falls to the finance minister to be the bad guy.”

Their roles have been further strained by Schaeuble’s evident distaste for Greek Prime Minister Alexis Tsipras’s Germany-bashing. That has deepened questions about Greece’s ability to repay its debt. At issue for Merkel is cutting loose a NATO ally in a region vulnerable to Vladimir Putin’s increasingly aggressive foreign policy. The conflict between the two played out during three days of European diplomacy in Brussels this month, where Merkel’s view that Greece can’t be suspended from the euro without its consent carried the day amid pressure from France and Italy. That unlocked a deal on July 13 to begin talks on a third bailout tied to further austerity for Greece.

The hypocrisy is stunning. In more ways than one, Greece is a lab rat.

• On Reform, Europe Asks Greece To Go Where Many Fear To Tread (Reuters)

Greece’s new bail-out deal imposes a stiff dose of budget rigor and market deregulation which critics say few leaders of Western Europe’s biggest nations have dared serve their own voters. “Francois Hollande is very good at telling others how to do their reforms,” opposition French conservative Xavier Bertrand said in a dig at France’s Socialist leader, a key broker in the Greek accord clinched on July 13 after all-night Brussels talks. “So what’s he waiting for in France?” said Bertrand, who was labor minister in the 2007-2012 government of former President Nicolas Sarkozy, which also struggled to make good on campaign pledges to revamp the euro zone’s second largest economy.

While euro zone leaders deflect cries of double standards by insisting the tough measures are justified to rescue Greece from collapse, such jibes underline how uneven reform has been in the 19-member currency area since its launch in 1999. While she has balanced Germany’s budget for the first time since 1969, Angela Merkel faces regular criticism that she has done little in a decade in power to modernize the bloc’s biggest economy since taking over from Gerhard Schroeder, voted out in 2005 after introducing a raft of painful labor reforms. The demands made on Athens to win a new bail-out worth up to €86 billion would, if implemented, transform the Greek economy from the bad boy of Europe into a reform poster-child.

They come as Greece pursues spending cuts of such rigor that it eked out a small primary budget surplus before debt service for the second successive year in 2014, in stark contrast to repeat deficit-sinning by France. Desperate times call for desperate measures, Greek creditors respond, arguing that this is what happens when your national debt hits 177% of gross domestic product and a crumbling economy leaves one in four of the workforce with no job. But as Greek Prime Minister Alexis Tsipras braced to push a further batch of measures through parliament on Wednesday, it is worth recalling that much of what Athens has been told to achieve has proven so socially and politically explosive that others in Europe have struggled to do the same.

Debt counselling?!

• Germany And Greece Need Counselling (Guardian)

Political Berlin feels emotional right now. A high-level German politician put it this way to me recently: “It’s like a whole hysteria going on here. The Berlin political world is emotional all the time. It has to stop, but I don’t know how. The anger is on the left, it’s on the right.” The historian Jacob Soll touched on this outpouring of emotion as it relates to Greece in a column in the New York Times last week, and his conclusion is that Germans must regain their cool if they want to lead Europe. He is right, but he is skipping a step. Germans cannot regain their cool until they reduce the outrage they feel towards Greece, which they perceive as the guilty partner in their eurozone marriage. To do this, both nations must engage an impartial, outside mediator to help them mitigate the outrage they feel towards each other.

In a structured, therapy-like setting, relevant policymakers from both sides would then finally be able to sit together and create a shared vision to wrest Greece from its economic depression. Outrage-mitigation mediation works in situations where activists and corporations find themselves at loggerheads. Ideally, corporations and their critics commit to sitting together in a room and sharing their dilemmas – to actually explaining their positions in the safe space created by the mediators. The chief executive of a corporation that has flouted environmental laws might say something like: “You activists just don’t get it. This pollution is not that bad. It creates X amount of jobs and it allows us to earn Y amount of profit. We can then pay Z taxes and thereby fulfil our role in society.”

The activists might reply: “We won’t accept that logic, because – aside from the fact that you’re ruining the environment, perhaps with the tacit acceptance of regulators whom you’ve bought off – your pollution is just shifting the cost of your business to society, which has to deal with all of these sick and/or dead people. But, OK, we get that your business has an economic purpose, so if you stop polluting and move to another model, we will mobilise our base and our leadership to support you.” Germany can look to its own transformation away from nuclear power to renewables as an example here. This process, accelerated after Fukushima, saw anti-nuclear activists, politicians and the power industry jointly define the vision for the future state of Germany’s energy supply.

Since everyone has bought into the vision, activists and industry stand eagerly behind the transformation. In fact, buy-in for this green movement has become so widespread that it has become part of Germany’s national identity. Seen in this light, last week’s deal imposing a 77% VAT increase – from 13% to 23% – and other punitive measures on Greece are bound to fail: not only because they would seem to contradict a century of economic theory, but also because neither Germany nor Greece has bought into them. Everyone hates this deal. Germany feels it is being asked for a gift at the end of a gun, sinking money into a country that will never actually pay it back and that it does not perceive as critical for its national and economic security. Greece is outraged that more austerity will further lower its standard of living, and it is tired of being called lazy and inept by Europe’s de facto hegemonic power.

“..any bankrupt nation that wants to survive is going to have to roll out bold incentive programs to attract talented people, growing businesses, and capital.”

• Greece Isn’t The Problem; It’s A Symptom Of The Problem (Simon Black)

All eyes may be on Greece right now, but in reality, the economic malaise is widespread across the continent. Italy is gasping to exit from its longest recession in history, while unemployment figures across Southern Europe remain at appalling levels. In France, the unemployment rate is near record highs. Finland, once a darling of the Eurozone, is posting its worst unemployment figures in 13-years. Even in Austria growth is flat and sluggish. It’s clear that Greece is not the problem. It’s a symptom of the problem. The real problem is that every one of these nations has violated the universal law of prosperity: produce more than you consume. This is the way it works in nature, and for individuals. If you spend your entire life going in to debt, making idiotic financial decisions, and rarely holding down a stable job, you’re not going to prosper.

Yet governments feel entitled to continuously run huge deficits, rack up historic debts, and make absurd promises that they cannot possibly keep. This is a complete and total violation of the universal law of prosperity. And as their financial reckoning days approach, history shows there are generally two options. The first outcome is that a country is forced to become more competitive– to rapidly change course and start producing more than it consumes. It’s like a bankrupt company bringing in a turnaround expert: Apple summoning Steve Jobs in its darkest hour. But here’s the thing: if a nation wants to produce, it needs producers. That means talented employees, professionals, investors, and entrepreneurs. So any bankrupt nation that wants to survive is going to have to roll out bold incentive programs to attract talented people, growing businesses, and capital.

This includes cutting taxes, reducing red tape, establishing easy residency programs for talented foreigners, etc. And it’s already happening. Even the UK has been working to slash its corporate tax burden and attract more multinationals to its shores. Portugal has been offering residency in exchange for real estate investment, which has helped stabilize its troubled property market. Malta offers economic citizenship, providing public finances with vital capital. And I expect Greece to launch similar programs; we might even see the Greek government selling off passports bundled together with an island. No joke. They’d be well advised to do so; because the second option for bankrupt nations is to slide deeper into chaos.

Nice, but gets stuck in train of thought.

• Moving on From the Euro (O’Rourke)

In the short run, the eurozone needs much looser monetary and fiscal policy. It also needs a higher inflation target (to reduce the need for nominal wage and price reductions); debt relief, where appropriate; a proper banking union with an adequate, centralized fiscal backstop; and a “safe” eurozone asset that national banks could hold, thereby breaking the sovereign-bank doom loop. Unfortunately, economists have not argued strongly for a proper fiscal union. Even those who consider it economically necessary censor themselves, because they believe it to be politically impossible. The problem is that silence has narrowed the frontier of political possibility even further, so that more modest proposals have fallen by the wayside as well.

Five years on, the eurozone still lacks a proper banking union, or even, as Greece demonstrated, a proper lender of last resort. Moreover, a higher inflation target remains unthinkable, and the German government argues that defaults on sovereign debt are illegal within the eurozone. Pro-cyclical fiscal adjustment is still the order of the day. The ECB’s belated embrace of quantitative easing was a welcome step forward, but policymakers’ enormously destructive decision to shut down a member state’s banking system – for what appears to be political reasons – is a far larger step backward. And no one is talking about real fiscal and political union, even though no one can imagine European Monetary Union surviving under the status quo.

Meanwhile, the political damage is ongoing: not all protest parties are as pro-European as Greece’s ruling Syriza. And domestic politics is being distorted by the inability of centrist politicians to address voters’ concerns about the eurozone’s economic policies and its democratic deficit. To do so, it is feared, would give implicit support to the skeptics, which is taboo. Thus, in France, Socialist President François Hollande channels Jean-Baptiste Say, arguing that supply creates its own demand, while the far-right National Front’s Marine Le Pen gets to quote Paul Krugman and Joseph Stiglitz approvingly. No wonder that working-class voters are turning to her party.

Koo shows his head is not a balanced one.

• EU Refuses To Acknowledge Mistakes Made In Greek Bailout (Richard Koo)

Strictly speaking, Greece confronted two problems simultaneously. One was that GDP had been artificially boosted by a profligate fiscal policy carried out under the cover of understated deficit data. The other was a balance sheet recession triggered by the collapse of the massive housing bubble that resulted from the ECB’s ultra-low-interest- rate policy that lasted from 2000 to 2005. The artificial increase in GDP (Mr. Blanchard correctly noted that Greek output was “above potential to start” in 2008) was something that other periphery countries like Spain and Ireland did not have to confront. A certain decline in GDP from such a level was inevitable as profligate fiscal policy was replaced by the necessary fiscal consolidation.

But what complicated matters in Greece is that in addition to the standard decline in GDP that results when profligate government spending eventually sparks a fiscal crisis, Greece was also in the midst of a balance sheet recession. The nation’s housing bubble and subsequent collapse were actually larger than those of Spain in terms of housing price appreciation and decline. If all of Greece’s current problems were simply the price to be paid for past fiscal indulgence, the decline in output would have been much smaller than the actual 30 percent. But because the economy also faced a serious balance sheet recession, the fiscal consolidation measures implemented to address excess government spending caused GDP to fall by nearly 30%.

Admittedly, it would have been extremely difficult for anybody to balance the need to end the profligate fiscal policy while maintaining sufficient fiscal stimulus to keep the country in balance sheet recession from falling off the fiscal cliff. But now that it is where it is, the policymakers must find ways to get the economy to grow again. There is also the possibility that the way data was presented by the EU and IMF further widened the perceptual gap between European lenders and the Greek public. Nearly all of the Greek analysis produced by the IMF and the EU has discussed matters relative to GDP, whereas Greek standards of living are linked directly to the absolute level of GDP.

The numbers dwarf our AE for Athens Fund.

• Bank Curbs Hit Greek Charities (Reuters)

Donations to Greek children’s charities have dived since the government imposed drastic curbs on bank withdrawals, putting some volunteer-run services at risk just when they are needed most. One charity chief is turning to the millions of Greeks who live abroad for help, as business and individual donors at home cannot get hold of cash beyond the 60 euros they are allowed to take out of their accounts each day, or €420 every week. The Smile of the Child – a charity which receives almost no state funding – said much of its income had been almost wiped out since the government introduced capital controls just over three weeks ago to avert a run on the banks. “As soon as capital controls were implemented, we saw a complete drop in donations to almost nothing,” the charity’s president, Costas Giannopoulos, told Reuters.

The public health system is struggling following five years of economic crisis and government austerity policies. However, the charity runs services including mobile health units offering free pediatric, dental and eye care to children, as well as a helpline which receives thousands of calls a year where young people can report issues such as physical and sexual abuse. With living standards tumbling, growing numbers of Greeks rely on these services. Asked what would happen if the capital controls are not eased, Giannopoulos said: “It means we’ll be in danger.” “That’s why we are trying to mobilize Greeks abroad … to understand that there is a Greece which is fighting to support people at the bottom of the chain.”

The ethnic Greek diaspora spans the world, with large populations in the United States, Australia, Britain and Germany. The Smile of the Child needs around €1.3 million a month to operate fully but has only around €400,000 in the bank. A new deal struck between Greece and its creditors last week could also push up demand for volunteer-run clinics and food banks across Greece. The cost of living already rose on Monday with value-added tax raised to 23% on a range of services and foodstuffs. Cuts to pensions, further tax increases and reductions in public spending will follow under a third bailout program for Greece. The Smile of the Child already expects to help around 50% more children this year than in 2014, with around 120,000 under-18s expected to benefit, up from 83,000 in 2014. In 2011, only around 20,000 babies and youngsters were being supported, a sign of the social crisis following years of high unemployment and cuts to areas such as health and education.

Finland has failed.

• Finns Told Pay Cuts Now Only Way to Rescue Economy From Failure (Bloomberg)

One of Germany’s staunchest allies in backing euro-zone austerity is about to feel some of the pain the policy brings with it. Finnish Prime Minister Juha Sipila will this month battle unions to reduce the cost of labor. Without the measure, he says Finland will need a €1.5 billion austerity package to meet budget goals. “Reducing labor costs is the first big challenge on the path of Finnish economic revival,” Aktia chief economist Anssi Rantala said in an interview. “The country cannot afford to fail in this.” Sipila wants Finnish labor to cost 5% less by 2019, a proposal unions already rejected in May, one month after the self-made millionaire won national elections on pledges to save Finland’s economy.

He’s due to put forward a detailed plan on July 31 and unions have three weeks to respond. Rantala at Aktia, a Finnish bank, says the fastest way to cut labor costs is to increase work hours without raising pay, in what amounts to an effective wage cut that might not look as bad on paper. Sipila needs to push through the unpopular policy to try to revive competitiveness in Finland, which has yet to recover from the loss of a consumer electronics industry once led by Nokia Oyj and a faltering paper manufacturing sector.

Unit labor costs in Finland, where gross domestic product has contracted for the past three years, are almost 20% higher than those of its main trading partners, including Germany. Finland’s euro membership means it can’t rely on a weaker currency to help close that gap. Unemployment has held at, or above, 10% for the past five months. Meanwhile, Sipila got the go-ahead from the Finnish parliament’s Grand Committee earlier this month to start negotiations on a third Greek bailout, after austerity policies failed to end that nation’s crisis. A poll published the same day showed 57% of Finns don’t want their government to back another Greek rescue.

First regional elections. Then 3 weeks later, national elections. Will Spain ever look the same?

• Catalans Spur the Remaking of Spain With Battle for Independence (Bloomberg)

Catalonia’s bid for independence has opened the floodgates: Now all Spain’s major parties are looking to remake the way the state’s power is carved up. Catalan President Artur Mas plans to use voting for the region’s parliament on Sept. 27 – weeks before national elections are due – as a de-facto referendum on leaving Spain. Just as the Scottish independence movement has prompted a rethink of how the U.K. is governed, Spain’s national parties are responding with plans to prevent the disintegration of a country whose mainland borders are unchanged since the 17th century. Prime Minister Mariano Rajoy’s People’s Party is seeking to give the regions much more say in the Senate in Madrid.

The main opposition Socialists are proposing a looser federal state, while the insurgent Podemos and Ciudadanos parties are floating their own ideas. “Mas has contributed to reopening the debate about how Spain should be governed and taxes should be distributed,” said Antonio Barroso, a London-based analyst at Teneo Intelligence. “With Mas or without him, that’s going to be an issue that Spaniards will face over the course of the next legislative term.” Spain’s 1978 constitution set up regional administrations with varying degrees of autonomy. But over the past three years, Mas has moved from seeking more control over taxes to demanding the right for Catalans to break away completely.

He’s already campaigning for September’s regional election. If separatist groups win a majority in the legislature in Barcelona and the central government refuses to negotiate, he says he’ll make a unilateral declaration of independence. “We are ready to do it,” Mas said as he presented a joint list of pro-secession candidates for the election at an event in Barcelona on Monday. “We have been getting ready for months and years.” Opposing Mas’s list, as well as the national parties, will be Unio, which split from Mas last month over the independence demands after running with his Convergencia party on a joint platform since 1978. Polls suggest Mas will fall short of a majority in the 135-member chamber.

A July 6-9 Feedback survey for La Vanguardia newspaper gave the groups in his alliance a maximum of 56 seats, 12 too few. The anti-capitalist Popular Unity Candidates, known as the CUP in Catalan, in line to win as many as 10 seats, also back independence but plan to run separately. Still, a single list including the CUP would gain as many as 72 seats, according to the poll, which was based on 1,000 interviews and with a margin of error of 3.2%. Even if Mas falls short in September, the genie is out of the bottle. Catalonia will be split down the middle, and other regions such as Valencia and the capital, Madrid, are pushing for changes to the tax system.

“Under current law, US companies owe the full 35% corporate tax rate—the highest of any industrialized nation—on income they earn around the world.”

• Tim Cook’s $181 Billion Headache: Almost 90% Of Apple’s Cash Held Overseas (BBG)

Apple’s cash topped $200 billion for the first time as the portion of money held abroad rose to almost 90%, putting more pressure on CEO Tim Cook to find a way to use the funds without incurring US taxes. Booming iPhone sales overseas are adding to Apple’s cash pile, pushing the company to embrace offshore affiliates to preserve and invest the money. Cook, who was called before US Congress in 2013 to defend Apple against allegations of dodging taxes, is facing questions on what Apple will do with its cash pile and fielding calls from investors, such as billionaire activist Carl Icahn, to return shareholder capital. “They don’t really have that much on-shore cash,” said Tim Arcuri at Cowen. “They’re still sort of hamstrung on what they can do, barring the ability to repatriate a bunch of off-shore cash.”

Cook has been vocal about his desire for US law makers to amend the country’s tax laws so that companies can repatriate more cash. Apple’s overseas cash has climbed 70% since Cook spoke to Congress, and now makes up 89% of Apple’s $202.8 billion in cash and investments at the end of June, the company said on Tuesday, up from 72% of $146.6 billion in cash two years ago. Driving that is Apple’s booming global revenue. Sales in greater China, for example, more than doubled to $13.2 billion in the latest quarter from a year earlier. At the same time, Apple’s US federal lobbying spending has been climbing, and reached a record $4.1 million last year as it advocated on a wide range of issues. The company’s lobbying climbed 46% in the second quarter from a year earlier.

The iPhone maker added three lobbyists on the issues of taxes in the past year, and is addressing concerns such as corporate and international “tax reform,” according to records filed with the US senate this week. Under current law, US companies owe the full 35% corporate tax rate—the highest of any industrialized nation—on income they earn around the world. They receive tax credits for payments to foreign governments, and have to pay the US the difference only when they bring the money home. That system encourages companies to shift profits to low-tax foreign countries and leave the money there. As a result, more than $2 trillion is being stockpiled overseas by US companies.

One big happy family.

• Ancient DNA Link Between Amazonians and Australasians Traced (NY Times)

Some people in the Brazilian Amazon are very distant relations of indigenous Australians, New Guineans and other Australasians, two groups of scientists who conducted detailed genetic analyses reported Tuesday. But the researchers disagree on the source of that ancestry. The connection is ancient, all agree, and attributable to Eurasian migrants to the Americas who had some Australasian ancestry, the scientists said. But one group said the evidence is clear that two different populations came from Siberia to settle the Americas 15,000 or more years ago. The other scientific team says there was only one founding population from which all indigenous Americans, except for the Inuit, descended and the Australasian DNA came later, and not through a full-scale migration.

For instance, genes could have flowed through a kind of chain of intermarriage and mixing between groups living in the Aleutian Islands and down the Pacific Coast. Both papers were based on comparisons of patterns in the genomes of many living individuals from different genetic groups and geographic regions, and of ancient skeletons. David Reich of Harvard, the senior author of a paper published Tuesday in the journal Nature, said the DNA pattern was “surprising and unexpected, and we weren’t really looking for it.” Pontus Skoglund, a researcher working with Dr. Reich who was investigating data gathered for previous research, found the pattern, or signal, as he described it. He and Dr. Reich and their colleagues used numerous forms of analysis, comparing different groups to see how distant they were genetically, to determine if there was some mistake.

But, Dr. Skoglund said, “we can’t make it go away.” Dr. Reich reported in 2012, based on some of the same evidence, that a group he called the First Americans came from Siberia 15,000 or more years ago, and were the ancestors of most Native Americans on both continents. There was a second and later migration, he said, that gave rise to a group of Indians including the Chipewyan, Apache and Navajo, who speak similar languages. The Inuit are generally agreed to have made a separate, later migration. Now, based on new evidence and much deeper analysis, he and Dr. Skoglund and colleagues concluded that the first migration, which began 15,000 or more years ago, consisted not only of the group he identified as the First Americans, but of a second group that he calls Population Y.

They could have come before, after or around the same time as the First Americans. But Population Y, he writes, “carried ancestry more closely related to indigenous Australians, New Guineans and Andaman Islanders than to any present-day Eurasians or Native Americans.”

Shouldn’t we really be having another discussion by now?

• The 97% Scientific Consensus on Climate Change Is Wrong-It’s Even Higher (Hill)

In May, Last Week Tonight host John Oliver attempted to visually demonstrate what a true debate on climate change should look like. Instead of bringing out one expert on either side of the issue, Oliver brought on set 97 scientists who support evidence that humans are causing global warming to argue with three climate skeptics—“a statistically representative climate change debate,” he said. The sketch was based on the “climate consensus,” the notion that 97% of climate scientists agree that global warming is occurring and that humans are part of the problem. But if Oliver really wanted to be up-to-date on his stats, he would have put 99.99 scientists on one side of the desk.

That’s according to James L. Powell, director of the National Physical Sciences Consortium, who reviewed more than 24,000 peer-reviewed scientific articles on climate change published between 2013 and 2014. Powell identified 69,406 authors named in the articles, four of whom rejected climate change as being caused by human emissions. That’s one in every 17,352 scientists. Oliver would need a much bigger studio to statistically represent that disparity. “The 97% is wrong, period,” Powell said. “Look at it this way: If someone says that 97% of publishing climate scientists accept anthropogenic [human-caused] global warming, your natural inference is that 3% reject it. But I found only 0.006% who reject it. That is a difference of 500 times.”

Debt Rattle July 10 2015

Jul 102015

July 10, 2015 Posted by Raúl Ilargi Meijer at 11:04 am Finance Tagged with: bailout, blackmail, control, Darwin, France, Germany, Greece, pope, proposal 12 Responses »

Wynand Stanley Ice-packed Buick motor stunt, San Francisco 1922

• Stock Slide Ruins China’s Illusion of Control (Bloomberg)

• Greece Seeks €53.5 Billion Bailout in Effort to Keep Euro (Bloomberg)

• France Intercedes on Greece’s Behalf to Try to Hold Eurozone Together (WSJ)

• The Big Achievement Of Tsipras’s Proposal Is To Sow Division (Münchau)

• Galbraith: Greek Revolt Against Bad Economics Threatens EU Elites (Parramore)

• The US Must Save Greece (Joe Stiglitz)

• Greece Presents €2 Billion Russian Gas Deal (FT)

• Germany Concedes Greece Needs Debt Relief, Greek Plan Awaited (Reuters)

• Germany Failed To Learn From Its Own History-And Greece Pays The Price (WaPo)

• Weidmann Warns Greek Banks Concerns Rising By Day (FT)

• Greek Government Insider On 5 Months Of ‘Humiliation’ And ‘Blackmail’ (MP)

• Swiss Poised To Support Greek Tax Amnesty (SI)

• The Lesson for the World Coming from Greece (Martin Armstrong)

• Varoufakis: Schäuble Wants Grexit, I Prefer Be an MP Known as Yanis (GF)

• Max Keiser and Yanis Varoufakis Retrospective (2012 footage)

• Darwin’s Casino (John Michael Greer)

• Pope Calls For New Economic Order, Criticizes Capitalism (Reuters)

And that is nigh impossible to regain.

• Stock Slide Ruins China’s Illusion of Control (Bloomberg)

The other, grander gamble that Xi has taken is to keep the Chinese economy growing. Of course, the Communist Party since Deng Xiaoping has staked its legitimacy on economic growth, so far to good effect. But Jiang Zemin and Hu Jintao governed through a broad-based consensus of senior party leaders, which meant that the risks of legitimacy and delegitimacy were spread across the group and the institution they represented. Xi, in contrast, has taken more power – and therefore the risks of economic growth – onto his shoulders. There are many tools central government can use to keep an economy growing, and China under Xi will use them all. State-owned enterprises may be less efficient in the long run than truly private companies, but they have the enormous political benefit of responding to centralized state directives.

With good economists advising him, Xi stands a reasonable chance of transitioning China into a more consumer-driven economy, thereby assuring a source of modest continued growth even as the export-driven economy slows down. But that task, too, depends on the individual purchasing decisions of ordinary Chinese – that is, success of China’s economy, and therefore of Xi’s presidency, ultimately depends on the domestic consumer market. This brings us back to the stock market. Sure, Xi has to worry that the correction will spook emerging consumers, encouraging them to sit on their cash rather than spending it. But the much bigger political problem is that ordinary Chinese, watching the market fall, will experience the certain knowledge that Xi can’t really do anything about it.

Short-term stopgaps like closing markets during sell-offs or ordering state-owned enterprises not to sell their shares won’t address market fundamentals – because they can’t. In confirmed capitalist societies, we long ago learned that the government can’t stop the market from going where it believes it must. The reason, of course, is that the market isn’t a single entity that can be forced to take collective action. It’s an aggregation of individual decision-makers, all of whom share a competitive interest in achieving gain and limiting loss. For that reason, governments in experienced capitalist countries know that the only meaningful, long-term way to respond to market declines is by trying to create economic conditions that will restore faith in the markets.

A whole long weekend of this. And then votes on Mon-Tue in national parliaments.

• Greece Seeks €53.5 Billion Bailout in Effort to Keep Euro (Bloomberg)

The government of Greek Prime Minister Alexis Tsipras sought a three-year bailout loan of at least €53.5 billion ($59.2 billion), in a last-ditch effort to keep the country in the euro. In exchange, it offered a package of reforms and spending cuts, including pension savings and tax increases, similar to the one presented by creditors last month. The proposal was submitted to European institutions late Thursday and will be presented to the Greek Parliament Friday. It is set to be discussed at a summit of European Union leaders Sunday to determine whether Greece gets a new bailout, or be forced to leave the single currency. Greece offered measures that almost mirrored a proposal from creditors on June 26, which was rejected by voters in a July 5 referendum.

In return, it asked for its long-term debt to be made more manageable to allow it to rebound from a crisis that has erased a quarter of its economy. It is unclear if the proposal is enough to clinch a deal with creditors amid signs of economic deterioration since banks were closed and capital controls imposed 12 days ago. “The Greeks appear to have made significant concessions, apparently accepting much of the most recent creditor proposal,” Chris Scicluna, head of economic research at Daiwa Capital Markets in London, wrote in a note. “It remains to be seen whether creditors will want even more austerity.” The Greek government said it would use the three-year loan from the European Stability Mechanism to cover debt repayments between 2015 and 2018, mostly to the International Monetary Fund and the European Central Bank.

It will then be left with debt owed only to European Union institutions. Greece’s proposal includes creditors’ longstanding demands for sales tax increases and cuts in public spending on pensions. Greece also proposes the restructuring of its debt and a package of growth measures of €35 billion. Pressure has been mounting on Greece’s creditors to make the country’s debt more manageable. “A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors,” European Union President Donald Tusk told reporters in Luxembourg Thursday. “Only then will we have a win-win situation.”

“French leaders have waxed poetic in recent days about the special place Greece holds. Greek independence was celebrated by French writers and artists from Victor Hugo and to Eugene Delacroix..”

• France Intercedes on Greece’s Behalf to Try to Hold Eurozone Together (WSJ)

The race to come up with a last-minute proposal to keep Greece in the eurozone began with a Sunday night phone call from Greek Prime Minister Alexis Tsipras to French President Francois Hollande, moments after Greece’s referendum dealt a near-fatal blow to the talks. If Greece wanted to remain in the eurozone, Athens must make ambitious proposals to its creditors quickly, Mr. Hollande told him, adding: “Help me help you.” That advice was part of an urgent French campaign to salvage months of negotiations from the wreckage of the Greek referendum. After long staying out of the fray, Mr. Hollande was scrambling to keep the discussions alive. His strategy: to press Mr. Tsipras for stronger economic overhauls while persuading Angela Merkel to give Greece more time and, ultimately, hope for debt relief.

The stance reflects a particularly French vision of the eurozone as a grand political project, with strategic benefits for Europe worth defending even at high cost. A Greek exit from the eurozone would set a dangerous precedent, French officials say, turning the currency bloc into little more than an arrangement of fixed currency exchange rates that governments could discard. French leaders have waxed poetic in recent days about the special place Greece holds. Greek independence was celebrated by French writers and artists from Victor Hugo and to Eugene Delacroix, Prime Minister Manuel Valls told lawmakers Wednesday in explaining why France refuses to accept a Greek exit from the euro. “Greece is a passion for France and Europe,” Mr. Valls said.

“The goddess that gave its name to our continent is at the heart of our mythology.” Domestic politics is also at work. Mr. Hollande, a Socialist, faces a rebellion from members of his parliamentary majority who accuse him of abandoning his 2012 election pledge to push for pro-growth policies in Europe. Standing up to Berlin on behalf of Greece is a chance to brandish his leftist credentials for party hard-liners, analysts say. It is unclear whether France’s triage will lead to a deal by Sunday, when European Union leaders are due to decide Greece’s fate. But France’s intervention has helped keep the talks on life support.

“.. there is now the acute problem of an insolvent banking system..” A problem all of the Troika’s own design.

• The Big Achievement Of Tsipras’s Proposal Is To Sow Division (Münchau)

I do not have the foggiest whether these latest Greek proposals will be enough to secure a deal. There are still very big obstacles to overcome. But Alexis Tsipras has achieved something that has eluded him in the past five months: he has managed to split the creditors. The IMF insists on debt relief. The French helped the Greek prime minister draft the proposal and were the first to support it openly. President François Hollande is siding with Mr Tsipras. And that changes the stakes for Angela Merkel. If the German chancellor says no now, she will stand accused of taking reckless risks with the eurozone and the Franco-German alliance. If she says yes, her own party might divide similarly to the way the British Conservatives divided over Europe. I have always predicted that the moment of truth for the eurozone will come eventually. It will come this weekend.

The financial markets seemed to have made up their mind that a deal will happen. But beware the many landmines on the path to a deal. Of those, only the first has been sidestepped with Mr Tsipras’ offer. What he is now proposing is, economically, not fundamentally different from what he, and the Greek electorate, rejected in Sunday’s referendum — but it works politically for him. The phase-in period of some of the harder measures is longer. And if there is a deal, there will have to be an explicit reference to debt relief this time. The IMF insists on it. And even Donald Tusk, the president of the European Council, says so. This is an important development, but it is not clear that all creditors will, or can, agree.

By tomorrow, the technical people and the finance ministers will need to discuss whether the Greek numbers add up. The answer is almost certainly no, not least because of the rapid deterioration of the country’s economy. The imposition of capital controls and bank withdrawal limits brought most economic activity to a standstill. Any macroeconomic adjustment programme will have to start with a realisation that the situation is worse today than two weeks ago. The Greek list takes account of this in terms of slower adjustment periods. This is economically sensible. But Ms Merkel has already said she wanted this problem taken care of through additional austerity. For a programme to be agreed, one side will have to back down here.

On top of this, there is now the acute problem of an insolvent banking system — one that is totally reliant on a special lifeline by ECB called emergency liquidity assistance. The ECB will find it hard to increase ELA. So apart from agreeing on a macroeconomic stabilisation programme, European leaders will this weekend need to answer the more immediate question of what to do with the Greek banks. This is possibly the single most complicated question because there are no easy and fast answers. What may have to happen is that the number of banks will have to shrink to three or two, and that depositors may have to be “bailed in”. I cannot see that the creditors would agree to a further bank restructuring programme, in addition to the €53.5bn in new loans currently under discussion.

The superego paradox again.

• Galbraith: Greek Revolt Against Bad Economics Threatens EU Elites (Parramore)

Lynn Parramore: What’s your view of the attitudes of the creditor powers?
Jamie Galbraith: What happened on the 26th of June was that Alexis (Tsipras) came to realize, at long last, that no matter how many concessions he made he wasn’t going to get the first one from the creditors. That’s something Wolfgang Schäuble had made clear to Yanis (Varoufakis) months before. But it was hard to persuade the Greek government of this because its members naturally expected, as you would when you’re in a negotiation, that if you make a concession the other side will make a concession. That isn’t the way this one worked. The Greeks kept making concessions. They’d present a program and the other side would say —as you can read in the press — oh, no, that’s not good enough. Do another one. Then they’d complain that the Greeks were not being serious. What the creditors meant by that was this: when you come around and agree to what we tell you, then you’re serious. Otherwise not. This is the way bad professors treat extremely recalcitrant students. You come in with a paper draft and they say, no, that’s not good enough. Do another one.

LP: Have the individual creditors differed on how to treat Greece?
JG: There are some divisions amongst the creditors that are well known. But they’re all variations on the theme of insular, sheltered, cloistered people who do not understand what is happening in Greece and do not know the economics. So, for example, the European Commission tends to be a little bit nicer, the IMF tends to be better on debt restructuring but worse on the structural issues, and the ECB was infuriated by the fact that its technocrats couldn’t walk into any ministry in Athens and make demands and be paid attention to. So there were different aspects of this that seemed to trouble different creditors, but it all amounted to the fact that between them there was no basis for arriving at anything other than the original Memorandum of Understanding (bailout program).

LP: What exactly triggered the breakdown that led to the referendum?
JG: What happened was that the IMF took the staff level agreement draft that the Greeks had presented, and marked it up in red ink and presented it back to the Greeks as an ultimatum— this is what we will accept. Or rather (EC president) Juncker presented it back to the Greeks as an ultimatum. And Yanis was told, take it or leave it. So they basically had no choice but to walk away from it, to leave it.

LP: How do you think the referendum has changed the situation? Has it given the Greeks leverage or not?
JG: That’s a difficult question. The recent Ambrose Evans Pritchard piece is very much on the mark. The Greek government, and particularly the circle around Alexis, were worn down by this process. They saw that the other side does, in fact, have the power to destroy the Greek economy and the Greek society — which it is doing — in a very brutal, very sadistic way, because the burden falls particularly heavily on pensions. They were in some respects expecting that the yes would prevail, and even to some degree thinking that that was the best way to get out of this. The voters would speak and they would acquiesce. They would leave office and there would be a general election. But civil society took this over in the most dramatic and heroic fashion. It was an incredible thing to see. The Greeks, amazingly, voted 61% no. That, momentarily, gave a jolt of adrenaline to everybody in the government. But the next morning, they were back where they were before. And that’s why, of course, Yanis left at that point.

What’s the use with Spain and Italy waiting in the wings?

• The US Must Save Greece (Joe Stiglitz)

As the Greek saga continues, many have marveled at Germany’s chutzpah. It received, in real terms, one of the largest bailout and debt reduction in history and unconditional aid from the U.S. in the Marshall Plan. And yet it refuses even to discuss debt relief. Many, too, have marveled at how Germany has done so well in the propaganda game, selling an image of a long-failed state that refuses to go along with the minimal conditions demanded in return for generous aid. The facts prove otherwise: From the mid-90’s to the beginning of the crisis, the Greek economy was growing at a faster rate than the EU average (3.9% vs 2.4%). The Greeks took austerity to heart, slashing expenditures and increasing taxes.

They even achieved a primary surplus (that is, tax revenues exceeded expenditures excluding interest payments), and their fiscal position would have been truly impressive had they not gone into depression. Their depression—25% decline in GDP and 25% unemployment, with youth unemployment twice that—is because they did what was demanded of them, not because of their failure to do so. It was the predictable and predicted response to the austerity. The question now is: What’s next, assuming (as seems ever more likely) they are effectively thrown out of the euro? It’s likely that the European Central Bank will refuse to do its job—as the Central Bank for Greece, it should do what every central bank is supposed to do, act as a lender of last resort.

And if it refuses to do that, Greece will have no option but to create a parallel currency. The ECB has already begun tightening the screws, making access to funds more and more difficult. This is not the end of the world: Currencies come and go. The euro is just a 16-year-old experiment, poorly designed and engineered not to work—in a crisis money flows from the weak country’s banks to the strong, leading to divergence. GDP today is more than 17% below where it would have been had the relatively modest growth trajectory of Europe before the euro just continued. I believe the euro has much to do with this disappointing performance. [..]

The U.S. was generous with Germany as we defeated it. Now, it is time for the U.S. to be generous with our friends in Greece in their time of need, as they have been crushed for the second time in a century by Germany, this time with the support of the troika. At a technical level, the Federal Reserve needs to create a swap line with Greece’s central bank, which—as a result of the default of the ECB in fulfilling its responsibilities—will have to take on once again the role of lender of last resort. Greece needs unconditional humanitarian aid; it needs Americans to buy its products, take vacations there, and show a solidarity with Greece and a humanity that its European partners were not able to display.

“Greece is no-one’s hostage,” he said. “The Greek people’s No vote, and I am referring to all of the people, is not going to become a humiliating Yes.”

• Greece Presents €2 Billion Russian Gas Deal (FT)

Greece has mapped out details of a landmark €2bn gas project with Russia, a scheme that could stir tensions with Brussels just as Athens seeks a third bail-out. Panayiotis Lafazanis, the firebrand leftist energy minister, presented the project to Greek energy executives on Thursday in a defiant speech, vowing that Athens would not be pushed around by EU institutions, writes Christian Oliver. EU policymakers are concerned that Russia could take advantage of the crisis to pull Greece deeper into its orbit and pipeline politics is critical to relations between the two nations. Athens and Moscow say their new project, the so-called South European Pipeline, will bring 47 billion cubic metres of Gazprom’s gas into Europe by 2018.

Mr Lafazanis promised that it would create 20,000 much needed jobs in Greece. This promised deal with Russia is a sharp rebuke to Brussels, which wants to reduce dependence on Gazprom and argues that southeastern Europe should diversify its supply by prioritising gas from Azerbaijan. Opening his remarks with pugnacious references to the eurozone crisis, Mr Lafazanis said that Greece was aiming to secure a deal with Brussels as quickly as possible. However, he then warned EU institutions that Athens was not about to roll over. “Greece is no-one’s hostage,” he said. “The Greek people’s No vote, and I am referring to all of the people, is not going to become a humiliating Yes.”

Only 5 months late. Or is that 5 years?

• Germany Concedes Greece Needs Debt Relief, Greek Plan Awaited (Reuters)

Germany conceded on Thursday that Greece would need some debt restructuring as part of any new loan programme to make its economy viable as the Greek cabinet raced to finalize reform proposals to avert an imminent economic meltdown. The admission by German Finance Minister Wolfgang Schaeuble came hours before a midnight deadline for Athens to submit a reform plan meant to convince European partners to give it another loan to save it from a possible exit from the euro. Greece has already had two bailouts worth €240 billion euros from the eurozone and the IMF, but its economy has shrunk by a quarter, unemployment is more than 25% and one in two young people is out of work.

Schaeuble, who has made no secret of his scepticism about Greece’s fitness to remain in the currency area, told a conference in Frankfurt: “Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that. But he added: “There cannot be a haircut because it would infringe the system of the European Union.” He offered no solution to the conundrum, which implied that Greece’s debt problem might not be soluble within the eurozone. But he did say there was limited scope for “reprofiling” Greek debt by extending loan maturities, shaving interest rates and lengthening a moratorium on debt service payments.

Germany resists all real history. Inferiority complex?

• Germany Failed To Learn From Its Own History-And Greece Pays The Price (WaPo)

One of the great paradoxes of our time is how Germany has done so exemplary a job in recent decades of understanding and accepting responsibility for the horrors of the Nazi era while continuing to entertain a willful ignorance of the economic policy errors that paved the Nazis’ path to power. The solution to this riddle is that Germans’ deep-seated debt obsession (in German, the words for “debt” and “guilt” are the same) has blinded them to the consequences of that obsession. You’d think, for instance, that Germans would have learned from John Maynard Keynes’s 1920 book “The Economic Consequences of the Peace,” which correctly predicted that the onerous reparations inflicted on Germany by the Treaty of Versailles were economically unsustainable and politically perilous to the prospects for German democracy.

You’d think they’d have learned from their own descent into Nazism that balancing budgets when unemployment is at record heights can undermine a democracy’s viability. You’d think they’d have learned from the London debt agreement of 1953 that debt forgiveness and reasonable repayment terms can foster prosperity and strengthen democracy in the debtor nation — which, in this case, happened to be Germany. That Germans have learned none of these lessons is now — tragically, for Greece — apparent. Germany’s insistence that Greece continue to slash services and social investment if it is ever to qualify for debt forgiveness remains unaltered, even though Greek unemployment stands at 25%, even though 40% of Greek children live in poverty, even though a neo-Nazi party (Golden Dawn) has come out of nowhere to win seats in Greece’s parliament.

Weidmann is saying weird things, as always.

• Weidmann Warns Greek Banks Concerns Rising By Day (FT)

Jens Weidmann, the president of Germany’s Bundesbank, has said doubts about Greek banks solvency are legitimate and rising by the day. Mr Weidmann also said the majority of Greeks who had voted ‘no’ in Sunday’s referendum had spoken out .. against contributing any further to the solvency of their country through additional consolidation measures and reforms. The Bundesbank president, a member of the governing council of the European Central Bank who has called for Greek banks ¨ 89bn liquidity lifeline to be scrapped, said in needed to be crystal clear that responsibility for Greece lay with Athens and international creditors, and not the ECB.

The Eurosystem [of eurozone central banks] should not increase the liquidity provision, and capital controls need to stay in force until an appropriate support package has been agreed by all parties and the solvency of both the Greek government and the Greek banking system has been ensured. The Bundesbank president hit out at Athens for causing economic ruin. [Eurozone member states] can decide for themselves not to service their debts, to collect taxes inadequately, and this is something I particularly fear in the case of Greece to lead their country s economy into deep trouble, he said in Frankfurt on Wednesday. The Syriza-led government had not only walked out on the previous agreements, but has been widely criticised as an unreliable negotiating partner. Mr Weidmann’s comments came as France s finance minister Michel Sapin, who is pushing for a deal that would allow Greece to stay in the eurozone, emphasised the greater cost of a Grexit.

“What s costlier? That Greece exits the eurozone and defaults on all its debt? Asking the question is answering it”, Mr Sapin told Radio Classique on Thursday. “A deal is the best solution for Greece and Europe.” “Greek banks have been closed for more than a week. Greece is already in a pre-chaos stat”e, he said. “How history will judge us?” However, Mr Sapin reiterated the need for the Greek government to present credible reforms as well as difficult decisions to balance the budget. “There are taxes to raise, it’s difficult,” he said. Mr Sapin saluted the good attitude of Greek Finance Minister Euclid Tsakalotos at the latest eurogroup meeting of finance ministers. “He came with a lot of modesty”, he said.

“How much money do you want to leave the euro?”

• Greek Government Insider On 5 Months Of ‘Humiliation’ And ‘Blackmail’ (MP)

A senior member of Greece’s negotiating team with its European creditors agreed to a meeting last week in Athens with Mediapart special correspondent Christian Salmon. Speaking on condition that his name is withheld, he detailed the history of the protracted and bitter negotiations between the radical-left Syriza government, elected in January, and international lenders for the provision of a new bailout for the debt-ridden country. The almost two-hour interview in English took place just days before last Sunday’s referendum on the latest drastic austerity-driven bailout terms offered by the creditors, and opposed by Prime Minister Alexis Tsipras, and which were finally rejected by 61.3% of Greek voters.

While the ministerial advisor slams the stance of the international creditors, who he accuses of leading a strategy of deliberate suffocation of Greece’s finances and economy, he is also critical of some of the decisions taken by Athens. His account also throws light on the personal tensions surrounding the talks led by former Greek finance minister Yanis Varoufakis, who resigned from his post on Monday deploring “a certain preference by some Eurogroup participants, and assorted ‘partners’, for my ‘absence’ from its meetings”. The advisor cites threats proffered to Varoufakis by Eurogroup president Jeroen Dijsselbloem, warning he would sink Greece’s banks unless the Tsipras government bowed to the harsh deal on offer, and by German finance minister Wolfgang Schäuble, who he says demanded: “How much money do you want to leave the euro?”

“..amnesties generally favour wealthy people who can pay accountants to exploit loopholes..”

• Swiss Poised To Support Greek Tax Amnesty (SI)

Struggling to pay off more than €300 billion in debts, Greece is banking on Switzerland to help it recover a treasure trove of undeclared assets that tax cheats have stashed in alpine vaults. But anti-tax haven campaigners are sceptical about “undemocratic” tax amnesties that are prone to loopholes, allowing many tax dodgers to wriggle out of their obligations. “The devil is always in the detail with these deals. If Switzerland can claim it is helping to clear untaxed assets out of its banks, this could provide it with a public relations service,” Nicholas Shaxson of Tax Justice Network told swissinfo.ch. “But amnesties generally favour wealthy people who can pay accountants to exploit loopholes, such as insurance wrappers and discretionary trusts.”

Such “slippery structures” render assets “technically declared”, allowing them to remain offshore under the radar of amnesties, Shaxson added. “Tax amnesties only make a difference if the public believe that, once they have ended, the government will assertively go after people who did not disclose,” Heather Low of Global Financial Integrity (GFI) told swissinfo.ch. “Tax cheats in the United States would be afraid of the authorities if they did not disclose during an amnesty. I’m not so sure this would be the case in Greece.” In April, former Greek Finance Minister Yanis Varoufakis announced plans for a global tax amnesty to repatriate overseas funds to Greece. It is believed the government has settled for a one-off 21% levy on those who come clean, pending parliamentary approval of the proposal.

Negotiations between Greece and Switzerland on how best to recover black money hidden in Swiss banks have been ongoing since 2012. But the two sides are reported to be edging closer to a solution that would allow banks to cooperate. While Switzerland would not be an official partner to a Greek tax amnesty, the approval and cooperation of the Swiss authorities would be integral to the scheme working. To this end, two meetings were arranged between the countries in March and April to discuss the practical details of persuading Greek tax cheats to sign up to the amnesty. While not yet concluded, Varoufakis felt encouraged enough to announce Greece’s intended global tax amnesty following a meeting with Swiss officials in April.

“If Russia really wants to take Europe, all they have to do is be patient.”

• The Lesson for the World Coming from Greece (Martin Armstrong)

The mainstream news is painting the Greeks as the bad guys, and the Troika as the savior of Europe. Quite frankly, it is really disgusting. Pictures of an elderly Greek pensioner have gone viral, depicting what the Troika is deliberately doing to the Greek people by punishing them for their own failed design of the euro in a system that is just economically unsustainable. The heartbreaking photographs circulating are of 77-year-old retiree, Giorgos Chatzifotiadis, after he collapsed on the ground openly in tears, driven to despair, outside a Greek bank with his savings book and identity card strewn next to him on the ground. This illustrates the horror the Troika is deliberately inflicting upon the Greek population.

This image illustrates the core of the issue: ordinary Greeks tormented by EU politicians who pretend to care about people. This is not a Greek debt crisis, this is a Euro Crisis and they refuse to admit that what they designed was solely for the takeover of Europe at the cost of the future of everyone, from pensioners to the youth. Chatzifotiadis queued up at three banks in Greece’s second city of Thessaloniki on Friday in the hope of withdrawing pensions on behalf of him and his wife. When he went to a fourth bank, he was told he could not withdraw his €120; the ordeal simply became too much and he fell down in tears in total desperation. His comments were simply that he “cannot stand to see my country in this distress”. He continued to say, “That’s why I feel so beaten, more than for my own personal problems.”

This is just the tip of the iceberg. We are facing terrible times ahead because socialism is completely collapsing. Government employees have lined their pockets, which is precisely the endgame and how Rome collapsed. It was not the barbarians at the gate. It was that the Roman army was not paid and they began hailing their various generals as emperor and they attacked cities who did not support their choice. Only after weakening themselves, then the barbarians came in for easy pickings. If Russia really wants to take Europe, all they have to do is be patient. They will self-destruct for the Troika cannot see any change in thinking for that means they must admit that they were wrong from the outset.

“Schaeuble has a plan for Greece’s exit from the Eurozone,” and added, “this is his best chance to succeed.”

• Varoufakis: Schäuble Wants Grexit, I Prefer Be an MP Known as Yanis (GF)

Former Greek Finance Minister Yanis Varoufakis admitted that Germany appears to have a plan to force Greece outside the Eurozone, even though while he was in office he insisted that Grexit scenarios were a bluff to push the Greek government to accept harsh austerity measures. Talking with reporters at the Greek Parliament café, Varoufakis noted that Wolfgang Schaeuble is the only Eurozone Minister with a specific plan. He also said that the German Finance Minister completely controls the majority of the Eurogroup except for French Finance Minister Michel Sapin.

“Schaeuble has a plan for Greece’s exit from the Eurozone,” and added, “this is his best chance to succeed.” When asked if he believes the Germans are taking into account the estimated cost of a Grexit, Varoufakis argued that Schaeuble believes losses can be controlled. Furthermore, the former Greek Finance Minister stated that it is possible that his exit from the Greek government was due to Schaeuble’s pressure.

As for whether he believes that a deal will be achieved in the next 24 hours, he initially said “no comment” but later added: “I would like an agreement to be reached but only if it is also a solution. At the moment, we cannot judge the outcome.” People at the café called him “Minister” but he always answered: “I’m not a Minister. I’m a member of Parliament.” “Once a Minister, always a Minister,” he said, adding that he prefers to be an MP and be called Yanis. Asked to comment on the recent referendum results, he stated that the outcome was epic and grandiose, although he avoided to answer the question about whether the citizens voted “No” but the government is following the “Yes” direction.

Nice compilation.

• Max Keiser and Yanis Varoufakis Retrospective (2012 footage)

Taken from Keiser Report episode 247 & 301 a look back at the dialogue between Max & Yanis in 2012 which should give some insight into the battle with financial terrorism unfolding in Greece.

“There’s quite precisely no common ground between the two belief systems, and yet self-proclaimed Christians who spout Rand’s turgid drivel at every opportunity make up a significant fraction of the Republican Party just now.”

• Darwin’s Casino (John Michael Greer)

Our age has no shortage of curious features, but for me, at least, one of the oddest is the way that so many people these days don’t seem to be able to think through the consequences of their own beliefs. Pick an ideology, any ideology, straight across the spectrum from the most devoutly religious to the most stridently secular, and you can count on finding a bumper crop of people who claim to hold that set of beliefs, and recite them with all the uncomprehending enthusiasm of a well-trained mynah bird, but haven’t noticed that those beliefs contradict other beliefs they claim to hold with equal devotion. I’m not talking here about ordinary hypocrisy. The hypocrites we have with us always; our species being what it is, plenty of people have always seen the advantages of saying one thing and doing another.

No, what I have in mind is saying one thing and saying another, without ever noticing that if one of those statements is true, the other by definition has to be false. My readers may recall the way that cowboy-hatted heavies in old Westerns used to say to each other, “This town ain’t big enough for the two of us;” there are plenty of ideas and beliefs that are like that, but too many modern minds resemble nothing so much as an OK Corral where the gunfight never happens. An example that I’ve satirized in an earlier post here is the bizarre way that so many people on the rightward end of the US political landscape these days claim to be, at one and the same time, devout Christians and fervid adherents of Ayn Rand’s violently atheist and anti-Christian ideology.

The difficulty here, of course, is that Jesus tells his followers to humble themselves before God and help the poor, while Rand told hers to hate God, wallow in fantasies of their own superiority, and kick the poor into the nearest available gutter. There’s quite precisely no common ground between the two belief systems, and yet self-proclaimed Christians who spout Rand’s turgid drivel at every opportunity make up a significant fraction of the Republican Party just now. Still, it’s only fair to point out that this sort of weird disconnect is far from unique to religious people, or for that matter to Republicans. One of the places it crops up most often nowadays is the remarkable unwillingness of people who say they accept Darwin’s theory of evolution to think through what that theory implies about the limits of human intelligence.

If Darwin’s right, as I’ve had occasion to point out here several times already, human intelligence isn’t the world-shaking superpower our collective egotism likes to suppose. It’s simply a somewhat more sophisticated version of the sort of mental activity found in many other animals. The thing that supposedly sets it apart from all other forms of mentation, the use of abstract language, isn’t all that unique; several species of cetaceans and an assortment of the brainier birds communicate with their kin using vocalizations that show all the signs of being languages in the full sense of the word—that is, structured patterns of abstract vocal signs that take their meaning from convention rather than instinct.

“Quoting a fourth century bishop, he called the unfettered pursuit of money “the dung of the devil”..”

• Pope Calls For New Economic Order, Criticizes Capitalism (Reuters)

Pope Francis on Thursday urged the downtrodden to change the world economic order, denouncing a “new colonialism” by agencies that impose austerity programs and calling for the poor to have the “sacred rights” of labor, lodging and land. In one of the longest, most passionate and sweeping speeches of his pontificate, the Argentine-born pope also asked forgiveness for the sins committed by the Roman Catholic Church in its treatment of native Americans during what he called the “so-called conquest of America.” Quoting a fourth century bishop, he called the unfettered pursuit of money “the dung of the devil,” and said poor countries should not be reduced to being providers of raw material and cheap labor for developed countries.

Repeating some of the themes of his landmark encyclical “Laudato Si” on the environment last month, Francis said time was running out to save the planet from perhaps irreversible harm to the ecosystem. Francis made the address to participants of the second world meeting of popular movements, an international body that brings together organizations of people on the margins of society, including the poor, the unemployed and peasants who have lost their land. The Vatican hosted the first meeting last year. He said he supported their efforts to obtain “so elementary and undeniably necessary a right as that of the three “L’s”: land, lodging and labor.”

“Let us not be afraid to say it: we want change, real change, structural change,” the pope said, decrying a system that “has imposed the mentality of profit at any price, with no concern for social exclusion or the destruction of nature.” This system is by now intolerable: farm workers find it intolerable, laborers find it intolerable, communities find it intolerable, peoples find it intolerable … The earth itself – our sister, Mother Earth, as Saint Francis would say – also finds it intolerable,” he said in an hour-long speech that was interrupted by applause and cheering dozens of times.

The pontiff appeared to take a swipe at international monetary organizations such as the IMF and the development aid policies by some developed countries. “No actual or established power has the right to deprive peoples of the full exercise of their sovereignty. Whenever they do so, we see the rise of new forms of colonialism which seriously prejudice the possibility of peace and justice,” he said. “The new colonialism takes on different faces. At times it appears as the anonymous influence of mammon: corporations, loan agencies, certain ‘free trade’ treaties, and the imposition of measures of ‘austerity’ which always tighten the belt of workers and the poor,” he said.

Debt Rattle July 1 2015

Jul 012015

July 1, 2015 Posted by Raúl Ilargi Meijer at 10:46 am Finance Tagged with: bailout, China, debt relief, Greece, IMF, refugees, Steve Keen, Troika, Tsipras 12 Responses »

Harris&Ewing Army surplus 1919

• Tsipras Prepared To Accept “All Bailout Conditions” (FT)

• Unpublished Troika Documents Say Greece Needs Substantial Debt Relief (Guardian)

• Prof. Steve Keen On Greek Debt Crisis (BBC)

• Greece’s Creditors Need A Wake-Up Call (Daniel Alpert)

• In Greece, IMF Repeats Its Own Mistakes (WSJ)

• IMF’s Uneven Dealings With Greece Is Saga Of Embarrassment (Guardian)

• In Its Worst Hour, Greece Overtakes Italy as Top Destination for Refugees (BBG)

• ECB Poised To Raise Heat On Greece’s Beleaguered Banks (FT)

• Why I Set Up The Greek Bailout Crowdfund (Thom Feeney)

• China’s Central Bank Can No Longer Save China (MarketWatch)

• American Workers Are Burned Out And Overworked (MarketWatch)

• We Are Living in the Anti-Europe (Spiegel)

• The Euro Is Only Headed Down: Goldman Sachs (CNBC)

• Systemic Turmoil, Structural Reform (Jim Kunstler)

• The Care and Feeding of a Financial Black Hole (Dmitry Orlov)

Sun Tzu?

• Tsipras Prepared To Accept “All Bailout Conditions” (FT)

Alexis Tsipras will accept all his bailout creditors’ conditions that were on the table this weekend with only a handful of minor changes, according to a letter the Greek prime minister sent late Tuesday night and obtained by the Financial Times. The two-page letter, sent to the heads of the EC, IMF and ECB, elaborates on Tuesday’s surprise request for an extension of Greece’s now-expired bailout and for a new, third €29.1bn rescue, writes Peter Spiegel. Although the bailout’s expiry at midnight Tuesday night means the extension is no longer on the table, Mr Tsipras’ new letter could serve as the basis of a new bailout in the coming days.

Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained. On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request. “The Hellenic Republic is prepared to accept this staff-level agreement subject to the following amendments, additions or clarifications, as part of an extension of the expiring [bailout] program and the new [third] loan agreement for which a request was submitted today, Tuesday June 30th 2015,” Mr Tsipras wrote.

No wonder they were never published: policy is 180º removed from the findings.

• Unpublished Troika Documents Say Greece Needs Substantial Debt Relief (Guardian)

Greece would face an unsustainable level of debt by 2030 even if it signs up to the full package of tax and spending reforms demanded of it, according to unpublished documents compiled by its three main creditors. The documents, drawn up by the so-called troika of lenders, support Greece’s argument that it needs substantial debt relief for a lasting economic recovery. They show that, even after 15 years of sustained strong growth, the country would face a level of debt that the IMF deems unsustainable. The documents show that the IMF’s baseline estimate – the most likely outcome – is that Greece’s debt would still be 118% of GDP in 2030, even if it signs up to the package of tax and spending reforms demanded.

That is well above the 110% the IMF regards as sustainable given Greece’s debt profile, a level set in 2012. The country’s debt level is currently 175% and likely to go higher because of its recent slide back into recession. The documents admit that under the baseline scenario “significant concessions” are necessary to improve Greece’s chances of ridding itself permanently of its debt financing woes. Even under the best case scenario, which includes growth of 4% a year for the next five years, Greece’s debt levels will drop to only 124%, by 2022. The best case also anticipates €15bn (£10bn) in proceeds from privatisations, five times the estimate in the most likely scenario.

But under all the scenarios, which all assume a third bailout programme, looked at by the troika, Greece has no chance of meeting the target of reducing its debt to “well below 110% of GDP by 2022” set by the Eurogroup of finance ministers in November 2012. In the creditors own words: “It is clear that the policy slippages and uncertainties of the last months have made the achievement of the 2012 targets impossible under any scenario”. These projections are from the report Preliminary Debt Sustainability Analysis for Greece, one of six documents that are part of the full set of materials that comprise the “final” proposal sent to Greece by its creditors last Friday.

Stevo!

• Prof. Steve Keen On Greek Debt Crisis (BBC)

Sound analysis.

• Greece’s Creditors Need A Wake-Up Call (Daniel Alpert)

Why would the banks and bond buyers of northern Europe have lent money to Greece in the first place? Or, for that matter, to housing speculators in Spain, to banks in Ireland or to the governments of Italy and Portugal? The answer is that the structure of the incomplete European monetary union gave them strong incentive to do so. After all, with substantial excess wealth and a resistance to inflating their own economies through internal spending, the euro regime itself encouraged trade-surplus countries such as Germany and the Netherlands to lend to their weaker brethren in order to bolster the peripheral countries’ ability to import even more of the surplus nations’ production (to the increasing benefit of the latter and the eventual implosion of the former).

And they were able to do so in a common currency, without the risk of currency devaluation by borrowers. This was mercantilism writ large and was without precedent in modern economic history, as there is no mechanism in the EMU to resolve the resulting imbalances and the captive peripheral countries had relinquished their ability to address the imbalances by adjusting exchange rates. And yet the credit providers expected -and still expect- to get their money back. The flip side of this debacle is that, when Greece defaults (or goes into what the IMF will almost certainly deem on this week to be “arrears,” to avoid use of the “D” word), there is really not much that the IMF, the ECB and the euro group central banks can do to get their money back.

And therein lies the realpolitik of the situation. Yes, it is not unlikely that the ECB may conclude that, upon Greece’s default, that country’s banks are no longer solvent and are not worthy of infusions of additional euro to maintain their liquidity. And, yes, that would result in the prolonging of the bank-capital controls Greece instituted on Monday to hold onto whatever euro they have left, and likely even to the issuance by Greece of an internal (and heavily devalued) currency to permit its moribund economy some semblance of functionality.

But none of those things will get the rest of the Europeans their money back. Moreover, as there is no provision in the treaty governing the EMU for ejecting a country from the euro zone (and certainly no basis for ejecting Greece from the European Union), further recourse is severely limited and of questionable force even if it were available. As a result, Greece, with its back to the wall already and its economy in shambles, will suffer further until it rebuilds but it will suffer the double-edged fate of a “debtor-in-possession,” to use a U.S. bankruptcy analogy. It will no longer be making payments on its debt, and may end up disavowing some of that debt altogether, but will remain a sovereign power in possession of its internal assets and resources. And unlike a private party in bankruptcy, Greece will be operating under its own rule of law.

The IMF is in the hands of the lenders, who don’t want restructuring. The IMF is making itself redundant.

• In Greece, IMF Repeats Its Own Mistakes (WSJ)

As Greece defaults on its payments to the IMF, is the emergency lender at risk of repeating bailout history? So say some of its sharpest critics. A host of economists have accused the IMF of setting up Greece for failure in 2010 by rejecting an initial debt restructuring and focusing heavily on near-term budget cuts. Instead of a return to growth by 2012, as the fund forecast, the country’s economy ended up shrinking by 25% over four years. By 2012, the IMF appeared to have learned its lesson. Besides facilitating a restructuring of privately held debt, fund officials also pressed Europe to give Greece significantly more debt relief. The IMF seemingly took every opportunity to remind the eurozone of its promise to help cut Greece’s debt ratio to significantly below 110% of GDP from over 170%.

Some IMF officials privately said it would be difficult to reach that level without a write-down of the value of the debt. The fund also admitted that it underestimated the effects of budget belt-tightening on Greece and other eurozone countries. And the fund gave a half-hearted mea culpa in 2013, saying that a restructuring earlier would have been helpful, (despite saying in the same breath it wouldn’t have done anything different). But Ajai Chopra, a visiting fellow at the Peterson Institute for International Economics and a former deputy director of the IMF’s European Department, said recent bailout negotiations with Greece show the IMF and European creditors are treading the same ground.

“They are bent on repeating past policy errors of forcing drastic growth-killing fiscal adjustment in a short period of time instead of providing debt relief,” Mr. Chopra said. “I recognize that it is a fantasy to think that creditors are willing to adopt a less stifling mix of financing and adjustment that promotes growth,” he said. “But it is equally a fantasy to think the current set of policies insisted on by creditors will address Greece’s long-term problems.” Joseph Stiglitz, a Columbia University professor and former chief economist for the World Bank, said “doubling down on a set of recipes that have proven themselves to produce a depression is not a recipe for success.”

“The body watered down long-held lending principles and its economic projections turned out to be worthless..”

• IMF’s Uneven Dealings With Greece Is Saga Of Embarrassment (Guardian)

One big loser from Greece’s (likely) default is the reputation of the IMF. The IMF, we used to believe, only stepped in when a country’s path to debt sustainability was clear and economic revival could be plotted with reasonable confidence. The organisation’s standing as a global lender of last resort relied on the even-handed application of that principle. In Greece, it’s hard to say the debt was ever sustainable in the world after the global financial crisis of 2007-09. In 2010, when the IMF contributed €30bn to the first bailout programme, Greece hadn’t yet experienced its deep recession. But the risk of deep spending cuts making the position worse was obvious: the unpromising backdrop was a weak eurozone in which banks remained under-capitalised.

Indeed, the IMF itself has admitted that it let its lending standards slip in Greece and that its economic projections may have been “overly optimistic”. A 2013 evaluation report confessed there was “a tension between the need to support Greece and the concern that debt was not sustainable with high probability.” The response was “to lower the bar for debt sustainability in systemic cases”. In other words, Greece was viewed as an exceptional case because it was a member of the eurozone, where a blow-up could ricochet around the world. You can’t blame non-eurozone contributors to the IMF coffers for smelling a European rat. The managing director of the IMF in 2010 was Dominique Strauss-Kahn and he was followed by another member of the French financial establishment, Christine Lagarde.

Hindsight is perfect but even in 2010 the IMF was behaving out of character. Normally, the body only gets involved when other lenders have been made to accept steep losses. In Greece, debt relief only arrived in the second bailout in 2012 and, even then, private lenders suffered only modest financial pain. Over the past six months of talks, the IMF’s stance on debt write-downs has also been wishy-washy: it seemed to be in favour without ever championing the cause openly. In the end, the IMF, at the head of the queue of creditors, will probably be repaid by Greece. But this saga is an embarrassment. The body watered down long-held lending principles and its economic projections turned out to be worthless. There is fuel there for critics of the IMF who argue the body is designed for the pre-globalisation world of the 1940s. Those voices will grow louder.

Plent of misery to go around.

• In Its Worst Hour, Greece Overtakes Italy as Top Destination for Refugees (BBG)

It couldn’t have come at a worse time for Greece. With the country on its knees, the number of refugees arriving by sea is at a record and for the first time overtakes Italy, a country almost nine times as rich. In the first six months of the year, Greece – a country of 11 million – received more migrants than Italy – a country of 60 million – according to a report by the UN Refugee Agency. The reason is Syria. Almost 40,000 Syrians seeking to escape the war take the eastern Mediterranean route from Turkey to reach a handful of Greek islands, principally Lesbos. Conditions on arrival are notoriously inadequate and unlikely to get better with the country now under capital controls with its citizens limited to 60 euros a day in daily withdrawals.

Not its function.

• ECB Poised To Raise Heat On Greece’s Beleaguered Banks (FT)

When the eurozone’s central bankers meet in Frankfurt on Wednesday, they could make a decision which some officials fear could push one or more of Greece’s largest banks over the edge. The ECB’s governing council is poised to impose tougher haircuts on the collateral Greek lenders place in exchange for the emergency loans. If the haircuts are tough enough, it could leave banks struggling to access vital funding. The ECB on Sunday imposed an €89bn ceiling for so-called emergency liquidity assistance, effectively putting the Greek banking system into hibernation. If, to reflect the increased risk of default, the ECB now applied bigger discounts to the Greek government bonds and government-backed assets which lenders use as collateral, that could leave banks struggling to roll over those emergency overnight loans.

Doubts abound in Frankfurt and Brussels about whether all of Greece’s four biggest banks can survive the week. Even with bank branches closed until next Tuesday and ATM withdrawals limited to €60, officials fear some of the country’s lenders are so weak that they will struggle to honour their customers until Sunday’s referendum, when Greeks will decide whether to accept the terms offered by international creditors. The Syriza-led government’s confirmation that it will not pay the €1.5bn it owes to the International Monetary Fund on Tuesday and the expectation that Athens will fall out of its bailout programme at midnight has put the ECB in a delicate position.

The ECB’s senior officials have now openly acknowledged the possibility of a Greek exit from the currency union. Benoît Cœuré, a member of the ECB’s executive board, told French newspaper Les Echos in an interview published on Tuesday: “A Greek exit from the eurozone, so far a theoretical issue, can unfortunately not be excluded any more.”

Still got a few billion to go.

• Why I Set Up The Greek Bailout Crowdfund (Thom Feeney)

You know when you just have a little idea, have a laugh to yourself and then move on with your day? I do that a lot, only on Sunday night, I didn’t let it pass but decided to try it out for real. I wondered, could the people of Europe have a crack at fixing this? Less talk, more direct action So, sat at the table after dinner, I started a crowdfunding campaign to try to rescue the Greek economy. Some basic maths told me that I only needed the entire population of Europe to donate €3.19 (£2.26) to reach the amount of the bailout fund. I included some nice perks for donating, including a Greek salad and holiday in Athens for two, and set up a page on IndieGoGo and a Twitter account.

Nobody was that interested at first, but after a couple of small stories on the internet, the idea seemed to explode overnight. I woke up to 1,200 emails and it got even more crazy from there. I set up the crowdfunding campaign to support the Greek bailout because I was fed up with the dithering of our politicians. Every time a solution to bail out Greece is delayed, it’s a chance for politicians to posture and display their power, but during this time the real effect is on the people of Greece. I wondered, could the people of Europe just have a crack at fixing this? Less talk, more direct action. If we want to sort it, let’s JFDI (just effing do it)! On Tuesday, between leaving for work and returning home, the crowdfunding page had raised over €200,000 in around six hours, which was incredible.

This isn’t just about raising the cash, though. In providing the perks, we would be stimulating the Greek economy through trade – buying Greek products and employing Greeks to source and send the perks out. The way to help a struggling economy is by investment and stimulus – not austerity and cuts. This crowdfunding is a reaction to the bullying of the Greek people by European politicians, but it could easily be about British politicians bullying the people of the north of England, Scotland and Wales. I want the people of Europe to realise that there is another option to austerity, despite what David Cameron and Angela Merkel tell you.

The reaction has been tremendous, I’ve received thousands of goodwill message and as I write almost €630,000 has been pledged by more than 38,000 donors. Many Greek people are messaging me to say how overjoyed they are to hear that real people around Europe care about them. It must be hard when you think the rest of the continent is against you.

Danger ahead.

• China’s Central Bank Can No Longer Save China (MarketWatch)

China’s domestic stock markets may have bounced back Tuesday, but the damage from the panic despite interest-rate and reserve-ratio cuts at the weekend will take longer to heal. The big problem is that the People’s Bank of China explicitly targeted the plunging stock market, and yet the Shanghai Composite kept falling, revealing that the PBOC was not in control. Even after Tuesday afternoon’s sharp rebound, the index is still flirting with bear territory, taken as a 20% drop from the recent high. The reprieve for the stock market came only after the Ministry of Finance stepped in to say that the state’s pension fund may be allowed to invest up to 30% of its 3.5 trillion yuan ($565 billion) into securities.

Now that the PBOC has played its hand — and revealed it to be a weak one — the next question is: What else is beyond its control? This new frailty can be expected to resonate beyond the millions of novice retail investors who might now conclude the Chinese equity rally is over. So much of the “risk-on” case for China is underpinned by a belief that a Beijing Put of never-ending stimulus can be deployed whenever the authorities so choose. This goes together with a belief that policy makers have a plan to deal with slower growth, scary debt levels, and negotiating a variety of financial and currency reforms. Yet much of this is faith based on little more than fear, as the alternative is so unpalatable.

For now, the immediate concern is what the ongoing slump in Chinese shares does to the psyche of domestic retail investors. As this column has argued, the new issues market is pivotal, as it has been instrumental in driving stock mania by continuously delivering outsized gains. Reports that China’s securities regulator is considering suspending IPOs to help stabilize the wider market underlines this. But it could be a high-risk move and just as easily send an unequivocal signal that the bull market is over.

“..how can workers say they feel both burned out and claim to be happy?”

• American Workers Are Burned Out And Overworked (MarketWatch)

American workers have found themselves in a 21st century paradox. More than half of Americans (53%) are burned out and overworked, according to an inaugural survey of more than 2,000 workers by Staples Advantage, the business-to-business division of office supplier Staples. And yet an overwhelming number (86%) say they’re happy and willing to work for a promotion within their organization, says Dan Schawbel, founder of WorkplaceTrends.com, a research and advisory service for the human resources industry, who helped create the Staples survey. So how can workers say they feel both burned out and claim to be happy?

“While many are still happy at work, we have to ask whether it’s because they’re truly inspired and motivated, or simply conditioned to the new reality,” says Schawbel, who is also the author of “Promote Yourself: The New Rules for Career Success” and founder of Millennial Branding, a management and consulting firm. “People understand that this is just the world they’re living in now.” But all this overworking may be hurting productivity, the survey found. About half of respondents acknowledged they receive too much email, with about one-third of those saying that email overload hurts productivity. There is an expectation to be always available: The majority of people (52%) who send a work-related email expect a reply within 12 and 24 hours, according to a separate survey released earlier this year of 1,500 people by MailTime.com, an app that aims to organize and simplify emails.

“..it is those institutions that are farthest from the voters that wield the greatest power – the ECB, the IMF and the executive.”

• We Are Living in the Anti-Europe (Spiegel)

Tired. Everyone is so tired — the politicians, the people, the media, the institutions, democracy. Europe is tired, exhausted, haggard. Yet another marathon negotiating session? How many have there already been? Yet again these tired eyes of overexertion of those involved in the negotiations. Once again a postponement or a compromise that nobody is convinced of and is really just the start of the next crisis. This is how things have been proceeding for years now. Enough already. We don’t want to speak of greatness, or of political heroes or of far-reaching actions. That’s difficult in a complex system like Europe. We want to speak of the minimum: Politics requires successes in order to legitimate itself. It has to solve problems, especially the really tough ones that require a lot of effort.

But that’s not happening. In the case of Greece, all we have been seeing are pseudo-solutions, if even that. A brief breather is always given, only to be followed by the next marathon meeting and the next expedited proceedings in the German parliament. The exhaustion will continue to grow, as will the weariness that will catapult the next populists into power – the very ones who will make solving the problems even harder. It’s a vicious cycle. But exhaustion is merely one of the costs of this permanent state of crisis. The truth is that we have lost Europe in recent years. It is no longer the Europe that its generation of founders and builders promised – people like Robert Schuman, Konrad Adenauer, Helmut Kohl and François Mitterrand. It’s almost the opposite. What we are living in today is an anti-Europe.

Much has contributed to this state of affairs – not least the euro crisis. But nothing has been as damaging as the protracted fight over Greece. Europe promised joint growth for everyone. Instead we have competition for prosperity. Many Germans don’t want to have to sacrifice anything for Greece, whereas many Greeks expect Germans to make a contribution to ensure that what the Greeks are forced to give up doesn’t become too harsh. Europe promised an end to nationalist thinking and even the end of the nation-state at some point in the future. In truth, the Continent is going through a renationalization. Few continue to believe in the greater good and the states have their eyes set on their own interests.

Europe promised reconciliation with its history. But instead, history has become a weapon, with Greece demanding that Germany pay World War II reparations. Meanwhile, images of German Chancellor Angela Merkel wearing a Hitler mustache have become a regular feature at anti-austerity protests all over Europe. Europe promised political equality. The intention was for France and Germany to lead on the Continent, while at the same time taking into account the concerns of the smaller member states. But in the crisis, Germany has overtaken its partners and become the EU’s dominant power.

Europe promised a Europe of the people. Instead, it is those institutions that are farthest from the voters that wield the greatest power – the ECB, the IMF and the executive. Parliaments, on the other hand, which have the greatest democratic legitimacy, are being forced to fast-track their approval of decisions made in Brussels.

“..the euro has been like a brick – you can throw it, just not very far..”

• The Euro Is Only Headed Down: Goldman Sachs (CNBC)

Amid Greece’s Sisyphean drama, the euro has been like a brick – you can throw it, just not very far. But that’s only temporary, Goldman Sachs says, sticking with its call for near-parity with the dollar. “This week’s jump in the euro on news of the Greek referendum made no sense to us,” the bank’s analysts said in a note Tuesday. “We continue to see mounting tensions over Greece as a catalyst for the euro-dollar to go near parity, if contagion to other peripherals causes the European Central Bank (ECB) to accelerate quantitative easing.” In one year’s time, the euro will be fetching just 95 cents, Goldman said.

Greece missed a repayment worth about €1.5 billion that was due to the IMF Tuesday, making it the first advanced nation to ever default on a debt to the global financial stability agency. That followed months of contentious negotiations with its creditors over exchanging reforms for another bailout. Those talks came to a standstill after a surprise move by Greek Prime Minister Alexis Tsipras to call for a referendum on whether to accept the creditors’ proposals, even though those proposals may no longer be on the table. The country is now subject to capital controls, meaning funds can no longer be transferred outside the country and ATM withdrawals are limited to just €60 a day.

“All this trouble with money comes from one meta problem: aggregate industrial growth has ended.”

• Systemic Turmoil, Structural Reform (Jim Kunstler)

Can anyone stabilize this bitch? At daybreak, anyway, the Federal Reserve governors were all bagging Z’s in their trundle beds. Maybe after a few pumpkin lattes they’ll jump in and tell their trading shills to BTFD. The soma-like perma-trance among those who follow markets and money matters appears to be ending abruptly with the recognition that sometimes robots and humans alike run shrieking to the exit. A pity when they get to the door and discover it opens onto a cliff-edge. Look out below.

All this trouble with money comes from one meta problem: aggregate industrial growth has ended. It has stopped more in some parts of the world than others, while in the USA it has actually been contracting. The cause is simple: the end of cheap energy, oil in particular. At over $70-a-barrel the price kills economies; under $70-a-barrel the price kills oil production. The bottom line is that, in the broadest sense, the world can no longer count on getting more stuff, except waste, garbage, political unrest, and the other various effects of entropy. From now on, there is only less of everything for a global population that has not stopped growing. The folks on-board are still having sex, of course, which has a certain byproduct.

This dynamic was plain to see a decade ago, but the people who run finance and governments thought it would be a good idea to maintain the appearance of growth via the usufruct mechanisms of central banking: ZIRP, QE, market intervention, and universal accounting fraud. It’s not working so well. Debt was generated in place of the missing growth, and now there is too much of it that can’t be repaid on a coherent schedule. Many nations, parties, and entities are in trouble with debt and the prospective defaults are starting to pile up like SUVs on a fog-bound highway. Greece is just the first one fishtailing into a guard-rail.

The magic moment will come when it becomes obvious that these systemic quandaries have no solution. The system itself is programmed for implosion, in particular and most immediately the banking sector, where most of the untruth and illusion is lodged these days. As it stands exposed, the people are compelled to shake off their faith in what it represents: order, authority, trust. Institutions fail and each failure acts as a black hole, sucking air, light, and even time out of the system.

“..it’s puppets all the way down.”

• The Care and Feeding of a Financial Black Hole (Dmitry Orlov)

A while ago I had the pleasure of hearing Sergey Glazyev—economist, politician, member of the Academy of Sciences, adviser to Pres. Putin—say something that very much confirmed my own thinking. He said that anyone who knows mathematics can see that the United States is on the verge of collapse because its debt has gone exponential. These aren’t words that an American or a European politician can utter in public, and perhaps not even whisper to their significant other while lying in bed, because the American eavesdroppers might overhear them, and then the politician in question would get the Dominique Strauss-Kahn treatment (whose illustrious career ended when on a visit to the US he was falsely accused of rape and arrested).

And so no European (never mind American) politician can state the obvious, no matter how obvious it is. The Russians have that pretty well figured out by now. Yes, maintaining a dialogue and cordial directions with the Europeans is important. But it is well understood that the Europeans are just a bunch of American puppets with no will or decision-making authority of their own, so why not talk to the Americans directly? Alas, the Americans too are puppets. The American officials and politicians are definitely puppets, controlled by corporate lobbyists and shady oligarchs. But here’s a shocker: these are also puppets—controlled by the simple imperatives of profitability and wealth preservation, respectively. In fact, it’s puppets all the way down. And what’s at the bottom is a giant, ever-expanding, financial black hole.

Do you like your black hole? If you aren’t sure you like it, then let me ask you some other questions: Do you like the fact that your credit cards still work, or that you can still keep money in the bank and even get cash out of an ATM, or that you are either receiving or hope to eventually receive a pension? Do you like the fact that you can get useful things—food, gas, airline tickets—for mere pieces of paper with pictures of dead white men on them? Do you like the fact that you have internet access, that the lights are on, and that there is water on tap? Well, if you like these things, then you must also like the financial black hole, because that’s what’s making all of these things possible in spite of your country being bankrupt. Perhaps it’s a love-hate relationship: you love being able to pretend that everything is still OK even though you know it isn’t, and you wish to enjoy a bit more of the business-as-usual before it all goes to hell, be it for a few more days or another year or two; but you hate the fact that eventually the black hole will suck you in, after which point things will definitely… suck.

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