Apr 232016
 
 April 23, 2016  Posted by at 9:33 am Finance Tagged with: , , , , , , , , ,  


Alfred Palmer New B-25 bomber at Kansas City plant of North American Aviation 1942

Albert Edwards: Central Bankers Lead Us On The Road To Perdition (ZH)
America’s Wealth Effect From Rising Home Prices Has Been Cut in Half (BBG)
China’s Great Ball of Money Is Rushing Into Commodities Futures (BBG)
Ex-BOJ Economist Suggests Tax to Make Japan Inc. Spend Their Cash (BBG)
US Oil Megaprojects Dreamed Up a Decade Ago Thrive Amid Price Slump (BBG)
Will the Fossil Fuel Industry Take the Rest of the Economy Down With It? (Ahmed)
SunEdison: Death Of A Solar Star (FT)
The Inside Story Of Vancouver’s Wildest Property Deal (ZH)
Greece’s Debt Crisis Looks Familiar, But Consequences May Be Worse (FT)
Lenders Tell Greece To Prepare Contingency Package Of Extra Reforms (R.)
The Economic Consequences Of The Eurozone (Coppola)
Refugee, Migrant Flow From Turkey To Greece Picking Up Again (Reuters)

“..Joe and Joanna Sixpack want to scream in rage. They are doing so by rejecting the establishment political parties and candidates at almost every electoral turn..”

Albert Edwards: Central Bankers Lead Us On The Road To Perdition (ZH)

Earlier this week we described the personal come to non-GAAP Jesus moment of trading commentator Richard Breslow, who confessed in no uncertain terms that he has had it with endless central banking intervention: “a portfolio built to only withstand stress thanks to central bank intervention is one destined to blow-up spectacularly. The embedded flaw in this new logic is that central banks give investors perfect foresight. And nothing can go wrong… You don’t need to be a Taleb or Mandelbrot to calculate that we have been having once in a hundred year events on a regular basis for the last thirty years.”

Today it is another famous skeptic, SocGen’s Albert Edwards who has had enough and says he feels “utterly depressed” because he has not “one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result. The only people who will benefit are not investors, but anarchists who will embrace with delight the resulting chaos these policies will bring!” As he openly warns his readers : “I have long recognised my own contrariness (or is it bloody-mindedness) and hopefully put it to good use in my chosen profession. If you want the consensus bull-market cheerleading nonsense, readers know it is amply available elsewhere.” With that warning in place, here is why the man who popularized the deflationary “Ice Age” blows up”

“I am neither monetarist nor Keynesian. I see merit and demerit in both sides of a very fractious argument. But what I do know is when in the last few weeks I have heard that Janet Yellen sees no bubble in the US, when Ben Bernanke hones and restates his helicopter money speech, and when Mario Draghi says that the ECB’s policy of printing money and negative interest rates was working, I feel utterly depressed (I could also quote similar nonsense from Japan, the UK and China). I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result. The only people who will benefit are not investors, but anarchists who will embrace with delight the resulting chaos these policies will bring!”

We said in 2010 when the Fed launched QE2 that the ultimate outcome would be civil (or more than civil) war, so we thoroughly agree with Edwards “depression” because sadly he is right, but since stocks keep rising, few others seem to care. Edwards’ lament continues:

“I’m not really sure how much more of this I can take. So here we are 5, 6 or is it now 7 years into this economic recovery and it still remains pathetically weak. And so it should in the wake of one of the biggest private sector credit bubbles in history. The de-leveraging hangover was always going to be massive and so it is. Quick-fix monetary QE nonsense has made virtually no difference to the economic recoveries other than to inflate asset prices, make the rich richer, inequality worse and make Joe and Joanna Sixpack want to scream in rage. They are doing so by rejecting the establishment political parties and candidates at almost every electoral turn and seeking out more extreme alternatives at both ends of the political spectrum. And who can blame them apart from the chattering classes?

I have just returned from Germany on a marketing trip. I absolutely agreed with their Finance Minister Schäuble when he blamed ECB loose money policies for contributing to the rise in the extremist right Alternative for Germany party. Schäuble, “said to Mario Draghi…be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy,” And this is not just a German phenomena – it is a global one. The people are angry and they are lashing out. But central bankers have painted themselves into a corner with their overconfident rhetoric and monetary experiments. They have now committed us all to their road to perdition.”

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Deflation 101: “..around the middle of 2005, households would spend an extra $3.40 in the event that their home gained in value by $100. Near the end of 2015, households would increase outlays by just $1.70..”

America’s Wealth Effect From Rising Home Prices Has Been Cut in Half (BBG)

The U.S. consumer might be the engine of global growth – just not the roaring V12 it used to be. From the fourth quarter of 2003 through 2006, amid the real estate bubble, personal consumption expenditures grew at an average annual clip of 3.5%. Since the S&P/Case-Shiller Composite 20-City Home Price Index bottomed out in March 2012, however, personal consumption expenditures have increased by just 2.3%, on average. In an economic letter published by the Federal Reserve Bank of Dallas, economists John Duca, Anthony Murphy, and Elizabeth Organ identify one reason why this American muscle car has lost its nitrous oxide. The researchers found that the wealth effect from real estate – that is, the extent to which home price appreciation juices consumer spending – has been cut in half since the mid-2000s:

The chart shows that around the middle of 2005, households would spend an extra $3.40 in the event that their home gained in value by $100. Near the end of 2015, households would increase outlays by just $1.70 if real estate values rose by the same amount. “In other words, home prices in 2015 need to rise double as fast as in 2005 in order to generate the same impact on consumer spending,” writes Torsten Slok, chief international economist at Deutsche Bank. “This weaker wealth effect is a key reason why the recovery since 2009 has been so weak.” This finding reinforces the challenge that monetary policymakers faced in reflating the U.S. economy via large-scale asset purchases, as this transmission channel didn’t pack the same punch it used to.

The wealth effect for liquid assets, such as bank deposits, is substantially higher than for illiquid assets like real estate, a testament to the ease with which the former can be deployed. The housing bubble of the aughts was characterized not only by soaring real estate values, but also households’ penchant for using real estate as a piggy bank to finance current consumption. In the wake of the crisis, access to credit by this channel was curtailed dramatically and the debt overhang served as a notable drag on consumption, to boot. “In the U.S., increased availability of consumer and mortgage credit, along with rising asset prices, contributed greatly to the consumption boom in the mid-2000s; reversals in these factors exacerbated the bust in consumption during the Great Recession,” the authors wrote.

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A huge bubble in things nobody wants. China gets nuttier by the day.

China’s Great Ball of Money Is Rushing Into Commodities Futures (BBG)

Chinese speculators have a new obsession: the commodities market. Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete. “The great ball of China money is moving away from bonds and stocks to commodities,” said Zhang Guoyu at Tebon Securities “We’ve seen a lot of people opening accounts for commodities futures recently.”

The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea. China’s army of investors is honing in on raw materials amid signs of a pickup in demand and as the nation’s equities fall the most among global markets and corporate bond yields head for the steepest monthly rise in more than a year. Hao Hong, chief China strategist at Bocom International in Hong Kong, says the improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders. “These guys are going nuts,” Hong said. “Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015.”

The gain in steel prices isn’t just on the futures market, with spot prices for the physical product also rallying amid a sudden shortage as construction activity accelerates. Rebar prices have risen 57% this year on average across China, according to Beijing Antaike Information Development, a state-owned consultancy. Even after output of steel increased to the highest monthly volume on record in March, rebar inventory is still falling, signaling a supply deficit.

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No-one wishes to acknowledge that it’s over. There’s a reason Japan Inc. is not investing.

Ex-BOJ Economist Suggests Tax to Make Japan Inc. Spend Their Cash (BBG)

Japanese policy makers have taken extraordinary measures in recent years to yank the nation clear of deflation and create a better environment for businesses. They’ve had mixed results, and corporate Japan is yet to reciprocate with higher spending and wages. That’s prompted some analysts to suggest more radical ways of compelling companies to deploy their cash hoard on capital investment and salaries. Hiromichi Shirakawa, a former central bank official who is now chief Japan economist at the Credit Suisse Group, is at the forefront of the debate with his plan to tax corporate savings. “We have to try this policy as a last resort for beating deflation,” he said in an interview by telephone from Tokyo. “We have been suffering deflation for twenty years and the current policy is still not working.”

Shirakawa’s thinking goes like this: Corporate savings have swelled since Prime Minister Shinzo Abe came to power at the end of 2012 and unleashed fiscal stimulus and unprecedented monetary easing via the Bank of Japan. The ultra-loose policy weakened the yen, boosting profits for exporters. These earning must now be put to work. Kozo Yamamoto, one of the key members of Abe’s brains-trust of reflationist advisers, thinks the idea is worth looking at. This month he called for more fiscal stimulus, a fresh round of easing from the central back and the consideration of a tax on corporate cash. Imposing a 2% levy tax on cash and deposits of non-financial corporations could spur them to redirect enough money into investment to boost GDP by 0.9%, according to one scenario explored by Shirakawa.

That’s a significant bump given that GDP is likely to expand about 0.5% this calendar year, based on the median of forecasts compiled by Bloomberg. Meanwhile, the BOJ’s preferred inflation gauge is hovering around zero. Businesses remain wary of boosting investment, given Japan’s low growth rate and the likelihood that the market for goods and services will contract as the population ages and declines. While ruling party lawmakers responsible for tax policy say they’re not currently looking at this option, the BOJ’s recent adoption of negative interest rates may open the door wider than ever before. By introducing the concept of a tax on savings – if only, for now, on a portion of cash that financial institutions park at the central bank – the move could in time spur a broader debate about fiscal measures to force companies to spend more.

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Follow the money.

US Oil Megaprojects Dreamed Up a Decade Ago Thrive Amid Price Slump (BBG)

Oil production in some of the riskiest, highest-cost regions of North America is still thriving, even as the worst slump in a generation takes a bite out of U.S. shale. Onshore U.S. output is poised to drop 22% from last year through 2017, according to the Energy Information Administration. However, new volumes coming on stream from developments envisioned years ago in Canada’s oil sands and the U.S. Gulf of Mexico are limiting North America’s total production decline. Exxon Mobil is among companies bringing platforms online in the U.S. Gulf of Mexico from discoveries made in the past decade, which will help boost offshore output by 18% from last year to a record high in 2017, the EIA forecast this month. In the oil sands, developers including Canadian Natural Resources are also expanding projects, leading to a 16% increase over the same period, Canadian Association of Petroleum Producers data show.

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Chicken and egg.

Will the Fossil Fuel Industry Take the Rest of the Economy Down With It? (Ahmed)

[..] Some analysts believe the hidden trillion-dollar black hole at the heart of the oil industry is set to trigger another global financial crisis, similar in scale to the Dot-Com crash. Jason Schenker, president and chief economist at Prestige Economics, says: “Oil prices simply aren’t going to rise fast enough to keep oil and energy companies from defaulting. Then there is a real contagion risk to financial companies and from there to the rest of the economy.” Schenker has been ranked by Bloomberg News as one of the most accurate financial forecasters in the world since 2010. The US economy, he forecasts, will dip into recession at the end of 2016 or early 2017. Mark Harrington, an oil industry consultant, goes further. He believes the resulting economic crisis from cascading debt defaults in the industry could make the 2007-8 financial crash look like a cakewalk.

“Oil and gas companies borrowed heavily when oil prices were soaring above $70 a barrel,” he wrote on CNBC in January. “But in the past 24 months, they’ve seen their values and cash flows erode ferociously as oil prices plunge—and that’s made it hard for some to pay back that debt. This could lead to a massive credit crunch like the one we saw in 2008. With our economy just getting back on its feet from the global 2008 financial crisis, timing could not be worse.” Ratings agency S&P reported this week that 46 companies have defaulted on their debt this year—the highest levels since the depths of the financial crisis in 2009. The total quantity in defaults so far is $50 billion. Half this year’s defaults are from the oil and gas industry, according to S&P, followed by the metals, mining and the steel sector. Among them was coal giant Peabody Energy.

Despite public reassurances, bank exposure to these energy risks from unfunded loan facilities remains high. Officially, only 2.5% of bank assets are exposed to energy risks. But it’s probably worse. Confidential Wall Street sources claim that the Dallas Fed has secretly advised major U.S. banks in closed-door meetings to cover-up potential energy-related losses. The Fed denies the allegations, but refuses to respond to Freedom of Information requests on internal meetings, on the obviously false pretext that it keeps no records of any of its meetings. According to Bronka Rzepkoswki at advisory firm Oxford Economics, over a third of the entire U.S. high yield bond index is vulnerable to low oil prices, increasing the risk of a tidal wave of corporate bankruptcies: “Conditions that usually pave the way for mounting defaults—such as growing bad debt, tightening monetary conditions, tightening of corporate credit standards and volatility spikes – are currently met in the U.S.”

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People’ll believe anything.

SunEdison: Death Of A Solar Star (FT)

The triumphant email message pinged into SunEdison chief executive Ahmad Chatila’s inbox with only moments to spare. “We are approved by the Independent Cmte,” it said, confirmation that his over-indebted solar energy company would be able to cheat death — at least that day. The email brought news of approval for a cash transfer from TerraForm Global, a company controlled by SunEdison, enough to pay off a $100m margin loan due by 3pm that afternoon. The drastic action that SunEdison took that day in November allowed it to postpone default for several months, but the company was already sliding towards the biggest bankruptcy the renewable energy industry has ever seen. Its fate became a little clearer on Thursday when the world’s largest developer of renewable power projects filed for bankruptcy with debts of $16.1bn, and assets valued at $20.7bn.

The collapse is full of the usual cautionary tales, of corporate hubris and excessive debt, but also offers a new one in its industry: the dangers of financial engineering taken to extremes. In 2009 Mr Chatila took charge at MEMC, a struggling supplier of silicon wafers for chip and solar panels, and set about transforming the company. Through a series of deals, he built a solar power development business, and in 2013 changed the group’s name to SunEdison, after one of the acquisitions. From a low point in 2012, the shares rose 20-fold to peak at $32.13 in July last year. Since then, they have dropped by 99%. The past 12 months have been rough on many US solar power companies, including SunPower and Elon Musk’s SolarCity, but SunEdison is the only one to have blown up in such a spectacular fashion. The root cause of this is its complex financial structure.

Solar power is fundamentally a low-risk business. Developers, unlike their counterparts in oil and gas, do not have to explore to find resources, and they do not have to manage wild swings in product costs. Projects are typically signed up on 20-year contracts with fixed or predictably rising prices, and the global market is growing rapidly as falling costs make solar increasingly competitive against fossil fuels. The downside of that stability is a crowded market in which returns are generally low. Mr Chatila, however, was thinking big. In a presentation to analysts in February last year, he suggested SunEdison was taking a tilt at the world’s most valuable energy company, ExxonMobil. “Their market cap is around $400bn,” he said. “That’s what we’re going after.” SunEdison’s market capitalisation at the time was about $6bn. A blitz of deals, fuelled by soaring debts, was intended to bring the company closer to realising that ambition. Instead, it sent it plunging to earth.

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Chinese will overpay by this much just to get money out of the country.

The Inside Story Of Vancouver’s Wildest Property Deal (ZH)

It was in fall last year that Bruno and Peter Wall received an offer too good to refuse. The prominent Vancouver property developers behind Wall Financial Corporation had spent C$16.8 million (HK$102 million) to buy two ageing walk-up apartment blocks on adjacent lots on Nelson Street in 2013. They had big plans for the downtown site: a glittering 60-storey residential skyscraper, taking advantage of the location within the city’s West End Community Plan, where a building could rise 168 metres tall under new zoning. The project was dubbed “Nelson on the Park” and the Walls turned to favourite designer Chris Doray to come up with what they hoped would be a new Vancouver landmark. But now a consortium of investors was proposing something even more remarkable.

They would pay the Walls C$60 million for the site alone, which had just been valued at C$15.6 million by BC Assessment. The huge profit was impossible to resist, and the sale was completed in late January. Doray, a 25-year veteran of the Vancouver development scene whose design has now been shelved, said he was “astonished” by the transaction, which he said set a new benchmark for commercial real estate in the city. “The price on this block of land has now thrown everybody in the industry out of whack,” said Doray. “The property is worth, what, C$20 million, and somebody pays C$60million? One wonders what’s going on. Is this New York? Is this Hong Kong?” The scale of the purchase, orchestrated by Sun Commercial Real Estate (Suncom) – a firm that specialises in pooling wealthy investors from Vancouver’s Chinese immigrant community – was exceptional enough.


1059 Nelson Street in downtown Vancouver, where property developers Bruno and Peter Wall had once hoped to build a 60-story skyscraper.

But an investigation by the South China Morning Post now reveals the strange and frantic backdrop to the transaction – including a two-hour stampede by Suncom’s investors, desperate for a slice of the deal. It is a transaction that also sheds light on the rush of Chinese money fuelling Vancouver’s soaring real estate market. The Post interviewed key players and pored over land titles, company directorship and address changes, and English and Chinese social media postings to understand a transaction that looked, from the outside, incomprehensible – and potentially disastrous. But Suncom, whose activities are being reviewed by the BC Securities Commission, knew exactly what it was doing. Because on February 29, one month after taking ownership of the Nelson Street site, the Suncom consortium flipped it, corporate records show. The price was C$68 million. And the Post met the new buyer, a rich Chinese immigrant named Gao Shan, last month.

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“While the IMF has demanded a restructuring of Greece’s debts, Germany has suddenly decided that no debt relief is needed at all. Still, it has insisted the IMF participate anyway.”

Greece’s Debt Crisis Looks Familiar, But Consequences May Be Worse (FT)

While Europe’s political class has been consumed with preventing refugees from entering the EU and Britain from exiting, the mother of all EU crises has slowly and quietly been gathering steam again: Greece. Eurozone finance ministers will meet on Friday after yet another round of fruitless talks in Athens where almost nobody agreed on the way forward. And just like the Greek crisis that gripped the EU last year, there is a hard stop arriving very soon: unless Athens receives its next round of bailout aid, it risks defaulting on €3.5bn in debt payments in July, raising anew the agonising prospect of Grexit. How could this be happening again? After a series of increasingly desperate summits nearly a year ago, EU leaders agreed an €86bn bailout that pulled Greece back from the brink.

Just months later, a chastened Alexis Tsipras, the far-left prime minister who made his political bones railing against two similar EU rescues, won re-election promising to implement the harsh fiscal measures included in a third programme. European Commission officials were touting Mr Tsipras as a changed man; shorn of his ornery finance minister Yanis Varoufakis, Brussels convinced itself that the long-time radical had transformed into a diligent economic reformer. But they overlooked the political realities in Athens — not to mention the financial realities of the bailout. In fact, last summer’s deal was less a cure-all for Greece’s economic woes than a collective kicking of the can down the road. It avoided default by loaning Athens €13bn very quickly in exchange for a narrowly focused set of pension and tax reforms.

Even then, much of the heavy lifting was put off until the new programme’s first quarterly review — including the politically combustible issue of debt relief. As if to underline how ephemeral the deal was, the International Monetary Fund made clear it was not participating and would put off any decision on whether to join until it was certain Mr Tsipras, who had become the first leader of a developed country to default on an IMF payment, would live up to his commitments. That first quarterly review has now stretched into two additional quarters, and the three-dimensional stand-off between Athens, Berlin and the IMF has only deepened. While the IMF has demanded a restructuring of Greece’s debts, Germany has suddenly decided that no debt relief is needed at all. Still, it has insisted the IMF participate anyway.

Meanwhile, the IMF has decided the agreement reached in July was badly constructed and should have lower budget surplus targets. As for Mr Tsipras, he has returned to an angry, defensive crouch, railing against outside forces. There is little political capacity in Athens to push through additional reforms or spending cuts even if Mr Tsipras wanted to. “Europe’s politicians have been distracted with other challenges and markets have become complacent about the inherent risks in Greece’s new bailout,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “But if Berlin doesn’t revise its approach, this is going to blow up in everyone’s faces.”

The players, the arguments and even the choreography have changed little since last year. But the consequences of failure may have. A year ago, EU leaders felt confident they had ringfenced Greece and that a Grexit, while severely damaging to the Greek economy, would have little impact on the rest of the eurozone. Now, however, they are deeply worried about the prospect of a failed EU member state with 50,000 Syrian, Iraqi and Afghan refugees stuck in deteriorating camps — a state the rest of the bloc is looking to as a front line against the influx of migrants into Europe.

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Succumbing to sadists.

Lenders Tell Greece To Prepare Contingency Package Of Extra Reforms (R.)

International lenders asked Greece on Friday to prepare a package of additional savings measures which would be passed into law now but implemented only if needed, to make sure the country reaches agreed fiscal targets. Once agreed, the set of contingent reforms, together with measures already under negotiation, would enable the disbursement of new loans to Athens and pave the way for debt relief. The idea of a contingency package appears to end a long dispute between the eurozone and the IMF over whether Greece’s current reforms are enough. “We came to the conclusion that the policy package should include a contingent package of additional measures that would be implemented only if necessary to reach the primary surplus target for 2018,” the chairman of euro zone finance ministers Jeroen Dijsselbloem told a news conference in Amsterdam after the ministers met.

The contingency measures needed to be “credible, legislated up-front, automatic and based on objective factors.” Greek Finance Minister Euclid Tsakalotos said Athens could not legislate “contingent measures” as Greek law did not allow it. But Dijsselbloem said a way would be found. “We need to work on how that mechanism is going to look like. Of course if there are legal constraints we can’t and won’t break legal constraints. We will design it in a way that delivers credibility …and (is) legally possible,” Dijsselbloem told a news conference. The contingency package is to produce savings of 2% of GDP, on top of savings of 3% that are to come from reforms under negotiation now, Dijsselbloem said. The amount is the difference between euro zone and IMF forecasts of what primary surplus Greece is likely to achieve in 2018.

The current reforms include a pension and income tax reform, the setting up of a privatization fund and a scheme to deal with bad loans. The content of the contingency set is not decided yet. Agreement on both reform packages – the regular and the contingent one – would mean euro zone ministers would meet again on Thursday to approve the deal and have a “serious discussion” on debt relief for Greece. The prospect of debt talks may encourage Athens to back the new package, and lenders reminded their Greek counterparts that there are time constraints. “The liquidity situation is becoming tight, there are debt service payments … there is a risk that the government may have to accumulate domestic arrears again,” the head of the euro zone bailout fund Klaus Regling said.

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It’s of little use to see this from an economic point of view; it makes no sense in that context. It’s purely a political power game, and economics are a side show at best.

The Economic Consequences Of The Eurozone (Coppola)

The latest round of Greek bailout negotiations is going anything but smoothly. In fact, the growing rift between Greece’s European creditors – notably Germany – and the IMF threatens to derail them completely. The IMF estimates that the proposed 3.5% primary surplus would turn out to be more like 1.5%, making debt relief essential. But Germany insists that a 3.5% of GDP primary surplus could be sustained indefinitely with the right reforms and no debt relief will be needed. Deadlock. But now we learn that an additional set of “contingent reforms” is to be imposed on Greece. The draft Memorandum of Understanding already specifies spending cuts and tax rises to the tune of 3% of GDP: the new set would make savings of a further 2% of GDP. These contingent measures are currently unspecified: apparently the Greek government is to propose them.

Once specified, they would be passed into law by the Greek government, though they would not come into force unless “needed” (i.e. if Greece missed its fiscal targets). But of one thing we can be certain. They will not be reforms aimed at restoring the Greek economy. No, their sole purpose will be to extract yet more money from Greek households and businesses, to the detriment of the health and wellbeing of the Greek people and the profitability of Greek businesses. The combination of the MOU with the new measures is brutal. No way can a fiscal tightening of 3% of GDP, plus a further tightening of 2% when (not if) Greece misses its fiscal targets, do anything but further economic damage. There is no monetary offset to soften the blow, since Greece is excluded from the ECB’s QE.

A fiscal tightening of this magnitude without central bank support is the equivalent of doing major surgery without anesthetic. The patient may survive the surgery, but the pain and shock will set back its recovery by years. And the surgery is counterproductive, too. It will not ensure that the creditors get their money back more quickly. On the contrary, it may mean they never get it back. The more damage is done to Greece’s economy, the harder it will find it to pay its creditors. To quote the great American economist Irving Fisher, “The more the debtors pay, the more they owe”. Fisher’s “The Debt Deflation Theory of Great Depressions”, from which this quotation is taken, should be required reading for anyone involved in the Greek bailout negotiations. Greece’s depression is now deeper and longer-lasting than the USA’s Great Depression – and it is far from over.

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“More than 3 million people have been displaced in the Lake Chad basin – in Nigeria, Niger, Cameroon and Chad – by violence by the militant group Boko Haram..”

Refugee, Migrant Flow From Turkey To Greece Picking Up Again (Reuters)

The numbers of migrants landing in Greece from Turkey is starting to creep up again, showing efforts to close off the route are coming under strain, the International Organization for Migration (IOM) said on Friday. Around 150 people a day had arrived over the last three days, still way off the numbers seen a month ago, the organisation added, but showing an increase since an EU deal with Turkey deal to stem the flow. “The arrivals in Greece which were down to literally zero some days this month, are beginning to creep back up,” IOM spokesman Joel Millman told a Geneva news briefing. “It could be the weather, it could be any number of things, it could be that smugglers are getting more creative.” Europe signed an agreement with Turkey last month to close off the main route into Europe for more than a million people, most fleeing war and poverty in the Middle East, Asia and Africa.

NATO sent ships into Greek and Turkish waters in the Aegean in March, though Greek Prime Minister Alexis Tsipras said on Friday that Turkish demands were hampering the mission. “It could be that there is just still a lot of demand in Turkey … people have already spent months to get to Turkey and where there is a will and where there is means, people will try to satisfy them,” Millman told the briefing. “It still shows that hermetic sealing that seemed to be happening a month ago isn’t anymore.” There were also signs of increased numbers of people from sub-Saharan Africa taking the perilous route across the Mediterranean to Europe, he said. More than 3 million people have been displaced in the Lake Chad basin – in Nigeria, Niger, Cameroon and Chad – by violence by the militant group Boko Haram, he added.

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Jul 282015
 
 July 28, 2015  Posted by at 9:02 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle July 28 2015


John Collier FSA housing project for Martin aircraft workers, Middle RIver, MD 1943

Weakness in Asia Batters Currencies Abroad (WSJ)
Wealth Doesn’t Trickle Down, It Just Floods Offshore -$32 Trillion (Guardian)
Hong Kong Is Feeling China’s Pain (Bloomberg)
The Good News in China’s Stock Plunge (Pesek)
How Much Worse Can the Junk-Bond Sell-Off Get? (WolfStreet)
The Few Who Won’t Say ‘Sorry’ for Financial Crisis (Ritholtz)
Varoufakis Unplugged: The London Call Transcript (FT)
Statement on the FinMin’s Plan B Working Group (Yanis Varoufakis’ office)
Varoufakis: It Would Be Irresponsible Not To Have Drawn Up Contingency Plans (E)
Yanis Varoufakis Admits ‘Contingency Plan’ For Euro Exit (Guardian) /td>
Contingency Plans (Paul Krugman)
Greece’s Headache: How To Lift Capital Controls (AFP)
Germany Rides Into Its Greek Colony On The “Quadriga” (Zero Hedge)
IMF Paints Dim Europe Picture, Says More Money Printing May Be Needed (Reuters)
How the Greek Deal Could Destroy the Euro (NY Times)
The Way To Fix Greece Is To Fix The Banks (Coppola)
France Wants To Outlaw Discrimination Against The Poor (Guardian)
Dutch Journalist, MH17 Expert: ‘UN Tribunal Attempt to Hide Kiev’s Role’ (RI)
Potemkin Party (Jim Kunstler)
It’s Really Very Simple (Dmitry Orlov)

Any country heavily dependent on commodities trade must suffer the inevitable.

Weakness in Asia Batters Currencies Abroad (WSJ)

The global commodities slump is testing the resilience of resource-driven economies, pushing currencies from Australia, Canada and Norway to lows not seen since the financial crisis. Weakening energy and metals prices are punishing investors, companies and governments. Slumping demand from China, the world’s biggest purchaser of many materials, is rippling through foreign-exchange markets, reflecting expectations that a valuable source of export growth is drying up. But few countries are being battered as badly as Canada, due to its dependence on the hard-hit energy industry and its central bank’s decision this month to cut its key overnight interest rate for the second time this year.

The Bank of Canada expects Canada’s gross domestic product to rise a paltry 1.1% this year, down from previous forecasts of 1.9% made earlier in the year, as a persistent decline in oil prices and a drop in exports that the central bank described as “puzzling” hampered growth. The decision to reduce rates is adding to the woes of the Canadian dollar, which is called the loonie, underscoring the delicate balance that policy makers must strike at a time of uneven global growth and whipsaw trading in currency markets. At the same time, a boost in exports—often billed as one of the silver linings of a currency’s decline—has yet to arrive.

“My gut feeling is that it’s going to be bad for some time to come,” said Thomas Laskey at Aberdeen Asset Management, which has US$483 billion under management. Mr. Laskey said he is shorting the Canadian dollar—a bet that the currency will fall—until he sees an improvement in Canadian oil-and-gas companies’ investment spending. The loonie is down 8.1% against the U.S. dollar since May 14 in New York trading, making it one of the biggest victims of the steep decline in global commodity prices since then. In that same period, the Australian dollar is down 10% and the Norwegian krone, which is pegged to the euro, has dropped 9.8% against its U.S. counterpart.

Plunging commodity prices and the end of a mining investment boom have pushed the Reserve Bank of Australia to cut interest rates twice this year. The central bank said that while it is open to further easing monetary policy, it is also wary of some of the unintended consequences of lower rates, such as burgeoning real-estate prices in Sydney. Norway’s central bank cut interest rates in June in a bid to boost its flagging economy, which is closely tied to oil exports. Norges Bank said more reductions are likely before the end of the year.

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“Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. “This new data shows the exact opposite has happened..”

Wealth Doesn’t Trickle Down, It Just Floods Offshore -$32 Trillion (Guardian)

The world’s super-rich have taken advantage of lax tax rules to siphon off at least $21 trillion, and possibly as much as $32tn, from their home countries and hide it abroad – a sum larger than the entire American economy. James Henry, a former chief economist at consultancy McKinsey and an expert on tax havens, has conducted groundbreaking new research for the Tax Justice Network campaign group – sifting through data from the Bank for International Settlements (BIS), the IMF and private sector analysts to construct an alarming picture that shows capital flooding out of countries across the world and disappearing into the cracks in the financial system.

Comedian Jimmy Carr became the public face of tax-dodging in the UK earlier this year when it emerged that he had made use of a Cayman Islands-based trust to slash his income tax bill. But the kind of scheme Carr took part in is the tip of the iceberg, according to Henry’s report, entitled The Price of Offshore Revisited. Despite the professed determination of the G20 group of leading economies to tackle tax secrecy, investors in scores of countries – including the US and the UK – are still able to hide some or all of their assets from the taxman. “This offshore economy is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of ‘source’ countries,” Henry says.

Using the BIS’s measure of “offshore deposits” – cash held outside the depositor’s home country – and scaling it up according to the proportion of their portfolio large investors usually hold in cash, he estimates that between $21tn and $32tn in financial assets has been hidden from the world’s tax authorities. “These estimates reveal a staggering failure,” says John Christensen of the Tax Justice Network. “Inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. “This new data shows the exact opposite has happened: for three decades extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich.”

In total, 10 million individuals around the world hold assets offshore, according to Henry’s analysis; but almost half of the minimum estimate of $21tn – $9.8tn – is owned by just 92,000 people. And that does not include the non-financial assets – art, yachts, mansions in Kensington – that many of the world’s movers and shakers like to use as homes for their immense riches.

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“Chinese tour group visitors to Hong Kong plunged 40% in the first two weeks of July compared with the same period a year earlier..”

Hong Kong Is Feeling China’s Pain (Bloomberg)

For Hong Kong, it’s been one thing after another when it comes to China. A series of anti-China and pro-democracy protests last year prompted stores to close and mainland tour groups to cancel bookings. Meanwhile, a slowing Chinese economy and President Xi Jinping’s anti-corruption and austerity campaigns have also made the Chinese more wary of buying pricey cognac and Gucci bags in the city. While the biggest outbound destination for Chinese tour groups last year, Hong Kong is in danger of losing its lead to regional rivals such as Thailand and South Korea, as well as mainland alternatives including Shenzhen and Shanghai. Mainland Chinese travelers to Hong Kong last year grew by the slowest pace since 2009, Bloomberg Intelligence data show.

Chinese tour group visitors to Hong Kong plunged 40% in the first two weeks of July compared with the same period a year earlier, the Hong Kong Economic Times reported Monday, citing Michael Wu, head of the city’s Travel Industry Council. With fewer mainland Chinese staying overnight, average daily rates at Hong Kong’s hotels fell for a ninth straight month through June. In addition, China slashed tariffs on products such as face creams and imported sneakers from June 1, reducing Hong Kong’s draw as a cheaper shopping destination. The effect on Hong Kong’s retailers has been immediate and painful. Retail sales fell in four of the five months through May, with jewelry, watches and other high-end gifts the worst hit.

Burberry Group Plc, whose stores in Hong Kong’s Causeway Bay and Tsim Sha Tsui shopping districts sell HK$18,500 ($2,400) handbags and HK$24,000 dresses, has said it may try and lower its rent bill to offset a worsening slump in Hong Kong, while Emperor Watch & Jewellery, which sells Cartier and Montblanc watches, said it may shut one or two of its Hong Kong stores when their leases end this year. And the news out of China doesn’t inspire much confidence. French distiller Remy Cointreau reported first-quarter sales that missed analyst estimates as Chinese wholesalers continued to hold back on cognac orders. Prada also reported first-quarter profit that trailed analyst estimates on slumping sales in China, while foreign carmakers including Audi have stepped up discounts to woo buyers.

So there’s no relief in sight for Hong Kong. The tourism board forecasts overall visitor arrival growth to slow to 6.4% in 2015 from 12% last year, with mainland Chinese tourist arrivals expected to drop by half to 8%. Hong Kong’s economy expanded 2.1% in the first quarter from a year earlier, weaker than a revised 2.4% expansion in October through December. “We’re just too exposed to China,” said Silvia Liu at UBS. “Structurally, until the tourism sector consolidates and Hong Kong finds new growth engines, I don’t see the way out yet.”

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It will force a free market?!

The Good News in China’s Stock Plunge (Pesek)

Panic is in the air as China suffers its biggest one-day stock plunge since 2007. It shouldn’t be. The 8.5% slide in the Shanghai Composite Index is actually a development that could leave China better off eight years from now. I’m focusing on eight both because it’s an auspicious number in Chinese folklore (the Beijing Olympics didn’t begin on 8/8/08 by accident) and Beijing’s idea of nirvana. Growth returning to 8% (relative to this year’s 7% target) would buttress President Xi Jinping’s reformist bona fides. Instead, stocks fell by that much Monday as Xi’s magic has lost potency. Why is that a good thing? It’s at once a reminder that rationality is returning to mainland markets and a message to Xi to stop putting the financial cart before the proverbial horse.

Since mid-June, when shares began sliding, Xi’s market-rescue squad has tried everything imaginable: interest-rate cuts, margin-lending increases, bans on short selling, a moratorium on initial public offerings, hauling supposedly rogue traders in for a talking to, ordering state-run institutions to buy shares, halting trading in at least half of listed companies, you name it. What Xi hasn’t tried is upgrading the economy and financial system in such a way as to help the stock market thrive. To find out what he should do next, Xi could do worse than to check in with Henry Paulson. Even though Paulson might regard with scorn China’s love of the number eight, it was on his watch as Treasury secretary in 2008 that the U.S. had its own brush with financial collapse.

Paulson has been merciless in his all-hype-and-no-fundamentals critique of Xi’s government. “China is especially vulnerable at this point because while its economy has grown and matured, its capital markets have lagged behind,” he wrote in the Financial Times. “It is no surprise that those ideologically opposed to markets would use recent events to make the opposite argument — that to prevent market instability, Beijing should slow the pace of financial liberalisation or perhaps even abandon market-based reforms altogether.” Yet, he argued, “while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market.”

That’s why ambivalence toward Xi’s titanically large market interventions could be a positive. It refocuses Beijing on what’s needed to re-create the vibrant markets that prevail in New York and Hong Kong. Xi’s Communist Party has tried and failed to stabilize things by edict. In fact, heavy-handed manipulation has set back Beijing’s designs on making the yuan a global reserve currency and getting Shanghai shares included in MSCI’s indexes.

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Junk bonds dive with commodities.

How Much Worse Can the Junk-Bond Sell-Off Get? (WolfStreet)

Commodities had once again an ugly week. Copper hit the lowest level since June 2009. Gold dropped below $1,100 an ounce. Other metals dropped too. Agricultural commodities fell; corn plunged nearly 7% for the week. Crude oil swooned, with West Texas Intermediate dropping nearly 7% to $47.97 a barrel, a true debacle for energy junk-bond investors. It was the kind of rout that bottom fishers a few months ago apparently didn’t think was possible. For example, in March, coal miner Peabody Energy had issued 10% second-lien notes due 2022 at 97.5 cents on the dollar. Now, these junk bonds are trading at around 49 cents on the dollar, having lost half their value in four months, and 17% in July alone, according to S&P Capital IQ’s LCD HY Weekly.

Yield-hungry fund managers that bought them at issuance and stuffed them into their bond funds that people hold in their retirement accounts should be sued for malpractice. Among the bonds: Cliffs Natural Resources down 27.6%, SandBridge down 30%, Murray Energy down 21.2%, and Linn Energy down 22.3%, according to Bloomberg. For example, Linn Energy 6.25% notes due in 2019 were trading at 78 cents on the dollar at the beginning of July and at 58 on Friday, according to LCD. There was bloodshed beyond energy, such as AK Steel’s 7.625% notes due in 2021. They were trading at 62 cents on the dollar, down 22% from the beginning of July. “The performance is a disappointment to investors who purchased about $40 billion of junk-rated bonds from energy companies this year, thinking that the worst of the slump was over,” Bloomberg noted.

The riskiest junk bonds, tracked by the BofA Merrill Lynch US High Yield CCC or Below Effective Yield Index, have been hit hard, with yields jumping from the ludicrous levels below 8% of last summer to 12.19% as of Thursday, the highest since July 2012. Note the spike in yield during the “Taper Tantrum” in the summer of 2013 when the Fed discussed ending “QE Infinity.” After which bonds soared once again and yields descended to record lows, until the oil panic set in, as investors in the permanently cash-flow negative shale oil revolution were coming to grips with the plunging price of oil. But in the spring, bottom fishers stepped in and jostled for position as energy companies sold them $40 billion in new bonds, including coal producer Peabody. Now a lot of people who touched these misbegotten bonds are scrutinizing their burned fingers.

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“..the Gramm-Leach-Bliley Act of 1999..”

The Few Who Won’t Say ‘Sorry’ for Financial Crisis (Ritholtz)

“Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make. – Former U.S. Senator Phil Gramm”

Many elected or appointed officials have a specific belief system that they may act upon in the implementation of policies. When the policies that flow from those beliefs go terribly wrong, it is natural to want to learn why. As is so often the case, that underlying ideology is usually a good place to begin looking. In the aftermath of the great credit crisis, we have seen all manner of contrition from responsible parties. Most notably, Alan Greenspan admitted error, saying as much in Congressional testimony. Greenspan was unintentionally ironic when he answered a question about whether ideology led him down the wrong path when it came to preventing irresponsible lending practices in subprime mortgages: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

Other contributors to the crisis have been similarly humbled. In “Bailout Nation,” I held former President Bill Clinton, and his two Treasury secretaries, Robert Rubin and Larry Summers, responsible for signing the ruinous Commodity Futures Modernization Act that exempted derivatives from regulation and oversight. The CFMA was passed as part of a larger bill by unanimous consent, and that Clinton signed on Dec. 21, 2000. Clinton joined Greenspan in admitting his contribution to the credit crisis, as well as saying the advice he received from his Treasury secretaries – Rubin and Summers – was wrong. The CFMA removed the standard regulations that all other financial instruments follow: reserve requirements, counter-party disclosures and exchange listings.

Bloomberg reported that Clinton said his advisers argued that derivatives didn’t need transparency because they were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection. The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency.” Even the American Enterprise Institute changed the name of its “Financial Deregulation Project” to the more benign “program on financial policy studies.” That is as close to an apology as we can expect for its part in pushing for market deregulation.

The exception to any post-crisis self-reflection is former Senator Phil Gramm. Although he was one of the chief architects of the radical gutting of financial regulations and oversight rules during the two decades that preceded the financial crisis, the former senator remains a stubborn believer that banks and markets can regulate themselves. Perhaps more than anyone else, Gramm drove the legislation that allowed banks to get much bigger and derivatives to run wild. His name is on the law – the Gramm-Leach-Bliley Act of 1999 – that overturned the Glass-Steagall Act, a Depression-era law that forced commercial banks to get out of the risky investment-banking business.

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It really is very revealing. How about: “Marsh wraps up the teleconference [..], reminding everyone Varoufakis’ remarks were under the so-called Chatham House rules, which means the information can be passed on but Varoufakis should not be cited as the source of the information.

Varoufakis Unplugged: The London Call Transcript (FT)

The London-based Official Monetary and Financial Institutions Forum, headed by two ex-Financial Times scribes – chairman John Plender and managing director David Marsh – on Monday released a 24-minute audiotape of a teleconference they held nearly two weeks ago with Yanis Varoufakis, the former Greek finance minister. Details of the call were first revealed by the Greek daily Kathimerini, and much of most sensational revelations Varoufakis made were about a surreptitious project he and a small team of aides worked on to set up a parallel payments system that could be activated if the European Central Bank forced the shutdown of the Greek financial system.

But Varoufakis also made some other interesting allegations, including claims the IMF believes the Greek bailout is doomed and that Alexis Tsipras, the Greek prime minister, offered him another ministry shortly after he was relieved as finance minister. We’ve had a listen to the entire call, and transcribed most of it – excluding some inconsequential asides to the teleconference’s hosts, Messrs Marsh and Norman Lamont, the former UK finance minister.

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Have the tapes taken Plan B off the table for good?

Statement on the FinMin’s Plan B Working Group (Yanis Varoufakis’ office)

During the Greek government’s negotiations with the Eurogroup, Minister Varoufakis oversaw a Working Group with a remit to prepare contingency plans against the creditors’ efforts to undermine the Greek government and in view of forces at work within the Eurozone to have Greece expelled from the euro. The Working Group was convened by the Minister, at the behest of the Prime Minister, and was coordinated by Professor James K. Galbraith. It is worth noting that, prior to Mr Varoufakis’ comfirmation of the existence of the said Working Group, the Minister was criticized widely for having neglected to make such contingency plans. The Bank of Greece, the ECB, treasuries of EU member-states, banks, international organisations etc. had all drawn up such plans since 2012.

Greece’s Ministry of Finance would have been remiss had it made no attempt to draw up contingency plans. Ever since Mr Varoufakis announced the existence of the Working Group, the media have indulged in far-fetched articles that damage the quality of public debate. The Ministry of Finance’s Working Group worked exclusively within the framework of government policy and its recommendations were always aimed at serving the public interest, at respecting the laws of the land, and at keeping the country in the Eurozone. Regarding the recent article by “Kathimerini” newspaper entitled “Plan B involving highjacking and hacking”, Kathimerini’s failure to contact Mr Varoufakis for comment and its reporter’s erroneous references to “highjacking tax file numbers of all taxpayers” sowed confusion and contributed to the media-induced disinformation.

The article refers to the Ministry’s project as described by Minister Varoufakis in his 6th July farewell speech during the handover ceremony in the Ministry of Finance. In that speech Mr Varoufakis clearly stated: “The General Secretariat of Information Systems had begun investigating means by which Taxisnet (Nb. the Ministry’s Tax Web Interface) could become something more than it currently is, to become a payments system for third parties, a system that improves efficiency and minimises the arrears of the state to citizens and vice versa.” That project was not part of the Working Group’s remit, was presented in full by Minister Varoufakis to Cabinet, and should, in Minister Varoufakis’ view, be implemented independently of the negotiations with Greece’s creditors, as it will contribute considerable efficiency gains in transactions between the state and taxpayers as well as between taxpayers.

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What I said yesterday.

Varoufakis: It Would Be Irresponsible Not To Have Drawn Up Contingency Plans (E)

Google Translate: Official statement issued by Yanis Varoufakis to be placed in relation to what came to light during the last two days after the publication of “Kathimerini” leaving clear spikes in the newspaper, noting that it would be irresponsible not to have alternative plans the Ministry of Finance . In its notification, the former Minister of Finance notes that “During the negotiations, and until the day of the Referendum, the t. Finance Minister. Yanis Varoufakis, as required, and at the behest of Prime Minister, oversaw working group which, coordinator Professor James K. Galbraith , elaborating emergency plan and response of the government to undermine plans by lenders , including the country known extrusion projects outside the eurozone. ”

Former Finance Minister points out that before the announcement that there was such a group accept continuous and intense criticism for the lack of response plan in the country to undermine plans by lenders. He adds, in fact, that “The Bank of Greece (which had, for example, ready PNP plan for a bank holiday), the ECB, the EU country governments, banks and international organizations have such groups and design by 2012. Indeed, it would be of utmost irresponsibility not drafted such plans the Ministry of Finance . ” “Since the t. Minister of Finance, announced the existence of that working group, the media inundated with imaginative “story” that affect the quality of public debate by trying to delineate as a group “conspiring” to restore national currency. This is pure slander.

The working group of the Ministry of Finance has always worked in the government policy and recommendations had as a permanent reference to the public interest, compliance with legality and stay in the country in the eurozone, “noted the statement of Yanis Varoufakis press office. In response to the “Daily report” leaves clear spikes in the newspaper stating that ” the pension “neglected” to request explanations and commentary by Mr. Varoufakis Before publishing inaccurate references to “tapping AFM of all taxpayers.” So, deliberately or not, sowed confusion contributed to widespread misinformation of SMEs “.

“In substance, the report appears to refer to plans of the Ministry of Finance that section. Minister stated boldly in the account at the ministry handover ceremony on July 6 with the following reference: The General Secretariat of Information Systems has started to process how whom taxisnet can become something more than what it is, be a payment system and to third parties, a system that increases efficiency and minimizes arrears of government to citizens and to businesses “noted the statement.

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What I said.

Yanis Varoufakis Admits ‘Contingency Plan’ For Euro Exit (Guardian)

Greece’s former finance minister, Yanis Varoufakis, has been thrust back in the spotlight as he vigorously defended plans to launch a parallel payment system in the event of the country being ejected from the euro. Saying it would have been “remiss” of him not to have a “plan B” if negotiations with the country’s creditors had collapsed, the outspoken politician admitted that a small team under his control had devised a parallel payment system. The secret scheme would have eased the way to the return of the nation’s former currency, the drachma. “Greece’s ministry of finance would have been remiss had it made no attempt to draw up contingency plans,” he said in a statement.

But Varoufakis, who resigned this month to facilitate talks between Athens’ left-led government and its creditors, denied that the group had worked as a rogue element outside government policy or beyond the confines of the law. “The ministry of finance’s working group worked exclusively within the framework of government policy and its recommendations were always aimed at serving the public interest, at respecting the laws of the land, and at keeping the country in the Eurozone,” the statement said. Earlier on Monday the Official Monetary and Financial Institutions Forum, which had organized a conference call between Varoufakis and investors, released a recording of the conversation held between the former minister and financial professionals on 16 July .

Varoufakis is heard saying that he ordered the ministry’s own software programme to be hacked so that online tax codes could be copied to “work out” how the payment system could be designed. “We were planning to create, surrepticiously, reserve accounts attached to every tax file number, without telling anyone, just to have this system in a function under wraps,” he says, adding that he had appointed a childhood friend to help him carry out the plan. “We were ready to get the green light from the PM when the banks closed.” The plan was denounced by Greek opposition parties, which in recent weeks have called for Varoufakis to be put on trial for treason. The academic-turned-politician has been blamed heavily for the handling of negotiations with Greece’s creditors which saw Greece come close to leaving the eurozone.

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” I think he called it wrong, but God knows it was an awesome responsibility – and we may never know who was right.”

Contingency Plans (Paul Krugman)

People are apparently shocked, shocked to learn that Greece did indeed have plans to introduce a parallel currency if necessary. I mean, really: it would have been shocking if there weren’t contingency plans. Preparing for something you know might happen doesn’t show that you want it to happen. Someday, maybe, we’ll know what kind of contingency plans the United States has had over the years. Plans to invade Canada? Probably. Plans to declare martial law in the event of a white supremacist uprising? Maybe. The issue now becomes whether Tsipras was right to decide not to invoke this plan in the face of what amounted to extortion from the creditors. I think he called it wrong, but God knows it was an awesome responsibility – and we may never know who was right.

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Be its own master?!

Greece’s Headache: How To Lift Capital Controls (AFP)

It is just the headache Greece’s government does not need right now: How can it loosen the capital controls that are shielding its banks, but strangling the rest of the economy? For the past month, Greece has been financially cut off from the rest of the world. It is almost impossible for most Greeks to take money out of the country, thanks to a raft of capital control measures put in place on June 29 amid fears of a catastrophic bank run. For companies, the capital controls have meant waiting for a government commission to sign off on large bills owed to foreign firms – a process that has slowed payments so much that distrustful suppliers started asking to be paid in advance.

Bank of Greece chief Yannis Stournaras on Friday loosened the restrictions to allow banks to greenlight companies’ foreign payments up to €100,000 But people remain unable to open new foreign bank accounts, buy shares, or transfer large sums of money. Athens is tolerating two main exceptions to the rules: Greek students abroad can receive €5,000 per quarter, while citizens having medical treatment in other countries can receive up to €2,000. Cash withdrawals were limited to €60 per day after Greeks emptied ATMs, worried for the safety of their savings. Greek Economy Minister Giorgos Stathakis warned on July 12 that it could be “several months” before it is deemed safe to lift the measures completely.

Announced in the throes of the crisis, when Greece appeared to be teetering on the brink of a chaotic eurozone exit, the capital controls were brought in with just one immediate concern in mind: protect the banks. Some €40 billion euros have left the banks’ coffers since December. As the world waits to see whether Greece and its creditors can hammer out a bailout worth up to €86 billion, staving off a panicked outpouring of the country’s cash remains a paramount concern. According to Diego Iscaro, an economist at consultancy IHS, the problem with capital controls is that they are “easy to implement but very difficult to lift.” Or as Moody’s analyst Dietmar Hornung put it: “Confidence (in the banks) is lost quickly, but it takes time to restore it.”

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“Apparently (and unfortunately), this is not a joke.”

Germany Rides Into Its Greek Colony On The “Quadriga” (Zero Hedge)

With creditors’ motorcades having officially returned to the streets of Athens in the wake of Greek lawmakers’ approval of the second set of bailout prior actions last Wednesday, tensions are understandably high. After all, these are the same “institutions” which Yanis Varoufakis famously booted from Greece after Syriza swept to power in January, and they’ve come to represent the oppression of the Greek people and are now a symbol of the country’s debt servitude. Although an absurd attempt was made to rebrand the dreaded “troika” earlier this year, the new and rather amorphous moniker – “the institutions” – never really stuck and perhaps because everyone involved felt the need to put a new name to the group that Greeks regard as the scourge of the Aegean in order to make negotiators feel safer on their trips to Athens, creditors have now added the ESM to their collective and rebranded themselves “The Quadriga.” Apparently (and unfortunately), this is not a joke. Here’s MNI:

The source from the Commission also noted that the group formerly known as Troika is now being renamed as “Quadriga”, to note the inclusion of the ESM in the talks. “Quadriga is the name inspired by Commission President, Jean-Claude Juncker for the new Greek project” the Commission source said, adding that “the EU side is a bit nervous of not knowing the IMF stance.”

We assume the reference to the IMF’s “stance” there refers to the size of the bailout and the prospects for debt relief and not to the new nickname choice, but whatever the case, here’s the definition of “quadriga” from Wikipedia:

A quadriga (Latin quadri-, four, and iugum, yoke) is a car or chariot drawn by four horses abreast (the Roman Empire’s equivalent of Ancient Greek tethrippon). It was raced in the Ancient Olympic Games and other contests. It is represented in profile as the chariot of gods and heroes on Greek vases and in bas-relief. The quadriga was adopted in ancient Roman chariot racing. Quadrigas were emblems of triumph; Victory and Fame often are depicted as the triumphant woman driving it. In classical mythology, the quadriga is the chariot of the gods; Apollo was depicted driving his quadriga across the heavens, delivering daylight and dispersing the night.

We’re not sure what’s more ironic there, the fact that an image which once appeared on Greek ceramics is now the symbol of serfdom or the fact that it’s the “chariot of the gods”, who in this case would be eurocrats and IMF officials. As amusing – and somewhat sad – as this is, perhaps the most tragically ironic part of the entire rebranding effort is that one of the most significant representations of a quadriga the world over sits atop the Brandenburg Gate in Berlin.

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IMF tells China central bank to cool it down, and at the same time tells ECB to turn up the heat. Vested interests?!

IMF Paints Dim Europe Picture, Says More Money Printing May Be Needed (Reuters)

The IMF warned on Monday that the euro zone’s prospects were modest and that more money printing than planned may be needed. Contrasting the IMF’s relative gloom, however, German think tank Ifo reported improving confidence the 19-country bloc’s largest economy. The IMF, saying medium-term growth would be subdued, urged the ECB to keep its money presses rolling, perhaps beyond the target late next year. “The important thing is that the ECB intends to stay the course until September 2016 and that, we think, will be necessary,” said Mahmood Pradhan, deputy director of the IMF’s European department, referring to QE. Letting the €1 trillion plus scheme to buy chiefly government bonds run longer could be better still, he suggested. “It may need to go beyond that,” he said.

Worries about the global economy, prompted by a slowdown in China where shares slid more than 8% on Monday , are weighing on many countries in Europe. Manufacturing confidence in the Netherlands, with huge exposure to international trade though several of Europe’s largest ports, slipped back in July, reflecting pessimism among companies over the prospects for the coming three months. Finnish consumer and industry confidence also weakened in July compared to the previous month. But the data was mixed, with the positive Ifo report on German business confidence after two monthly drops and the ECB reporting a boom in lending for home buyers, which could bolster the bloc’s economy.

The ECB also said is M3 measure of money circulating in the euro zone, which is often an early indicator of future economic activity, grew by 5.0% in June, in line with the previous month. But lending to companies fell by 0.2% in June. This was a slower pace of decline for the 11th month in a row, but still suggested most of the ECB’s largest is going to consumers not companies. In its report on the euro zone, the IMF said that the bloc was getting stronger thanks to lower oil prices, a weaker euro and central bank action, but that medium-term prospects were for an average potential growth of just 1%. The IMF said euro area GDP should accelerate to 1.7% next year from 1.5% in 2015, with inflation of 1.1% from zero.

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“In essence, Germany established that some democracies are more equal than others.”

How the Greek Deal Could Destroy the Euro (NY Times)

Indeed, the European institutions led by Germany seem to have decided that waging an ideological battle against a recalcitrant and amateurish far-left government in Greece should take precedence over 60 years of European consensus built painstakingly by leaders across the political spectrum. By imposing a further socially regressive fiscal adjustment, the recent agreement confirmed fears on the left that the EU could choose to impose a particular brand of neoliberal conservatism by any means necessary. In practice, it used what amounted to an economic embargo — far more brutal than the sanctions regime imposed on Russia since its annexation of Crimea — to provoke either regime change or capitulation in Greece. It has succeeded in obtaining capitulation.

Through its actions, Germany has made a broader political point about the governance of the euro. It has confirmed its belief that federalism by exception — the complete annihilation of a member state’s sovereignty and national democracy — is in order whenever a eurozone member is perceived to challenge the rules-based functioning of the monetary union. In essence, Germany established that some democracies are more equal than others. By doing so, the agreement has sought to remove politics and discretion from the functioning of the monetary union, an idea that has long been very dear to the French.

The negotiations leading to the Greek agreement also destroyed the constructive ambiguity created by the Maastricht Treaty by making it absolutely clear that Germany is prepared to amputate and obliterate one of its members rather than make concessions. Germany appears to believe that the single currency ought to be a fixed exchange-rate regime or not exist at all in its current form, even if this means abandoning the underlying project of political integration that it was always meant to serve. Finally, and perhaps most importantly, Germany signaled to France that it was prepared to go ahead alone and take a clear contradictory stand on a critical political issue.

This forceful attitude and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one that the French elite can sell and the French public can subscribe to. The choice will soon be whether Germany can build the euro it wants with France or whether the common currency falls apart. Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.

Over the long run, France, Italy and Spain, to name just a few, would not take part in such a union, not because they can’t, but because they wouldn’t want to. The collective GDP and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.

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Yeah, but which banks? Only the Greek ones? Would that suffice? How about the rest of Europe?

The Way To Fix Greece Is To Fix The Banks (Coppola)

Successive bailout strategies for Greece have failed to grasp the nettle of the zombie banks. The banking sector is highly concentrated, with 90% of banking assets held by four players — Alpha Bank, Eurobank, Piraeus Bank and National Bank of Greece (not to be confused with Bank of Greece, which is the central bank). All four required recapitalisation in 2012 when the “public sector involvement” restructuring impaired their holdings of Greek sovereign debt. The funds to do this were provided by eurozone and IMF creditors via the Hellenic Financial Stability Fund, the entity created in 2010 to channel bailout funds to banks. The HFSF now holds majority stakes in all four. However, recapitalising did not mean restructuring them. Nor did it mean ensuring good practice in balance sheet management.

Although the proximate cause of the 2012 bailout was the PSI, their performance had declined sharply since 2008 and they have been persistently lossmaking since about 2010. The biggest single-year loss was in 2012, but the underlying decline in profitability is actually far more damaging both to the banks themselves and to the Greek economy. The headline explanation for the banks’ problems is lack of liquidity. From 2009, successive credit rating downgrades of their own bonds and Greek sovereign debt increased their cost of funding at the same time as deposit flight increased their need of it. They lost market access in 2009 and have since relied entirely on eurosystem aid, both funding from the ECB and emergency liquidity assistance from Bank of Greece. Since March 2015, only ELA has been available, and this is currently capped by the ECB.

The banks’ dependence on official sector liquidity makes it easy to claim that their problems are caused by the restriction of it — what the former Greek finance minister Yanis Varoufakis called “asphyxiation”. Although providing liquidity beyond their credit appetite does not increase lending, restricting liquidity does force them to avoid activities that could create funding gaps. Lending, by its very nature, creates a funding gap: if banks are not confident of being able to obtain the funding to settle loan drawdowns, they will not lend. But liquidity restriction is not the whole story. The other side of the banks’ balance sheets is also to blame for the credit crunch. Since 2009, non-performing loans have risen considerably and now make up at least a third of Greek bank assets: some estimates put the figure as high as 50%.

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They can start with Greece then.

France Wants To Outlaw Discrimination Against The Poor (Guardian)

In France it could soon be illegal to discriminate against people in poverty. Under proposed legislation – already approved by the senate and likely to be passed by the chamber of deputies – it would be an offence in France to “insult the poor” or to refuse them jobs, healthcare or housing. Similar laws banning discrimination on the grounds of social and economic origin already exist in Belgium and Bolivia, but the French version is said to be the most far-reaching. Anyone found guilty of discrimination against those suffering from “vulnerability resulting from an apparent or known economic situation” would face a maximum sentence of three years in prison and a fine of €45,000.

It is easy to judge the proposed French law as showing the worst excesses of the state, or to bemoan the practicalities of how difficult it could be to implement. But most of us are content to outlaw discrimination on the grounds of race, religion, or sex. Is it so ridiculous to add poverty to that list? And if it does feel ridiculous, why is that? Whether it’s the discrimination of people in poverty or how government should respond to it, this is not a problem just for other countries. “People think that because we are poor, we must be stupid,” Oréane Chapelle, an unemployed 31-year-old from Nancy told Le Nouvel Observateur. Micheline Adobati, 58, her neighbour, who is a single mother with no job and five children, said: “I can’t stand social workers who tell me that they’re going to teach me how to have a weekly budget.”

One study reported by The Times found that 9% of GPs, 32% of dentists and 33% of opticians in Paris refused to treat benefit claimants who lacked private medical insurance. Doctors say they are “reluctant to take on such patients for fear that they will not get paid”. Does any of this sound familiar? These are attitudes – and even outright discrimination – that have been growing in Britain for some time. You can hear it in stories about local authorities monitoring how much people drink or smoke before awarding emergency housing payments. Or when politicians respond to a national food bank crisis by saying the poor are going hungry because they don’t know how to cook. It is there in the fact that it’s now all too common for landlords to refuse to rent flats to people on benefits. Britain is front and centre of its own discrimination of the poor – whether that’s low-income workers, benefit claimants, or the recurring myth that these are two separate species.

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Another farce that keeps on giving.

Dutch Journalist, MH17 Expert: ‘UN Tribunal Attempt to Hide Kiev’s Role’ (RI)

The proposed UN-backed MH17 tribunal is a “desperate attempt to hide Kiev’s responsibility”, Dutch journalist and blogger Joost Niemoller argues in his post “How Chess Player Putin Wins the MH17 Game”. Niemoller is no layman. In October 2014 he published a book on the MH17 disaster whose title De Doofpotdeal (“The Cover Up Deal”) summarizes its key argument. The inside flap explains what the author means:

“The Netherlands took charge of the investigation into the cause of the disaster, but agreed to grant a covert deal to Kiev. It thus became a pawn in an international political chess game. Unvarnished Cold War rhetoric is making a comeback. Putin here is the ultimate bad guy. What he says is labeled as poisonous propaganda in the West. Meanwhile, it seems, all those concerned suffer from tunnel vision. Can we still be assured that the investigators do their work independently and objectively?”

In his piece, Niemoller laments the shortcomings of the Dutch Safety Board, the body charged with conducting the investigations on the MH17 disaster. The ever-postponed deadline – the final report might be released at the end of the year, hence one and a half year after the crash, but that too is still uncertain – he finds perplexing:

“When the co-operating countries, the JIT (Joint Investigation Team), intend to complete their probe, is not known. Then, something gets leaked to the press: ‘At the end of this year’. With which legal framework? It is not yet known. Under which conditions? No idea. How will the co-operation between the Ukrainian, the JIT and Dutch Safety Board unfold?” “Everything is vague and secret. That is not the way it should be for such an important study.”

Niemoller contrasts this with the approach taken by Moscow:

“Russia proposed last year to conduct an international study based on research carried out by the UN – and not by means of a secret deal of countries, where one of the possible culprits, namely Ukraine, has veto power.”

Niemoller, a Dutchman, laments the dubious role of his country, especially when considering that it was the one affected most by the MH17 tragedy: 193 of the 298 victims were Dutch. And yet, Niemoller says:

“What we know for sure is that the Netherlands from day zero intensely cooperates with Kiev. What we know is that the Russians are kept out and that there is a blame game played against Putin.”

Now Niemoller focuses his attention on the role Russia is about to play. He argues that Moscow holds all the cards, and that Kiev & co apparently hold none:

“When the Russians said that if a BUK had been fired by the separatists, they would have certainly seen it on their radar, the Russians indicated that they know much more”. “After a year, there is still no evidence of that alleged separatist Buk on the table. Kindergarten-level work from Bellingcat has been dismissed. And there was no ‘Buk-track’ through the Donbas region.”

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“..1) our society faces a crisis, and 2) the existing political parties are not up to the task of comprehending what society faces.”

Potemkin Party (Jim Kunstler)

The “to do” list for rearranging the basic systems of daily life in America is long and loaded with opportunity. Every system that is retooled contains jobs and social roles for people who have been shut out of the economy for two generations. If we do everything we can to promote smaller-scaled local farming, there will be plenty of work for lesser-skilled people to do and get paid for. Saying goodbye to the tyranny of Big Box commerce would open up vast vocational opportunities in reconstructed local and regional networks of commerce, especially for young people interested in running their own business.

We need to prepare for localized clinic-style medicine (in opposition to the continuing amalgamation and gigantization of hospitals, with its handmaidens of Big Pharma and the insurance rackets). The train system has got to be reborn as a true public utility. Just about every other civilized country is already demonstrating how that is done — it’s not that difficult and it would employ a lot of people at every level. That is what the agenda of a truly progressive political party should be at this moment in history. That Democrats even tolerate the existence of evil entities like WalMart is an argument for ideological bankruptcy of the party. Democratic Presidents from Carter to Clinton to Obama could have used the Department of Justice and the existing anti-trust statutes to at least discourage the pernicious monopolization of commerce that Big Boxes represented.

By the same token, President Obama could have used existing federal law to break up the banking oligarchy starting in 2009, not to mention backing legislation to more crisply define alleged corporate “personhood” in the wake of the ruinous “Citizens United” Supreme Court decision of 2010. They don’t even talk about it because Wall Street owns them. So, you fellow disaffected Democrats — those of you who can’t go over to the other side, but feel you have no place in your country’s politics — look around and tell me who you see casting a shadow on the Democratic landscape. Nobody. Just tired, corrupt, devious old Hillary and her nemesis Bernie the Union Hall Champion out of a Pete Seeger marching song.

I’ve been saying for a while that this period of history resembles the 1850s in America in two big ways: 1) our society faces a crisis, and 2) the existing political parties are not up to the task of comprehending what society faces. In the 1850s it was the Whigs that dried up and blew away (virtually overnight), while the old Democratic party just entered a 75-year wilderness of irrelevancy. God help us if Trump-o-mania turns out to be the only alternative. Oh, by the way, notice that the lead editorial in Monday’s New York Times is a plea for transgender bathrooms in schools. What could be more important?

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The western model has died.

It’s Really Very Simple (Dmitry Orlov)

The old world order, to which we became accustomed over the course of the 1990s and the 2000s, its crises and its problems detailed in numerous authoritative publications on both sides of the Atlantic—it is no more. It is not out sick and it is not on vacation. It is deceased. It has passed on, gone to meet its maker, bought the farm, kicked the bucket and joined the crowd invisible. It is an ex-world order. If we rewind back to the early 1980s, we can easily remember how the USSR was still running half of Europe and exerting major influence on a sizable chunk of the world. World socialist revolution was still sputtering along, with pro-Soviet regimes coming in to power here and there in different parts of the globe, the chorus of their leaders’ official pronouncements sounding more or less in unison.

The leaders made their pilgrimages to Moscow as if it were Mecca, and they sent their promising young people there to learn how to do things the Soviet way. Soviet technology continued to make impressive advances: in the mid-1980s the Soviets launched into orbit a miracle of technology—the space station Mir, while Vega space probes were being dispatched to study Venus. But alongside all of this business-as-usual the rules and principles according which the “red” half of the globe operated were already in an advanced state of decay, and a completely different system was starting to emerge both at the center and along the periphery. Seven years later the USSR collapsed and the world order was transformed, but many people simply couldn’t believe in the reality of this change.

In the early 1990s many political scientists were self-assuredly claiming that what is happening is the realization of a clever Kremlin plan to modernize the Soviet system and that, after a quick rebranding, it will again start taking over the world. People like to talk about what they think they can understand, never mind whether it still exists. And what do we see today? The realm that self-identifies itself as “The West” is still claiming to be leading economically, technologically, and to be dominant militarily, but it has suffered a moral defeat, and, strictly as a consequence of this moral defeat, a profound ideological defeat as well. It’s simple.

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