Jul 312016
 
 July 31, 2016  Posted by at 9:05 am Finance Tagged with: , , , , , , , , ,  1 Response »


DPC Elks Temple (Eureka Club), Rochester, NY 1908

How Slow Is US Economic Growth? ‘Close To Zero’ (CNBC)
US Non-Consumer Economy Is Now In A Recession (ZH)
US Government Entitlements – Sixth Biggest Economy On Earth (Stockman)
Helicopter Money Talk Takes Flight As Bank of Japan Runs Out Of Runway (R.)
No Clean Bill Of Health For EU Banks In Stress Test (R.)
Ireland Jails Three Top Bankers Over 2008 Banking Meltdown (R.)
Australia’s Property Market Is Completely Bonkers (Schwab)
Minsky’s Moment (Economist)
The IMF Confesses It Immolated Greece On Behalf Of The Eurogroup (YV)
Econocracy Has Split Britain Into Experts And Ordinary People (G.)
Network Close To NATO Military Leader Fueled Ukraine Conflict (Spiegel)
America’s Military Is “Lender Of Last Resort” (Cate Long)

 

 

Not a pretty picture.

How Slow Is US Economic Growth? ‘Close To Zero’ (CNBC)

While 2016’s anemic growth level isn’t an automatic disqualifier for an interest rate increase, the bar just got a little higher. Friday’s GDP reading fell below even the dimming hopes on Wall Street. The 1.2% growth ratein the second quarter combined with a downward revision to the first three months of the year to produce an average growth rate of just 1%. In total, it was far below the Wall Street forecast of 2.6% second-quarter growth and didn’t lend a lot of credence to a Fed statement earlier this week that sounded more confident on the economy. (The Atlanta Fed was much closer, forecasting 1.8%.) In short, they are not numbers upon which a rate hawk would want to hang one’s hat.

“We’re tired of talking about rate hikes when it’s not going to happen for a while,” Diane Swonk of DS Economics told CNBC. “I really think the Fed is sidelined until the end of the year. Or, perhaps, longer. Market expectations for the next Fed hike had been sliding as the release of the GDP report got closer, and they plunged afterward. The fed funds futures market Friday morning was indicating just a 34.4% chance of a rate rise this year, with the next move pushed out until well into 2017. A day earlier, the futures market had moved to just over 50% for a 2016 move. The Fed last hiked in December 2015, which was the first move after eight years of keeping the overnight rate near zero.

To be sure, GDP growth is just one input for the central bank. Ostensibly, the Fed’s mandate is to ensure full employment and price stability, and it has come close to achieving the former while continually falling short of the latter. [..] .. the Fed has been warning about weak business investment, and Friday’s data showed those concerns were well-founded. Business investment fell 2.2%, its third consecutive quarterly decline. Gross private domestic investment tumbled 9.7%, and residential investment, which had been on the rise, reversed course and declined 6.1%, the first decrease since early 2014. Those numbers act as a counterweight to the declining jobless rate, which is down to 4.9%.

“What is really worrying is that pace has still been enough to reduce the unemployment rate further, suggesting that the economy’s potential growth rate could conceivably be close to zero,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. The headline jobless rate has been declining, in part, due to a generational low in labor force participation, suggesting that outside a decline in labor slack, there’s little moving economic growth.

Read more …

And consumer spending is set to contract sharply.

US Non-Consumer Economy Is Now In A Recession (ZH)

While yesterday’s GDP report was an undisputed disappointment, printing at 1.2% or less than half the 2.5% expected following dramatic historical data revisions, an even more troubling finding emerged when looking at the annual growth rate of GDP.  This is how Deutsche Bank’s Dominic Konstam summarized what we showed yesterday

The latest GDP release favors our hypothesis of an imminent endogenous labor market slowdown over a more optimistic scenario in which productivity will replace employment as the engine for growth. With real GDP growing at just 1.2%, there is little evidence that productivity is ready to do the heavy lifting. We are particularly concerned because annual nominal growth has slowed to 2.4%, essentially a cyclical trough

He was looking at the following chart (which as the BEA admitted yesterday, may be revised even lower in coming quarters).

 

However, as it turns out, that was not even the biggest risk. Recall that even as overall GDP rose a paltry 1.2%, somehow the consumer-driven portion of this number soared, with Personal Consumption Expenditures surging at an annualized 2.8% rate, nearly triple that recorded in the first quarter.

This means that the non-consumer part of the US economy subtracted 1.6% from GDP growth in the second quarter. In fact, as Deutsche Bank calculates, on an annual basis, the non-consumer portion of the economy is shrinking, i.e., in a recession, not only in real terms but also in nominal terms.

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More parts of Stockman’s upcoming book ‘Trumped’.

US Government Entitlements – Sixth Biggest Economy On Earth (Stockman)

……..Because the main street economy is failing, the nation’s entitlement rolls have exploded. About 110 million citizens now receive some form of means tested benefits. When social security is included, more than 160 million citizens get checks from Washington. The total cost is now $3 trillion per year and rising rapidly. America’s entitlements sector, in fact, is the sixth biggest economy in the world. Yet in a society that is rapidly aging to the tune of 10,000 baby boom retirees per day, this 50% dependency ratio is not even remotely sustainable. As we show in a later chapter, social security itself will be bankrupt within 10 years. Still, there is another even more important aspect of the mainstream narrative’s absolute radio silence about the monumental entitlements problem.

Like in the case of the nation’s 30-year LBO, the transfer payments crisis is obfuscated by the economic blind spots of our Keynesian central banking regime. Greenspan, Bernanke, Yellen and their posse of paint-by-the-numbers economic plumbers have deified the great aggregates of consumer, business and government spending as the motor force of economic life. As more fully deconstructed below, however, this boils down to a primitive notion of bathtub economics. In this bogus economic model, it is assumed that the supply-side of the economy is always fully endowed or even over-provided. By contrast, the perennial problem is purportedly a shortfall of an ether called “aggregate demand”.

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Can we please stop talking about it, and do it already?

Helicopter Money Talk Takes Flight As Bank of Japan Runs Out Of Runway (R.)

In the narrowest sense, a government can arrange a helicopter drop of cash by selling perpetual bonds, which never need to be repaid, directly to the central bank. Economists do not expect this in Japan, but they do see a high chance of mission creep, with the BOJ perhaps committing to buy municipal bonds or debt issued by state-backed entities, giving its interventions more impact than in the treasury bond market, where it is currently buying 80 trillion yen a year of Japanese government bonds (JGBs) from financial institutions. “Compared with government debt, these assets have low trading volume and low liquidity, so BOJ purchases stand a high chance of distorting these markets,” said Shinichi Fukuda, a professor of economics at Tokyo University.

“Prices would have an upward bias, so even if the BOJ bought at market rates, this would be considered close to helicopter money.” Other options include creating a special account at the BOJ that the government can always borrow from, committing to hold a certain%age of outstanding government debt or buying corporate bonds, economists say. With the BOJ’s annual JGB purchases already more than twice the volume of new debt issued by the government, Japan has already adopted something akin to helicopter money, said Etsuro Honda, a former special adviser to the Cabinet and a key architect of Abe’s reflationary economic policy. But it has not been enough to stop consumer prices falling in June at their fastest since the BOJ began quantitative easing in 2013.

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And these are half-ass stress tests designed to let banks pass.

No Clean Bill Of Health For EU Banks In Stress Test (R.)

Banks from Italy, Ireland, Spain and Austria fared worst in the latest European Union stress test, which the region’s banking watchdog said on Friday showed there was still work to do in order to boost credit to the bloc’s economy. Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe’s banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors. “While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority – that Europe’s banks are resilient to another crisis – is heartening,” Anthony Kruizinga at PwC said. Italy’s Monte dei Paschi, Austria’s Raiffeisen, Spain’s Banco Popular and two of Ireland’s main banks came out with the worst results in the EBA’s test of 51 EU lenders.

“Whilst we recognize the extensive capital raising done so far, this is not a clean bill of health,” EBA Chairman Andrea Enria said in a statement. “There remains work to do.” Italy’s largest lender, UniCredit, was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures. Germany’s biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays. Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the ECB ahead of the test results. The Italian bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a €5 billion capital increase.

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More!

Ireland Jails Three Top Bankers Over 2008 Banking Meltdown (R.)

Three senior Irish bankers were jailed on Friday for up to three-and-a-half years for conspiring to defraud investors in the most prominent prosecution arising from the 2008 banking crisis that crippled the country’s economy. The trio will be among the first senior bankers globally to be jailed for their role in the collapse of a bank during the crisis. The lack of convictions until now has angered Irish taxpayers, who had to stump up €64 billion – almost 40% of annual economic output – after a property collapse forced the biggest state bank rescue in the euro zone. The crash thrust Ireland into a three-year sovereign bailout in 2010 and the finance ministry said last month that it could take another 15 years to recover the funds pumped into the banks still operating.

Former Irish Life and Permanent Chief Executive Denis Casey was sentenced to two years and nine months following the 74-day criminal trial, Ireland’s longest ever. Willie McAteer, former finance director at the failed Anglo Irish Bank, and John Bowe, its ex-head of capital markets, were given sentences of 42 months and 24 months respectively. All three were convicted of conspiring together and with others to mislead investors, depositors and lenders by setting up a €7.2 billion circular transaction scheme between March and September 2008 to bolster Anglo’s balance sheet. Irish Life placed the deposits via a non-banking subsidiary in the run-up to Anglo’s financial year-end, to allow its rival to categorize them as customer deposits, which are viewed as more secure, rather than a deposit from another bank.

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“..a couple of generations of Australians will be all the poorer for it…”

Australia’s Property Market Is Completely Bonkers (Schwab)

House prices are no longer a function of value but rather of how much people are prepared to pay. That in turn is determined by how much banks are willing to lend. And that amount continues to rise. Before the current boom started in 1997, the ratio of household debt to GDP was around 40% — it’s now more than 100% (it’s the same story for household income to household debt). In short, the banks are lending Australians a whole load of cash, and we’re using that cash to bid up the price of an unproductive asset (established housing).

The removal of housing prices from reality is almost total. Most investment advisers will tell you that the price of an asset is dependent on the income that asset generates. For example, the more a company earns (or more specifically, the more investors think that company will earn in the future), the higher its share price will rise. Given house and apartment prices are currently high (based on their terrible net rental yield) one would expect rents to be increasing significantly to justify their price. However, the data tells a very different story. CoreLogic found that Australian dwellings increased in price by 10% in the past year. In Sydney and Melbourne the price rises were even more significant, with Sydney increasing by 13% and Melbourne by 13.9%.

If the market had any degree of rationality, given the market is already expensive, rentals would have needed to rise by around 20% during the year to justify those price increases. However, CoreLogic also reported that Sydney rents were up a mere 0.4% and Melbourne up by 1.7% (both well below the inflation rate). That means if the market was insane a year ago, it’s even worse now. Already overprice property is increasing, in Sydney’s case, 20 times as fast as underlying income. The problem is no one seems to care what the banks do (least of all the government, even though taxpayers are on the hook if any of the big banks fall over, which if the history of banking is anything to go by is a virtual certainty at some point).

Moreover, successive governments’ taxation policies (negative gearing, no capital gains tax, minimal land tax) serve to exacerbate the insanity. How long will the boom last? Potentially some time. There are a lot of vested interests (banks, real estate industry, state governments, the media) who are utterly reliant on the bubble continuing. Sadly, a couple of generations of Australians will be all the poorer for it.

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“Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious.”

Minsky’s Moment (Economist)

Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed.

Economies dominated by hedge financing—that is, those with strong cashflows and low debt levels—are the most stable. When speculative and, especially, Ponzi financing come to the fore, financial systems are more vulnerable. If asset values start to fall, either because of monetary tightening or some external shock, the most overstretched firms will be forced to sell their positions. This further undermines asset values, causing pain for even more firms. They could avoid this trouble by restricting themselves to hedge financing. But over time, particularly when the economy is in fine fettle, the temptation to take on debt is irresistible. When growth looks assured, why not borrow more? Banks add to the dynamic, lowering their credit standards the longer booms last.

If defaults are minimal, why not lend more? Minsky’s conclusion was unsettling. Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious. Of course, debt and finance matter. But for decades the study of economics paid little heed to the former and relegated the latter to a sub-discipline, not an essential element in broader theories. Minsky was a maverick. He challenged both the Keynesian backbone of macroeconomics and a prevailing belief in efficient markets.

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Yanis calling for heads to roll.

The IMF Confesses It Immolated Greece On Behalf Of The Eurogroup (YV)

[..] an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries. First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status.

A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB. Finally, and most importantly, the apology and the dismissals will count for nothing if they are not followed by a complete U-turn over macroeconomic, fiscal and reform policies for Greece and beyond.

Is any of this going to happen? Or will the IMF’s IEO report light up the sky fleetingly, to be forgotten soon? The omens are pointing to the latter. In which case, the EU’s chances of regaining the confidence of its citizens, chances that are already too slim, will run through our leaders’ fingers like thin, white sand.

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“..the shift into an era of post-truth politics…”

Econocracy Has Split Britain Into Experts And Ordinary People (G.)

During the EU referendum debate almost the whole global economic and financial establishment lined up to warn of the consequences of Brexit, and yet 52% of the country ignored them. For many Remain voters it is a clear sign of the shift into an era of post-truth politics. While economists developed rigorous, evidence-based arguments, Leave campaigners slandered experts and appeared to pluck numbers out of the air. Yet they won. Post-truth politics is indeed a scary prospect but to avoid such a future we cannot simply blame “populist politicians” or “ill-informed voters”. We must understand the referendum in its wider context; economists must realise that they are both part of the problem and a necessary part of the solution. We are living in an econocracy.

Such a society seems like a democracy, with political parties and elections, but political goals are expressed in terms of their effect on “the economy”, and economic policymaking is viewed as a technical, not a political, activity. Areas of political life are increasingly delegated to experts, whether at the Bank of England, the government’s behavioural insights team, the Competition Commission or the Treasury. As members of Rethinking Economics, an international student movement seeking to reform the discipline of economics, we are campaigning for a more pluralist, critical and participatory approach. We conduct workshops in schools, run evening crash courses for adults, and this year launched Economy, a website providing accessible economic analysis of current affairs and a platform for lively public debate.

We want economists and citizens to join us in our mission to democratise economics. That’s because the language of economics has become the language of government, and as the experts on “the economy”, economists have secured a position of prestige and authority. Their rise has gone hand in hand with the increasing importance over the 20th century and beyond of the idea of the economy in political and social life. This idea in its modern use took hold only in the 1950s but today GDP growth is one of the central indicators of success for governments, and it is unheard of for a political party to win a general election without being viewed as competent on the economy.

We have also seen the economisation of daily life, so that parts of society as diverse as the arts and healthcare now justify their value in terms of their contribution to the economy. But in this process economists have largely ignored citizens and failed to consider their right to participate in discussion and decision-making.

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A bunch of dangerous sickos.

Network Close To NATO Military Leader Fueled Ukraine Conflict (Spiegel)

The newly leaked emails reveal a clandestine network of Western agitators around the NATO military chief, whose presence fueled the conflict in Ukraine. Many allies found in Breedlove’s alarmist public statements about alleged large Russian troop movements cause for concern early on. Earlier this year, the general was assuring the world that US European Command was “deterring Russia now and preparing to fight and win if necessary.” The emails document for the first time the questionable sources from whom Breedlove was getting his information. He had exaggerated Russian activities in eastern Ukraine with the overt goal of delivering weapons to Kiev. The general and his likeminded colleagues perceived US President Barack Obama, the commander-in-chief of all American forces, as well as German Chancellor Angela Merkel as obstacles.

Obama and Merkel were being “politically naive & counter-productive” in their calls for de-escalation, according to Phillip Karber, a central figure in Breedlove’s network who was feeding information from Ukraine to the general. “I think POTUS sees us as a threat that must be minimized,… ie do not get me into a war????” Breedlove wrote in one email, using the acronym for the president of the United States. How could Obama be persuaded to be more “engaged” in the conflict in Ukraine – read: deliver weapons – Breedlove had asked former Secretary of State Colin Powell. Breedlove sought counsel from some very prominent people, his emails show. Among them were Wesley Clark, Breedlove’s predecessor at NATO, Victoria Nuland, the assistant secretary of state for European and Eurasian affairs at the State Department, and Geoffrey Pyatt, the US ambassador to Kiev.

One name that kept popping up was Phillip Karber, an adjunct assistant professor at Georgetown University in Washington DC and president of the Potomac Foundation, a conservative think tank founded by the former defense contractor BDM. By its own account, the foundation has helped eastern European countries prepare their accession into NATO. Now the Ukrainian parliament and the government in Kiev were asking Karber for help. On February 16, 2015, when the Ukraine crisis had reached its climax, Karber wrote an email to Breedlove, Clark, Pyatt and Rose Gottemoeller, the under secretary for arms control and international security at the State Department, who will be moving to Brussels this fall to take up the post of deputy secretary general of NATO.

Karber was in Warsaw, and he said he had found surreptitious channels to get weapons to Ukraine – without the US being directly involved. According to the email, Pakistan had offered, “under the table,” to sell Ukraine 500 portable TOW-II launchers and 8,000 TOW-II missiles. The deliveries could begin within two weeks. Even the Poles were willing to start sending “well maintained T-72 tanks, plus several hundred SP 122mm guns, and SP-122 howitzers (along with copious amounts of artillery ammunition for both)” that they had leftover from the Soviet era. The sales would likely go unnoticed, Karber said, because Poland’s old weapons were “virtually undistinguishable from those of Ukraine.”

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What Trump said.

America’s Military Is “Lender Of Last Resort” (Cate Long)

America is slowly awakening from its long debt-induced slumber. It has conducted two major wars, a bailout of banks and a major stimulus program without raising taxes to pay for them. Because the Federal Reserve kept interest rates low, it was easy for politicians to continue to raise the debt ceiling and spend without making reductions in other areas of the budget. But those days have ended, the punch bowl has been removed and a new sobriety has rolled into our national capital. Even with its massive deficit problems, America has been providing security for its global allies for decades at no cost to them.

This resulted in spending 4.8% of GDP on U.S. military in 2010, which was ramped up from 3.0% in 2001, according to the Stockholm International Peace Research Institute. In contrast, you can see that European countries spent 1.73% of total GDP on military in 2010, which declined slightly from 1.99% in 2001. America has been subsidizing European military needs largely due to its role in the NATO alliance. The Council on Foreign Relations explains the new problems with this arrangement:

In 2011, then Secretary of Defense Robert Gates warned that ‘there will be dwindling appetite and patience in the U.S. . . . to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources to be serious and capable partners in their own defense.’ France in Mali is now a case in point; the Obama administration is providing only grudging assistance to an under-resourced French intervention.

[…] French military spending…has since 2001 exhibited a marked constancy—one which is inconsistent with the country’s newfound passion for military engagement. (Libya in March 2011 was another example of the French, as well as British, military biting off more than it could chew). It also highlights the need for the Obama administration to address Gates’ prescient concern and to develop a clearer policy foundation for America’s global military ‘lender of last resort’ role.

America is woefully underfunded in infrastructure spending and many other social needs. A big question is whether it can also be the global military “lender of last resort” and still maintain its own house. The military contracting industry in America does create a lot of jobs, but in essence it also gives the benefits away free to its allies. Times must change. America must either charge for these services or understand more clearly what we gain from continued military involvement overseas.

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Jul 182016
 
 July 18, 2016  Posted by at 8:54 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


Arthur Rothstein General store and railroad crossing, Atlanta, Ohio 1938

Ireland Hits Brexit Alarm in Biggest Foreign Crisis in 50 Years (BBG)
Yuan Declines to 2010 Low as Property Prices Slow, Dollar Rises (BBG)
Goodbye Lenin, Hello Bernanke (ABC.au)
Stocks and Bonds Are on a Collision Course (DR)
Bubbles in Bond Land (David Stockman)
Chinese Cities’ Expansion Plans Could House 3.4 Billion People (BBG)
Slowing China Home Price Rises Add To Doubts About Economy (R.)
Under-35s Could Be The First Generation To Earn Less Than Their Parents (DM)
Boom to Bust (Salt)
Justice Department ‘Uses Aged Computer System To Frustrate FOIA Requests’ (G.)
MH-17: Russia Convicted By Propaganda (PCR)
Donald Trump’s Ghostwriter Tells All (New Yorker)
Six Wealthiest Countries Host Less Than 9% Of World’s Refugees (G.)
20 Migrants Dead, 366 Saved From Boats In Mediterranean (NW)

 

 

Huh? Didn’t Ireland grow 26% just last week?

Ireland Hits Brexit Alarm in Biggest Foreign Crisis in 50 Years (BBG)

The prime minister is under pressure, economists are slashing growth forecasts and companies are warning of Brexit’s dire consequences. London? No, Dublin. The intertwining of trade and finance means no other country is feeling the fallout from the U.K.’s vote to leave the European Union more than Ireland. In the year the Irish marked the centenary of their uprising against British rule, the country remains at the mercy of the unfolding drama in its closest neighbor. “It’s the most serious, difficult issue facing the country for 50 years,” said John Bruton, 69, who was Irish prime minister between 1994 and 1997 and later served as the EU’s ambassador to the U.S.

Exporters have warned the plummeting pound will erode earnings and economic growth, just as a recovery had taken hold after the 2010 international bailout that followed the banking meltdown. Irish shares have declined, not least because the U.K. is the top destination for the country’s exports after the U.S. and the biggest for its services. Meantime, Prime Minister Enda Kenny is fending off demands by Northern Irish nationalists for a reunification poll as he comes to terms with the loss of a key EU ally and plotters from his own party try to topple him. Then there’s the future of the U.K.’s only land border with the EU. “The consequences are mind-boggling,” said Eoin Fahy, chief economist at Kleinwort Benson Investors in the Irish capital.

Britain and Ireland joined the European Economic Community in 1973. Ireland was drawn in part to escape what one politician called “our gate-lodge attitude towards England.” More than four decades later, the two countries remain woven together economically as well as culturally and linguistically. Ireland uses the euro, yet does about $45 billion of trade with the U.K. About 380,000 Irish citizens living in Britain were eligible to vote in the Brexit referendum. Britain also chipped in for Ireland’s bailout six years ago, despite not being part of the euro region. When Theresa May took over as British prime minister last Wednesday, Kenny was among three leaders she spoke to, along with Germany’s Angela Merkel and Francois Hollande of France.

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Bloomberg should simply say: “The yuan fell, and we have no idea why”.

Yuan Declines to 2010 Low as Property Prices Slow, Dollar Rises (BBG)

China’s yuan fell to the weakest level since 2010, pulled down by cooling property prices, a dollar rebounding on haven demand and a weaker central bank fixing. New home prices rose in fewer cities in June compared with a month earlier, according to official data released Monday, blunting optimism prompted by last week’s figures showing forecast-beating economic growth. The monetary authority weakened the yuan’s daily fixing to the lowest since 2010 after the dollar strengthened Friday following a coup attempt in Turkey.

The greenback was supported on Monday also as China said it would hold military exercises in the South China Sea. “The dollar strengthened as orders to buy the currency jumped, pressuring the yuan and the rest of Asian currencies lower,” said Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia. “There’s news that China will hold military exercises in the South China Sea later this month,” which could spur some haven-demand for the greenback.

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Lookalike contest.

Goodbye Lenin, Hello Bernanke (ABC.au)

Maybe it’s just me, but have you noticed the striking similarity between Vladimir Lenin and Ben Bernanke lately? Superficially, there’s the obvious physical resemblance; whippet build, glabrous pate, facial hair and a penchant for stylish, if somewhat conservative, garb. More significantly, both appear to harbour the same ideological distrust of free markets or, at the very least, a burning desire to control them as much as possible. Separated by almost a century, both men have made it a lifelong ambition to impose state control over the economy. And it has to be said, while Vladimir Ilyich Ulyanov Lenin achieved significant success in spreading the word from Russia through developing nations, he and his successors never quite got across the line when it came to the so-called free world.

Maybe it was his reputation as a firebrand, an over-reliance on bloody revolution by force and the frightening prospect – for the ruling elite at least – that wealth would be redistributed to the poor. Enter Ben Bernanke. In the space of a mere eight years, the former Federal Reserve chief has managed to achieve what Vladimir could barely conceive. He’s convinced the United States of America, the United Kingdom, Japan and Europe to embark on a revolutionary journey to completely subvert free market instincts. Unlike his Russian predecessor, Ben has opted for the calm, congenial exterior of Central Banker from Central Casting, complete with a mogadon monotone designed to lull his audience into a state of torpor.

He’s also wisely decided to modify the wealth distribution bit. As western governments have raided the kitty, plunging themselves into an ocean of debt, much of the proceeds have flowed directly into asset markets – stocks, bonds and property – which has helped maintain the flow of wealth towards the wealthy. Brilliant! Last week, Ben was in Japan. And that got twitchy fingered traders across the globe all hot under the collar. Ben, after all, is the man who pioneered the implementation of “unorthodox monetary policy”.

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“Bond markets are signaling something very nasty coming down the road at us — an all-encompassing, worldwide deflation.”

Stocks and Bonds Are on a Collision Course (DR)

One of the following is correct: A) The stock market is lying. B) The bond market is lying. They both can’t be true. Consider: The stock market has sprung to record highs this week. Shocking, given the world was coming to an end after Brexit. But it’s true. Both the S&P and the Dow eclipsed previous records this week. What does that normally indicate? A rollicking economy in high gear, stability, investor belief in the future. Maybe some “healthy” inflation into the bargain. Now consider: Bonds are also trading at record highs. Meaning yields are at historic lows (prices and yields move in opposite directions – the higher the price, the lower the yield, and vice versa). Yields on 10-year Treasuries plunged to all-time lows this month. Same with 30-year Treasuries.

That would normally signal an economy on the brink of ruin and investors panicking into government bonds. It also means deflation of the hide-the-women-and-children variety. TheTelegraph: “Bond markets are signaling something very nasty coming down the road at us — an all-encompassing, worldwide deflation.” Two completely different narratives. One wrong, one right. Someone’s in for a nasty shock – and probably soon. Says analyst William Koldus, founder of The Contrarian: The tug of war between inflationary and deflationary assets is likely to be resolved in 2016. Either U.S. stock prices, which have been an outlier to the upside, are wrong, and a significant correction awaits stock investors, or U.S. bond prices, and global sovereign bond yields, which have priced in a significant deflationary head wind, are wrong, and safe-haven bondholders are set for losses.

Who’s the jury to believe? Generally, the bond market. As Neil Irwin of The New York Times explains, “Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.” Here he dumps more rain on the parade: “And right now, if the bond market is correctly predicting the economic path ahead, we should all be terrified.”

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“Surely, BOJ Governor Kuroda will go down in history as the stupidest central banker of all-time.”

Bubbles in Bond Land (David Stockman)

Last year Japan lost another 272,000 of its population as it marches steadily toward its destiny as the world’s first bankrupt old age colony. At the same time, the return on Japan’s 40-year bond during the last six months has been an astonishing 48%. That’s right! We aren’t talking Tesla, the biotech index or the FANGs. To the contrary, like the rest of the Japanese Government Bond (JGB) yield curve, this bond has no yield and no prospect of repayment. But that doesn’t matter because it’s not really a sovereign bond, anyway. It has actually morphed into a risk free gambling chip. Leveraged front-runners are scooping up whatever odds and sots of JGBs that remain on the market and are selling them to the Bank of Japan (BOJ) at higher, and higher and higher prices.

At the same time, these punters face virtually no risk. That’s because the BOJ already owns 426 trillion yen of JGBs, which is nearly half of the bonds outstanding. And it is buying up the rest at a rate of 80 trillion yen per year under current policy, while giving every indication of sharply stepping up its purchase rate as it segues to outright helicopter money. It can therefore be well and truly said that the BOJ is the ultimate roach motel. Virtually every scrap of Japan’s gargantuan public debt will go marching into its vaults never to return, and at “whatever it takes” bond prices to meet the BOJ’s lunatic purchase quotas. Surely, BOJ Governor Kuroda will go down in history as the stupidest central banker of all-time.

But in the interim the man is contributing — along with Draghi, Yellen and the rest of the central bankers guild — to absolute mayhem in the global fixed income market. That’s because these fools have succeeded in unleashing a pincer movement among market participants that is flat-out suicidal. That is, the leveraged fast money gamblers are chasing prices ever higher as sovereign bonds become increasingly scarce. At the same time, desperate bond fund managers, who will lose their jobs for just sitting on cash, are chasing yields rapidly lower on any bond that still has a positive current return. This is the reason the 30-year U.S. treasury bond has produced a 22% return during the last six months. To say the least, that’s not shabby at all considering that its current yield is just 2.25%.

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Want to see a real housing crisis?

Chinese Cities’ Expansion Plans Could House 3.4 Billion People (BBG)

New areas planned by China’s small cities could accommodate 3.4 billion people by 2030 – or almost half the world’s current population – a target that even Chinese state media calls problematic. A report by the National Development & Reform Commission, China’s central planning agency, found that small- and medium-sized cities were planning more than 3,500 new areas that could accommodate more than twice the country’s current population of 1.4 billion. The entire world has a population of 7.4 billion, according to U.S. Census estimates. The findings were detailed in an analysis by the official Xinhua News Agency, which criticized the planned new areas as unworkable: “Who’s going to live in them? That’s a problem,” the piece said.

The expansion comes amid urbanization calls by President Xi Jinping and Premier Li Keqiang as China prepares for another 100 million people to move from the countryside to urban metropolises by the end of the decade. People tend favor bigger markets with more opportunities and fewer than 1-in-10 migrant workers moved to small cities last year, according to an NDRC report published in April. Even without the new areas, China already has more housing than it needs and “ghost cities” have proliferated. China has been building more than 10 million new units annually for the past five years, outstripping an estimated of demand of less than 8 million, according to an analysis by Bloomberg Intelligence Economists Tom Orlik and Fielding Chen.

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Look, Reuters, there comes a point where things like “..a construction-led rebound in the economy may not be sustainable..” become meaningless. We reached that point quite a while ago.

Slowing China Home Price Rises Add To Doubts About Economy (R.)

Home price rises in China slowed in June for a second straight month, adding to fears that a construction-led rebound in the economy may not be sustainable. The property market is a key driver of the world’s second-largest economy and a robust recovery in home prices and sales gave a stronger-than-expected boost to activity in the first half of the year. But slowing price growth in smaller cities and cooling property investment show the bounce may already be fading, raising the risk of weaker economic growth in coming months. Home prices in China’s 70 major cities rose 7.3% in June from a year earlier, an official survey showed on Monday, accelerating from a 6.9% rise in May.

To be sure, some of the biggest cities showed eye-popping gains on a yearly basis, with prices in the southern boomtown of Shenzhen up 46.7% and Shanghai up 27.7%. Gains on a monthly basis continued to slow, however, as cities tightened policies amid fears of a housing price bubble. The monthly rise slowed slightly to 0.8% in June, easing from 0.9% in May, according to a Reuters calculation based on data issued by the National Bureau of Statistics (NBS). “We continue to expect the property rebound to subside and property investment growth to fall in the second half of the year,” economists at Nomura said in a note, predicting sales would stabilize and a large glut of unsold homes would keep pressure on prices in some areas.

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Stupidest term in a long time: “generational pay progress”.

Under-35s Could Be The First Generation To Earn Less Than Their Parents (DM)

Millennials could become the first generation to earn less than their predecessors, analysis by a think-tank has found. The Research Foundation found that under-35s have been hit hardest by the recent pay squeeze and earned £8,000 less during their 20s than a typical person in the previous generation – known as generation X. The finding comes just days after new Prime Minister Theresa May warned of a ‘growing divide between a more prosperous older generation and a struggling younger generation’. The report, which comes as the thank-tank launches its Intergenerational Commission, warns that a post-Brexit downturn could depress millennials’ wages further.

The Intergenerational Commission report states that while some of the pay squeeze is down to millennials entering the job market as the recession hit, it also found generational pay progress had actually stopped before the 2007/08 financial crash. If the future pay of millennials follows the path of generation X, that would reduce their lifetime earnings to around £825,000 – making them the first ever generation to earn less than their predecessors over the course of their working lives. The comparable figure for Generation X is around £832,000. Even if their wages followed a more optimistic path and improved rapidly like their baby boomer parents, their lifetime earnings would be around £890,000. This would be just 7% more than generation X and a third of the size of the pay progress that generation X are set to enjoy over the baby boomers.

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“Boomers got the Pill, free love, free education and easy jobs. Gen X got AIDS, HECS and the GFC.”

Boom to Bust (Salt)

I feel sorry for Generation X, those of you born between 1965 and 1983 and who are now straddling the load-bearing years of the late 30s and 40s. There is no escaping the big responsibilities at this time in the life cycle. At this very moment, Xers are raising families and paying taxes and working flat out… and yet nary a peep from this lot does anyone hear. It’s all about the baby boomers, and if it’s not about the baby boomers and their interminable retirement woes then it’s all about their gifted Generation-Y children. Are we paying you enough, Gen Y? Is anyone being mean to you? Can I get you a pillow? You do realise that I am a Generation Xer, trapped inside a baby boomer body. The reason I feel sorry for the Xers is that they’re always in the wrong place at the wrong time.

Xers are the pissed-off generation. They are heartily sick of baby boomers and their cultural chest-beating. Yes, boomers, we know it was you who saved humanity from the Vietnam War. Yes, we know you discovered free love in the 1960s. No one had thought of sex prior to that, had they? This is what I mean about being pissed off. Baby boomers got the Pill and free love when they were coming of age. But what did older Xers get when they passed through their teens and 20s? The 1980s. Out went the concept of free love; in came the mortal threat of HIV-AIDS. Kind of puts a dampener on the sex thing, don’t you think?

Boomers got fee-free university education courtesy of Gough Whitlam. When did most Xers go to uni? Oh, that’d be after 1989, when we decided fee-free tertiary education was unsustainable and in came HECS. When did many Xers enter the workforce? Oh, that’d be in the early 1990s, when unemployment peaked at nearly 12 per cent. And then they worked for baby boomer managers, biding their time, pacing, scheming, forever waiting for the boomers to let go of the reins. And when was it that baby boomer management let go of the reins? Oh, that’d be around the time of the global financial crisis. “Here you go Xers, it’s your turn now. We’re off on a Rhine River cruise. Make sure you pay your taxes. Bye.”

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If the Department of Justice won’t obey the law, what do you get?

Justice Department ‘Uses Aged Computer System To Frustrate FOIA Requests’ (G.)

A new lawsuit alleges that the US Department of Justice (DoJ) intentionally conducts inadequate searches of its records using a decades-old computer system when queried by citizens looking for records that should be available to the public. Freedom of Information Act (Foia) researcher Ryan Shapiro alleges “failure by design” in the DoJ’s protocols for responding to public requests. The Foia law states that agencies must “make reasonable efforts to search for the records in electronic form or format”. In an effort to demonstrate that the DoJ does not comply with this provision, Shapiro requested records of his own requests and ran up against the same roadblocks that stymied his progress in previous inquiries.

A judge ruled in January that the FBI had acted in a manner “fundamentally at odds with the statute”. Now, armed with that ruling, Shapiro hopes to change policy across the entire department. Shapiro filed his suit on the 50th anniversary of Foia’s passage this month. Foia requests to the FBI are processed by searching the Automated Case Support system (ACS), a software program that celebrates its 21st birthday this year. Not only are the records indexed by ACS allegedly inadequate, Shapiro told the Guardian, but the FBI refuses to search the full text of those records as a matter of policy. When few or no records are returned, Shapiro said, the FBI effectively responds “sorry, we tried” without making use of the much more sophisticated search tools at the disposal of internal requestors.

“The FBI’s assertion is akin to suggesting that a search of a limited and arbitrarily produced card catalogue at a vast library is as likely to locate book pages containing a specified search term as a full text search of database containing digitized versions of all the books in that library,” Shapiro said.

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Will be a big story again when Holland produces its ‘objective’ report. Which has lost all credibility way before publication.

MH-17: Russia Convicted By Propaganda (PCR)

Today is the second anniversary of the downing of Malaysia Airlines Flight 17, and we still do not know the explanation. Washington and its European vassal politicians and media instantly politicized the event: The Russians did it. End of story. After 15 months of heavy anti-Russian propaganda had imprinted the message on peoples’ minds, the Dutch Safety Board issued its inconclusive report. By then, it was irrelevant what the report said. Everyone already knew that “the Russians did it.” I remember when pre-trial media accusations resulted in dismissed cases. Anyone declared guilty prior to presentation of evidence and conviction was considered to have been convicted in advance and unable to receive a fair trail. Such cases were dismissed by judges.

Washington’s story never made any sense. Neither Russia nor the separatists in the Donetsk region had any reason to shoot down a Malaysian airliner. In contrast Washington had enormous incentives as Washington’s propaganda machine could place the blame on Russia and use the incident to compel European governments to accept Washington’s sanctions placed on Russia. It worked for Washington. Washington successfully used the incident to wreck Europe’s political and economic relationships with Russia. Four months into the anti-Russian propaganda campaign, a website called Bellingcat, claiming to be an open source site for citizen journalists, but which could be a MI-5, MI-6, or CIA front, issued a report that the Buk missile was fired by a Russian unit, the 53rd Buk Brigade, based in the Russian city of Kursk.

This allegation exposed the propaganda for what it is. Whereas it is possible that separatists unfamiliar with the Buk weapon system could accidentally shoot down a civilian airliner, it is not possible for a Russian military unit to make such a mistake. Moreover, it is unclear why separatists or the Ukrainian government would have any reason to use Buk missiles in their conflict. The separatists have no air force. The Ukrainians attack the separatists at ground level with ground attack aircraft and helicopters, not with high altitude bombing. The Buk missile is a high altitude missile. The only way the separatists could have acquired Buk missiles is by overrunning and capturing Ukrainian positions that for unfathomed reasons had deployed Buk missiles.

It seems to me that if a Buk missile was present in the conflict area, it was moved there for a reason unrelated to the conflict. A European air traffic controller said that MH-17 and the airliner carrying Russian President Vladimir Putin were initially on the same course. Possibly Washington and its vassal in Kiev thought MH-17 was Putin’s plane and destroyed the Malaysian flight by mistake.

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Brought to you by the Clinton Foundation: “I put lipstick on a pig,” he said. “I feel a deep sense of remorse that I contributed to presenting Trump in a way that brought him wider attention and made him more appealing than he is.” He went on, “I genuinely believe that if Trump wins and gets the nuclear codes there is an excellent possibility it will lead to the end of civilization.”

Donald Trump’s Ghostwriter Tells All (New Yorker)

Last June, as dusk fell outside Tony Schwartz’s sprawling house, on a leafy back road in Riverdale, New York, he pulled out his laptop and caught up with the day’s big news: Donald J. Trump had declared his candidacy for President. As Schwartz watched a video of the speech, he began to feel personally implicated. Trump, facing a crowd that had gathered in the lobby of Trump Tower, on Fifth Avenue, laid out his qualifications, saying, “We need a leader that wrote ‘The Art of the Deal.’ ” If that was so, Schwartz thought, then he, not Trump, should be running. Schwartz dashed off a tweet: “Many thanks Donald Trump for suggesting I run for President, based on the fact that I wrote ‘The Art of the Deal.’ ”

Schwartz had ghostwritten Trump’s 1987 breakthrough memoir, earning a joint byline on the cover, half of the book’s five-hundred-thousand-dollar advance, and half of the royalties. The book was a phenomenal success, spending forty-eight weeks on the Times best-seller list, thirteen of them at No. 1. More than a million copies have been bought, generating several million dollars in royalties. The book expanded Trump’s renown far beyond New York City, making him an emblem of the successful tycoon. Edward Kosner, the former editor and publisher of New York, where Schwartz worked as a writer at the time, says, “Tony created Trump. He’s Dr. Frankenstein.”

Starting in late 1985, Schwartz spent eighteen months with Trump—camping out in his office, joining him on his helicopter, tagging along at meetings, and spending weekends with him at his Manhattan apartment and his Florida estate. During that period, Schwartz felt, he had got to know him better than almost anyone else outside the Trump family. Until Schwartz posted the tweet, though, he had not spoken publicly about Trump for decades. It had never been his ambition to be a ghostwriter, and he had been glad to move on. But, as he watched a replay of the new candidate holding forth for forty-five minutes, he noticed something strange: over the decades, Trump appeared to have convinced himself that he had written the book. Schwartz recalls thinking, “If he could lie about that on Day One—when it was so easily refuted—he is likely to lie about anything.”

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While being responsible for 91% of them fleeing in the first place.

Six Wealthiest Countries Host Less Than 9% Of World’s Refugees (G.)

The six wealthiest countries in the world, which between them account for almost 60% of the global economy, host less than 9% of the world’s refugees, while poorer countries shoulder most of the burden, Oxfam has said. According to a report released by the charity on Monday, the US, China, Japan, Germany, France and the UK, which together make up 56.6% of global GDP, between them host just 2.1 million refugees: 8.9% of the world’s total. Of these 2.1 million people, roughly a third are hosted by Germany (736,740), while the remaining 1.4 million are split between the other five countries. The UK hosts 168,937 refugees, a figure Oxfam GB chief executive, Mark Goldring, has called shameful.

In contrast, more than half of the world’s refugees – almost 12 million people – live in Jordan, Turkey, Palestine, Pakistan, Lebanon and South Africa, despite the fact these places make up less than 2% of the world’s economy. Oxfam is calling on governments to host more refugees and to do more to help poorer countries which provide shelter to the majority of the world’s refugees. “This is one of the greatest challenges of our time yet poorer countries, and poorer people, are left to shoulder the responsibility,” said Mark Goldring, chief executive of Oxfam GB. “It is a complex crisis that requires a coordinated, global response with the richest countries doing their fair share by welcoming more refugees and doing more to help and protect them wherever they are.

“Now more than ever, the UK needs to show that it is an open, tolerant society that is prepared to play its part in solving this crisis. It is shameful that as one of the richest economies the UK has provided shelter for less than 1% of refugees.”

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Look away.

20 Migrants Dead, 366 Saved From Boats In Mediterranean (NW)

Rescuers saved 366 migrants from rickety boats trying to cross the Mediterranean to Italy but at least 20 people were reported to have drowned, Italian police said on Saturday. The survivors, who were rescued in four separate operations, were crammed onto three rubber dinghies and a wooden fishing boat. They were all taken to the Sicilian port of Augusta, where they were questioned on Friday evening by the Italian police unit Interforce, which combats illegal immigration.

The Norwegian ship Siem Pilot went to the aid of one dinghy that sank in the Sicilian Channel, but many migrants were already in the sea when it arrived, Antonio Panzanaro, an Interforce official, told Reuters. One corpse was recovered but survivors said that at least 20 people had drowned before the ship arrived, he said. There were 82 women and 25 children among the 366 people rescued, he said. The survivors were mainly from Nigeria, Ethiopia, Eritrea and Bangladesh. Seven people were arrested from the four boats, including their drivers, on suspicion of people-trafficking, he said.

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May 172016
 
 May 17, 2016  Posted by at 7:59 am Finance Tagged with: , , , , , , , , ,  3 Responses »


DPC Clam seller in Mulberry Bend, NYC 1904

Deutsche Bank’s Woes May Be ‘Insurmountable’ (BBG)
Wall Street Banks See A Painful Summer For Stocks Ahead (MW)
IMF Wants Eurozone Debt Relief for Greece Until 2040-2080 (WSJ)
ECB Grants Debt Relief To All Eurozone Nations Except Greece (Vox)
Canada Terrified Of Popping Foreign-Buyer Housing Bubble (CBC)
New Zealand Housing Crisis Forces Hundreds To Live In Tents And Garages (G.)
Chinese Investors Have Spent $300 Billion On US Property (R.)
China’s Economy Is Past The Point Of No Return (Chang)
Money Trail Shows China Sticking To ‘Original Sin’ (R.)
China Challenged to Keep Yuan Stable as Dollar Rises (WSJ)
The Great Foreclosure Fraud (Dayen)
Climate Change Puts 1.3 Billion People, $158 Trillion At Risk: World Bank (G.)
Will Brexit Make Ireland A Nation Once Again? Don’t Write It Off (McWilliams)
The Leftwing Case For Brexit -One Day- (Mason)
As Brexit Vote Looms, US Banks Review Their European Commitments (R.)
UN Urges Greece To Stop Detaining Migrant Children (R.)
Syrians Returned To Turkey In EU Deal ‘Have No Access To Lawyers’ (G.)

A long time coming. Key: derivatives exposure. Something’s bound to push Deutsche eerily close to the edge. What will Berlin do?

Deutsche Bank’s Woes May Be ‘Insurmountable’ (BBG)

Deutsche Bank is stuck in a vicious circle as co-CEO John Cryan seeks to overhaul an impaired business that needs more capital, which the bank would struggle to raise if it tried to tap investors, according to Berenberg. The Frankfurt-based lender’s biggest problem is excessive leverage, Berenberg’s James Chappell wrote Monday in a note that said the bank faces “insurmountable headwinds.” He cut his rating to sell from hold and reduced his target price for the stock to €9 per share, the lowest among more than 30 analysts tracked by Bloomberg and about 40% below current levels. While Cryan, 55, has scrapped dividends, earmarked businesses for sale and pledged to eliminate thousands of jobs, Deutsche Bank earnings have been undermined by €12.6 billion in costs linked to past misconduct.

Efforts to sell assets may be hampered by illiquid credit markets, while Cryan will also struggle to boost capital as the investment-banking industry is in “structural decline,” Chappell wrote “It’s hard to see how Deutsche Bank can escape this vicious circle without raising more capital,” Chappell wrote. “The CEO has eschewed this route for now, in the hope that self-help can break this loop, but with risk being re-priced again, it is hard to see Deutsche Bank succeeding.” Shares in Deutsche Bank have dropped 35% this year. The company trades at about 39% of tangible book value, the lowest ratio among the top global banks, according to Bloomberg data. That means they are worth less than investors would expect to receive if the firm liquidated assets.

Credit Suisse, which last year raised capital to help restructure its businesses, is trading at 65%. Eleven analysts recommend selling Deutsche Bank shares, while 21 have a hold rating and six suggest buying the stock, according to Bloomberg data. The lender’s average 12-month price target is about €18, with analysts at Goldman Sachs forecasting shares to reach €23.80. Cryan has already signaled that Deutsche Bank may post another loss this year, hurt by restructuring costs and charges ties to past misconduct. Chappell cut his estimate for Deutsche Bank’s earnings-per-share by about 35% for 2017 and 2018. He predicts the lender will earn about €2 per share in 2018.

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Talking their books? Sell in May?

Wall Street Banks See A Painful Summer For Stocks Ahead (MW)

If you gathered a group of stock analysts in a room, odds are each analysts would have a different view on the market. So when analysts from three big investment banks are on the same page, it might pay to listen. Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan are all urging investors to rotate out of equities because they see a painful summer ahead. “An increasing number of trends worry us as we head into summer,” said Savita Subramanian, an equity and quantitative strategist at Bank of America Merrill Lynch. The fact that corporate buybacks are near an all-time high while the number of companies projected to post losses has also risen is a huge red flag for Subramanian.

Furthermore, an interest-rate hike during an earnings recession never ends well, she said. “Since 1971, the Fed has begun tightening during a bona fide profits recession only three other times – 1976, 1983, and 1986; two out of those three instances saw stocks drop over the next twelve months. The S&P is just 1% off its Dec. 16 level when the Fed initially hiked,” said the strategist in a report. An earnings recession, like an economic contraction, is two consecutive quarters of negative year-on-year profit growth. First-quarter earnings fell 7.1% from a year earlier, marking four consecutive quarters of declines, according to FactSet. Subramanian also sees signs that capital is drying up with initial public offerings at an all-time low while commercial lending standards have tightened.

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Schäuble says NEIN!

IMF Wants Eurozone Debt Relief for Greece Until 2040 (WSJ)

The IMF is pressing the eurozone to let Greece skip paying interest or principal on bailout loans until 2040, say officials familiar with the talks. The IMF wants the loans to Greece to fall due gradually in the following decades, and as late as 2080, according to the IMF’s proposal. The IMF’s proposal, presented to eurozone governments late last week, would keep Greece’s annual debt-service needs below 15% of its gross domestic product, under the IMF’s relatively pessimistic forecast for Greece’s long-term economic trajectory. The IMF’s demands go far beyond what Greece’s eurozone creditors have said they are willing to do to help Greece regain its financial health.

Eurozone governments, led by Germany, are reluctant to make such major concessions on their loans to Greece, which currently total just over €200 billion with around another €60 billion to come under the latest Greek bailout plan. But Germany, the eurozone’s dominant economic power, also wants the IMF to rejoin the Greek bailout as a lender. The IMF hasn’t yet signed up to the Greek program agreed last summer. German Chancellor Angela Merkel has long viewed the IMF as essential to the credibility of the Greek bailout. Her government promised Germany’s parliament, the Bundestag, last year that the IMF would join the new bailout program before Europe disburses further money to Athens.

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As Germany gets more debt relief than anyone else.

ECB Grants Debt Relief To All Eurozone Nations Except Greece (Vox)

It looks like Greece may get some debt relief. There is as yet no certainty about this because some German politicians continue to conduct rear-guard battles to prevent it. What is certain, however, is that all Eurozone countries, with the exception of Greece, have been enjoying debt relief since early 2015. That may seem surprising to the outsider. Some explanation is necessary here. As part of its new policy of ‘quantitative easing’ (QE), the ECB has been buying government bonds of the Eurozone countries since March 2015. Since the start of this new policy, the ECB has bought about €645 billion in government bonds. And it has announced that it will continue to do so, at an accelerated monthly rate, until at least March 2017 (Draghi and Constâncio 2015). By then, it will have bought an estimated €1,500 billion of government bonds.

The ECB’s intention is to pump money in the economy. In so doing, it hopes to lift the Eurozone economy out of stagnation. I have no problems with this. On the contrary, I have been an advocate of such a policy. What I do have problems with is the fact that Greece is excluded from this QE programme. The ECB does not buy Greek government bonds. As a result, the ECB excludes Greece from the debt relief that it grants to the other countries of the Eurozone. How is this possible? When the ECB buys government bonds from a Eurozone country, it is as if these bonds cease to exist. Although the bonds remain on the balance sheet of the ECB (in fact, most of these are recorded on the balance sheets of the national central banks), they have no economic significance anymore.

Each national treasury will pay interest on these bonds, but the central banks will refund these interest payments at the end of the year to the same national treasuries. This means that as long as the government bonds remain on the balance sheets of the national central banks, the national governments do not pay interest anymore on the part of its debt held on the books of the central bank. All these governments enjoy debt relief. How large is the debt relief enjoyed by the governments of the Eurozone? Table 1 gives the answer. It shows the cumulative purchases of government bonds by the ECB since March 2015 until the end of April 2016.

As long as these bonds are held on the balance sheets of the ECB or the national central banks, governments do not have to pay interest on these bonds. The ECB has announced that when these bonds come to maturity, it will buy an equivalent amount of bonds in the secondary market. We observe that the total debt relief granted by the ECB until now (April 2016) to the Eurozone countries amounts to €645 billion. We also note the absence of Greece and the fact that the greatest adversary of debt relief for Greece, Germany, enjoys the largest debt relief from the ECB.

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What bubbles can do.

Canada Terrified Of Popping Foreign-Buyer Housing Bubble (CBC)

There’s a bidding war for government action on Canada’s soaring housing market, but as fingers point to foreign buyers as a reason for escalating prices, governments at all three levels are not yet motivated to cool the market down. Young Canadians complain home ownership is increasingly beyond their reach. Governments fear rules to put a lid on stratospheric prices — expected to show another strong increase in today’s real estate data for April — could have an an economic impact far beyond the first-time buyer market. The difficulty governments face is that while Canadian manufacturing and exports fall, while oil and resources crash, the property market has become the spark plug of the economy. The proverbial engine of growth is firing on a single cylinder.

Efforts to tabulate exactly how much foreign money is entering the market are unlikely to be definitive. The debate over whether it is five, 14 or 66% of sales, to quote some of the estimates in a recent Maclean’s article, will not be easily resolved. Family members can be placeholders for overseas investors. Layers of corporate ownership can do something similar [..] And that may be just the way a lot of those who benefit from the real estate market want to keep it. The fact is the foreign contribution to rising prices is only accelerating a global phenomenon that would have happened in Canada anyway. The real issue is land, hence the real estate truism: “They ain’t makin’ any more of it.” As populations grow, prime land close to where people want to live inevitably gets bid up in value.

Compared to the rest of the world, Canada has been living in a bubble. Ours is a huge country with a small population, so for decades Canadians have imagined it their God-given right to sprawl out over the best agricultural land surrounding our cities, offering everyone a suburban backyard and a picket fence. The end of that seemingly endless sprawl just happened to coincide with historically low interest rates and large parts of a global population having risen from poverty to be at least as rich as Canadians. No longer the poor and hungry, many now have a healthy down payment. The very difficult question facing municipal, provincial and federal governments is exactly how they should respond if the new data on foreign ownership shows overseas money is significantly distorting Canadian markets.

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If everything becomes speculation, then so do people.

New Zealand Housing Crisis Forces Hundreds To Live In Tents And Garages (G.)

Hundreds of families in Auckland are living in cars, garages and even a shipping container as a housing crisis fuelled by rising property prices forces low-income workers out of private rental accommodation. Charity groups have warned that, as the southern hemisphere winter approaches, most of the premises have no electricity, sewage or cooking facilities. “This is not people who haven’t been trying. They have been trying very hard and still they’re failing,” said Campbell Roberts of The Salvation Army, who has worked in South Auckland for 25 years. “A few years ago people in this situation were largely unemployed or on very low-incomes. But consistently now we are finding people coming to us who are in work, and have their life together in other ways, but housing is alluding them.”

Auckland’s housing market is one of the most expensive in the world, with property prices increasing 77.5% over the last five years (this growth has now slowed), and the average house price fetching over NZ$940,000 (£440,000), according to CoreLogic, New Zealand. Combined with low interest rates, rising migration, near full occupancy of state housing in South Auckland, and minimal wage rises, the pressure on many low to middle income earners has become too much to bear. Some families are now forced to choose between having a permanent roof over their heads, or feeding themselves and their children. Jenny Salesa, a Labour MP in the South Auckland suburb of Otara, says Maori and Pacific peoples are overwhelmingly bearing the brunt of Auckland’s housing crisis, and she has people coming to her office every day begging for help.

“People are living in garages with ten family members and paying close to NZ$400 for the privilege,” said Salesa. “People are ashamed their lives have come to this, and they try to hide. But you can tell which garages are occupied – there are curtains on the windows, small attempts to make it a home. And on the weekends, in the park, there can be up to fifty cars grouped together, with people sleeping in them.” Salesa estimates nearly 50% of people asking for her help in finding a home are in paid employment, and many families have two parents working and are still unable to make ends meet.

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$200 billion of which is in mortgage-backed securities?!

Chinese Investors Have Spent $300 Billion On US Property (R.)

Chinese investment in the U.S. real estate market has surpassed $300 billion and is growing despite China’s economic weakness and increased currency controls, the authors of a new report said on Monday. Between 2010 and 2015 Chinese buyers bought $93 billion in residential real estate, nearly $208 billion of mortgage-backed securities, and roughly $17 billion of commercial real estate, including office towers and hotels, according to the report by the Rosen Consulting Group and the Asia Society. Despite those eye-popping numbers, foreign direct investment from China still only makes up 10% of all foreign direct investment put into the United States. However, the report is significant as the first independent study to prove Chinese investors rank among the top in every real estate sector.

It also shows Chinese investors have stamina and can withstand short-term market events, said Arthur Margon, a co-author of the report and a partner at Rosen Consulting Group, which specializes in real estate. “There are strong signals that there will be continued, maybe even increasing appetite,” said Margon, during an event at New York’s Asia Society. How long the good times will last depends on both the U.S. and Chinese economies. Rosen’s team projects the United States will move out of its economic recovery and into a minor slowdown within 18 to 24 months, during which time China’s slowdown may worsen. China’s President Xi Jinping said Monday that he will push supply-side reforms and focus on increasing the middle-class, underscoring the pressure the country faces to reverse growth rates that are the lowest in 25 years.

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The narrative of the service economy falls flat.

China’s Economy Is Past The Point Of No Return (Chang)

After a near-disastrous start to the year and a one-month recovery in March, the Chinese economy looks like it’s now headed in the wrong direction again. The first indications from April show the country was unable to sustain upward momentum. Even before the first dreadful numbers for last month were released, Anne Stevenson-Yang of J Capital Research termed the uptick the “Dead Panda Bounce.” The economy is essentially moribund as there is not much that can stop the ongoing slide. A contraction is certain, and a severe adjustment downward—in common parlance, a crash—looks likely. At the moment, China appears healthy. The official National Bureau of Statistics reported that growth in the first calendar quarter of this year was 6.7%.

That is just a smidgen off 6.9%, the figure for all of last year. Moreover, the quarterly result cleared the bottom of the range of Premier Li Keqiang’s growth target for this year, 6.5%. The first-quarter 6.7% was too good to be true, however. And there are two reasons why we should be particularly alarmed. First, China’s statisticians appear to be just making the numbers up. For the first time since 2010, when it began providing quarter-on-quarter data, NBS did not release a quarter-on-quarter figure alongside the year-on-year one. And when NBS got around to releasing the quarter-on-quarter number, it did not match the year-on-year figure it had previously reported. NBS’s 1.1% quarter-on-quarter figure for Q1, when annualized, produces only 4.5% growth for the year.

That’s a long distance from the 6.7% year-on-year growth that NBS reported for the quarter. Even China’s own technocrats do not believe their own numbers. Fraser Howie, the coauthor of the acclaimed Red Capitalism, notes that the chief of a large European insurance company, who had just been in meetings with the People’s Bank of China, said that even the Chinese officials were joking and laughing in derision when they talked about official reports showing 6% growth. Second, the central government simply turned on the money taps, flooding the economy with “gobs of new debt,” as the Wall Street Journal labeled the deluge. The surge in lending was one for the record books. Credit growth in Q1 was more than twice that in the previous quarter.

China created almost $1 trillion in new credit during the quarter, the largest quarterly increase in history. [..] The Ministry of Finance also did its part to refloat the economy. Its figures show that in March, the central government’s revenue increased 7.1% while spending soared 20.1%. All that money produced good results—for one month. In April, the downturn continued. Exports, in dollar terms, fell 1.8% from the same month last year, and imports tumbled 10.9%. Both underperformed consensus estimates. A Reuters poll, for instance, predicted that exports would decline only 0.1%, while imports would fall 5%. Exports have now dropped in nine of the last ten months, and imports, considered a vital sign of domestic demand, have fallen for eighteen straight months.

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Iron ore, steel, housing…

Money Trail Shows China Sticking To ‘Original Sin’ (R.)

When it comes to reducing its dependence on debt, China’s actions matter more than its words. Last week the state-owned People’s Daily newspaper quoted an unnamed “authoritative figure” saying that the country’s high leverage was the “original sin”. Yet official data released over the weekend confirm debt is still rising while infrastructure and property investment are increasing at a rapid pace. Until the numbers show otherwise, it’s safe to assume Beijing is still focused on growth. On the surface, recent credit data suggests that China’s economy has entered debt rehab. New total social financing (TSF), a widely used barometer of investment, was 751 billion yuan ($115 billion) in April, down sharply from 2.3 trillion yuan in March. New loans fell to 564 billion yuan from 1.3 trillion yuan in the previous month.

This appeared to confirm speculation that the interview, published in People’s Daily on May 9, had signaled a high-level shift in policy. Yet a closer look at the numbers shows the story remains much as before. The TSF numbers don’t include a monthly record of one trillion yuan of new local government bonds, most of which were issued as part of a scheme to swap bank loans for longer-term securities. Add these back in and UBS calculates that overall credit in China grew 17% year on year. That’s far too high for an economy where nominal GDP is growing at about half that pace. Moreover, the new money is still pouring into the same areas that gave China years of lop-sided growth. Property prices have risen sharply in prime cities such as Shanghai and Shenzhen.

Construction starts were 21.4% higher measured by floor space in the first four months of 2016 than a year ago, China’s National Bureau of Statistics said on May 14. Even though infrastructure spending slowed slightly, it still increased by 21% year on year in April, with investment in utilities growing at an even faster pace, according to UBS. Meanwhile, private sector firms complain of a shortage of credit. To rebalance China’s economy, Beijing needs to direct capital to areas that can generate better returns. For now, the numbers show no sign of that happening. Then again, renouncing original sins was never going to be easy.

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“It can choose to keep the yuan stable either against the dollar OR the basket. ”

China Challenged to Keep Yuan Stable as Dollar Rises (WSJ)

Having had it easy for a few months, the Chinese central bank is now coming under renewed pressure to steady the yuan and prevent money from leaving China’s shores. The culprit is the dollar. The greenback’s weakness in the past two months had given the People’s Bank of China some breathing room to stabilize the yuan, reducing the Chinese appetite for foreign assets along the way. But since the end of April, the yuan has depreciated 0.6% against the dollar, eroding the 1% gain the Chinese currency made over the previous two months. The yuan’s renewed weakness puts the PBOC back in a familiar juggling act: Its mandate to support growth requires it to pump credit into the economy, which tends to weaken the yuan. But it must make sure it doesn’t weaken the currency so much that it worsens the flood of money exiting China.

Growing concern about China’s economic outlook also weighs on the yuan. Late Monday, China’s state broadcaster showed footage of President Xi Jinping emphasizing at a top-level meeting the urgency of implementing restructuring steps to put the economy on a stronger footing. Some economists and officials within China, including those at the government think tank China Academy of Social Sciences, have urged the central bank to let the market steer the yuan lower as China’s slowdown deepens. But for officials at the People’s Bank a bigger worry, at least for now, is the potential for ordinary Chinese to exchange their yuan assets for foreign currencies and take them out of the country. The central bank is also wary of causing the kind of market gyrations that have twice in the past year resulted from its exchange-rate maneuvering.

Most recently, in early January, an unexpected move by the People’s Bank to guide the yuan sharply weaker against the dollar triggered a global market selloff. The central bank “wants yuan stability in order to minimize the shocks to the weak economic momentum,” said Chi Lo, China economist at BNP Paribas Investment Partners, the asset-management arm of the Paris-based bank. To do that, it is trying to shift investors’ focus on the yuan’s movements against the dollar to its value against a broader group of currencies. When the dollar declines, the central bank can keep the yuan largely flat or even slightly stronger against the greenback, while it still weakens against the basket of 13 currencies. But when the dollar advances, the central bank needs to guide the yuan weaker against it to safeguard the economy and keep the yuan stable against the basket. The upshot: It can choose to keep the yuan stable either against the dollar or the basket.

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..an excerpt from Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, published on May 17 by The New Press.

The Great Foreclosure Fraud (Dayen)

All whistleblowers are a little bit crazy. They obsess over things most people overlook. They see grand conspiracies where others see only shadows. In this case, these whistleblowers, armed with only a few websites and a hunger for the truth, found that the mortgage industry fundamentally ruptured a centuries-old system of U.S. property law; that millions of documents generated to foreclose on people’s homes were phony; and that all those purchasing a mortgage in America were taking a gamble that they would be tossed onto the street with nothing, even if they made every payment and played by the rules. Virtually everyone to whom they presented this information reacted the same way: “That can’t be true.” Right up until the day the banks admitted it.

These three—Lisa Epstein, Michael Redman, and Lynn Szymoniak— unearthed another layer of the mystery, too. After they exposed foreclosure fraud and forced the nation’s leading mortgage companies to stop repossessing homes, they saw firsthand the unwillingness of our government to deliver any consequences. In fact, walk into any courtroom today and you will see the same false documents, the same ones Lisa, Michael, and Lynn exposed, used to foreclose on homeowners. As America searches for understanding amid the perversity of the financial crisis, they should know that there were a few determined people, far from the corridors of power, who tried to write an alternative history, one where the perpetrators of fraud get rounded up and put away.

But the same democracy that allows ordinary Americans to collaborate and organize and build a movement allows their deep-pocketed opponents to use the tools of entrenched power to counteract it. And we have to reckon with the fact that, in our current system of justice, who you are matters more than what you did. Michael Redman, one of these whistleblowers, sat next to me one night as he told me his story, and said over and over again, “I don’t believe your book. I lived through it, and I don’t believe it.” I will forgive readers their skepticism, as even a protagonist in the tale shares it. It is unbelievable. That doesn’t make it untrue.

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Think if the numbers get big enough we’ll all get smart one day?

Climate Change Puts 1.3 Billion People, $158 Trillion At Risk: World Bank (G.)

The global community is badly prepared for a rapid increase in climate change-related natural disasters that by 2050 will put 1.3 billion people at risk, according to the World Bank. Urging better planning of cities before it was too late, a report published on Monday from a Bank-run body that focuses on disaster mitigation, said assets worth $158tn – double the total annual output of the global economy – would be in jeopardy by 2050 without preventative action. The Global Facility for Disaster Reduction and Recovery said total damages from disasters had ballooned in recent decades but warned that worse could be in store as a result of a combination of global warming, an expanding population and the vulnerability of people crammed into slums in low-lying, fast-growing cities that are already overcrowded.

“With climate change and rising numbers of people in urban areas rapidly driving up future risks, there’s a real danger the world is woefully unprepared for what lies ahead,” said John Roome, the World Bank Group’s senior director for climate change. “Unless we change our approach to future planning for cities and coastal areas that takes into account potential disasters, we run the real risk of locking in decisions that will lead to drastic increases in future losses.” The facility’s report cited case studies showing that densely populated coastal cities are sinking at a time when sea levels are rising. It added that the annual cost of natural disasters in 136 coastal cities could increase from $6bn in 2010 to $1tn in 2070. The report said that the number of deaths and the monetary losses from natural disasters varied from year to year, but the upward trend was pronounced.

Total annual damage – averaged over a 10-year period – had risen tenfold from 1976–1985 to 2005–2014, from $14bn to more than $140bn. The average number of people affected each year had risen over the same period from around 60 million people to more than 170 million.

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The hope of the Irish.

Will Brexit Make Ireland A Nation Once Again? Don’t Write It Off (McWilliams)

If Britain leaves the EU, it could start a domino effect – at the end of which is a united Ireland Here’s a scenario that might not be too far-fetched. It is not, by any stretch of the imagination, one that would be welcomed here; but it could happen. What will happen if Britain votes to leave the European Union in five weeks’ time? What happens to Northern Ireland? The DUP is campaigning for Brexit, but Brexit may loosen the UK so much that the DUP could be signing its own death warrant. Here is the possible scenario that will unfold if there’s a break-up of the UK. The English lead the British out of Europe. The Scottish then go to the polls again, wanting to stay in Europe. They have to leave the UK to stay in the EU, and by a small margin they vote to stay in Europe but leave the English. Not unfeasible.

The rump UK becomes an entity involving a eurosceptic England, a modestly pro-European but compliant Wales and an ever-divided Northern Ireland. However it is a Northern Ireland shorn of its fraternal brothers, the Scots – in a union with the ambivalent English. There has never been the same cultural affinity between the English and the Northern Unionists. The cultural glue of Protestant Northern Ireland within the UK is Scotland. I have some experience of this. My grandparents were Scottish. My wife is from Belfast. My children were born in the Ulster Hospital (where the missus and me were the only couple at the pre-natal classes not in his-and-hers matching Rangers tracksuits). Unlike many Southerners, my bonds with that part of the world are strong. Ethnically, without Scotland, the union of Northern Ireland and a multicultural but nationalistic little England is not particularly coherent.

All the while, the demographic forces are on the side of nationalism. As I write, I am looking at demographics in Northern Ireland from the 2011 census. The most interesting statistic shows the proportion of Catholics and Protestants in various age groups. Of the elderly, those over-90 in the North, 64% are Protestant and 25% are Catholic. A total of 9% had no declared religion. This reflects the religious status quo when these people were born, in the 1920s, and more or less reflects the realities of the Treaty. When you look at those children and babies born since 2008, the picture changes dramatically. This corresponding figure is 31% Protestant and 44% Catholic. In one (admittedly long) lifetime, the Catholic population in the youngest cohort has nearly doubled, while the Protestant cohort has more than halved. Even given the fact that 23% of parents of infants declared themselves as having no religion, we seem to be en route to a united Ireland.

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I have the idea that making this a left vs right issue is not helpful. And while Paul Mason realizes what’s wrong in Brussels, he doesn’t seem to grasp there’ll be no second chance for a very long time. He says it himself: “..in Britain I can replace the government, whereas in the EU, I cannot.”, but still wants to stay in EU because of Boris Johnson. Where’s the logic?

The Leftwing Case For Brexit -One Day- (Mason)

The leftwing case for Brexit is strategic and clear. The EU is not – and cannot become – a democracy. Instead, it provides the most hospitable ecosystem in the developed world for rentier monopoly corporations, tax-dodging elites and organised crime. It has an executive so powerful it could crush the leftwing government of Greece; a legislature so weak that it cannot effectively determine laws or control its own civil service. A judiciary that, in the Laval and Viking judgments, subordinated workers’ right to strike to an employer’s right do business freely. Its central bank is committed, by treaty, to favour deflation and stagnation over growth. State aid to stricken industries is prohibited.

The austerity we deride in Britain as a political choice is, in fact, written into the EU treaty as a non-negotiable obligation. So are the economic principles of the Thatcher era. A Corbyn-led Labour government would have to implement its manifesto in defiance of EU law. And the situation is getting worse. Europe’s leaders still do not know whether they will let Greece go bankrupt in June; they still have no workable plan to distribute the refugees Germany accepted last summer, and having signed a morally bankrupt deal with Turkey to return the refugees, there is now the prospect of that deal’s collapse.

That means, if the reported demand by an unnamed Belgian minister to “push back or sink” migrant boats in the Aegean is activated, the hands of every citizen of the EU will be metaphorically on the tiller of the ship that does it. You may argue that Britain treats migrants just as badly. The difference is that in Britain I can replace the government, whereas in the EU, I cannot. That’s the principled leftwing case for Brexit. Now here’s the practical reason to ignore it. In two words: Boris Johnson.

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More threats?

As Brexit Vote Looms, US Banks Review Their European Commitments (R.)

If Britain votes to leave the European Union in June, some U.S. banks could give up parts of their business in the bloc altogether. The option is an extreme scenario under consideration by some Wall Street firms if the terms of an exit, currently a matter of speculation, leave financial services companies in Britain unable under their current set-ups to do business inside the EU, according to discussions Reuters had with several U.S. banks and their lawyers. The scenarios being studied by taskforces at U.S. banks underscore the extent to which the London operations of non-European banks are linked to business on the continent. In particular focus are the banks’ market operations, as trading of most European securities is regulated at the EU level but conducted by many investment banks mainly out of London.

The five largest U.S. banks employ 40,000 people in London, more than in the rest of Europe combined, taking advantage of the EU “passporting” regime that allows them to offer services across the bloc out of their British hubs. Having to reorganize business in order to set up new continental European outposts — which U.S. banks say is a worst-case scenario that they are being forced to consider — would be so costly that it would make some rethink their commitment to the bloc altogether. “The costs may lead some banking groups to reassess how important Europe is in the context of their global business and what sort of presence they wish to maintain post-Brexit,” said Edward Chan, a partner at the law firm Linklaters, which has been advising banks on contingency arrangements.

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Blame EU, not Greece.

UN Urges Greece To Stop Detaining Migrant Children (R.)

A top United Nations official urged Greece on Monday to stop detaining refugee and migrant children, some of whom are locked up in police cells for weeks, and to develop child protection services instead. The U.N. Special Rapporteur on the human rights of migrants, Francois Crepeau, said he had met unaccompanied children held in police stations for more than two weeks without access to the outdoors, and “traumatised and distressed” by the experience. Others were with their families in overcrowded detention centres, where inter-communal frictions and contradictory information created “an unacceptable level of confusion, frustration, violence and fear”, he said. “Children should not be detained – period,” said Crepeau, on a fact-finding mission in Greece from May 12 to 16.

“Detention should only be ordered when people present a risk, a danger, a threat to the public and it has to be a documented threat, it cannot simply be a hunch.” Crepeau said children and families should be offered alternatives to detention. He urged authorities to develop a “substantial and effective” guardianship system for unaccompanied minors and increase the shelter capacity for them. More than a million migrants, many fleeing the Syrian war, have arrived in Europe through Greece since last year. More than 150,000 have arrived in 2016 so far, 38% of them children, according to U.N. refugee agency data. Greece, in its sixth year of economic crisis, has struggled to cope with the numbers.

International charity Save the Children says an estimated 2,000 unaccompanied children who travelled alone to Europe or lost their families on the way are stranded in Greece and only 477 shelter spaces are available across the country. (Unaccompanied minors) are put in … protective custody and the only place there is space (for them) is the cell in police stations and that’s where we find them quite often,” Crepeau said. “Spending 16 days (in a police cell) is way too long. What is needed is specialised body of competent professionals who can take care of unaccompanied minors.”

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What a surprise.

Syrians Returned To Turkey In EU Deal ‘Have No Access To Lawyers’ (G.)

The first Syrians to be returned by plane under the EU-Turkey deal have been detained in a remote camp for the past three weeks with no access to lawyers, casting further doubts over EU claims that they are being sent back to a safe third country. With hundreds more likely to be expelled in similar fashion in the coming weeks, the returnees have warned that those following in their wake face arbitrary detention, an inscrutable asylum process, and substandard living conditions. Their claims undermine the legitimacy of the EU-Turkey migration deal, under which it is likely most Syrians landing on Greek islands will be returned to Turkey, on the assumption that they can live without restrictions once there.

Turkey has said they will be released soon. But a group of 12 Syrians returned by plane on 27 April who were contacted by telephone said they had simply been detained without clear legal recourse since they arrived in a remote detention centre in southern Turkey called Düziçi. The fate of two other Syrians deported along with hundreds of non-Syrians earlier in April is unknown.

“You can’t imagine how bad a situation we are in right now,” said one Syrian mother detained with her children, who now wants to return to Syria because she sees no alternative. “My children and I are suffering, the food is not edible. I’m forcing my children to eat because I don’t have any money to buy anything, but they refuse because there are bugs in it.” The detainees have also been denied access to lawyers and specialised medical care, she alleged. Like all the interviewed detainees, the Syrian asked to remain anonymous for fear of reprisals, but said she now wanted to return to Syria because she felt that even a war-zone would be better for her family than the refugee detention centres in Greece and Turkey.

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Jul 192015
 


Harris&Ewing “Congressional Union for Woman Suffrage” 1916

China’s $16.1 Trillion Corporate Debt Threat (Reuters)
Chinese Investors Flock To Sell Properties, Cancel Contracts (Nikkei)
Regulators Cannot Eliminate Volatility In China’s Stock Markets (Pettis)
Greece Should Turn To China To Break Debt Spiral – Economic Hit Man (ABC.au)
‘Plan B’ Needed As Euro One Recession Away From Implosion – David McWilliams (GC)
Deeper Eurozone Integration Would Be A ‘Huge Mistake’ (Telegraph)
Built To Foster Friendship, The Euro Is Manufacturing Misery (Economist)
Greece Is Being Taxed To Death (Politico)
Greece: Death Spiral Ahead (James K. Galbraith)
Greece Reforms ‘Will Fail’ – Varoufakis (BBC)
Dr Schäuble’s Plan for Europe: Do Europeans Approve? (Yanis Varoufakis)
Dublin, Lisbon And Madrid Beat The Bailout. It’s No Comfort To Athens (Guardian)
Alexis Tsipras Has Shown Greeks He Can Save Them (Spiegel)
Stiglitz Meets With Greek Government Officials (GR)
Greece’s Lesson For Russia – and China (Paul Craig Roberts)
Europe’s Best And Brightest Need To Head For Greece (Helene Rey)
Hillary Clinton and Glass-Steagall (Robert Reich)
Don Quixote Airport Cost €1bn – It Could Sell To China For €10,000 (Guardian)
Lunch with Beppe Grillo (FT)

China borrows itself into oblivion.

China’s $16.1 Trillion Corporate Debt Threat (Reuters)

Beijing may have averted a crisis in its stock markets with heavy-handed intervention, but the world’s biggest corporate debt pile – $16.1 trillion and rising – is a much greater threat to its slowing economy and will not be so easily managed. Corporate China’s debts, at 160% of GDP, are twice that of the United States, having sharply deteriorated in the past five years, a Thomson Reuters study of over 1,400 companies shows. And the debt mountain is set to climb 77% to $28.8 trillion over the next five years, credit rating agency Standard & Poor’s estimates. Beijing’s policy interventions affecting corporate credit have so far been mostly designed to address a different goal – supporting economic growth, which is set to fall to a 25-year low this year.

It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend. Though it wants more of that credit going to smaller companies and innovative areas of the economy, such measures are blunt instruments. “When the credit taps are opened, risks rise that the money is going to ‘problematic’ companies or entities,” said Louis Kuijs, RBS chief economist for Greater China. China’s banks made 1.28 trillion yuan ($206 billion) in new loans in June, well up on May’s 900.8 billion yuan.

The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed, but there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high, and banks are reluctant to take risks. Manufacturers’ debts are increasingly dwarfing their profits. The Thomson Reuters study found that in 2010, materials companies’ debts were 2.8 times their core profit. At end-2014 they were 5.3 times. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit. For industrials, from 2.5 to 4.2.

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It’s all just starting. The margin calls will come in fast and furious. From the shadow banking system. Will we see a ban on selling real estate too?

Chinese Investors Flock To Sell Properties, Cancel Contracts (Nikkei)

Turbulence on China’s equity market is starting to rock the country’s property market. Investors are quickly pulling their cash out of housing they purchased to cover losses incurred by stock investments. Some have begun offering discounts on property due to difficulties with finding buyers. Continued turmoil on the stock market looks as though it will have a heavy impact on the country’s real estate market. China’s stock market rally also helped drive up sales of domestic homes. The Shanghai Composite Index surged 60% from its low of around 3,200 in early March, rising to 5,166 logged on June 12. China Securities Depository and Clearing said that the number of accounts opened to trade yuan-denominated A-shares reached 980,000 in May in Shenzhen, where property prices are climbing faster than other areas.

The figure accounted for roughly 80% of the total 1170,000 accounts in Guangdong Province, where large numbers of such account holders reside. Many newbie investors, who have just jumped into the stock market, likely gave a fresh impetus to the property market. China’s share price upswing prompted investors to reach out for new investments, including houses and other properties. A property analyst at major Chinese brokerage Guotai Junan Securities said that sales of luxury properties worth over 10 million yuan ($1.61 million) each for the first half of the year topped annual sales last year in Shanghai and Beijing. After this, Chinese stocks began to crumble. In early July, the Shanghai Composite Index dropped more than 30%, after hitting a seven-year high in mid-June.

Investors who suffered big losses on the stock market were forced to sell property and cancel real estate purchase agreements. The Hong Kong Economic Times said that consumers are increasingly asking real estate firms for grace periods on down payments for mortgage loans, as they run out of cash because of weak stocks. Some canceled home purchase contracts, while others canceled mortgage loans, according to China’s largest property developer China Vanke, which has a strong foothold in Shenzhen. Local media reported that an official at China Vanke is concerned about massive numbers of cancellations in the future.

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“It’s not just that markets are about volatility. It is that volatility can never be eliminated.”

Regulators Cannot Eliminate Volatility In China’s Stock Markets (Pettis)

For now I think we can safely say the panic is finally over, but none of the fundamental questions have been resolved and I expect continued volatility. Because I also think the market remains overvalued, however, I have little doubt that we will see at least one more very nasty bear market. Either way the panic and the policy responses have opened up a ferocious debate on China’s economic reforms and Beijing’s ability to bear the costs of the economic adjustment. Among these costs are volatility. Rebalancing the economy and withdrawing state control over certain aspects of the economy, especially its financial system, will reduce Beijing’s ability to manage the economy smoothly over the short term but it may be necessary in order to prevent a very dangerous surge in volatility over the longer term. Sunday’s Financial Times included an article with the following:

Critics of the measures unleashed by Beijing last week argue that they point to a fundamental tension at the heart of China’s political economy that a free-floating renminbi would test even more severely. The ruling Chinese Communist party, they argue, is ultimately incapable of surrendering control of crucial facets of the country’s economic and financial system. As one person close to policymakers in Beijing puts it: “The problem with this system is that it cannot tolerate volatility and markets are all about volatility.”

It’s not just that markets are about volatility. It is that volatility can never be eliminated. Volatility in one variable can be suppressed, but only by increasing volatility in another variable or by suppressing it temporarily in exchange for a more disruptive adjustment at some point in the future. When it comes to monetary volatility, for example, whether it is exchange rate volatility or interest rate and money supply volatility, central banks can famously choose to control the former in exchange for greater volatility in the latter, or to control the latter in exchange for greater volatility in the former.

Regulators can never choose how much volatility they will permit, in other words. At best, they might choose the form of volatility they least prefer, and try to control it, but this is almost always a political choice and not an economic one. It is about deciding which economic group will bear the cost of volatility.

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China is two-faced being. Economic collapse at home, aid offers abraod.

Greece Should Turn To China To Break Debt Spiral – John Perkins (ABC.au)

A prominent economist says China’s banks are circling debt-stricken countries like Greece, offering an alternative to the brutal austerity measures proposed by the IMF and EU. Former adviser to the IMF and the World Bank, John Perkins, told the ABC’s The Business that China’s Asian Infrastructure Investment Bank (AIIB) and the BRICS bank were courting countries like Greece. Mr Perkins said he believed China had sent people to Greece to offer an alternative bailout deal. “If I were the finance minister running the system I would seriously be looking at that alternative. I think that the Chinese are presenting a competitive edge here,” he said.

Mr Perkins revealed in his international bestseller, Confessions of an Economic Hit Man, how international organisations like the IMF and the World Bank enslave countries like Greece by offering crippling and unsustainable loans which never deliver the economic growth they promise. He said he believed Greece and the other European countries in similar positions should turn to China as a means of breaking the debt spiral. “These austerity programs are not the right program, even the IMF said recently there has to be more debt forgiveness we have to readjust the debt and the Europeans don’t seem willing to do this,” he said. Mr Perkins was surprised by the IMF’s public criticism of the eurozone’s bailout deal this week and said it shows the growing influence of China’s banks.

“I think the motivation may have been the Chinese because the Chinese have stepped in before, in Ecuador and several other countries, and we now have these very powerful banks that the Chinese are heading up,” he said. Mr Perkins said the growing strength of the banks will result in a major shift of power away from the United States and European Union. He conceded that there is nothing to stop China from becoming another “economic hit man” but said the Chinese have a good record so far, particularly in South American countries like Ecuador. “I recently met with a minister of Ecuador – and he said ultimately that he has no idea what China will do but we do know that the IMF, the World Bank, the Europeans and the US have screwed us over,” he said. “They’ve put military bases around here and threatened us and China hasn’t done that, so right now we trust China more than the US.”

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“Countries that don’t play ball with Germany will see their banking system used against their democratically elected politicians.”

‘Plan B’ Needed As Euro One Recession Away From Implosion – David McWilliams (GC)

Europe’s next recession will “kill the euro” according to economist, writer and journalist David McWilliams. McWilliams, who is among the best economics commentators from the only Anglophone nation in the euro – Ireland, warns that we only have a few months to plan an alternative to the disastrous consequences on peripheral nations of what he sees as German hegemony. He describes the mismanagement of the euro currency as “both laughable and terrifying”. Marathon negotiation sessions are not conducive to clear headed, rational decision making on the future of a nation or the eurozone. Indeed, it smacks of coercion. He lambasts the suggestion offered that Greece could have a “temporary euro”, adding, “If the board and management of a public company dealt with problems like this, the share price would collapse. There is quite simply no corporate governance within the euro”.

David McWilliams believes that Germany is out control. France is no longer strong enough to offer a counterweight and Britain is happy to allow the circus to continue as they focus on potentially getting out of the EU. He describes last weekends negotiations in Brussels as a “teutonic kangaroo court”. Should Britain successfully navigate its way out of the EU, other countries will likely follow rather than exist as provinces of Germany. Norway and Switzerland have coped just as well from the outside as their EU neighbours. He makes the obvious, though seldom heard assertion that “when economic negotiations stop making economic sense, you should begin to question the motives of the EU”. Pointing to the plundering of Greek state assets to pay off creditors whilst forcing further austerity on the Greek people.

Each previous round of austerity has caused the economy to contract further – thus forcing Greece into a debt trap from which it cannot escape. We believe this is a crucial point. While Germany have played a major role it in the subjugation of Greece it is worth asking who truly benefits from economic negotiations that have stopped making economic sense. Could it be the large banks who, following a similar model imposed on countries in Latin America, Southeast Asia and Africa since the 1970’s, continue to extract wealth from the poorest people on earth? Has not almost every development in the EU in the past ten years served to consolidate the power of financial institutions at the expense of the citizenry?

McWilliams highlights the dramatic u-turn in policy where membership of the EU is now conditional. When Mario Draghi initiated the “whatever-it-takes” mass purchase of bonds of peripheral nations the message was clear – the euro is forever. Now, however, countries must bend to Germany’s demands which are the demands of politicians who want to keep their electorate happy if they are to be re-elected. “Countries that don’t play ball with Germany will see their banking system used against their democratically elected politicians. The banking system is the soft underbelly and the Germans are prepared to orchestrate bank runs in member states to get their way. This is not only new, it is outrageous.”

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Amen.

Deeper Eurozone Integration Would Be A ‘Huge Mistake’ (Telegraph)

Deeper fiscal integration in the eurozone is a “huge mistake” that could end up tearing the bloc apart, Sweden’s former finance minister has warned. Anders Borg said forcing countries to cede sovereignty could trigger a right-wing backlash across Europe, as he predicted that countries such as Sweden and Poland, which are obliged to join the euro, would not adopt the single currency for “decades”. “If you go for tighter co-operation that basically brings higher taxes to the north to subsidise the south, you build in a political divide that is not sustainable in the long term,” he said. Mr Borg, who stepped down in October 2014, said that while the current structure of the eurozone was problematic, the only way to secure a broad-based recovery across the bloc without creating a political rift was to focus on competitiveness.

“We’re not talking about good and bad outcomes here, we are talking about only very problematic alternatives. If you push for further fiscal integration, moving more decisions to Brussels, taxing northern European countries more heavily and subsidising countries with long-term competitive issues and deep problems in the south you would obviously have a strong Right-wing reaction that would undermine the political support for that direction and create a less open, less liberal and less dynamic Europe,” he said. “I think there are great risks in connection to the course that we now hear from political integration. There is no voter base for that and it’s not certain either that you’re dealing with the right focus.”

Mr Borg said the eurozone and the wider EU area, which includes the UK, should focus on policies such as “completing the single market, voting for free trade co-operation with the US and increasing infrastructure investment”. “[Countries] are under-spending on infrastructure. We are under-spending in education. Our labour markets are over-regulated and we have tax levels for investment and work that are too high, so we need to do fundamental tax reforms and we need to fix our expenditure so that we are concentrating on the areas where public expenditures have most return.” Mr Borg, who voted for Sweden to join the euro in 2003, said the country’s membership was unlikely for “decades”. “It’s very difficult to argue today to your population that it’s a well functioning system,” he said.

Mr Borg, who predicted in 2012 that Greece would leave the euro, welcomed the news that the eurozone had opened the door to a third Greek bail-out package to begin. He said he was in “full agreement” with the IMF that creditors needed to write off some of the country’s debt “substantially”. “There is a need to establish a credible long-term programme for financing Greece. There is serious rethinking that has to be done on the Greek side but also on the creditors’ side. I would hope that people are ready to do this because the alternative is catastrophic for Greece. It’s clear that we’re not out of the woods yet,” he said.

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Shouldn’t have left it in the hands of sociopaths.

Built To Foster Friendship, The Euro Is Manufacturing Misery (Economist)

Unravelling the tangled logic of Greece’s bail-out talks, Charlemagne has learned, is a little like trying to explain the rules of cricket to an American. How to make sense of a process in which Greek voters loudly spurn a euro-zone bail-out offer in a referendum, only to watch Alexis Tsipras, their prime minister, immediately seek a worse deal that is flatly rejected by the euro zone, which in turn presses a yet more stringent proposal to which Mr Tsipras humbly assents? Better, perhaps, not to try. After six months of this nonsense, little wonder everyone is depressed. The immediate danger of Grexit has at least been averted, after Mr Tsipras and his fellow euro-zone heads of government pulled a brutal all-nighter in Brussels this week.

But it comes at the price of a vast taxpayer-funded bail-out for Greece, worth up to €86 billion over three years, and a humiliating capitulation by Mr Tsipras. Greece’s economy is in tatters, its creditors are fuming and Europe’s institutions are in despair. Much to Britain’s disgust even non-euro countries have been sucked into the nightmare: a bridge loan designed to keep Greece afloat while the bail-out talks proceed looks set to tap a fund to which all EU countries have contributed. But wasn’t this week’s agreement a triumph for the shock troops of austerity? Hardly. Finland’s coalition, formed only two months ago, tottered at the prospect of funding a third Greek bail-out. The Dutch prime minister, Mark Rutte, has admitted that it would violate an election pledge he made in 2012.

One euro-zone diplomat says that 99% of her compatriots would say “no” to the bail-out if offered a Greece-style referendum. Even Angela Merkel, Germany’s chancellor and Mr Tsipras’s chief tormentor, is damaged. The deal, crafted largely by Mrs Merkel, Mr Tsipras and François Hollande, France’s president, has exposed the German chancellor to competing charges: of cruelty abroad and of leniency at home, notably among Germany’s increasingly irritable parliamentarians, who must vote twice on the Greek package. Europe’s single currency, designed to foster unity and ease trade between its members, has thus become a ruthless generator of misery for almost all of them.

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“Looked at separately, each of these suffocating tax rates might appear almost reasonable. Looked at together, they are totally unreasonable.”

Greece Is Being Taxed To Death (Politico)

More than five years have passed since May 2010, when Greece was enticed to borrow €73 billion from the IMF, EC and ECB with painful strings attached. That 2010 program, said the IMF, “had two broad aims: to make fiscal policy and the fiscal and debt position sustainable, and to improve competitiveness.” There was no emphasis on improving domestic economic growth or employment — just “competitiveness” in trade. The IMF speculated that “restoring confidence” would “lead to a growth recovery” in 2012. When that didn’t happen, another €154 billion in loans was provided. And the IMF blamed the bad “investment climate” on a “lack of confidence,” rather than any lack of after-tax income.

Prominent U.S. economists blame the seven-year depression in Greece on savage cutbacks in government spending. “The contraction in government spending has been predictably devastating,” wrote Joseph Stiglitz in February. And Paul Krugman later criticized the period “from 2009 to 2013, the last year of major spending cuts” in Southern Europe. In reality, however, Greek government spending rose from 44.9% of GDP in 2006 to 53.7% from 2009 to 2012 and to 60.1% in 2013. That 2009-2013 “fiscal stimulus” was precisely when the economy contracted — by 4.4% in 2009, 5.4% in 2010, 8.9% in 2011, 6.6% in 2012 and 3.9% in 2013. By contrast, the economy grew slightly in 2014 when government spending was “only” half of GDP.

That is, the economy fell when government’s share rose, and the economy rose when government’s share fell. What is rarely or never mentioned in the typically one-sided misperception of spending “austerity” is the other side of the budget — namely, taxes. The latest Greek efforts to appease creditors would raise corporate tax again to 28%, raise the 5% “solidarity surcharge” on personal incomes, and discourage tourism by raising the VAT on restaurants and island shopping. Looked at separately, each of these suffocating tax rates might appear almost reasonable. Looked at together, they are totally unreasonable.

To offer a Greek employee an extra €100 requires that €42 be first subtracted for Social Security tax, and then up to €46 more subtracted for income tax. Out of the original €100 of marginal labor cost, the remaining €14 of after-tax income going to a skilled worker could only buy about €10 worth of goods after value-added tax is paid. The tax wedge between what employers pay for labor and what workers have left to spend, after taxes, is 43.4% for a Greek family of four with average earnings — the highest in the OECD and more than double the comparable U.S. wedge of 20.6%. This demoralizing tax wedge, which grows even larger at higher incomes, clearly depresses hiring and working in the formal economy. It also helps explain why a third of the Greek labor force is self-employed (making tax avoidance easier).

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“..an economic death spiral — contraction leading to banking failure, banking failure leading to contraction — first in Greece and, later on, elsewhere in Europe.”

Greece: Death Spiral Ahead (James K. Galbraith)

The Greek parliament has now voted to surrender control of the Greek state to platoons of bureaucrats from Brussels, Frankfurt and Berlin, who will now re-impose the full policy regime against which Greeks rebelled in January 2015 — and which they again rejected, by overwhelming majority, in the referendum of July 5. The orders from Brussels will impose strict new rules on the Greek people in the interest of paying down Greece’s debt. In return, the Europeans and the IMF will put up enough new money so that they themselves can appear to be repaid on schedule — thus increasing Greece’s debt — and the ECB will continue to prop up the Greek banking system. A hitch has already appeared in the plan: the IMF, whose approval is required, has pointed out — correctly — that the Greek debt cannot be paid, and so the Fund cannot participate unless the debt is restructured.

Now Germany, Greece’s main creditor, faces a new decision: either grant debt relief, or force Greece into formal default, which would cause the ECB to collapse Greece’s banks and force the Greeks out of the Euro. There are many ways to rewrite debt, and let’s suppose the Germans find one they can live with. The question arises: What then? An end to the immediate crisis is likely to have some good near-term effect. The Greek banks will “reopen,” likely on Monday, and the European Central Bank will raise the ceiling on the liquidity assistance on which they rely for survival. The ATMs will be filled, although limits on cash withdrawals and on electronic transfers out of the country will likely remain. There will be some talk of new public investment, funded by the EU; perhaps some stalled road projects will restart.

With these measures, it is not impossible that the weeks ahead will see a small uptick of economic life, and certainly, any such will make big news. It’s also possible that even without good news, Greece may limp along in stagnation, within the euro. ut if you walk through the requirements of Greece’s new program, there is another possibility. That possibility is an economic death spiral — contraction leading to banking failure, banking failure leading to contraction — first in Greece and, later on, elsewhere in Europe.

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“This programme is going to fail whoever undertakes its implementation.” Asked how long that would take, he replied: “It has failed already.”

Greece Reforms ‘Will Fail’ – Varoufakis (BBC)

Former Greek Finance Minister Yanis Varoufakis has told the BBC that economic reforms imposed on his country by creditors are “going to fail”, ahead of talks on a huge bailout. Mr Varoufakis said Greece was subject to a programme that will “go down in history as the greatest disaster of macroeconomic management ever”. The German parliament approved the opening of negotiations on Friday. The bailout could total €86bn in exchange for austerity measures. In a damning assessment, Mr Varoufakis told the BBC’s Mark Lobel: “This programme is going to fail whoever undertakes its implementation.” Asked how long that would take, he replied: “It has failed already.”

Mr Varoufakis resigned earlier this month, in what was widely seen as a conciliatory gesture towards the eurozone finance ministers with whom he had clashed frequently. He said Greek Prime Minister Alexis Tsipras, who has admitted that he does not believe in the bailout, had little option but to sign. “We were given a choice between being executed and capitulating. And he decided that capitulation was the optimal strategy.” Mr Tsipras has announced a cabinet reshuffle, sacking several ministers who voted against the reforms in parliament this week. But he opted not to bring in technocrats or opposition politicians as replacements. As a result, our correspondent says, Mr Tsipras will preside over ministers who, like himself, harbour serious doubts about the reform programme.

Greece must pass further reforms on Wednesday next week to secure the bailout. Germany was the last of the eurozone countries needing parliamentary approval to begin the talks. But the head of the group of eurozone finance ministers, Jeroen Dijsselbloem, has warned that the process will not be easy, saying he expected the negotiations to take four weeks. On Saturday, the Greek government ordered banks to open on Monday following three weeks of closures. Separately, the European Council approved the €7bn bridging loan for Greece from an EU-wide emergency fund. The loan was approved in principle by eurozone ministers on Thursday and now has the go-ahead from all non-euro states. It means Greece will now be able to repay debts to two of its creditors, the ECB and IMF, due on Monday.

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Another very transparent essay from Yanis.

Dr Schäuble’s Plan for Europe: Do Europeans Approve? (Yanis Varoufakis)

The avalanche of toxic bailouts that followed the Eurozone’s first financial crisis offers ample proof that the non-credible ‘no bailout clause’ was a terrible substitute for political union. Wolfgang Schäuble knows this and has made clear his plan to forge a closer union. “Ideally, Europe would be a political union”, he wrote in a joint article with Karl Lamers, the CDU’s former foreign affairs chief (Financial Times, 1st September 2014). Dr Schäuble is right to advocate institutional changes that might provide the Eurozone with its missing political mechanisms. Not only because it is impossible otherwise to address the Eurozone’s current crisis but also for the purpose of preparing our monetary union for the next crisis. The question is: Is his specific plan a good one? Is it one that Europeans should want?

How do its authors propose that it be implemented? The Schäuble-Lamers Plan rests on two ideas: “Why not have a European budget commissioner” asked Schäuble and Lamers “with powers to reject national budgets if they do not correspond to the rules we jointly agreed?” “We also favour”, they added “a ‘Eurozone parliament’ comprising the MEPs of Eurozone countries to strengthen the democratic legitimacy of decisions affecting the single currency bloc.” The first point to raise about the Schäuble-Lamers Plan is that it is at odds with any notion of democratic federalism. A federal democracy, like Germany, the United States or Australia, is founded on the sovereignty of its citizens as reflected in the positive power of their representatives to legislate what must be done on the sovereign people’s behalf.

In sharp contrast, the Schäuble-Lamers Plan envisages only negative powers: A Eurozonal budget overlord (possibly a glorified version of the Eurogroup’s President) equipped solely with negative, or veto, powers over national Parliaments. The problem with this is twofold. First, it would not help sufficiently to safeguard the Eurozone’s macro-economy. Secondly, it would violate basic principles of Western liberal democracy. Consider events both prior to the eruption of the euro crisis, in 2010, and afterwards. Before the crisis, had Dr Schäuble’s fiscal overlord existed, she or he might have been able to veto the Greek government’s profligacy but would be in no position to do anything regarding the tsunami of loans flowing from the private banks of Frankfurt and Paris to the Periphery’s private banks.

Those capital outflows underpinned unsustainable debt that, unavoidably, got transferred back onto the public’s shoulders the moment financial markets imploded. Post-crisis, Dr Schäuble’s budget Leviathan would also be powerless, in the face of potential insolvency of several states caused by their bailing out (directly or indirectly) the private banks. In short, the new high office envisioned by the Schäuble-Lamers Plan would have been impotent to prevent the causes of the crisis and to deal with its repercussions. Moreover, every time it did act, by vetoing a national budget, the new high office would be annulling the sovereignty of a European people without having replaced it by a higher-order sovereignty at a federal or supra-national level.

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Ireland: “30% of people live in deprivation conditions – 40% of children..”

Dublin, Lisbon And Madrid Beat The Bailout. It’s No Comfort To Athens (Guardian)

They used to be pejoratively labelled the “Pigs”: Portugal, Ireland, Greece and Spain, the “peripheral” countries carried into the eurozone on a wave of prosperity that were all forced to go cap in hand to their neighbours – and the IMF – when the financial crash came. Yet while Greece’s plight has only worsened over the five years since it was first rescued, the other three bailed-out countries have managed to return to growth, and send the inspectors from the International Monetary Fund back to Washington. Ireland graduated from its bailout programme in 2013. Spain – which never had a full-blown rescue, but received aid to prop up its ailing banks – did so in January last year; Portugal followed suit shortly afterwards.

As Greece attempts to rebuild its shattered economy with the aid of last week’s controversial bailout, it will be encouraged to take heart, and learn the lessons, from these success stories. Yet these countries have taken their own, tough paths back to economic growth – and the pain is still being felt. Ireland, which experienced an extraordinary property boom in the runup to the crisis and a deep downturn when the reckoning came, is expected to see GDP growth of around 5% this year. But its economic output is artificially boosted by the enthusiasm of multinationals for the country’s rock bottom 12.5% corporation tax rate — part of a long-term industrial strategy.

Ireland was also in a very different position to Greece when entering the crisis: until the country’s politicians chose to bail out its fragile banks, the public finances were in a relatively healthy state, with government debt at around 40% of GDP. Nevertheless, Michael Taft of the Unite trade union in Ireland says the deep spending cuts imposed as part of the post-crisis settlement have left long-term scars. “30% of people live in deprivation conditions – 40% of children,” he says. He adds that the fact that parties on both sides of the political divide shared a commitment to spending cuts meant it was hard for a Syriza-style, anti-austerity narrative to take hold: “The debate has been like the sound of one hand clapping.” However, more recently there was a noisy public revolt when the government considered imposing charges for water.

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The view from Germany.

Alexis Tsipras Has Shown Greeks He Can Save Them (Spiegel)

At the moment it appears that Tsipras the pragmatist has knocked out Tsipras the ideologue. “He’s finally putting his country before his party,” one opposition politician said on Wednesday, expressing relief. But Tsipras didn’t have any other choice. If Tsipras hadn’t reached an agreement in Brussels, Greece would have collapsed. The banks would have collapsed; even more businesses would have gone under. And Tsipras would have been the one responsible for it all. But with his U-turn, he also showed that he is ultimately a politician and not a gambler. The latest summit in Brussels lasted 17 hours, during which Tsipras abandoned one position after the other. He repeatedly left the room, where he was negotiating with Angela Merkel, François Hollande and EC President Donald Tusk.

Outside, he telephoned with his people back in Athens. In the end, he did succeed in keeping the fund for privatizing state-owned assets — that was to be based in Luxembourg and used as collateral for the loans — under Athens’ control. The fact that the fund is unlikely to ever bring in the €50 billion expected hardly mattered. Tsipras needed the victory. It is virtually a certainty that this won’t be the only element in the new bailout deal that will not get implemented. Tsipras knows that and so do Greece’s international creditors. Greece will never be able to pay back its debts — the InMF isn’t the only party to have come to this conclusion.

Despite all the broken promises, despite the “no” vote on the austerity diktat that Tsipras would transform into a “yes” vote only a few days later, like some magician pulling a rabbit out of the hat, surveys showed 70% of Greeks supporting the deal, which they consider to be “necessary and without alternative.” 68% say they would vote for Tsipras again if there were new elections. Polls also suggest he would be able to govern without a coalition partner. Those are astonishing figures for a prime minister under whose watch the banks had to be shuttered because they were threatened with collapse. Under whom capital controls had to be introduced, limiting daily withdrawals by Greeks to €60.

Furthermore, the Greek economy hasn’t been in this bad a shape at any other point since the start of the crisis five years ago. After one and a half years of consolidation, the economy has fallen back into recession and is shrinking rapidly. The fact that he isn’t being loudly criticized and that he managed to get 61% of Greeks to back him in the July 5 referendum is Tsipras’ political masterpiece. He had pitted “democracy against the Troika” as he often stated. It was a demonstration of power and at the same time a slap in the face of the Europeans. It’s possible they underestimated Tsipras because he had always come across as being so polite and reserved. But Tsipras also tested the limits and had no qualms about crossing the line.

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No, Stiglitz is not a scientist. Economics is NOT a science. See Popper and falsifiability.

Stiglitz Meets With Greek Government Officials (GR)

Former World Bank chief economist and Nobel Prize winner Joseph Stiglitz expressed his serious concerns over the economic rationale behind Greece’s rescue agreement during his meetings with Greek government officials in Athens on Friday. He reassured, however, that both he and a large number of eminent scientists from Europe and America are willing to assist the Greek government in any way possible during its agonizing efforts to end the harsh austerity tantalizing the country and its people. The American economist has been opposed to the tactics of the IMF and the structure of the current financial system, defending Greece and the attempts of Greek Prime Minister Alexis Tsipras during his country’s negotiations with creditors, exerting harsh criticism toward Germany. “Germany has shown no common sense regarding the European economy, nor compassion,” he stressed, disapproving the measures imposed to Greece by European forces, and suggested a “brave” haircut to the Greek debt.

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“It is testimony to the insouciance of our time that the stark inconsistency of globalism with American unilateralism has passed unnoticed..”

Greece’s Lesson For Russia – and China (Paul Craig Roberts)

The termination of Greece’s fiscal sovereignty is what is in store for Italy, Spain, and Portugal, and eventually for France and Germany. As Jean-Claude Trichet, the former head of the European Central Bank said, the sovereign debt crisis signaled that it is time to bring Europe beyond a “strict concept of nationhood.” The next step in the centralization of Europe is political centralization. The Greek debt crisis is being used to establish the principle that being a member of the EU means that the country has lost its sovereignty. The notion, prevalent in the Western financial media, that a solution has been imposed on the Greeks is nonsense. Nothing has been solved. The conditions to which the Greek government submitted make the debt even less payable. In a short time the issue will again be before us.

As John Maynard Keynes made clear in 1936 and as every economist knows, driving down consumer incomes by cutting pensions, employment, wages, and social services, reduces consumer and investment demand, and thereby GDP, and results in large budget deficits that have to be covered by borrowing. Selling pubic assets to foreigners transfers the revenue flows out of the Greek economy into foreign hands. Unregulated naked capitalism, has proven in the 21st century to be unable to produce economic growth anywhere in the West. Consequently, median family incomes are declining. Governments cover up the decline by underestimating inflation and by not counting as unemployed discouraged workers who, unable to find jobs, have ceased looking.

By not counting discouraged workers the US is able to report a 5.2% rate of unemployment. Including discouraged workers brings the unemployment rate to 23.1%. A 23% rate of unemployment has nothing in common with economic recovery. Even the language used in the West is deceptive. The Greek “bailout” does not bail out Greece. The bailout bails out the holders of Greek debt. Many of these holders are not Greece’s original creditors. What the “bailout” does is to make the New York hedge funds’ bet on the Greek debt pay off for the hedge funds. The bailout money goes not to Greece but to those who speculated on the debt being paid. According to news reports, Quantitative Easing by the ECB has been used to purchase Greek debt from the troubled banks that made the loans, so the debt issue is no longer a creditor issue.

China seems unaware of the risk of investing in the US. China’s new rich are buying up residential communities in California, forgetting the experience of Japanese-Americans who were herded into detention camps during Washington’s war with Japan. Chinese companies are buying US companies and ore deposits in the US. These acquisitions make China susceptible to blackmail over foreign policy differences. The “globalism” that is hyped in the West is inconsistent with Washington’s unilateralism. No country with assets inside the Western system can afford to have policy differences with Washington. The French bank paid the $9 billion fine for disobeying Washington’s dictate of its lending practices, because the alternative was the close down of its operations in the United States. The French government was unable to protect the French bank from being looted by Washington.

It is testimony to the insouciance of our time that the stark inconsistency of globalism with American unilateralism has passed unnoticed.

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Oh good god, she means tax collectors… Greece “needs” German tax collectors…. What, to revive biblical times?

Europe’s Best And Brightest Need To Head For Greece (Helene Rey)

Last weekend’s negotiations were painful, but the Greeks were not entirely without friends. Amid the conflict and antagonism, France helped Athens draft its proposals and François Hollande, the French president, battled to avoid Grexit while keeping Germany and others on board. European solidarity looked exhausted. But contrary to some reports, it was not dead. The deal to keep Athens in the single currency, despite all its undesirable aspects, remains vastly preferable to Grexit. Now that the tricky business of implementation is about to begin, it is time that Greece received a little more help from its European friends. Admittedly, generosity was not Mr Hollande’s only motive. Grexit would have spelt still more hardship for Greek people and risked creditors losing all their money.

But it would also have imperilled the European project itself. It would have bolstered the likes of the Nationl Front’s Marine Le Pen in France, who is keen to see the euro disintegrate, and Vladimir Putin, Russian president, who has made clear his desire for European fragmentation. Mr Hollande’s actions were also well received by the ruling Socialist party’s disaffected leftwingers, who harbour sympathy for Greece’s Syriza-led government. But this is not enough of an effort, either on Greece’s part or that of its partners. The agreement comes in the wake of massive austerity in Greece, amid deteriorating economic and fiscal conditions and in an environment where elementary pro-growth reforms have yet to be made. The danger is that the deal, and what should be a healing process in Europe, will be derailed.

One huge issue is implementation: the Greek government needs to improve the judicial system, write a new civil code, fight cartels in product markets and reform public administration very quickly. Such reforms should improve the country’s wellbeing, but enacting them speedily would be a tall order for even the best-organised administration. And it is here that the rest of Europe can and should help out. The fabled École nationale d’administration might offer a few tips, but this is not a question of énarques — as its graduates are known — parachuting into Athens, or of more European overlords appearing in Greece. It is instead one of using European know-how to provide technical assistance in areas where Greece needs it and where Syriza, like its predecessor governments, has failed to deliver.

Goals such as more efficient tax collection (particularly from the rich) and fighting clientelism are part of the agreement and are vital. But they come bundled with other measures, such as value added tax increases, that will stifle any recovery. Hence the need for more solidarity to help the Greeks move fast.

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Reich is right, of course. But why did he stay on in Bill Clinton’s cabinet when he disagreed so much on the repeal?

Hillary Clinton and Glass-Steagall (Robert Reich)

For more than six decades after 1933, Glass-Steagall worked exactly as it was intended to. During that long interval few banks failed and no financial panic endangered the banking system. But the big Wall Street banks weren’t content. They wanted bigger profits. They thought they could make far more money by gambling with commercial deposits. So they set out to whittle down Glass-Steagall. Finally, in 1999, President Bill Clinton struck a deal with Republican Senator Phil Gramm to do exactly what Wall Street wanted, and repeal Glass-Steagall altogether. What happened next? An almost exact replay of the Roaring Twenties. Once again, banks originated fraudulent loans and sold them to their customers in the form of securities. Once again, there was a huge conflict of interest that finally resulted in a banking crisis.

This time the banks were bailed out, but millions of Americans lost their savings, their jobs, even their homes. [..] To this day some Wall Street apologists argue Glass-Steagall wouldn’t have prevented the 2008 crisis because the real culprits were nonbanks like Lehman Brothers and Bear Stearns. Baloney. These nonbanks got their funding from the big banks in the form of lines of credit, mortgages, and repurchase agreements. If the big banks hadn’t provided them the money, the nonbanks wouldn’t have got into trouble. And why were the banks able to give them easy credit on bad collateral? Because Glass-Steagall was gone. Other apologists for the Street blame the crisis on unscrupulous mortgage brokers. Surely mortgage brokers do share some of the responsibility. But here again, the big banks were accessories and enablers.

The mortgage brokers couldn’t have funded the mortgage loans if the banks hadn’t bought them. And the big banks couldn’t have bought them if Glass-Steagall were still in place. I’ve also heard bank executives claim there’s no reason to resurrect Glass-Steagall because none of the big banks actually failed. This is like arguing lifeguards are no longer necessary at beaches where no one has drowned. It ignores the fact that the big banks were bailed out. If the government hadn’t thrown them lifelines, many would have gone under. Remember? Their balance sheets were full of junky paper, non-performing loans, and worthless derivatives. They were bailed out because they were too big to fail. And the reason for resurrecting Glass-Steagall is we don’t want to go through that ever again.

As George Santayana famously quipped, those who cannot remember the past are condemned to repeat it. In the roaring 2000’s, just as in the Roaring Twenties, America’s big banks used insured deposits to underwrite their gambling in private securities, and then dump the securities on their customers. It ended badly. This is precisely what the Glass-Steagall Act was designed to prevent – and did prevent for more than six decades. Hillary Clinton, of all people, should remember.

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All borrowed money anyway. Can someone please hold Brussels accountable?

Don Quixote Airport Cost €1bn – It Could Sell To China For €10,000 (Guardian)

It cost €1bn (£694m) to build and was on sale for a knockdown price of €40m, but now looks set to be sold for just €10,000. Ciudad Real airport, one of the most notorious emblems of Spain’s economic crash, has found a buyer. A Chinese-led consortium has emerged as the only bidder for the deserted site 100 miles south of Madrid, for an apparent bargain price after no one met the much reduced valuation. Its facilities include a runway long enough to land an Airbus A380, the world’s largest passenger plane, along with a passenger terminal that could handle 10m travellers per year. It is also in pristine condition because it has barely been used, having opened to international flights in 2010 as the eurozone crisis raged, only to shut two years later.

Appropriately for such a vainglorious project, the La Mancha airport was previously named after the region’s most famous, and deluded, literary export: Don Quixote. But Tzaneen International, a Chinese company set up in March with just €4,000 in capital, believes it can succeed where others have failed. Its bid – the only offer – succeeded at a public auction. Its initial €10,000 outlay buys all the land and most of the buildings, including the runway and control tower. Tzaneen says it also wants to acquire the terminal building and the car parks and is prepared to invest up to €100m in the project because “there are several Chinese companies that want to make the airport the European point of entry for cargo”.

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“I am sure that if they take back the drachma, they’ll have a year of trouble but then they will become paradise on earth with 10m people.“

Lunch with Beppe Grillo (FT)

[..] when I ask him directly what he thinks of the deal, he seems more discouraged than angry. “I don’t know, it’s always the same story. Every nation has lost its sovereignty.” This leads into the first of many tangents. “We’ve delegated politics to bankers. The ECB is inside Deutsche Bank and Deutsche Bank is inside the Bundesbank,” he says before moving on to mention Japanese “just-in-time” manufacturing and Britain’s zero-hour labour contracts. “They trick all the statistics because, if you work one hour, it means you’re employed.” As we nibble on pane carasau, a traditional Sardinian flatbread, I try to reel him back to the main question. A week earlier, Grillo had showed his support for Greece by making the trip to Athens’ Syntagma Square, after Tsipras had unexpectedly called a referendum on earlier bailout terms proposed by Brussels. The “No” vote — backed by Tsipras — won a resounding victory that night.

Now that plebiscite of defiance seems to have been pointless. Greece still needed funds to avoid default, and Tsipras had been forced to cave on many points to get it. So was it worth it, I ask? Grillo, who has been vocal about his desire for Italy to hold its own referendum on the euro, hesitates. “I think it helped clear up the notion that these decisions should be taken by the people, not others,” he says. As for Tsipras, he says: “If he sells out the country, that’s exactly what the Greeks don’t want.” The food arrives and the best of my antipasto is the seared tuna with peach, and the marinated salmon. Grillo loads his salad up with salt and that seems to rev him up a notch. He starts attacking “those people” who have a stranglehold on Europe’s economy.

“They have a kind of illness, it’s called alexithymia, which means difficulty recognising the emotions of others: pain, pleasure, joy,” he says. Does he mean people like Merkel and Jean-Claude Juncker, president of the European Commission? “Yes,” he responds. “They don’t care if they have to put tens of millions of people into hunger to balance an account, it’s collateral damage. We’ve entrusted our lives to people who know nothing about life,” he adds. I suggest that a referendum on euro membership might not appeal to Italians, given the scenes of economic distress they have witnessed in Athens in the past few weeks. But Grillo tells me I’m wrong because Italy’s experience with the single currency has been awful.

The Italian economy has only just started growing again — by 0.3% in the first quarter of this year, after a bruising triple-dip recession. Unemployment remains high — at 12.4% — and for the country’s youth that figure is more than 40%. “We entered monetary union from one day to the next, and they said it was for our own good,” he says. “Since then, all our economic, social and financial indicators have got worse.” The chaos in Athens has, he says, been wildly overstated. “I went there with bread, cheese and nylon socks, to help. I thought there would be people on the ground, screaming, ‘Aaaaaah!’ Instead, I found a splendid city, the restaurants were full. There were many tourists. You ate well — with €18 or €20. It was clean. I am sure that if they take back the drachma, they’ll have a year of trouble but then they will become paradise on earth with 10m people.”

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Jul 182015
 
 July 18, 2015  Posted by at 10:26 am Finance Tagged with: , , , , , , , , ,  1 Response »


Harris&Ewing State, War & Navy Building, Washington DC 1917

Those In Power Will Risk War And Civil Unrest To Preserve It (Martin Armstrong)
Irish €14.3 Billion Payments To Bank Bondholders May Have Been Avoidable (TFM)
Why Argentina Consistently, and Unapologetically, Refuses to Pay Its Debts (BBG)
China Unleashes $483 Billion to Stem the Market Rout (Bloomberg)
China Destroyed Its Stock Market In Order To Save It (Patrick Chovanec)
Greece’s Tsipras Shakes Up Cabinet in Bid to Rebuild Government (Bloomberg)
Wolfgang Schäuble, The Trust Troll (Steve Keen)
Alice In Schäuble-Land: Where Rules Mean What Wolfgang Says They Mean (Whelan)
Greece, Europe, and the United States (James K. Galbraith)
The Euro Is A Disaster Even For The Countries That Do Everything Right (WaPo)
Blame the Banks (The Atlantic)
Greece’s Debt Can Be Written Off – Whatever Wolfgang Schäuble Says (Guardian)
Greece And Europe: Is Europe Holding Up Its End Of The Bargain? (Ben Bernanke)
Why Is Germany So Tough On Greece? Look Back 25 Years (Guardian)
Greece Made The Wrong Choice (John Lloyd)
The Greek Crisis Represents The Humiliation Of European Democracy (Andrea Mammone)
The End Of Capitalism Has Begun (Paul Mason)
The Freakish Year in Broken Climate Records (Bloomberg)

Absolutely must see Farage video.

Those In Power Will Risk War And Civil Unrest To Preserve It (Martin Armstrong)

Nigel Farage may be the only practical politician these days because he came from the trading sector. He explains the Euro-Project and its failures. He makes it clear that the Greek people never voted to enter the euro, and explains that it was forced upon them by Goldman Sachs and their politicians. Nigel also explains that the Euro project idea that a trade and economic union would then magically produce a political union – the United States of Europe and eliminate war. He has warned that the idea of a political union would end European wars has actually turned Europe into a rising resentment in where there is now a new Berlin Wall emerging between Northern and Southern Europe.

The Euro project was a delusional dream for it was never designed to succeed but to cut corners all in hope of creating the United States of Europe to challenge the USA and dethrone the dollar, That dream has turned into a nightmare and will never raise Europe to that lofty goal of the financial capitol of the world. The IMF acts as a member of the Troika, yet has no elected position whatsoever. The second unelected member is Mario Draghai of the ECB. Then the head of Europe is also unelected by the people. The entire government design is totally un-Democratic and therein lies the crisis.

Not a single member of the Troika ever needs to worry about polls since they do not have to worry about elections. This is authoritarian government if we have ever seen one. The ECB attempts by sheer force to manipulate the economy with zero chance of success employing negative interest rates and defending banks as the (former?) Goldman Sachs man Mario Draghai dictates. Now, far too many political jobs have been created in Brussels. This is no longer about what is best for Europe, it is what is necessary to retain government jobs. The Invisible Hand of Adam Smith works even in this instance – those in power are only interested in their self-interest and will risk war and civil unrest to maintain their failed dreams of power.

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If true, a main argument for Greece.

Irish €14.3 Billion Payments To Bank Bondholders May Have Been Avoidable (TFM)

The legal advisor to the former government has said it WOULD have been legally possible to burn the bondholders of Ireland’s banks, without customers having to lose their deposits. The advice from the former attorney general Paul Gallagher appears to contradict the claims of some former ministers. Ministers in the former administration have consistently claimed that it would have been impossible to ‘burn’ bondholders without also enforcing a haircut on deposits, because the two were considered legally equal. However today Mr Gallagher has said that although it would have been difficult, it was legally possible to break this link and enforce losses on bondholders without depositors also taking a hit.

He said this had also been accepted by the Troika – but that the lenders simply refused to allow any burden-sharing under the bailout programme, making the prospect obsolete. Unsecured senior bondholders were paid around €14.3 billion under the period of the bank guarantee – much of it as a result of the state’s huge investment in the banking sector. Mr Gallagher’s evidence seems to suggest that these payments could have been avoided without depositors also facing any losses, but for the Troika’s stance.

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If Argentina can do it…

Why Argentina Consistently, and Unapologetically, Refuses to Pay Its Debts (BBG)

Argentina’s fight with foreign banks and bondholders is more than just business. It’s part of the national psyche, enshrined in a special museum at the business school at the University of Buenos Aires. The Museum of Foreign Debt is nothing fancy. There are a few flimsy panels plastered with grainy photos, dates, text, and graphs. Oh, but the saga portrayed on those panels! Banks, bond investors, and the International Monetary Fund flood crooked regimes with overpriced credit. The Argentine economy collapses, and the people suffer. International markets are roiled. It happens time and time again. The story has all the emotions of a good tango. Argentina has reneged on foreign debt obligations at least seven times, starting in 1827.

The latest was in July 2014, when Argentina defaulted rather than give in to pressure from Paul Singer of Elliott Management. The fight with Singer has been going on for a dozen years, and the term vulture investor—rather esoteric in much of the world—is now pretty much universally known in Argentina. It’s so much on people’s minds that Buenos Aires toy stores carry a homegrown board game called Vultures, packaged in a box depicting a pair of the birds picking at a pile of dollars. “We planted the anti-vulture flag in the world,” President Cristina Fernández de Kirchner said in a speech in mid-May. “We gave a name to international usury and despotism.” One May morning at the debt museum, guide Antonella Fagnano, a 21-year-old business major, describes Argentines’ attitude toward default.

She pauses by a black-and-white photo of the late General Jorge Videla, who led a 1976 coup that ushered in a seven-year dictatorship. Successive presidents in that period loaded up on foreign debt to finance, among other things, the 1982 Falklands War with the U.K. Today’s Argentina, Fagnano says, has no moral obligation to make good on debts like those. In fact, it would be wrong to pay. “Foreigners financed a lot of leaders, like these dictators. They didn’t do what they were supposed to do with the money, and left future generations the debt,” she says, shaking her head. “So, of course, you cannot allow that.” Fernandez is nearing the end of her term, and it doesn’t look like things will change under the next president. Daniel Scioli, the front-runner for October elections, vows to carry on the fight against paying the vultures in full.

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And counting.

China Unleashes $483 Billion to Stem the Market Rout (Bloomberg)

China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government. China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public. While it’s unclear how much CSF will ultimately deploy into China’s $6.6 trillion equity market, the financing is up to 25 times bigger than the support fund started by Chinese brokerages earlier this month.

That’s probably enough to restore confidence among China’s 90 million individual investors, says Bocom International Holdings Co. The Shanghai Composite Index jumped 3.5 % on Friday, capping a two-week rally that’s turned it into one of the world’s best-performing equity gauges. “It doesn’t have to use up all the money, as long as it can make the rest of the market believe that it has enough ammunition,” said Hao Hong, a China strategist at Bocom International in Hong Kong. “It is a game of chicken. For now, it seems to be working.” CSF, founded in 2011 to provide funding to the margin-trading businesses of Chinese brokerages, has transformed into one of the key government vehicles to combat a 32 % selloff in the Shanghai Composite from mid-June through July 8.

At 3 trillion yuan, its funding would be about five times bigger than the new proposed bailout for Greece and exceed China’s 2.3 trillion yuan of regulated margin financing during the height of the stock-market boom last month. “What the authorities are demonstrating to the market is that if panic does take hold, they have the resources at their disposal to deal with that,” said James Laurenceson, the deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “Monetary authorities around the word regularly send the same signal in credit and foreign exchange markets.”

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“Chinese punters were borrowing in large sums, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral.”

China Destroyed Its Stock Market In Order To Save It (Patrick Chovanec)

During the Vietnam War, surveying the shelled wreckage of Ben Tre, an American officer famously remarked, “It became necessary to destroy the town to save it.” His comment came to epitomize the sort of self-defeating “victory” that undoes what it aims to achieve. Last week, China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthlessly, and recklessly, to turn those prices around. Its heavy-handed approach seemed to work, for the moment, but only by severely damaging far more important goals and ambitions. Prior to the crash, China’s stock market had enjoyed a blissful disconnect from reality. As China’s economy slowed and corporate profits declined, share prices soared, nearly tripling in just 12 months.

By the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above a preposterous 85-times earnings. It was a clear warning flag — one that Chinese regulators encouraged people to ignore. Then reality caught up. At first, when prices began to fall, the central bank responded by cutting interest rates and bank reserve requirements — measures to inject more money that had never failed to juice the market. But prices continued to fall. Then the government rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market to buy stocks too. A few stocks rose, but most fell even further. The relentless crash was intensified by a new factor in Chinese markets: margin lending.

Chinese punters were borrowing in large sums, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral. At the peak, according to Goldman Sachs, formal margin lending alone accounted for 12% of the market float and 3.5% of China’s GDP, “easily the highest in the history of global equity markets.” Margin loans served as rocket fuel for the market on its way up, but prices began to fall and borrowers received “margin calls” that forced them to liquidate their positions, pushing prices down further in a kind of death spiral.

Chinese regulators, who had been trying (ineffectually) to rein in risky margin lending, now suddenly reversed course. They waved rules requiring brokerages to ask for more collateral when stock prices fall and allowed them to accept any kind of asset — including people’s homes — as collateral for stock-buying loans. They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk. Yet no one will borrow if no one is confident enough to buy, and the market continued to fall, wiping out nearly all its gains since the start of the year.

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The deal “has an ownership problem for Tsipras and the Greeks in general..”

Greece’s Tsipras Shakes Up Cabinet in Bid to Rebuild Government (Bloomberg)

Greek Prime Minister Alexis Tsipras replaced some ministers in a cabinet reshuffle after almost a quarter of his lawmakers rejected measures he agreed on with creditors to keep the country in the euro. The prime minister’s office said Friday that Panagiotis Skourletis will replace Panagiotis Lafazanis, who heads the Left Platform fraction of Tsipras’s Syriza party, as energy minister. George Katrougalos will succeed Panagiotis Skourletis as labor minister. The Greek parliament in the early hours of Thursday backed the deal with creditors, needed to unblock further financing aid, with decisive votes from the opposition. With 38 of 149 Syriza lawmakers refusing to support further spending cuts and tax increases, that marked a blow for Tsipras, who came to power on an anti-austerity platform in January.

Tsipras told his associates after the parliament vote that he would be forced to lead a minority government until a final deal with creditors is concluded. The European Union finalized a €7.2 billion bridge loan to Greece on Friday that will help provide the debt-ravaged nation with a stop-gap until its full three-year bailout is settled. In all, 64 of the parliament’s 300 lawmakers voted against the bill. Half of the “no” votes came from Syriza, including from Lafazanis and former Finance Minister Yanis Varoufakis. Finance Minister Euclid Tsakalotos, called in by Tsipras to replace Varoufakis before the final bailout negotiations, discussed on Friday with Joseph Stiglitz, a Nobel-prize winning economist, about the difficulties expected in the implementation of the deal with Greece’s creditors.

The deal “has an ownership problem for Tsipras and the Greeks in general,” said Paolo Manasse, a professor of economics at the University of Bologna, Italy. “It’s a liberal program to be carried out by a radical-left premier and imposed on a country that’s just voted no in a referendum.”

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“To the Confidence Fairy we can now add the ‘Trust Troll’ : appease the Trust Troll, and all your macroeconomic ills will magically vanish.”

Wolfgang Schäuble, The Trust Troll (Steve Keen)

Paul Krugman invented the term “confidence fairy” to characterize the belief that all that was needed for growth to resume after the Global Financial Crisis was to restore ‘confidence’. Impose austerity and the economy will not shrink, but will instead grow immediately, because of the boost to confidence:

.. don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. The idea that austerity measures could trigger stagnation is incorrect, declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because confidence-inspiring policies will foster and not hamper economic recovery. ( Myths of Austerity , July 1 2010)

To the Confidence Fairy we can now add the ‘Trust Troll’ : appease the Trust Troll, and all your macroeconomic ills will magically vanish. The identity of the Confidence Fairy was never revealed, but the identity of the Trust Troll is obvious. It‘s German Finance Minister Wolfgang Schäuble. Schäuble was clearly the primary architect of the Troika’s dictat for Greece. One only has to compare its language to that used by Schäuble in his OpEd in the New York Times three months ago (Wolfgang Schäuble on German Priorities and Eurozone Myths , April 15 2015). There he stated that ‘My diagnosis of the crisis in Europe is that it was first and foremost a crisis of confidence, rooted in structural shortcomings , and that the essential factor in ending the crisis was the restoration of trust:

The cure is targeted reforms to rebuild trust in member states finances, in their economies and in the architecture of the European Union. Simply spending more public money would not have done the trick nor can it now.

Compare this to the first line of the communique:

The Eurogroup stresses the crucial need to rebuild trust with the Greek authorities as a pre requisite for a possible future agreement on a new ESM programme.

The policies in the document match those in Schäuble’s OpEd as well. Schäuble called for:

.. more flexible labor markets; lowering barriers to competition in services; more robust tax collection; and similar measures.

The Troika’s document forces these measures upon Greece. These include ‘the broadening of the tax base to increase revenue’, ‘rigorous reviews of collective bargaining, industrial action and collective dismissals’ and ‘ambitious product market reforms’. At the same time, Greece is required to aim to achieve a government surplus equivalent to 3.5% of GDP -the opposite of ‘spending more public money’ which Schäuble rejected in his OpEd. Rather than debt reduction and rescheduling as even the IMF now calls for, “The Euro Summit acknowledges the importance of ensuring that the Greek sovereign can clear its arrears to the IMF and to the Bank of Greece and honour its debt obligations”.

This cannot in any sense be seen as an economic document, since an economic document would have to assess the feasibility of its proposals. Instead it simply states Schäuble s ideology: regardless of your economic circumstances, simply implement these (so-called) market-oriented reforms, restore trust, and your economy will grow. With the government debt that Greece currently labours under, this is a fantasy. Even if Greece were to pay a mere 3% on its debt, interest payments alone would absorb over 5% of GDP. To do that, and run a primary surplus of 3.5% of GDP in an economy where 25% of the population is unemployed is simply impossible.

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Karl Whelan makes much the same point as Steve Keen: “..the truth is it is really Grade-A concern trolling (“I’d love to help you guys but I can only do it if you leave the euro”) dressed up as legal argumentation.”

Alice In Schäuble-Land: Where Rules Mean What Wolfgang Says They Mean (Whelan)

After trying his best to chuck Greece out of the euro last weekend, Germany’s finance minister Schäuble has continued to openly undermine the deal that was agreed by European leaders and endorsed by the Greek parliament. A key argument he has been putting forward is that a debt write-down for Greece “would be incompatible with the currency union’s rules” but that such a write-down would be possible if Greece left the euro. While this claim is being widely repeated in the German press, the truth is it is really Grade-A concern trolling (“I’d love to help you guys but I can only do it if you leave the euro”) dressed up as legal argumentation.

The rules of the EU and Eurozone are so byzantine that it is quite easy to make false claims about these rules and get away with it. However, I do not believe there is anything in the European Union or Eurozone rules that would preclude a debt write-down inside the euro. The basis for Schäuble’s argument appears to be Article 125.1 of the consolidated treaty on the functioning of the EU. Here is the article in full.

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

This is the article that used to be called “the no bailout clause”. However, it is nothing of the sort. It simply says that member states cannot take on the debts of another member state. This did not rule out member states “bailing out” other countries by making loans to them. And indeed, the European Court of Justice in its Pringle decision established that the European Stabilisation Mechanism bailout fund was consistent with Article 125. Also worth noting about Article 125 are all the things it doesn’t mention. It doesn’t rule out loans being member states and doesn’t discuss these loans being restructured. And it makes no mention whatsoever of the Eurozone. So there is simply no legal basis for the idea that Greek debt being written down is illegal while they remain in the Eurozone but is fine if they leave the euro.

It is conceivable that someone could still take a case to the ECJ objecting to a write-off on the grounds that the granting and write-off of loans to Greece would result in more debt for European countries and allowed Greece to pay off other creditors. So you could argue that this was effectively the same thing as the other member states assuming Greece’s other debt commitments. To my mind, this line of argumentation moves far away from the simple and clear language of Article 125.1. I also don’t see much in the Pringle decision to suggest the ECJ would uphold such a case. There would be even less case for a legal argument against an “effective write-off” involving postponing interest payments and principal payments for some very long period of time, such as 100 years.

So there is no “Eurozone rule” against a writing off Greek debt. Conversely, despite Schäuble’s enthusiastic support, the rules don’t allow for a euro exit. Rules it appears, mean whatever Mr. Schäuble wants them to mean.

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“After all, Poland, the Czech Republic, Croatia, and Romania (not to mention Denmark and Sweden, or for that matter the United Kingdom) are still out and will likely remain so—yet no one thinks they will fail or drift to Putin because of that.”

Greece, Europe, and the United States (James K. Galbraith)

SYRIZA was not some Greek fluke; it was a direct consequence of European policy failure. A coalition of ex-Communists, unionists, Greens, and college professors does not rise to power anywhere except in desperate times. That SYRIZA did rise, overshadowing the Greek Nazis in the Golden Dawn party, was, in its way, a democratic miracle. SYRIZA’s destruction will now lead to a reassessment, everywhere on the continent, of the “European project.” A progressive Europe—the Europe of sustainable growth and social cohesion—would be one thing. The gridlocked, reactionary, petty, and vicious Europe that actually exists is another. It cannot and should not last for very long.

What will become of Europe? Clearly the hopes of the pro-European, reformist left are now over. That will leave the future in the hands of the anti-European parties, including UKIP, the National Front in France, and Golden Dawn in Greece. These are ugly, racist, xenophobic groups; Golden Dawn has proposed concentration camps for immigrants in its platform. The only counter, now, is for progressive and democratic forces to regroup behind the banner of national democratic restoration. Which means that the left in Europe will also now swing against the euro.

As that happens, should the United States continue to support the euro, aligning ourselves with failed policies and crushed democratic protests? Or should we let it be known that we are indifferent about which countries are in or out? Surely the latter represents the sensible choice. After all, Poland, the Czech Republic, Croatia, and Romania (not to mention Denmark and Sweden, or for that matter the United Kingdom) are still out and will likely remain so—yet no one thinks they will fail or drift to Putin because of that. So why should the euro—plainly now a fading dream—be propped up? Why shouldn’t getting out be an option? Independent technical, financial, and moral support for democratic allies seeking exit would, in these conditions, help to stabilize an otherwise dangerous and destructive mood.

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The story comes from everywhere now: non-euro countries fare much better than euro nations. Even in Germany, workers are being stiffed.

The Euro Is A Disaster Even For The Countries That Do Everything Right (WaPo)

The euro might be worse for you than bankruptcy. That, at least, has been the case for Finland and the Netherlands, which have actually grown less than Iceland has since 2007. Iceland, you might recall, went bankrupt in 2008. Now, it’s true that Finland and the Netherlands have had their fair share of economic problems, but those should have been manageable. Neither country is a basket case, and both have done what they were supposed to do. In other words, they’ve followed the rules, and the results have still been a catastrophe. That’s because the euro itself is. Or, if you want to be polite, the common currency is “imperfect, and being imperfect is fragile, vulnerable, and doesn’t deliver all the benefits it could.” That was ECB chief Mario Draghi’s verdict on Thursday.

So what’s happened to them? Well, just your run-of-the-mill bad economic news. It’s only a slight exaggeration to say that Apple has kneecapped Finland’s economy. Its two biggest exports were Nokia phones and paper products, but, as the country’s former prime minister Alex Stubb has said, the iPhone killed the former and the iPad killed the latter. Now, the normal way to make up for this would be to cut costs by devaluing your currency, except that Finland doesn’t have a currency to devalue anymore. It has the euro. So instead it’s had to cut costs by cutting wages, which not only takes longer, but also causes more economic damage since you have to fire people to convince them to take pay cuts. The result has been a recession longer than anything in Finland’s living memory, longer even than its great depression in the early 1990s. It hasn’t helped, of course, that the rules of the euro zone have forced Finland’s government to cut its budget at the same time that all this has been happening.

It’s been a different kind of story in the Netherlands. Its goods are more than competitive abroad—its trade surplus is an absurd 10 % of economic output—but its domestic spending is a problem. The Netherlands had a huge housing bubble, fueled, in part, by the fact that interest payments are fully tax deductible, that has since deflated some 20%. That’s left Dutch households with a bigger debt burden than anyone else in the euro zone. On top of that, there’s been the usual austerity to keep its recovery from being much—or any—of one. Indeed, the Netherlands’ economy was slightly smaller at the end of 2014 than it was at the end of 2007. That’s a lot better than Finland, whose economy has shrunk 5.2% during that time, but it still lags the 1.1% growth Iceland has eked out.

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Excellent.

Blame the Banks (The Atlantic)

In buying various assets European banks were doing what banks are supposed to do: lending. But by doing so without caution they were doing exactly what banks are not supposed to do: lending recklessly. The European banks weren’t lending recklessly to only the U.S. They were also aggressively lending within Europe, including to the governments of Spain, Portugal, and Greece. In 2008, when the U.S. housing market collapsed, the European banks lost big. They mostly absorbed those losses and focused their attention on Europe, where they kept lending to governments—meaning buying those countries’ debt—even though that was looking like an increasingly foolish thing to do:

Many of the southern countries were starting to show worrying signs. By 2010 one of those countries—Greece—could no longer pay its bills. Over the prior decade Greece had built up massive debt, a result of too many people buying too many things, too few Greeks paying too few taxes, and too many promises made by too many corrupt politicians, all wrapped in questionable accounting. Yet despite clear problems, bankers had been eagerly lending to Greece all along. That 2010 Greek crisis was temporarily muzzled by an international bailout, which imposed on Greece severe spending constraints. This bailout gave Greece no debt relief, instead lending them more money to help pay off their old loans, allowing the banks to walk away with few losses.

It was a bailout of the banks in everything but name. Greece has struggled immensely since then, with an economic collapse of historic proportion, the human costs of which can only be roughly understood. Greece needed another bailout in 2012, and yet again this week. While the Greeks have suffered, the northern banks have yet to account financially, legally, or ethically, for their reckless decisions. Further, by bailing out the banks in 2010, rather than Greece, the politicians transferred any future losses from Greece to the European public. It was a bait-and-switch rife with a nationalist sentiment that has corrupted the dialogue since: Don’t look at our reckless banks; look at their reckless borrowing.

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Legalese.

Greece’s Debt Can Be Written Off – Whatever Wolfgang Schäuble Says (Guardian)

A vote in the Greek parliament means little to Germany’s finance minister, Wolfgang Schäuble. The self-appointed guardian of the EU’s financial rulebook says Athens can vote as many times as it likes in favour of a deal that promises, even in the vaguest terms, to write off some of its colossal debts, but that doesn’t mean the rules allow it. In fact, as Schäuble delights in pointing out, any attempt at striking out Greek debt is, according to his advice, illegal. Yet Schäuble knows Greece’s debts are unsustainable unless some of them are written off – he has said as much on several occasions. So faced with its internal contradictions, he posits that the deal must fail and the poorly led Greeks exit the euro.

As a compromise, he repeated his suggestion on Tuesday that Greece leave the euro temporarily. Those who care more for maintaining the current euro currency bloc as a 19-member entity immediately spotted this manoeuvre as a one-way ticket with no way back for Greece. The Austrian chancellor, Werner Faymann, a centre-left social democrat, said Schäuble was “totally wrong” to create the impression that “it may be useful for us if Greece falls out of the currency union, that maybe we pay less that way”. Faymann, who has consistently taken a sympathetic line on Greece, showed his growing irritation at the German minister’s stance: “It’s morally not right, that would be the beginning of a process of decay … Germany has taken on a leading role here in Europe and in this case not a positive one.”

Greece and Faymann’s problem is that there are plenty of other forces at play pulling at the loose threads of the latest bailout deal. The IMF has said a big debt write-off is needed to prevent a proposed €86bn deal collapsing under the sheer weight of future liabilities and a reluctance in Greece to carry through reforms.

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Bernanke weighs in.

Greece And Europe: Is Europe Holding Up Its End Of The Bargain? (Ben Bernanke)

This week the Greek parliament agreed to European demands for tough new austerity measures and structural reforms, defusing (for the moment, at least) the country’s sovereign debt crisis. Now is a good time to ask: Is Europe holding up its end of the bargain? Specifically, is the euro zone’s leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece a reasonable chance to meet their growth, employment, and fiscal objectives? Over the longer term, these questions are evidently of far greater consequence for Europe, and for the world, than are questions about whether tiny Greece can meet its fiscal obligations.

Unfortunately, the answers to these questions are also obvious. Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing. The failure of European economic policy has two, closely related, aspects: (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone. The poor overall performance is illustrated by Figure 1 below, which shows the euro area unemployment rate since 2007, with the U.S. unemployment rate shown for comparison.

In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10% of the labor force. Today the unemployment rate in the United States is 5.3%, while the unemployment rate in the euro zone is more than 11%. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential. The unevenness in economic outcomes among countries within the euro zone is illustrated by Figure 2, which compares the unemployment rate in Germany (which accounts for about 30% of the euro area economy) with that of the remainder of the euro zone.

Currently, the unemployment rate in the euro zone ex Germany exceeds 13%, compared to less than 5% in Germany. Other economic data show similar discrepancies within the euro zone between the “north” (including Germany) and the “south.” The patterns illustrated in Figures 1 and 2 pose serious medium-term challenges for the euro area. The promise of the euro was both to increase prosperity and to foster closer European integration. But current economic conditions are hardly building public confidence in European economic policymakers or providing an environment conducive to fiscal stabilization and economic reform; and European solidarity will not flower under a system which produces such disparate outcomes among countries.

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How Wolfie asset-stripped East Germany.

Why Is Germany So Tough On Greece? Look Back 25 Years (Guardian)

It was 25 years ago, during the summer of 1990, that Schäuble led the West German delegation negotiating the terms of the unification with formerly communist East Germany. A doctor of law, he was West Germany’s interior minister and one of Chancellor Helmut Kohl’s closest advisers, the go-to guy whenever things got tricky. The situation in the former GDR was not too dissimilar from that in Greece when Syriza swept to power: East Germans had just held their first free elections in history, only months after the Berlin Wall fell, and some of the delegates from East Berlin dreamed of a new political system, a “third way” between the west’s market economy and the east’s socialist system – while also having no idea how to pay the bills anymore.

The West Germans, on the other side of the table, had the momentum, the money and a plan: everything the state of East Germany owned was to be absorbed by the West German system and then quickly sold to private investors to recoup some of the money East Germany would need in the coming years. In other words: Schäuble and his team wanted collateral. At that time almost every former communist company, shop or petrol station was owned by the Treuhand, or trust agency – an institution originally thought up by a handful of East German dissidents to stop state-run firms from being sold to West German banks and companies by corrupt communist cadres. The Treuhand’s mission: to turn all the big conglomerates, companies and tiny shops into private firms, so they could be part of a market economy.

Schäuble and his team didn’t care that the dissidents had planned to hand out shares of companies to the East Germans, issued by the Treuhand – a concept that incidentally led to the rise of the oligarchs in Russia. But they liked the idea of a trust fund because it operated outside the government: while technically overseen by the finance ministry, it was publicly perceived as an independent agency. Even before Germany merged into a single state in October 1990, the Treuhand was firmly in West German hands. Their aim was to privatise as many companies as possible, as soon as possible – and if you were to ask most Germans about the Treuhand today they would say it achieved that objective. It didn’t do so in a way that was popular with the people of East Germany, where the Treuhand quickly became known as the ugly face of capitalism. It did a horrible job in explaining the transformation to shellshocked East Germans who felt overpowered by this strange new agency. To make matters worse, the Treuhand became a hotbed of corruption.

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“As for the future of the euro, it would no longer be the Greeks’ problem. What, they may say, has the euro done for us?”

Greece Made The Wrong Choice (John Lloyd)

Former Greek Finance Minister Yanis Varoufakis has, as Macbeth put it, “strutted and fretted his hour upon the stage.” But he will still be heard some more. While Prime Minister Alexis Tsipras pleaded for support Wednesday for a European Union “rescue” plan in which he said he didn’t believe, Varoufakis was busy ripping it apart. In a widely circulated blog, Varoufakis boiled down his belief to this: Greece had been reduced to the status of a slave state. While his words were clearly driven by anger and spite, he’s not entirely out of line. The agreement is, as Tsipras said, a kind of blackmail. The economist Simon Tilford described it as an order to “acquiesce to all our demands or we will evict you from the currency union.”

Pensions will be cut further, labor markets liberalized, working lives extended, collective bargaining “modernized,” and hiring and firing made easier. For a government that takes its inspiration from Karl Marx, this is a neo-liberal dousing. There are few enthusiasts for the deal: the most important of the skeptics is the IMF, which called for the euro zone creditors to allow a partial write-off of its €300+ billion debt, or at least permit a repayment pause for 30 years. In an ironic twist, the IMF, the creditor the Tsipras government most despised, is now its (partial) friend. Skeptics have focused not just on the impossibility of debt repayment, but also on the deepening poverty that will result from the agreement.

Francois Cabeau, an economist in Barclays Bank, told the French daily Figaro that the economy would continue to shrink by between 6 and 8% a year. Because the Greek economy has so few sectors where significant value is added other than shipping and tourism, it depends heavily on consumption — which is being further cut, thus prompting a vicious cycle and a further immiseration of the poor, elderly and sick. These conditions validate Varoufakis’ analysis. Greece is a country so firmly under the unremitting pressure of its creditors and so tied to foreign demands, that it may soon resemble an East European communist state in the high tide of Soviet power. Like two of these states — Hungary in 1956, Czechoslovakia in 1968 — Syriza made a failed attempt at a revolt, and was crushed.

[..] So should it leave the euro zone? The objections to a Grexit are twofold: first, that its currency — presumably a newly issued drachma — would be walloped by an unfavorable exchange rate as a result. Foreign goods and foreign travel would be priced out of many families’ reach. At the same time, as euro zone leaders have warned continually, a Grexit would also shake the euro to its foundations — and though the remaining 18 members could be protected, a precedent would be set that this is a contingent currency, with membership dependent on national conditions. That it would be bad is certain: but how much worse than staying in and swallowing bitter medicine? As for the future of the euro, it would no longer be the Greeks’ problem. What, they may say, has the euro done for us?

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“The key (overlooked) question here is: Is this EU reflecting Europeans’ will? ”

The Greek Crisis Represents The Humiliation Of European Democracy (Andrea Mammone)

Fears, disillusionment, uncertainty, and astonishment are mixed together by the hot wind blowing from Greece and the cold rain coming from some of Northern Europe. No, it is not a weather forecast. After the Greek referendum and the recent night-long negotiations, these are the feelings of many people across Europe. Even if the reality will probably be less apocalyptic, the truth is that democracy is being ridiculed around the EU. Some media from all around the world are, in fact, suggesting that Greece has been excessively humiliated and there is a strong attempt to force it out from the Eurozone. And this is not merely because one of the proposals from the summit stated that €50bn of Greek assets had to be handed over to an institution fundamentally controlled by Berlin.

These days Greece has been constantly at the centre of Europe’s microcosm. The “mother” of western democracy and inner culture, according to some, has to learn the lesson. It is a matter of mere power. They rejected austerity, potentially provoking another European downturn, and a default with unclear outcomes. Stories of poverty and unemployment are indeed in the eyes of everyone willing to see them. The situation is undermining the future of the European community. It is not simply opening the way for member states to be essentially pushed out by the strongest ones. Referring to the Greek early approach and a possible “exit”, EU Commission president Jean-Claude Juncker said that he could not “pull a rabbit out of a hat”. This is very true.

But early post-war politicians pulled many rabbits out when Europe had to be rebuilt after the war, and so one would expect a similar proficiency. This contemporary generation of European leaders might be instead remembered like the one leading to the disappearance of many transnational bonds established by Europeans. Europe is, then, really navigating with no compass. It has not a single voice. Socially, there seems to be no concern with people’s living standards. Politically, they lack any preoccupations with geo-politics, as some of the Mediterranean might fall under Putin’s influence. Budget and austerity are the main interests. As Pierre Moscovici, the socialist EU economic commissioner, in fact, put it, the “integrity” of the Eurozone has been saved with the novel agreement.

The key (overlooked) question here is: Is this EU reflecting Europeans’ will? Its image (and also Germany’s image) is seriously damaged even if all Greeks voted yes. For this reason the statement by the German European MP and chairman of the leading centre-right European People’s Party, Manfred Weber, that Europe is “based on solidarity, not a club of egoists” looks highly paradoxical, especially after what it is happening to Greece.

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From Mason’s upcoming new book. Lots of technohappiness.

The End Of Capitalism Has Begun (Paul Mason)

The 2008 crash wiped 13% off global production and 20% off global trade. Global growth became negative – on a scale where anything below +3% is counted as a recession. It produced, in the west, a depression phase longer than in 1929-33, and even now, amid a pallid recovery, has left mainstream economists terrified about the prospect of long-term stagnation. The aftershocks in Europe are tearing the continent apart. The solutions have been austerity plus monetary excess. But they are not working. In the worst-hit countries, the pension system has been destroyed, the retirement age is being hiked to 70, and education is being privatised so that graduates now face a lifetime of high debt. Services are being dismantled and infrastructure projects put on hold.

Even now many people fail to grasp the true meaning of the word “austerity”. Austerity is not eight years of spending cuts, as in the UK, or even the social catastrophe inflicted on Greece. It means driving the wages, social wages and living standards in the west down for decades until they meet those of the middle class in China and India on the way up. Meanwhile in the absence of any alternative model, the conditions for another crisis are being assembled. Real wages have fallen or remained stagnant in Japan, the southern Eurozone, the US and UK. The shadow banking system has been reassembled, and is now bigger than it was in 2008. New rules demanding banks hold more reserves have been watered down or delayed. Meanwhile, flushed with free money, the 1% has got richer.

Neoliberalism, then, has morphed into a system programmed to inflict recurrent catastrophic failures. Worse than that, it has broken the 200-year pattern of industrial capitalism wherein an economic crisis spurs new forms of technological innovation that benefit everybody. That is because neoliberalism was the first economic model in 200 years the upswing of which was premised on the suppression of wages and smashing the social power and resilience of the working class. If we review the take-off periods studied by long-cycle theorists – the 1850s in Europe, the 1900s and 1950s across the globe – it was the strength of organised labour that forced entrepreneurs and corporations to stop trying to revive outdated business models through wage cuts, and to innovate their way to a new form of capitalism.

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“This El Niño hasn’t peaked yet, but by some measures it’s already the most extreme ever recorded for this time of year and could lead 2015 to break even more records than last year.”

The Freakish Year in Broken Climate Records (Bloomberg)

The annual State of the Climate report is out, and it’s ugly. Record heat, record sea levels, more hot days and fewer cool nights, surging cyclones, unprecedented pollution, and rapidly diminishing glaciers.
The U.S. National Oceanic and Atmospheric Administration (NOAA) issues a report each year compiling the latest data gathered by 413 scientists from around the world. It’s 288 pages, but we’ll save you some time. Here’s a review, in six charts, of some of the climate highlights from 2014.

1. Temperatures set a new record It’s getting hot out there. Four independent data sets show that last year was the hottest in 135 years of modern record keeping. The map above shows temperature departure from the norm. The eastern half of North America was one of the few cool spots on the planet.

2. Sea levels also surge to a record The global mean sea level continued to rise, keeping pace with a trend of 3.2 millimeters per year over the last two decades. The global satellite record goes back only to 1993, but the trend is clear and consistent. Rising tides are one of the most physically destructive aspects of climate change. Eight of the world’s 10 largest cities are near a coast, and 40 % of the U.S. population lives in coastal areas, where the risk of flooding and erosion continues to rise.

3. Glaciers retreat for the 31st consecutive year Data from more than three dozen mountain glaciers show that 2014 was the 31st straight year of glacier ice loss worldwide. The consistent retreat of glaciers is considered one of the clearest signals of global warming. Most alarming: The rate of loss is accelerating over time.

4. There are more hot days and fewer cool nights Climate change doesn’t just increase the average temperature—it also increases the extremes. The chart above shows when daily high temperatures max out above the 90th %ile and nightly lows fall below the lowest 10th %ile. The measures were near their global records last year, and the trend is consistently miserable.

5. Record greenhouse gases fill the atmosphere By burning fossil fuels, humans have cranked up concentrations of carbon dioxide in the atmosphere by more than 40 % since the Industrial Revolution. Carbon dioxide, the most important greenhouse gas, reached a concentration of 400 parts per million for the first time in May 2013. Soon we’ll stop seeing concentrations that low ever again.
The data shown are from the Mauna Loa Observatory in Hawaii. Data collection was started there by C. David Keeling of the Scripps Institution of Oceanography in March 1958. This chart is commonly referred to as the Keeling curve.

6. The oceans absorb crazy amounts of heat The oceans store and release heat on a massive scale. Over shorter spans of years to decades, ocean temperatures naturally fluctuate from climate patterns like El Niño and what’s known as the Pacific Decadal Oscillation. Longer term, oceans are absorbing even more global warming than the surface of the planet, contributing to rising seas, melting glaciers, and dying coral reefs and fish populations. In 2015 the world has moved into an El Niño warming pattern in the Pacific Ocean. El Niño phases release some of the ocean’s stored heat into the atmosphere, causing weather shifts around the world. This El Niño hasn’t peaked yet, but by some measures it’s already the most extreme ever recorded for this time of year and could lead 2015 to break even more records than last year.

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Jun 302015
 
 June 30, 2015  Posted by at 10:32 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


G. G. Bain The new Queensboro (59th Street) Bridge over the East River, NYC 1909

Who Will Dare Say Out Loud ‘Emperor Has No Clothes’? (Irish Times)
A New Mode of Warfare (Michael Hudson)
Greece Threatens Top Court Action To Block Grexit (AEP)
Alexis Tsipras Must Be Stopped: The Underlying Message Of Europe’s Leaders (G.)
Where Is My European Union? (Alex Andreou)
Milton Friedman Predicted Euro Would Be A Disaster (Vox)
The Awesome Gratuitousness of the Greek Crisis (Krugman)
Krugman’s Right: The Euro Was The Original Mistake, Vote No (Tim Worstall)
Stiglitz: Troika Caused Greek Recession, Has “Criminial Responsibility” (Time)
Europe’s Attack On Greek Democracy (Joseph Stiglitz)
As Crisis Deepens, Eurozone Critics Are Vocal (WSJ)
Europe’s Dream Is Dying In Greece (Gideon Rachman)
Will Syriza’s Last Desperate Gamble Pay Off? (Paul Mason)
A Fight Between The Greeks And Europe’s Cruel Capitalism (Chakrabortty)
A European Tyranny? (Jacques Sapir)
The Road To Grexit And Beyond (Wolfgang Münchau)
Greek BofA Strategist Sees Humanitarian Disaster Looming (Bloomberg)
Puerto Rico Has No Easy Path Out of Debt Crisis (WSJ)
China’s Stocks Post Biggest Gain Since 2009 as Volatility Soars (Bloomberg)

“The Pride of Europe”, just another story.

Who Will Dare Say Out Loud ‘Emperor Has No Clothes’? (Irish Times)

In a normal democracy, urgent questions are asked when the prime minister says things that are wildly untrue. Was he lying or deluded? Which of these possibilities is more alarming? If he was lying, had he never heard of Google? If he genuinely didn’t know what the Government has been up to, why is he in government? But we don’t bother to ask these questions about St Enda’s extraordinary epistle to the Athenians last week, when he urged Greece to follow Ireland : “in Ireland’s case we did not increase income tax; we did not increase VAT; we did not increase PRSI”. Each of these claims is flatly wrong: all three taxes were very substantially increased, both by the present and previous governments But this truth is utterly irrelevant. Why? Because we all know that the Taoiseach wasn’t making a statement about reality.

He was telling a story. At some point in our lives – usually when we’re three or four – we all ask the question: “Daddy, did this really happen or is it a makey-up story?” And once we know which is which, we’re okay with it. And by now, we’re more or less okay with the fact that Ireland’s primary presence on the European stage is as a makey-up story. We don’t live in a country; we live in a narrative, a tale with no more truth content than Cinderella and considerably less than “The Emperor’s New Clothes”. Our current story is called, according to the Minister for Foreign Affairs Charlie Flanagan, “the pride of Europe”. Of course this doesn’t mean that Europe is proud that we’ve almost doubled consistent child poverty, or that we keep centenarians for days on hospital trollies or that basic services like clinics for sufferers of rheumatic diseases are simply disappearing or that we’ve been left with unpayable public debt.

It surely doesn’t mean that Europe is proud that little Ireland was forced to bear the cost of a bank bailout put last week by Patrick Honohan, governor of the Central Bank, at €100 billion and rising. At the level of reality, it doesn’t actually mean anything at all. But that doesn’t mean that it’s a harmless fiction. “The Pride of Europe” is a makey-up story that is intended to take the place of the realities it displaces. It’s not a stand-alone narrative. It has an evil twin: Greece. It belongs to a particular genre of fiction: the morality tale. Ireland is the pride of Europe because it is the anti-Greece. We are good because we play along with the bigger stories of the euro zone crisis. Greece is evil because it stopped doing so.

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Nice take: “By going through the sham negotiations with The Institutions, Syriza gave Greeks enough time to protect what savings and cash they had..”

A New Mode of Warfare (Michael Hudson)

By going through the sham negotiations with The Institutions, Syriza gave Greeks enough time to protect what savings and cash they had – by converting these bank deposits into euro notes, automobiles and “hard assets” (even boats). Businesses borrowed from local banks where they could, and moved their money into eurozone banks or even better, into dollar and sterling assets. Their intention is to pay back the banks in depreciated drachma, pocketing a 30% capital gain. What commentators miss is that Syriza (at least its left) wants to be transformative. It wants to free Greece from the post-military oligarchy that evades taxes and monopolizes the economy. And it wants to transform Europe, away from ECB austerity to create a real central bank. In the process, it demands a clean slate of past bad debts.

It wants to reject the IMF’s austerity philosophy and refusal to take responsibility for its bad 2010-12 bailout. This larger, transformative picture is at the center of Syriza-left plans. I’m in Germany now, and have heard from Germans that the Greeks are lazy and don’t pay taxes. There is little recognition that what they call “the Greeks” are really the oligarchs. They have gained control of the old coalition Pasok/New Democracy parties, avoided paying taxes, avoided being prosecuted (New Democracy refused to act on the “Lagarde List” of tax evaders with nearly €50 billion in Swiss bank accounts), orchestrated insider dealings to privatize infrastructure at corrupt prices, and used their banks as vehicles for capital flight and insider lending. This has turned the banks into vehicles for the oligarchy.

They are not public institutions serving the economy, but have starved Greek business for credit. So one casualty apart from the credibility of the eurozone, the ECB and the IMF will be these banks. Syriza is positioning itself to provide a public option – public banks that will promote the economy, and a national Treasury that will spend government money INTO the economy, not drain it to pay the Troika for having bailed out French and other banks back in 2010-1.

The European popular press is as bad as the U.S. press in describing matters. It warns of “hyperinflation” if a central bank monetizes as much as one euro of government spending in the way that the U.S. Fed does, or the bank of England or any other real central bank. The reality is that nearly all hyperinflations stem from a collapse of foreign exchange as a result of having to pay debt service. That was what caused Germany’s hyperinflation in the 1920s, not domestic German spending. It is what caused the Argentinean and other Latin American hyperinflations in the 1980s, and Chile’s hyperinflation earlier.

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Might have to try The Hague.

Greece Threatens Top Court Action To Block Grexit (AEP)

Greece has threatened to seek a court injunction against the EU institutions, both to block the country’s expulsion from the euro and to halt asphyxiation of the banking system. “The Greek government will make use of all our legal rights,” said the finance minister, Yanis Varoufakis. “We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable,“ he told the Telegraph. The defiant stand came as Europe’s major powers warned in the bluntest terms that Greece will be forced out of monetary union if voters reject austerity demands in a shock referendum on Sunday.

“What is at stake is whether or not Greeks want to stay in the eurozone or want to take the risk of leaving,” said French president Francois Hollande. Sigmar Gabriel, Germany’s vice-chancellor and Social Democrat leader, said the Greek people should have no illusions about the fateful choice before them. “It must be crystal clear what is at stake. At the core, it is a yes or no to remaining in the eurozone,” he said. Chancellor Angela Merkel – standing next to him after an emergency meeting of party leaders – was more oblique, but the message was much the same. She praised hard-liners in her own party and insisted that the eurozone cannot yield to any one country. “If principles are not upheld, the euro will fail,” she said.

The refusal to hold out an olive branch to Greece more or less guarantees that it will not repay a €1.6bn loan to the IMF on Tuesday, potentially setting off a domino effect of cross-default clauses and the biggest sovereign bankruptcy in history. Any request for an injunction against EU bodies at the European Court would be an unprecedented development, further complicating the crisis. Greek officials said they are seriously considering suing the ECB itself for freezing emergency liquidity for the Greek banks at €89bn. It turned down a request from Athens for a €6bn increase to keep pace with deposit flight. This effectively pulls the plug on the Greek banking system. Syriza claims that this is a prima facie breach of the ECB’s legal duty to maintain financial stability.

“How can they justify setting off a run on the Greek banking system?” said one official. Mr Varoufakis said Greece has enough liquidity to keep going until the referendum but acknowledged that capital controls introduced over the weekend were making life difficult for Greek companies. Money is being rationed by an emergency payments committee made up of the key agencies and the banks. “We are having to prioritize spending,” he said. The one-week closure of the Greek banks and the drastic escalation of the crisis over the weekend caught investors by surprise. Most had assumed that a deal was in the works.

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The mind of a psychopath.

Alexis Tsipras Must Be Stopped: The Underlying Message Of Europe’s Leaders (G.)

One day before Greece’s bailout ends and the country’s financial lifeline melts away, Europe’s big guns have lined up one after another to tell the Greeks unequivocally that voting no in Sunday’s referendum means saying goodbye to the euro. There was no mistaking the gravity of the situation now facing both Greece and Europe on Monday. Leaders were by turns ashen-faced, resigned, desperate and pleading with Athens to think again and pull back from the abyss. There were also bitter attacks on Alexis Tsipras, the young Greek prime minister whose brinkmanship has gone further than anyone believed possible and left the eurozone’s leaders reeling. One measure of the seriousness of the situation could be gleaned from the leaders’ schedules.

In Berlin, Brussels, Paris and London, a chancellor, two presidents and a prime minister convened various meetings of cabinet, party leaders and top officials devoted solely to Greece. The French president, François Hollande, was to the fore. “It’s the Greek people’s right to say what they want their future to be,” he said. “It’s about whether the Greeks want to stay in the eurozone or take the risk of leaving.” Athens insists that this is not what is at stake in the highly complicated question the Greek government has drafted for the referendum, but Berlin, Paris and Brussels made plain that the 5 July vote will mean either staying in the euro on their tough terms or returning to the drachma.

In what was arguably the biggest speech of his career, the president of the European commission, Jean-Claude Juncker, appeared before a packed press hall in Brussels against a giant backdrop of the Greek and EU flags. He was impassioned, bitter and disingenuous in appealing to the Greek people to vote yes to the euro and his bailout terms, arguing that he and the creditors – rather than the Syriza government – had the best interests of Greeks at heart. Tsipras had lied to his people, deceived and betrayed Europe’s negotiators and distorted the bailout terms that were shredded when the negotiations collapsed and the referendum was called, he said.

“I feel betrayed. The Greek people are very close to my heart. I know their hardship … they have to know the truth,” he said. “I’d like to ask the Greek people to vote yes … no would mean that Greece is saying no to Europe.” In a country where an estimated 11,000 people have killed themselves during the hardship wrought by austerity, Juncker offered unfortunate advice. “I say to the Greeks, don’t commit suicide because you’re afraid of dying,” he said.

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Great piece.

Where Is My European Union? (Alex Andreou)

Last winter, I stood outside the Opera House in the centre of Athens looking at the posters in the window. I was approached by a well-dressed and immaculately groomed elderly lady. I moved to the side. I thought she wanted to pass. She didn’t. She asked me for a few euros because she was hungry. I took her to dinner and, in generous and unsolicited exchange, she told me her story. Her name was Magda and she was in her mid-seventies. She had worked as a teacher all her life. Her husband had been a college professor and died “mercifully long before we were reduced to this state”, as she put it. They paid their tax, national insurance and pension contributions straight out of the salary, like most people.

They never cheated the state. They never took risks. They saved. They lived modestly in a two bedroom flat. In the first year of the crisis her widow’s pension top-up stopped. In the second and third her own pension was slashed in half. Downsizing was not an option – house prices had collapsed and there were no buyers. In the third year things got worse. “First, I sold my jewellery. Except this ring”, she said, stroking her wedding ring with her thumb. “Then, I sold the pictures and rugs. Then the good crockery and silver. Then most of the furniture. Now there is nothing left that anyone wants. Last month the super came and removed the radiators from my flat, because I hadn’t paid for communal fuel in so long. I feel so ashamed.”

I don’t know why this encounter should have shocked me so deeply. Poverty and hunger is everywhere in Athens. Magda’s story is replicated thousands of times across Greece. It is certainly not because one life is worth more than another. And yet there is something peculiarly discordant and irreconcilable about the “nouveau pauvres”, just like like there is about the nouveau riches. Most likely it shocked me because I kept thinking how much she reminded me of my mother. And, still, I don’t know whether voting “yes” or “no” will make life better or worse for her. I don’t know what Magda would vote either. I can only guess. What I do know, is that the encounter was the beginning of the end of my love affair with the European project. Because, quite simply, it is no longer my European Union.

It is Amazon’s and Starbucks’. It is the politicians’ and the IMF’s. But it is not mine. If belonging to the largest and richest trading bloc in the world cannot provide dinner for a retired teacher like her, it has no reason to exist. If a European Union which produces €28,000 of annual GDP for every single one of its citizens cannot provide a safety net for her, then it is profoundly wicked. If this is not a union of partners, but a gang of big players and small players, who cut the weakest loose at the first sign of trouble, then it is nothing. Each one of us will have to engage in an internal battle before Sunday’s referendum. I will be thinking of you, Magda, when I vote. It seems as honest a basis to make a decision as any.

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“Europe’s common market exemplifies a situation that is unfavorable to a common currency…”

Milton Friedman Predicted Euro Would Be A Disaster (Vox)

Milton Friedman might be best known today for his free-market political views. But some of his most important contributions to economics were in monetary policy. He explained the high inflation rates of the 1970s, and he was also an early and influential advocate of the system of floating exchange rates that we have today. So European policymakers would have done well to pay attention in 1997 when Friedman predicted that the euro would be a disaster. Eighteen years later, with Greece on the verge of a financial meltdown, his analysis looks prophetic:

Europe’s common market exemplifies a situation that is unfavorable to a common currency. It is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of “Europe.” Despite being a free trade area, goods move less freely than in the United States, and so does capital.

The European Commission based in Brussels, indeed, spends a small fraction of the total spent by governments in the member countries. They, not the European Union’s bureaucracies, are the important political entities. Moreover, regulation of industrial and employment practices is more extensive than in the United States, and differs far more from country to country than from American state to American state. As a result, wages and prices in Europe are more rigid, and labor less mobile. In those circumstances, flexible exchange rates provide an extremely useful adjustment mechanism.

What Friedman means here is that if Greece still had the drachma, it could deal with its financial difficulties by devaluing the currency. A cheaper drachma would make Greek goods more attractive to foreigners, boosting exports and creating jobs. And a bit of inflation in Greece would help ease the country’s debt burden — not an ideal outcome, but better than the yearslong depression the country has suffered since the 2008 financial crisis. It’s much harder for an unemployed man in Greece to move to get a job in Germany than it is for somebody who loses his job in Pennsylvania to find work in Texas. So Greece’s unemployment rate has stayed disastrously high, even as other eurozone nations have enjoyed a robust recovery. Friedman concluded that the euro experiment would backfire:

The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.

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Now take that story to Washington, and tell them to wake up.

The Awesome Gratuitousness of the Greek Crisis (Krugman)

Barry Eichengreen asks himself why his influential analysis, suggesting that the euro was irreversible now appears wrong. Surely in a direct, mechanical sense what we’re seeing is the process I warned about five years ago: Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling. But doesn’t the ultimate cause lie in wild irresponsibility on the part of the Greek government? I’ve been looking back at the numbers, readily available from the IMF, and what strikes me is how relatively mild Greek fiscal problems looked on the eve of crisis.

In 2007, Greece had public debt of slightly more than 100% of GDP — high, but not out of line with levels that many countries including, for example, the UK have carried for decades and even generations at a stretch. It had a budget deficit of about 7% of GDP. If we think that normal times involve 2% growth and 2% inflation, a deficit of 4% of GDP would be consistent with a stable debt/GDP ratio; so the fiscal gap was around 3 points, not trivial but hardly something that should have been impossible to close. Now, the IMF says that the structural deficit was much larger — but this reflects its estimate that the Greek economy was operating 10% above capacity, which I don’t believe for a minute.

(The problem here is the way standard methods for estimating potential output cause any large slump to propagate back into a reinterpretation of history, interpreting the past as an unsustainable boom.) So yes, Greece was overspending, but not by all that much. It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170% of GDP despite savage austerity? The euro straitjacket, plus inadequately expansionary monetary policy within the eurozone, are the obvious culprits. But that, surely, is the deep question here. If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable.

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The EU was the original mistake.

Krugman’s Right: The Euro Was The Original Mistake, Vote No (Tim Worstall)

It’s not exactly a secret that Paul Krugman hasn’t been a great fan of the euro over the years. In fact, most economists haven’t been great fans of it: it has always been the political classes urging it on. So, the question now becomes, with the situation in Greece, what should be done next? And the answer is almost certainly to encourage a no vote at the upcoming referendum. That would seal the idea that Greece just will not continue within the eurozone and at that point we would almost certainly see signs of life in the Greek economy once again. And that is actually the aim of whatever policy is followed now. The heck with European unity and all that jazz: the task is to get some growth back into that Greek economy, get people back to work. Seriously, a 50% youth unemployment rate is evidence of little else than all out economic war. So, let’s stop doing that and go and do something useful and sensible instead. Here’s the opening of Krugman’s column:

It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.

Yep, entirely so, and many economists (and others, like myself) have been saying this all along. It doesn’t and didn’t matter how much people praised this idea of ever more Europe, the currency, as designed, was simply not going to work over the area it was planned to introduce it over. And it’s worth noting that there really were many economists who were saying this. Here’s a quite gorgeous paper from the European Commission. It’s from 2009, and it’s a look back at what American economists were saying about the euro from 1989 to 2002. The tone is most fun: they’re dancing along, tooting their horns, shouting that well, the Yankees didn’t think it would work! And yet here we are in 2009 and we’ve still got our lovely euro!

The euro: It can’t happen, It’s a bad idea, It won’t last.
– US economists on the EMU, 1989 – 2002

Schadenfreude on those celebrating their own schadenfreude is so much fun, isn’t it? We should note that Krugman was on the right side in all of this. And he also asks the right question: well, what should be done next?

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Now make that stick.

Stiglitz: Troika Caused Greek Recession, Has “Criminial Responsibility” (Time)

A few years ago, when Greece was still at the start of its slide into an economic depression, the Nobel prize-winning economist Joseph Stiglitz remembers discussing the crisis with Greek officials. What they wanted was a stimulus package to boost growth and create jobs, and Stiglitz, who had just produced an influential report for the United Nations on how to deal with the global financial crisis, agreed that this would be the best way forward. Instead, Greece’s foreign creditors imposed a strict program of austerity. The Greek economy has shrunk by about 25% since 2010. The cost-cutting was an enormous mistake, Stiglitz says, and it’s time for the creditors to admit it.

“They have criminal responsibility,” he says of the so-called troika of financial institutions that bailed out the Greek economy in 2010 “It’s a kind of criminal responsibility for causing a major recession,” Stiglitz tells TIME in a phone interview. Along with a growing number of the world’s most influential economists, Stiglitz has begun to urge the troika to forgive Greece’s debt – estimated to be worth close to $300 billion in bailouts – and to offer the stimulus money that two successive Greek governments have been requesting. Failure to do so, Stiglitz argues, would not only worsen the recession in Greece – already deeper and more prolonged than the Great Depression in the U.S. – it would also wreck the credibility of Europe’s common currency, the euro, and put the global economy at risk of contagion.

So far Greece’s creditors have downplayed those risks. In recent years they have repeatedly insisted that European banks and global markets do not face any serious fallout from Greece abandoning the euro, as they have had plenty of time to insulate themselves from such an outcome. But Stiglitz, who served as the chief economist of the World Bank from 1997 to 2000, says no such firewall of protection can exist in a globalized economy, where the connections between events and institutions are often impossible to predict. “We don’t know all the linkings,” he says.

Many countries in Eastern Europe, for instance, are still heavily reliant on Greek banks, and if those banks collapse the European Union faces the risk of a chain reaction of financial turmoil that could easily spread to the rest of the global economy. “There is a lack of transparency in financial markets that makes it impossible to know exactly what the consequences are,” says Stiglitz. “Anybody who says they do obviously doesn’t know what they’re talking about.”

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On Europe’s democracy.

Europe’s Attack On Greek Democracy (Joseph Stiglitz)

The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics. Of course, the economics behind the program that the “troika” foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018. Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands. We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies. But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy? In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

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Numbers are rising, but timing is way off.

As Crisis Deepens, Eurozone Critics Are Vocal (WSJ)

With Greece on the brink of leaving the eurozone and global financial markets panicked by that prospect, eurozone policy makers can’t have expected favorable reviews Monday for their recent efforts. So they won’t have been surprised as a queue of academics formed to detail their failings. The ECB’s decision not to expand the emergency liquidity assistance given to Greek banks came in for particularly harsh criticism, as long-time critics of the policies pursued by the Troika in which it is joined by the IMF and EC lined up to claim vindication. The most stinging attack on the ECB came from Charles Wyplosz, professor of international economics at the Graduate Institute, Geneva and a respected commentator on eurozone economic policy.

In a posting on the VoxEU blog run by the Centre for Economic Policy Research, Mr. Wyplosz argued the ECB had acted from political motives, and not for the first time. “No other central bank in the world tells its government what reforms it should conduct, nor how sharp should fiscal consolidating be,” he wrote. Mr. Wyplosz argued that one of the ECB’s key roles is to act as a lender of last resort to the eurozone’s banks, and in failing to do that it was “pushing Greece out of the eurozone.” “Politicians may debate about the wisdom of making Greece leave,” he wrote. “As non-elected officials, the people who sit on the Governing Board of the Eurosystem have no such mandate.”

Writing for Foreign Policy, the London School of Economics’ Philippe Legrain also saw the ECB’s decision as a “political move” in the service of “brutal power politics” that seeks to bypass democracy. “There is a chance that a resounding No vote in the referendum will bring the creditors to their senses,” Mr. Legrain wrote. “But if it doesn’t, default on the 3.5 billion euros due to the ECB on July 20 and leaving the euro is better than debt bondage.” Some U.S. observers joined the fray, penning unflattering assessments of the Troika’s track record. Writing for The Conversation, the University of California’s Barry Eichengreen was criticial of the Greek government’s decision to call a referendum as “a transparent effort to evade responsibility.”

But he had a harsher judgement to deliver. “Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF,” Mr. Eichengreen wrote, arguing their key mistake was to deny a debt restructuring in 2010, and once again earlier this year.

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Already has.

Europe’s Dream Is Dying In Greece (Gideon Rachman)

The shuttered banks of Greece represent a profound failure for the EU. The current crisis is not just a reflection of the failings of the modern Greek state, it is also about the failure of a European dream of unity, peace and prosperity. Over the past 30 years Europe has embraced its own version of the “end of history”. It became known as the European Union. The idea was that European nations could consign the tragedies of war, fascism and occupation to the past. By joining the EU, they could jointly embrace a better future based on democracy, the rule of law and the repudiation of nationalism. As Lord Patten, a former EU commissioner, once boasted, the success of the union ensured that Europeans now spent their time “arguing about fish quotas or budgets, rather than murdering one another”.

When the Greek colonels were overthrown in 1974, Greece became the pioneer of a new model for Europe — in which the restoration of democracy at a national level was secured by a simultaneous application to join the European Economic Community (as it then was).
Greece became the 10th member of the European club in 1981. Its early membership of an EU that now numbers 28 countries is a rebuke to those who now claim it has always been a peripheral member. The model first established in Greece — democratic consolidation, secured by European integration — was rolled out across the continent over the next three decades. Spain and Portugal, which had also cast off authoritarian regimes in the 1970s, joined the EEC in 1986.

After the fall of the Berlin Wall, almost all the countries of the former Soviet bloc followed the Greek model of linking democratic change at home to a successful application to join the EU. For the EU itself, Greek-style enlargement became its most powerful tool for spreading stability and democracy across the continent. As one Polish politician put it to me shortly before his country joined the EU: “Imagine there is a big river running through Europe. On one side is Moscow. On the other side is Brussels. We know which side of the river we need to be on.” That powerful idea — that the EU represented good government and secure democracy — has continued to resonate in modern Europe. It is why Ukrainian demonstrators were waving the EU flag when they overthrew the corrupt government of Viktor Yanukovich in 2014.

The danger now is that, just as Greece was once a trailblazer in linking a democratic transition to the European project, so it may become an emblem of a new and dangerous process: the disintegration of the EU. The current crisis could easily lead to the country leaving the euro and eventually the union itself. That would undermine the fundamental EU proposition: that joining the European club is the best guarantee of future prosperity and stability. Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity.

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Mason’s growing.

Will Syriza’s Last Desperate Gamble Pay Off? (Paul Mason)

But Syriza is different. Syriza is a coalition whose colours are red for socialism, green for ecology and purple for feminism. But it is primarily red. It was born out of Eurocommunism – when the communist parties of the west declared loyalty to parliamentary democracy instead of Moscow. Its most influential activists are aged 50 and above: people who have read all three volumes of Karl Marx’s Capital, plus the Grundrisse, Theories of Surplus Value and Friedrich Engels’ Anti-Dühring. A lot of them are MPs now, or special advisers: you’ll find them in greying huddles in their old haunts – the radical bars and cafes of Exarchia and Plaka. How this generation of Greek leftwingers broke out of isolation is of more than academic interest.

They have managed – for the first time in modern history – to form a government that defied the global finance system, and to do so with flair. Their strength was that they understood the significance of the youth revolts of 2008 and 2011. Some pitched their own tents in Syntagma Square and were tear-gassed out of it. But in the process, the party built something more official and resilient. Their weakness, it turns out, starts with Nicos Poulantzas. Poulantzas was a Greek intellectual of the new left who famously clashed with Ed Miliband’s father, Ralph, in 1969 over the nature of the capitalist state. Miliband said the state was “capitalist” because personally controlled by the business elite. Poulantzas said the state was structurally capitalist – independent of the will of individuals.

Poulantzas evolved a dual strategy for the Greek left in the 1970s: first, to encircle the state with social movements, which were not to be controlled by any party but allowed to become expressions of popular democracy. And at the same time, to enter the state, democratise it and use it to pursue social justice. Poulantzas killed himself in 1979, but his ideas guided the precursor organisation to Syriza. Not many people remember now, but the party’s predecessor, Synaspismos, joined a short-lived coalition government with the conservatives in 1988, and a national government thereafter. In the runup to its election victory, Syriza got a chance to execute the Poulantzas strategy of the march through the state: it won the Euro elections and the vital prefecture of Attica, where its candidate was protest veteran Rena Dourou. Then it won state power – but that has turned out differently.

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“.. large swaths of the continent have fallen under the rule of institutions that find it almost impossible to deal with democracy.”

A Fight Between The Greeks And Europe’s Cruel Capitalism (Chakrabortty)

The incompatibles here are about as big as you get: the Greek people on one side, busted economics on the other. The irony is that if anyone was going to marry those incompatibles it was Tsipras. Despite it all, Syriza remains committed to the single currency, in a country that before the crisis ranked as among the most euro-enthusiastic of all the members. As in other European countries where national poverty is still recalled by grandparents, the Greek elite treats membership of the single currency almost as a badge of first-world status. When he was still an academic, Yanis Varoufakis, the finance minister, spent years figuring out ways to make European monetary union viable.

Whatever insults the northern European press might hurl, Syriza’s leading policymakers are euro-believers who have been forced into disillusionment. Last week the government offered a compromise deal to Greece’s creditors. It was “austerian” and “recessionary” – those words came from Varoufakis, the man who wrote it. Yet it was not austere enough for the creditors, who reportedly quibbled over Syriza’s plans to tax the rich. That was the final rupture. Less idealistic people than Tsipras and Varoufakis might have guessed at this outcome. Since the euro crisis broke out in 2010, large swaths of the continent have fallen under the rule of institutions that find it almost impossible to deal with democracy.

Most important are the ECB– unelected and almost totally unaccountable – and Juncker’s European commission: neither directly nor even indirectly answerable to the Greeks, Portuguese, Irish and Spanish who have lost jobs, wages and benefits at its command. The informal Eurogroup meeting of eurozone finance ministers is about as close to democracy as the system gets. As Fritz Scharpf, former head of the Max Planck institute for the Study of Societies in Cologne, puts it: “The regime that has been established to rescue an over-extended and ill-designed monetary union is in fact jeopardising … democratic self-government in Europe.”

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Useful, but a bit all over the place. Translations get worse.

A European Tyranny? (Jacques Sapir)

The reaction of the Eurogroup which convened in Brussels on Saturday has consisted indeed in an action joining the most glaring illegality with the will to impose one’s views onto a sovereign State. In taking the decision to hold a reunion in the absence of a representative of the Greek state the Eurogroup has decided to exclude de facto Greece from the Euro. This constitutes evidently an abuse of power. We must here be reminded of several points which are not without consequences from the standpoint of the law as well as from the one of politics.

• There is no procedure presently in existence allowing to exclude a country from the Economic and Monetary Union (the real name of the « Eurozone »). If there can be separation, it can only occur in a common accord and on a friendly basis.

• The Eurogroup has no legal existence. It is only a « club » operating under cover of the European Commission and the European Council. This means that if the Eurogroup has committed an illegal action – and this seems to be the case – the responsibility for it is incumbent upon both of these institutions. The Greek government would therefore have grounds to attack the Commission and the Council both before the European Court of Justice as well as before the International Court in The Hague. Indeed, the European Union is at base an international organization. The rule in any international organization is the one of unanimity. True, the Treaty of Lisbon has foreseen mechanisms of a qualified majority, but these mechanisms do not apply to the Euro nor to the questions of fundamental relationships between the states.

• The coup de force – for this is what it is – which has been committed the Eurogroup, does not concern Greece alone. Other member countries of the European Union, think of Great Britain or Austria, could also sue before the European as well as the International court the de facto decision taken by the Eurogroup. In effect, the European Union rests on rules of law which apply to all. Any decision to violate these rules against one particular country constitutes a threat against all the members of the European Union.

We must therefore be clear. The decision taken by the Eurogroup could well signify, in time, the death of the EU. Either the European leaders, taking measure of the abuse of power which has been perpetrated, will decide to annul it or, if they persevere in this direction, they must expect an insurgency of the peoples, but also of the leaders of some of the states against the EU. One cannot see well how states which have just recovered their sovereignty, such as Hungary, the Czech Republic or Slovakia, could accept such practices.

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Parallell currency seems certain. How about today?

The Road To Grexit And Beyond (Wolfgang Münchau)

When a shock you predicted actually happens, it still feels like a shock. Alexis Tsipras was right to walk away. But it was a momentous decision nevertheless when the Greek prime minister rejected an offer that would have allowed it to pay its debt to the IMF and the ECB. What I am struggling to understand is why he suddenly decided to call a referendum on whether to accept a bailout for next Sunday. There might be some super-smart strategy behind this beyond my capacity to comprehend. The problem with the referendum is that the offer on which the Greek people are asked to vote is no longer on the table. And the programme to which it relates expires tomorrow at midnight. Why should the Greeks vote Yes to a package the creditors themselves no longer support?

By far the biggest tactical error committed over the weekend, however, was the rejection by eurozone finance ministers of a five-day extension of the Greek bailout programme to beyond the referendum. With that decision, they foreclosed the only way to keep the show on the road. They have unwittingly strengthened the political argument of the Greek prime minister. He will now be able to say: first the creditors wanted to destroy the Greek economy with their austerity programme. And now they are hoping to destroy Greek democracy. To see where all this might be going, it is instructive to go through the various scenarios, eliminate the implausible and see what is left. If the Greek referendum on Sunday goes ahead and concludes in a No vote, Grexit probably beckons.

If the result is a Yes, there will be initial confusion. A vote to accept the bailout may be interpreted as a vote in favour of remaining in the eurozone. In that case I would expect the Greek government — whoever that may be after a Yes vote — to maintain the regime of capital controls and introduce a parallel currency, denominated in euros. A parallel currency scenario could split into three directions: Grexit within a short time; a regime where Greece defaults but maintains the capital controls indefinitely; and a scheme where the controls are eventually lifted and Greece remains in the eurozone. The latter would require a resolution for the Greek banks. That would be the ideal scenario but it is hard to do. Since the eurozone lacks a true banking union, the only route to bank recapitalisation would be through another round of negotiations between Greece and its creditors.

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Big risk.

Greek BofA Strategist Sees Humanitarian Disaster Looming (Bloomberg)

Athanasios Vamvakidis, Bank of America’s head of European currency strategy, is in a difficult spot: He advises clients from London on how to make money – or at least minimize losses – as his homeland unravels. His view: Greek banks will soon exhaust cash supplies, leading to shortages of imports including medicine unless the ECB expands assistance, he said in an interview. A July 5 referendum on austerity measures probably will usher in August elections and a potential new government. Then “the earliest Greece will get any new funding is September or later – in the meantime, the economy will collapse,” Vamvakidis said. “On a personal level, this is a very bad situation. And the worst is still ahead of us.”

To prevent a crisis, the ECB will have to boost the Emergency Liquidity Assistance program long beforehand, continuing to ensure Greek lenders have enough cash on hand, the strategist said. “Otherwise, you’ll have a humanitarian disaster,” he said. “People will start to be affected when they can’t withdraw their paychecks, when you start to see shortages because Greece imports many of its products. For instance medications are imported, some food items are imported.” Greece imposed emergency capital controls for its financial system early Monday, closing banks and financial markets after the announcement of the referendum fueled concern the country will exit the euro. Over the weekend, citizens lined up at ATMs to withdraw savings. They are now limited to €60 in daily withdrawals.

The referendum probably will result in a “yes” vote to proposed reforms as most Greeks want to remain part of the euro, Vamvakidis said. A “no” vote could result in bank failures as the ECB closes its emergency liquidity facility, he said. Without more ECB help, “banks will run out of money soon,” he said. “Within the limits, we will need more euro notes in Greece.”

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Greece 2 or Detroit 2?

Puerto Rico Has No Easy Path Out of Debt Crisis (WSJ)

Its economy has been mired in recession for years. The public is fed up with austerity. Investors want big premiums to lend to a government deep in debt, with no ability to devalue its currency. Greece? Try Puerto Rico, the U.S. commonwealth whose long-simmering debt crisis—its $72 billion debt equals nearly 70% of its economic output, far more than any U.S. state—is about to come to a boil. The commonwealth’s governor, Alejandro García Padilla, is expected to lay out in a speech on Monday next steps that could include calls for significant concessions from the island’s creditors, according to people familiar with the matter. The change in course for the central government comes months after it commissioned former IMF officials to draft a long-term plan for the commonwealth’s finances, which is expected to offer a grim assessment.

Credit-rating companies this week expect the island’s electricity provider, which has borrowed $9 billion, to miss a payment to creditors, in what would be one of the largest municipal defaults ever. Things don’t get better after that. Analysts believe the central government will run out of cash as soon as July, which could lead to a government shutdown, employee furloughs and other emergency measures. “This is going to be painful for the next two to three years,” said Rep. Pedro Pierluisi, the island’s Democratic representative in the U.S. House, in an interview. “The government is facing serious cash-flow issues.” Many analysts have concluded the island has more debt than it can afford to repay given its listless economy.

“It’s a Sisyphean task,” said Richard Ravitch, the former New York lieutenant governor who steered New York City’s financial restructuring in the 1970s and is currently advising Detroit. So how did the U.S. end up with its own version of Greece? Puerto Rico’s problems date to the end of the Cold War, when the U.S. began closing military bases on the island, whose residents have American citizenship but don’t pay federal tax on their local income. The expiration of corporate tax breaks in 2006 prompted an exodus of pharmaceutical and other manufacturers, nudging the island into a deep recession. As the economy has worsened, migration to the U.S. mainland has accelerated, further shrinking the tax base. Puerto Rico’s population has fallen 4.7% since 2010 to 3.5 million, a period when the U.S. overall grew 3%.

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Grandmas on quaaludes.

China’s Stocks Post Biggest Gain Since 2009 as Volatility Soars (Bloomberg)

Chinese stocks rallied, sparking the benchmark index’s biggest intraday swing since 1992, on speculation the government will take steps to prevent bear-market losses from deepening. The Shanghai Composite Index rose for the first in four days, jumping 5.5% to 4,277.22 at the close, the most since March 2009. The gauge swung 432 points from the highs and lows, propelling a volatility measure to a seven-year peak. An industry group representing brokerages called on investors and fund managers to take responsibility to stabilize the market after a weekend interest-rate cut failed to stem a rout.

“After the recent correction, investors might think stocks are oversold and hope regulators will introduce further measures to support the market,” said Shen Zhengyang, an analyst at Northeast Securities Co. in Shanghai. “The fund industry association’s remarks on stocks might also have boosted investor confidence.” Speculation is growing that policy makers are preparing support measures after the Shanghai Composite plunged more than 20% from a June 12 peak amid surging valuations and concern record high levels of borrowing to buy stocks were unsustainable.

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Oct 042014
 
 October 4, 2014  Posted by at 1:24 pm Finance Tagged with: , , , , , ,  5 Responses »


John Vachon “Career Girl” New York 1955

Hi, Ilargi here. As per October 3, the Daily Links that used to be in the top space on every page will now become part of a daily separate post, entitled Debt Rattle +date (to be found below where all posts are, at about 8am ET every day), which will also include the quotes from these same links, which used to be below our own daily essays. The latter will now stand on themselves, and also be separate posts. So the only change for you is that to get to the links, you will need to execute one extra click, but then you get everything I read everyday presented in one go.

If you think this is the worst idea ever, or if you think it’s great, please do let me know at ilargi •AT• theautomaticearth •DOT• com. And thanks for your support. Talking of which: our donate box is at the top of the left hand column, below the ad; please donate what you can. This site runs well below the poverty line these days, and that’s neither right nor sustainable. I want to bring back a lot more Nicole Foss here, but she does have to make a living.

Yours, Raúl Ilargi Meijer

King Dollar Rules: Betting On The Buck (CNBC) American Exceptionalism Thrives Amid Struggling Global Economy (Bloomberg)
OPEC Price War Signaled by Saudi Move Risks Deeper Drop (Bloomberg) Record Low Labor Participation Rate, Record High Not In Labor Force (ZH)
ECB’s Treatment Of Ireland And Italy Is A Constitutional Scandal (AEP) Draghi Breathing Life Into Moribund ABS Bond Market (Bloomberg)
How Payday Loans Leave Cash-Strapped Borrowers Unbankable (Bloomberg) Loan Borrowers Pinched as Banks Increase Rates (Bloomberg)
John Lewis Boss Sorry For Calling France ‘Hopeless’ And ‘Finished’ (Guardian) Finished And Hopeless? That’s Just How We Like Things In France (Guardian)
Secret Leveraging of Junk Bonds Revealed in Stock Trade (Bloomberg) When Schoolgirls Dream Of Jihad, Society Has A Problem (Guardian)
Australia’s Investment In Renewable Energy Slumps 70% In One Year (Guardian) Deforestation In West Africa Linked To Ebola Epidemic (Guardian)

The boys don’t sound too convinced yet.

King Dollar Rules: Betting On The Buck (CNBC)

Amid wild fluctuations in stocks and range-bound trading in bonds this week, the U.S. dollar marched ever higher. The currency is set to finish another week stronger, which would mark 12-straight weeks of gains, the longest winning streak ever. And pros say though the move has been sharp, the uptrend is still firmly intact. First, a warning: Buying the dollar is the trade du jour. As the U.S. economy flexes its muscles amid an increasingly uncertain global backdrop, more investors have jumped on the strong dollar bandwagon. Weekly data from the Commodities Futures Trading Commission show hedge funds and other large speculators’ positions have increased substantially in the past few weeks, and the net long dollar bet now stands at $35.81 billion, not far from its its highest ever. Net shorts on the euro and yen grew larger as well. Those crowded trades mean the dollar is vulnerable to a painful drop when momentum turns on any given day and trades unwind. However, it doesn’t change the logic for buying the dollar and the currency’s trajectory.

“As the Fed steps away from ultra-loose policies, the dollar should gain against the chief beneficiaries of those policies, namely emerging market and commodity currencies,” currency strategists led by Kit Juckes at Societe Generale wrote in a note this week. That goes for the dollar against emerging markets’ currencies, too. “The jump in total debt levels in the emerging markets in recent years leaves them vulnerable to rising interest rates and a resurgent dollar,” Juckes wrote. In the third quarter, the dollar index shot up 7%, the biggest gain since the third quarter of 2008, when investors everywhere were scrambling for safe-haven assets as the financial crisis gripped the globe. Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi, found that after a strong quarterly performance, there’s still scope for further gains. “Looking back over the last 20 years, we found that similarly large quarterly gains have tended to be followed by further, although more modest, gains in the following quarter,” Hardman wrote in a note this week.

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If only they didn’t need to trade ….

American Exceptionalism Thrives Amid Struggling Global Economy (Bloomberg)

The U.S. is proving to be an oasis of prosperity in the midst of a troubled world economy. Unemployment dropped to a six-year low of 5.9% in September as payrolls rose by a greater-than-forecast 248,000, a Labor Department report showed yesterday. Other data this week showed U.S. factories had their strongest quarter in more than three years, while exports rose to a record in August. St. Louis-based Macroeconomic Advisers bumped up its estimate of third-quarter growth to 3.3%, from 2.8%, after government data published yesterday showed the U.S. trade deficit shrank in August to its lowest level in seven months. “The internal dynamics of the economy are very strong right now,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, for consultants IHS Inc. “We can withstand a lot of shocks.” U.S. stocks rose with the dollar as the jobs data boosted confidence in the economy. After weakening earlier in the week on concerns about global growth, the Standard & Poor’s 500 Index rose 1.1% to 1,967.9 yesterday in New York.

The Bloomberg Dollar Spot Index climbed to a four-year high. The solid performance by the U.S. contrasts with what’s happening in much of the rest of the world. The euro area’s economy stagnated in the second quarter and is suffering from the softest inflation in five years, while a consumer-tax increase in Japan triggered its biggest economic contraction since 2009. China’s economy, which helped bring advanced economies out of the recession in 2009, this year may undershoot the government’s growth target of about 7.5% amid a property slump and the slowest expansion in factory output in five years. “Matters can be described as American exceptionalism,” said Larry Hatheway, chief economist at UBS AG in London. “The U.S. is the only large economic bloc experiencing an acceleration of growth, preparing for a tightening of monetary policy and enjoying an appreciating currency.”

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Did the Saudis make another deal with Washington, this time to cripple Putin and IS? Remember, they reported a deficit recently.

OPEC Price War Signaled by Saudi Move Risks Deeper Drop (Bloomberg)

Crude oil is poised to extend the biggest slump in more than two years after Saudi Arabia signaled it’s ready for a price war with other OPEC members, according to Commerzbank and Citigroup. Saudi Aramco, the state-run oil producer of the world’s biggest exporter, cut prices on Oct. 1 for all its exports, reducing those for Asia to the lowest level since 2008. The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus, according to Commerzbank. “There is no indication whatsoever that the Saudis are going to put a floor into this market,” Seth Kleinman, head of European energy research at Citigroup in London, said by e-mail.

“Saudi market share in Asia is really under assault. It is a price war. The Saudis will win, but it won’t be painless.” Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 barrels a day to eliminate the supply glut now stemming from the highest U.S. output in three decades, Citigroup and Barclays Plc estimate. While the banks said Saudi Arabia’s strategy may weaken prices in the short-term, they forecast a recovery later. Commerzbank projects Brent will average $105 a barrel in 2015, Citigroup predicts $97.50. Brent for November settlement traded for $93.54 as of 10:07 a.m. local time.

Aramco reduced official selling prices, or OSPs, for all grades of crudes to all regions for November. It lowered the OSP for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest level since December 2008. OSPs are regional adjustments Aramco makes to price formulas to compete against oil from other countries. “OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said in a report yesterday. “We therefore do not expect prices to stabilize until this impression disappears and OPEC returns to coordinated production cuts.”

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These graphs are so damning it’s positively crazy that job numbers still get presented as positive by just about all media.

Record Low Labor Participation Rate, Record High Not In Labor Force (ZH)

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% – the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

And that’s how you get a fresh cycle low in the unemployment rate.

 

So the next time Obama asks you if you are “better off now than 6 years ago” show him this chart of employment to the overall population: it speaks louder than the president ever could.

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As I said repeatedly before. Democracy in Europe is dead. Elect a eurosceptic government and you’ll find out for yourself.

ECB’s Treatment Of Ireland And Italy Is A Constitutional Scandal (AEP)

So the truth comes out at last. The EU/IMF Troika – actually the ECB – compelled the Irish state to take on the vast liabilities of Anglo-Irish and other banks in the white heat of the financial crisis. It threatened to pull the plug on ECB support for the Irish banking system, in breach of its own core duty to act as a lender-of-last resort, unless the Irish taxpayer took the full losses. This protected bondholders from their condign fate, even though these creditors were fully complicit in Ireland’s credit bubble. Indeed, they helped to cause it, along with the ECB’s ultra-loose monetary policy and negative real rates (set for German needs) during the boom. Even the riskiest tranches of junior bank debt were deemed off limits. Working class youths in Cork, Limerick, and Dublin will have to service a very high public debt – currently 124pc of GDP, up from 25pc in 2007 – for a very long time. Patrick Honohan, Ireland’s central bank governor, told a group of foreign journalists in Dublin some time ago that this had occurred.

We knew, but were sworn to silence, forced to bite our tongues every time we had to listen to the usual pack of lies from certain quarters. Now he has spoken out in a new book on the former Irish finance minister, the late Brian Lenihan. Extracts were published in the Irish Independent on Sunday. Those who follow Ireland will already be aware of this, so forgive me for coming to it late. Mr Honohan was in an impossible position in 2010. The ECB could at any time have withheld emergency support, sending the Irish financial system crashing down in flames. Yet the ECB’s terms for a rescue programme were that Ireland protect all creditors. (Many of them British, Dutch, Belgian, and German) “The Troika staff told Brian in categorical terms that burning the bondholders would mean no programme and, accordingly, could not be countenanced,” he said. “For whatever reason, they waited until after this showdown to inform me of this decision, which had apparently been taken at a very high-level teleconference to which no Irish representative was invited.”

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Sounds cute and all, but he’s already been whistled back by the two biggest economies in the eurozone.

Draghi Breathing Life Into Moribund ABS Bond Market (Bloomberg)

For the first time in four years there are signs of life in Europe’s market for asset-backed securities. Mario Draghi’s plan to kick-start growth by buying the securities spurred more than €10 billion ($12.7 billion) of issuance in September. That’s almost double the monthly average for the year, signaling a revival in a market that’s shrunk more than 40% since 2010, according to JPMorgan Chase. The European Central Bank president said yesterday that purchases of asset-backed debt will start before the end of the year and may include notes from the junk-rated nations of Greece and Cyprus. He’s made the revival of the market a top priority because he says it will allow banks to increase lending and boost economic growth. “ABS sales have been pretty low over the past few years so the ECB’s plans could be the jolt the market needs to get started again.” said Gareth Davies, the London-based head of European asset-backed securities research at JPMorgan.

“With all the questions about what it can buy, an obvious area of supply would be the new-issue market, which we expect to become more active.” There are two new deals in the market now, including bonds backed by a loan financing a Westfield Corp. shopping center in London, JPMorgan data show. Even after the surge in transactions over the past month, issuance of €57 billion of asset-backed debt issuance this year is the least since 2009, the data show. Draghi’s plans have cut borrowing costs for issuers of the notes to the lowest level in seven years, according to data compiled by Barclays Plc. The extra yield investors demand to hold Spanish and Italian residential mortgage-backed securities, compared with benchmark rates, fell below 1 percentage point in September, data compiled by JPMorgan show.

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What are we coming to? You pay 10% a week, banks pay 0.1% a year?

How Payday Loans Leave Cash-Strapped Borrowers Unbankable (Bloomberg)

Thousands of Americans exit the banking system after turning to last-resort lenders, according to a study released yesterday by the Pew Charitable Trusts. Of 252 online payday-loan borrowers surveyed by Pew as part of a three-year research project, 22% closed a checking account or had one closed for them. Payday lending is migrating to the Internet as states from New York to California restrict the costly short-term loans, which are secured by a borrower’s next paycheck. The websites charge twice as much on average as payday stores and account for a disproportionate share of consumer complaints about fraudulent charges or harassment by debt collectors, according to Pew. “Abusive practices in the online payday-loan market not only exist but are widespread,” Nick Bourke, director of the Pew project, said in a statement. Pew is releasing the study as the U.S. Consumer Financial Protection Bureau weighs the first federal payday-loan guidelines. Regulators should require lenders to make more affordable loans and disclose the cost clearly, Pew said.

Payday lenders say they provide a valuable service to people who lack access to cheaper forms of credit. The Online Lenders Alliance, a lobbying group, said in a statement responding to the Pew study that “its members are working to ensure consumers are treated fairly.” Some of the borrowers surveyed by Pew who closed their bank accounts said lenders were making unauthorized withdrawals, while others said they couldn’t keep up with the payments. The average interest on a $100 loan is about $25 every two weeks, or an annual rate of 652%, according to Pew. About a third of borrowers said their loans were set up to only withdraw those fees, meaning they ended up making several payments without reducing the principal. “Their business model is based on churning — getting people a loan and then having people re-up it so they stay in debt indefinitely,” said Liz Murray, policy director for National People’s Action, a network of community organizations that ran protests against payday lenders in August that it called “Shark Week.”

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A lot of hurt is in the air.

Loan Borrowers Pinched as Banks Increase Rates (Bloomberg)

Borrowers are feeling the pinch in the U.S. loan market as the Federal Reserve boosts its oversight of high-risk corporate debt. Banks increased interest rates on almost 54% of the leveraged loans they arranged last month, up from 36% in August and the most since January 2013, data compiled by Bloomberg show. Micro Focus International Plc may pay 1 %age point more than it initially sought on a $1.35 billion loan backing its purchase of Attachmate Group Inc. as prices in the $800 billion market for corporate loans drop to a 21-month low. The Fed, which along with other regulators has been asking banks for more than a year to adhere to guidelines aimed at curbing risky underwriting practices, will now start reviewing individual deals after previous warnings were largely ignored.

The heightened scrutiny adds to the difficulty in finding loan buyers willing to accept lower margins after investors pulled money from funds that invest in the debt in each of the last 12 weeks, bringing withdrawals for the year to $6.9 billion. “People are taking a step back from risk at the moment, and you can sense the market is uneasy,” Tim Anderson, chief fixed-income officer at Richmond, Virginia-based RiverFront Investment Group, said in a telephone interview. “Regulators have picked up on underwriting standards, and when people see and read that, they realize that they aren’t being compensated enough for some of the risks they are taking.”

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Foot in mouth.

John Lewis Boss Sorry For Calling France ‘Hopeless’ And ‘Finished’ (Guardian)

John Lewis’s managing director has apologised for a string of derogatory remarks about France, as the deputy mayor of Paris dismissed his tirade as “false and idiotic”. Andy Street told a gathering of British entrepreneurs on Thursday night that France was “sclerotic, hopeless and downbeat” and urged them to get out if they had investments there because the country was “finished”. His comments sparked outrage in France and a sharp rebuttal from Jean-Louis Missika, a deputy Paris mayor in charge of economic development and the attractiveness of Paris to investors. He told the Guardian that if Andy Street was joking, perhaps Paris should respond in kind. “What he says is false and idiotic. As we say, everything excessive is exaggerated, but then it seems French bashing is all the fashion chez vous.

“Factually it’s false because figures show that last year Paris attracted more foreign investment than London, and because Paris is a dynamic city with a quality of service that is often better than in London. “But this guy has shops in London, right, so of course he wants to attract people away from the shops in Paris. I think it’s called publicity.” Street, who is launching a French-language version of John Lewis’s website soon, apologised on Friday afternoon as the reaction to his comments snowballed. Waitrose, the John-Lewis-owned supermarket, also has a deal to sell food on Eurostar. “The remarks I made were supposed to be lighthearted views, and tongue in cheek,” said Street. “On reflection I clearly went too far. I regret the comments, and apologise unreservedly.”

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There you go. That’ll show ’em.

Finished And Hopeless? That’s Just How We Like Things In France (Guardian)

Business students’ textbooks have an addition for their “PR disasters” chapters. With John Lewis planning to launch a French-language version of its website, allowing customers to pay in euros, its managing director, Andy Street, returning from a short trip in Paris to collect an award for the group, said France was “finished”. And that’s not all. Street is the coloratura soprano of French-bashing: his repertoire is colourful and flowery, with a high range. His savoury piques include, “I have never been to a country more ill at ease … nothing works and worse, nobody cares about it”. British entrepreneurs with investments in the country should “get them out quickly”, he advised; while the award he got in Paris at the World Retail Congress was “made of plastic and is frankly revolting”. “If I needed any further evidence of a country in decline, here it is. Every time I [see it], I shall think, God help France.”

Meanwhile, “In Salle Wagram, this beautiful salon, just off the Champs-Élysées, we were treated to the naffest troupe of modern dance you’ve ever known and, literally, a chap’s trousers fell down.” The French embassy in London had the embarrassing task of defending France against Street’s attacks with figures and facts. I won’t. France doesn’t need defending, especially from fools. What I’d like to do is to help Street understand a thing or two about France that probably never crossed his mind. Street has since said his comments were “tongue in cheek”. So are mine. Finished, hopeless, sclerotic and downbeat are precisely how we like things. Love is finished, life is hopeless, we are in essence a grumpy and downbeat people and nobody will ever take it away from us. Heard of Jean-Paul Sartre? Probably not. He was a joyous human being, very funny, very ugly and supremely intelligent. He gave us the greatest gift of all, a philosophy called existentialism. We and we alone are responsible for our own misery. We have never looked back since.

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“… the $1.3 trillion U.S. junk-bond market is being inflated by a growing amount of leverage being used by buyers”. Please act surprised.

Secret Leveraging of Junk Bonds Revealed in Stock Trade (Bloomberg)

If stock investors are any guide, the $1.3 trillion U.S. junk-bond market is being inflated by a growing amount of leverage being used by buyers. Both stock and junk-bond managers tend to deploy more leverage when markets are booming, and more than ever is being used to purchase U.S. equities, based on levels of margin debt on the New York Stock Exchange, according to UBS analysts. That suggests junk-debt buyers are engaging in similar financing activities. As investors use more borrowed cash, they increase the potential for bigger losses in a downturn. This trend adds to concern that six years of unprecedented Federal Reserve stimulus has produced a bubble in the junk-bond market — and one that will be all the more painful when it eventually pops.

“Rising debt levels will be a problem going forward,” UBS analysts Stephen Caprio and Matthew Mish wrote in a report dated Oct. 2. Investors increase “leverage to meet return hurdles that are more challenging to hit as prices rise.” Measuring leverage in the junk bond market with any kind of precision is a tricky thing. Caprio said in an interview that he doesn’t know of a direct way to do it. Margin debt has surged to more than 2.5% of U.S. gross domestic product, about the highest level in data going back to the early 1990s, the UBS analysts wrote. The measure of leverage tends to be a leading indicator of relative yields on speculative-grade bonds, with a rising level of margin debt increasing the odds of future spread widening.

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I’d say.

When Schoolgirls Dream Of Jihad, Society Has A Problem (Guardian)

Teenage angst can cause all kinds of unfortunate behaviour, but when schoolgirls tell their parents they want to join the fight in Syria and Iraq, then society has a serious problem. Alarmingly, this is increasingly happening in France, as young Muslims express their desire for jihad. Worse still, an estimated 100-150 young women and girls have actually joined groups such as the self-styled Islamic State (Isis), travelling to a war zone to devote their lives to setting up a highly militarised caliphate and, if necessary, dying for the cause. The situation has been replicated in Britain, but in smaller numbers, and women tend to be far less hateful of the country where they were often born and raised. There are no verified figures on either side of the Channel, but anecdotal evidence suggests that, in France, alienation from society is a far greater incentive to join a conflict than it is in Britain. Thus, in June, a 14-year-old girl known as Sarah disappeared from her home in a Parisian suburb, heading for Syria.

She texted her parents, telling them to search her bedroom where, under the mattress, they found a pained letter saying she was “heading for a country where they do not prevent you from following your religion”. Rather than a fanatical interpretation of Islamic teaching, or anger at western attacks on countries such as Iraq and Afghanistan, Sarah’s motivations were based on what she regards as homegrown discrimination. This is markedly different from British jihadis, who tend to position themselves in a worldwide struggle against aggressive interference in the Muslim world. Numerous other girls in France regularly fill social media sites with reasons why they would consider fleeing abroad. Two, aged 15 and 17, are under judicial supervision after apparently corresponding with Sarah with a view to joining her in Syria, where they would almost certainly take husbands among the French combatants already there, as well as being trained in the use of weaponry. All of the would-be women militants rally against France’s distrust of Islam, which has manifested itself in a range of discriminatory legislation.

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It seems an Anglo-Saxon movement.

Australia’s Investment In Renewable Energy Slumps 70% In One Year (Guardian)

Australia’s investment in renewable energy projects has slumped below that of Algeria, Thailand and Myanmar, new figures have shown, with the sector “paralysed” by the government’s review of the Renewable Energy Target. Just $193m was invested in new large-scale clean energy projects in the third quarter of 2014, according to Bloomberg New Energy Finance. Investment in the year to date is $238m. This represents a massive 70% slump on 2013 investment and has resulted in Australia slipping from the world’s 11th largest investor in clean energy to 31st in 2014. This ranking is below Algeria, Myanmar, Thailand and Uruguay. By comparison, Canada has invested $US3.1bn in large clean energy projects so far in 2014. The slowdown in renewable energy investment is pinned squarely by Bloomberg on the government’s review of the RET, which mandates that 41,000 gigawatt hours of Australia’s energy comes from renewable sources by 2020.

A recent review of the RET by businessman Dick Warburton found that although it has created jobs and driven investment, it should either be suspended or shut down completely. The government has yet to formally respond to the report, instead holding talks with Labor on a “compromise” position that may see the RET altered in some way without being scrapped entirely. Labor, the Greens and the Palmer United Party all oppose any change to the RET. Kobad Bhavnagri, an analyst at Bloomberg New Energy Finance, told Guardian Australia that the renewables sector is “in the doldrums.” “The government’s position has caused this, it has had some pretty strong anti-renewables rhetoric, particularly anti-wind, and wants to close certain clean energy programs,” he said. “The review has been particularly protracted. The industry was fearful the recommendations would be extreme and they were. It has been shattering.

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Unintended consequences.

Deforestation In West Africa Linked To Ebola Epidemic (Guardian)

The world now knows in great detail how Thomas Eric Duncan, a man who just a few weeks ago showed admirable compassion for a sick, pregnant neighbor in Liberia, has become the first person to come down with Ebola in the United States. What is less well known is how the virus came to West Africa to infect Duncan’s neighbor. Knowing and acting on that story is absolutely critical if we hope to contain future outbreaks of Ebola and other scary diseases before they turn into global headlines. The Ebola epidemic in West Africa may have surprised most of the medical establishment – this is the first such outbreak in the region – but the risk had been steadily rising for at least a decade. The risk had grown so high, in fact, that this outbreak was almost inevitable and very possibly predictable.

All that was needed was to see the danger was a bat’s eye view of the region. Once blanketed with forests, West Africa has been skinned alive over the last decade. Guinea’s rainforests have been reduced by 80%, while Liberia has sold logging rights to over half its forests. Within the next few years Sierra Leone is on track to be completely deforested. This matters because those forests were habitat for fruit bats, Ebola’s reservoir host. With their homes cut down around them, the bats are concentrating into the remnants of their once-abundant habitat. At the same time, mining has become big business in the region, employing thousands of workers who regularly travel into bat territory to get to the mines. The result: virus, bats and people have had more opportunities to meet.

Fruit bats carry the Ebola virus, but generally don’t die from it. The virus could easily have migrated from Central to West Africa inside them in much the same way that birds spread West Nile virus across North America: passing it among flocks during seasonal migrations. Although bats have long been on the menu in West Africa, there are other transmission routes for the virus besides bushmeat. It is conceivable the two-year-old boy in Guinea thought to be the first case in this outbreak was infected after eating bat-contaminated fruit. This mode of transmission may also explain how the disease gets into wild gorilla populations.

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