Troika Archives - Page 2 of 6 - The Automatic Earth

Markets are in for a huge US election shock. An apt question Mish asked: what was she doing running around in public with a potentially highly contagious disease? More on this later.

• Clinton Health Another Landmine for Suddenly Vulnerable Markets (BBG)

Investors nursing wounds after the worst selloff in three months for equity and debt markets got another stress to ponder after concerns over Hillary Clinton’s health flared anew. The 68-year-old Democratic presidential nominee, whose polling edge over Donald Trump has soothed traders who fear ruptures to U.S. policy and see virtue in political gridlock, is suffering from pneumonia and became overheated and dehydrated during a Sept. 11 commemoration Sunday, forcing her to leave abruptly, her doctor said. Clinton was prescribed antibiotics and advised to modify her schedule so she can rest.

Volatility is already resurfacing in markets that had purred along for two months inured to everything from politics to weakening global growth, with the S&P 500 Index getting jarred Friday out of its tightest trading range ever in a selloff that erased about $500 billion of share value. While investors and analysts were reluctant to speculate on Clinton’s health, they said expectations she will prevail in November have been a factor in the calm and predicted the scrutiny will intensify. “If we found out that there was something catastrophic about her health it obviously would matter, but you have to be very careful about extrapolating shorter-term news,” Jonathan Golub at RBC Capital Markets in New York, said by phone.

“What we do know is we have two candidates around 70 years old and in reality it must be brutal running around the world for two years.” Speculation central banks are losing their taste for extra stimulus on Friday tore through the blanket of tranquility that has enveloped global markets. The S&P 500, global equities and emerging-market assets tumbled at least 2 percent in the biggest drop since Britain voted to secede from the European Union. The yield on the 10-year Treasury note jumped to the highest since June and the dollar almost erased a weekly slide.

It’s Brainard day. From Friday: “..investors recoiled over news that the central bank’s most dovish official, Governor Lael Brainard, will be delivering a previously unannounced speech Monday..”

• Asia Stocks, Bonds Sell-Off In Central Bank Anxiety Attack (R.)

Asian shares suffered their sharpest setback since June on Monday as investors were rattled by rising bond yields and talk the Federal Reserve might be serious about lifting U.S. interest rates as early as next week. Reports that the Bank of Japan was considering ways to steepen the Japanese yield curve, along with worries that central banks more generally were running short of fresh stimulus options, also hit sovereign debt and risk appetite globally. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.4%, pulling away from a 13-month peak. It was the largest daily drop since the frenzy caused by Britain’s vote in late June to leave the European Union. On a technical basis the index had been overbought in recent sessions, leaving it vulnerable to a pullback.

Shanghai followed with a fall of 2%, while Australian stocks sank 2.2%. The Nikkei 225 lost 1.9% as the safe haven yen firmed and selling in bonds drove yields on 20-year JGBs to the highest since March. Traders were unsure how the BOJ would try to steepen the yield curve if it goes down that path at a policy review later this month, but markets are worried that tapering of its buying in long-dated bonds could be among the options. EMini futures for the S&P 500, traded in Chicago during Asian hours, swung 0.6% lower, though Treasuries were finding safe-haven demand. Some Fed members have been trying to convince markets that the September meeting would be “live” for a hike, even though futures only imply a one-in-four chance of a move.

No less than three Fed officials are expected to speak later in the day, including board member and noted dove Lael Brainard. Any hint of hawkishness would likely further pressure bonds and equities.

Angst alright.

• Global Stocks Sink With Bonds, Commodities as Fed Angst Builds (BBG)

Global selloffs in stocks and bonds resumed Monday, while commodities slumped amid concern central banks in the world’s biggest economies are questioning the benefits of loose monetary policy. Shares in Europe and Asia dropped by the most since the aftermath of Brexit, and futures foreshadowed declines in U.S. equities. Portugese debt led losses among euro-area bonds, while yields in Australia and New Zealand climbed to their highest levels of the quarter. Oil sank to about $45 a barrel as nickel tumbled the most in four weeks. The yen strengthened and South Korea’s won tumbled. Financial markets have been jolted out of a period of calm by an uptick in concern over the outlook for central bank policies.

Federal Reserve Bank of Boston President Eric Rosengren spurred bets on an interest-rate hike on Friday, saying the U.S. economy could overheat should policy makers wait too long to tighten. The comments came a day after European Central Bank chief Mario Draghi surprised markets by playing down the prospect of further stimulus. The S&P 500 slumped 2.5% Friday, breaking out of a range that hadn’t seen it move more than 1% in either direction for 43 days. “Central banks are reluctant to add additional stimulus and that’s causing a lot of concern,” Niv Dagan, executive director at Peak Asset Management in Melbourne, told Bloomberg Radio. “We expect additional downside in the near term. You want to wait and see and remain cautious,” he said.

“..I wouldn’t be surprised that we see some kind of repeat as we had towards the end of last year into January-February, which was something close to a 12% correction.”

• A ‘Perfect Storm’ In Stocks Is Coming, And Nothing Can Stop It (CNBC)

A sharp stock market pullback is imminent, according to David Rosenberg, chief economist and strategist at Gluskin Sheff. On Friday, stocks were hammered by fears the Federal Reserve might hike rates sooner than expected, sending the S&P 500 index and the Dow Jones industrial average into a tailspin. According to Rosenberg, there’s more trouble ahead. “You have a perfect storm here if you get something like a Fed rate hike into the next several months,” Rosenberg said Thursday on CNBC’s “Futures Now. “The problem is that the market is not priced for it. I wouldn’t be surprised that we see some kind of repeat as we had towards the end of last year into January-February, which was something close to a 12% correction.”

Rosenberg, who has been named to the U.S. Institutional Investor All-America All Star Team several times in his career, doesn’t think the shake-up can be avoided. His reasoning doesn’t just include a potential Fed rate hike. He also takes into account a more richly valued stock market, signs of investor complacency and a sluggish U.S. economy. “We entered into the third quarter with momentum and a lot of hope, and now we’re exiting the third quarter,” he said. “And, let’s face it: The last five or six [economic] numbers have been really soft,” he contended. “The problem now, looking at where the market is priced, you’ve got cycle high multiples, you’ve got a lot of hedge funds in the futures options market that have been chasing performance here up to the price highs, and it doesn’t take much in the way of any sort of near-term adverse news to cause the market to correct.”

“Where to Invest Now: None of the Above.”

• Goldman: We’ve Reached ‘Maximum’ Bullishness; Bad News for US Stocks (BBG)

U.S. stocks have climbed many walls of worry as they marched to fresh all-time highs in 2016. But the market calm that characterized the summer also propelled investor enthusiasm to extremely elevated levels, according to Goldman Sachs Group Inc., which bodes ill for the near-term performance of equities. Goldman’s sentiment indicator, which tracks S&P 500 futures positioning, now stands at 100 – its maximum level. Readings above 90 or below 10 are contrarian indicators that are “significant in predicting future returns,” writes Chief U.S. Equity Strategist David Kostin in a note titled “Where to Invest Now: None of the Above.” This degree of enthusiasm “points to a 2% near-term S&P 500 fall,” he said.

AKA: After central banks fail, governments have a go. But they are equally clueless.

• Governments May Boost Fiscal Stimulus As Central Banks Step Back (CNBC)

Central banks have done bulk of the heavy lifting to boost growth since the global financial crisis, but economists now were expecting fiscal spending will get some life. Analysts and central bankers alike have talked up the benefits recently of letting the sun shine in on government spending after years of an austerity drumbeat amid an anaemic global recovery from the financial crisis. “Numerous central bankers, including Mario Draghi, have stressed that monetary policy alone cannot get the world out of its current malaise,” noted Andrew Kenningham, senior global economist at Capital Economics, in a note Wednesday.

“The U.S. Treasury Secretary, Jacob Lew, even claimed ahead of the G-20 summit in China last weekend that the U.S. had won the argument in favour of ‘growth rather than austerity’ and that this had prompted a policy shift by many G-20 governments.” That was in part due to the effects of long-running easing efforts by central banks, Kenningham noted. Many sovereigns have seen their bond yields turn negative, while smaller government budget deficits have reduced debt sustainability concerns, he said. “With global growth still lacklustre, monetary policy seemingly ineffective and government bond yields unprecedentedly low, the case for fiscal stimulus has become more compelling,” Kenningham said. “Partly as a result, we now expect advanced economies overall to benefit from a small fiscal boost in the next couple of years.”

Oil is no longer an industry, it’s a gambling den.

• Oil Prices Fall As US Drillers Add New Rigs, Long Positions Are Cut (R.)

Crude prices fell over 1.5% on Monday after U.S. oil drillers added rigs to look for new production as producers adapt to cheaper crude, with speculators cutting positions betting on further price rises. Brent crude futures were trading at $47.29 per barrel at 0200 GMT (10:00 p.m. EDT), down 72 cents, or 1.5%, from their last settlement. U.S. West Texas Intermediate futures were down 80 cents, or 1.74%, at $45.08 a barrel. Traders said the price falls on Monday and Friday were a result of increasing oil drilling activity in the United States, which indicated that producers can operate profitably around current levels.

“Each dollar is being used far more efficiently and, as a result, $50 oil appears much more palatable,” Barclays bank said in a note to clients. U.S. drillers added oil rigs for a tenth week in the past 11, according to a Baker Hughes rig count report on Friday. It was the longest streak without rig cuts since 2011. Speculative oil traders also became less confident of higher oil prices, cutting their net long U.S. crude futures and options positions for a second consecutive week last week, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday. Oil’s near 5%price decline since Sept. 8 partly reverses a 10% rally early in the month, which was fueled by speculation that oil exporters could cap production.

“Monte dei Paschi presented a plan in July to sell €28 billion of bad loans at 27% of face value. That has effectively set a new benchmark for the pricing of Italian bad loans..” But UniCredit expects to lose just 10%? Since UniCredit attributes a higher value to its bad loans, a sale of €20 billion of loans would force it to take €2 billion in write-downs…

• Woes at Italy’s Biggest Bank Reverberate in Europe (WSJ)

For UniCredit, the summer of discontent for Italy’s banks looks likely to stretch well into the fall—and possibly beyond. UniCredit, Italy’s largest lender by assets, emerged as one of the weakest big banks in Europe in July’s stress tests, showcasing the failure of its attempts to respond to rock-bottom interest rates and a huge pile of bad loans. Now, as Jean-Pierre Mustier, the bank’s new CEO, readies a big-bang plan to revive UniCredit’s fortunes, he faces a series of unpalatable choices: Aggressive action to cut the bank’s €80 billion ($89.9 billion) in bad loans—the largest of any European bank—would force the Milanese bank to raise billions in fresh capital, while an asset sale could help bolster its capital position but would hurt already thin profit.

Meanwhile, the travails of Italy’s No. 3 lender, Banca Monte dei Paschi di Siena, promise to only complicate Mr. Mustier’s job. On Thursday, Monte dei Paschi said its CEO, Fabrizio Viola, had agreed with the bank’s board to resign, in a surprise move that came as that bank works on a plan to shed €28 billion in bad loans. Troubles at UniCredit, which has a vast business in Germany and Eastern Europe, could threaten not only Italy’s ailing economy but also the continent’s already fragile financial stability. Brexit has upended Europe’s status quo, making the financial system more sensitive to shocks. Investors are watching UniCredit closely, as they expect its fate to affect both Italy and potentially other lenders on the continent.

[..] A major move to unload bad loans, perhaps as much as €20 billion, “will be key for a rerating of the stock,” said Vicenzo Longo at IG Markets. However, Monte dei Paschi presented a plan in July to sell €28 billion of bad loans at 27% of face value. That has effectively set a new benchmark for the pricing of Italian bad loans. Since UniCredit attributes a higher value to its bad loans, a sale of €20 billion of loans would force it to take €2 billion in write-downs…

Quality vs quantity. If it can hide reality in the US, it can do so in Oz.

• Where Have The Jobs Gone? Australians Grapple With Less Work, Low Pay (R.)

While the unemployment rate in Australia has been relatively stable, at 5.7% in July, there is a historically high underemployment rate – people who want to work more – of 8.5%. Combined, the measures lead to an underutilisation rate of 14.2%, much higher than during the global financial crisis and a worrying trend for the Reserve Bank of Australia (RBA). That spare capacity in the labor market limits the ability of workers to push for pay rises, and feeds through to muted demand and confidence. If this trend persists, the RBA could be forced to lower rates again after already easing twice this year. Indeed, wages growth is already at record lows while inflation is likely to remain below the central bank’s target band of 2-3% until 2018.

“For that to turn around you need to see a pick-up in domestic demand,” said Gareth Aird, senior economist at Commonwealth Bank. “We have cash rates down to 1.5% and we’re still not seeing a pick-up in wages or inflation. We probably need to see a pick-up in investment in order to see full-time employment materially lift.” For policymakers – unable to do much in the face of slow global demand – the low business investment is a particularly worrying phenomenon, especially as the end of the mining boom and a slowdown in major trading partner China leave corporate managers leery about spending on new projects. Indeed, latest data showed business investment tumbled in the June quarter as miners continued to cut back while spending plans slipped 9%.

The Troika enjoys its stranglehold on an entire people.

• EU/IMF Rift On Greek Debt Is Hurting Country, Says Tsipras (R.)

A rift between the IMF and the EU on how to address Greece’s debt crisis is damaging for the country, Prime Minister Alexis Tsipras said on Sunday. “I would say that what is creating conditions of delay in regaining trust of markets and investors … is the constant clash and disagreement between the IMF and European institutions,” Tsipras told a news conference in the northern city of Thessaloniki. The IMF has yet to decide whether to participate in a third international bailout Greece signed up to in mid-2015, saying it is not convinced its debt is sustainable. The country’s current debt to GDP ratio exceeds 170% of national output, the highest in the eurozone. Tsipras said disagreements between the EU and the IMF was preventing timely participation of the country in the quantitative easing program of the ECB. “A country which has made such harsh adjustment cannot wait much more… It is entitled to a fair regulation of the debt issue. The Greek problem is a European problem,” Tsipras said.

No-one’s ever considered that trade was a bubble?!

• It’ll Take More Than Hanjin’s Crisis To Fix Shipping’s Overcapacity (CNBC)

The crisis surrounding Hanjin Shipping has rocked the industry, but even more shipping lines could find themselves in trouble thanks to the huge amount of overcapacity in the industry, warns the CEO of a logistics company. Hanjin, which had around 3% of market share in shipping, filed for court receivership at the end of August, which has meant that its ships have been denied access to ports and, in some cases, have been seized. One result of Hanjin’s troubles is that shipping rates have spiked. Prices for shipments between Asia and the U.S. have risen 50% through September, according to data from Freightos, an online shipping rate marketplace. However, this is likely to prove temporary, as prices will fluctuate and currently empty container slots are brought into use, the company added.

Not only have shipping rates risen, but companies which were using Hanjin have received charges from some ports, according to Philip Damas, director for supply chain advisors at Drewry. “Some ports have imposed surcharges on exporters and importers who used Hanjin as a carrier and are waiting for their products in the destination port to cover the port costs unpaid by Hanjin. This is also increasing exporters’ costs,” he told CNBC in an email. Hanjin has been a shock to the system, but a glut in the number of ships carrying goods around the world is still an issue, warns Dr. Zvi Schreiber, CEO of Freightos, an online logistics marketplace. “There has been a significant overcapacity, which is why rates have been so low and that’s why Hanjin went bankrupt in the first place, but it’s not clear if that’s enough..”

A curious article on a curious report. I don’t quite know what to make of it.

• Low-Income US Teens Often Forced To Trade Sex For Food (G.)

Teenagers in America are resorting to sex work because they cannot afford food, according to a study that suggests widespread hunger in the world’s wealthiest country. Focus groups in all 10 communities analysed by the Urban Institute, a Washington-based thinktank, described girls “selling their body” or “sex for money” as a strategy to make ends meet. Boys desperate for food were said to go to extremes such as shoplifting and selling drugs. The findings raise questions over the legacy of Bill Clinton’s landmark welfare-reform legislation 20 years ago as well as the spending priorities of Congress and the impact of slow wage growth. Evidence of teenage girls turning to “transactional dating” with older men is likely to cause particular alarm.

“I’ve been doing research in low-income communities for a long time, and I’ve written extensively about the experiences of women in high poverty communities and the risk of sexual exploitation, but this was new,” said Susan Popkin, a senior fellow at the Urban Institute and lead author of the report, Impossible Choices. “Even for me, who has been paying attention to this and has heard women tell their stories for a long time, the extent to which we were hearing about food being related to this vulnerability was new and shocking to me, and the level of desperation that it implies was really shocking to me. It’s a situation I think is just getting worse over time.”

The qualitative study, carried out in partnership with the food banks network Feeding America, created two focus groups – one male, one female – in each of 10 poor communities across the US. The locations included big cities such as Chicago, Los Angeles and Washington and rural North Carolina and eastern Oregon. A total of 193 participants aged 13 to 18 took part and were allowed to remain anonymous. Their testimony paints a picture of teenagers – often overlooked by policymakers focused on children aged zero to five – missing meals, making sacrifices and going hungry, with worrying long-term consequences. Popkin said: “We heard the same story everywhere, a really disturbing picture about hunger and food insecurity affecting the wellbeing of some of the most vulnerable young people.”

Debt Rattle August 24 2016

Aug 242016

August 24, 2016 Posted by Raúl Ilargi Meijer at 9:17 am Finance Tagged with: Brexit, Fed, Greece, Hillary, housing, nukes, pensions, Troika 5 Responses »

G. G. Bain Asbury Park, Jersey Shore 1914

• British House-Buyers Dance With the Devil (BBG)

• How America Accidentally Nationalised Its Mortgage Market (Economist)

• Fed Going Out To Jackson Hole To Get Divorce From Markets (MW)

• The Real Casualty Of Brexit: Reputations Of Economists Who Predicted Doom (MW)

• Companies Must Sort Pension Black Holes Before Paying Out Dividends (Tel.)

• Illinois Governor’s Office Warns Of Crippling Pension Payment Hike (R.)

• Many Donors To Clinton Foundation Met With Her At State Department (AP)

• ECB Secretly Hands Cash to Select Corporations (DQ)

• Troika Prompts Greece To Tighten Debt Repayments (Kath.)

• Investors Controlling $13 Trillion Want G20 Leaders To Ratify Paris Deal (G.)

• A Thousand Balls of Flame (Dmitry Orlov)

“..people are still very keen to buy and the lenders are keen to lend..”

• British House-Buyers Dance With the Devil (BBG)

What will it take to halt the U.K. housing market? Maybe not the Brexit vote. British builder Persimmon became the latest to challenge the “Brexit is bearish for building” thesis on Tuesday when it said home reservation rates are 17% higher since July 1 compared to the same period a year ago. Customer site visits are buoyant too. To outsiders, this property obsession seems a kind of collective madness. Yes, British house prices are expected to fall 1% next year, according to economists at Countrywide, but they believe they’ll restart the upward march in 2018. Brits’ appetite for houses at inflated prices (see chart below) brings to mind former Citigroup boss Chuck Prince’s infamous 2007 assertion that “as long as the music is playing [in terms of liquidity], you’ve got to get up and dance”.

Wavering prospective home-buyers are enticed by ultra-cheap mortgages, bolstered by the Bank of England cutting rates after the Brexit vote. So buying is still often cheaper than renting. And while falling interest rates raise big questions about company pension promises, buying a home at least gives you somewhere to live in retirement. Persimmon CEO Jeff Fairburn told Bloomberg that “people are still very keen to buy and the lenders are keen to lend”.Brits aren’t mad, they’re just trapped: prisoners of a system that conspires to keep prices high and houses in short supply. They know their government will do almost anything to prevent house prices collapsing. Buyers can already obtain loans from the government to help get on the housing ladder, a policy that will further inflate prices for those lucky enough to own property already.

Desperately trying to keep the bubble afloat.

• How America Accidentally Nationalised Its Mortgage Market (Economist)

The most dramatic moment of the global financial crisis of the late 2000s was the collapse of Lehman Brothers on September 15th 2008. The point at which the drama became inevitable, though—the crossroads on the way to Thebes—came two years earlier, in the summer of 2006. That August house prices in America, which had been rising almost without interruption for as long as anyone could remember, began to fall—a fall that went on for 31 months. In early 2007 mortgage defaults spiked and a mounting panic gripped Wall Street. The money markets dried up as banks became too scared to lend to each other. The lenders with the largest losses and smallest capital buffers began to topple. Thebes fell to the plague.

Ten years on, and America’s banks have been remade to withstand such disasters. When Jamie Dimon, the boss of JPMorgan Chase, talks of its “fortress” balance-sheet, he has a point. The banking industry’s core capital is now $1.2 trillion, more than double its pre-crisis level. In order to grind out enough profits to satisfy their shareholders, banks have slashed costs and increased prices; their return on equity has edged back towards 10%. America’s lenders are still widely despised, but they are now in reasonable shape: highly capitalised, fairly profitable, in private hands and subject to market discipline. The trouble is that, in America, the banks are only part of the picture.

There is a huge, parallel structure that exists outside the banks and which creates almost as much credit as they do: the mortgage system. In stark contrast to the banks it is very badly capitalised (see chart 2). It is also barely profitable, largely nationalised and subject to administrative control. That matters. At $26 trillion America’s housing stock is the largest asset class in the world, worth a little more than the country’s stockmarket. America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. It is still closely linked to the global financial system, with $1 trillion of mortgage debt owned abroad. It has not gone unreformed in the ten years since it set off the most severe recession of modern times. But it remains fundamentally flawed.

The strange path the mortgage machine has taken has implications for ordinary people, as well as for financiers. The supply of mortgages in America has an air of distinctly socialist command-and-control about it. Some 65-80% of all new home loans are repackaged by organs of the state. The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat. No one is keen to make transparent the subsidies and dangers involved, the risks of which are in effect borne by taxpayers. But an analysis by The Economist suggests that the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12.

My bet is they’re too scared.

• Fed Going Out To Jackson Hole To Get Divorce From Markets (MW)

Like celebrities who went to Las Vegas in the 1950s to get quick divorces, the Federal Reserve could be going to Jackson Hole this week to prepare to divorce policy from financial markets. In a way, the Fed’s relationship with the markets can be boiled down to a simple rule: the U.S. central bank is happy to surprise markets when it is easing policy but has never surprised the market with a rate hike. But the Fed may be preparing to end this relationship, especially given the recent behavior of financial markets with interest rates so low. Despite some fairly clear warnings that September is a “live” meeting. the market continues to see only a 24% probability of a rate hike in September, according to the CME’s Fed Watch tool.

New York Fed President William Dudley, San Francisco Fed President John Williams, and Atlanta Fed President Dennis Lockhart have pointed to a possible September move. Even Fed Vice Chairman Stanley Fischer chimed in with some broadly hawkish comments. In the wake of these developments, Carl Tannenbaum, chief economist at Northern Trust in Chicago, said he did not understand why rate hike probabilities remain so low. “I am mystified at what the short-term futures market is looking at,” he said. One thing the financial markets are clearly not looking at is a mirror. If they did they might see that their behavior is a big reason the Fed wants to hike rates in the first place.

Funny how that goes.

• The Real Casualty Of Brexit: Reputations Of Economists Who Predicted Doom (MW)

Did you hear the one about the economist who drove into a swimming pool and broke his neck? He forgot to seasonally adjust. Have you seen the version of Trivial Pursuit designed by an economist? It has 3,000 questions and 10,000 answers. There has always been a thriving, if niche, market in jokes about the dismal science, and its equally gloomy practitioners. And no doubt, there will soon be plenty to add to the list about Brexit. What‘s the difference between an economist predicting a Brexit-triggered recession and a confused and senile old man? The economist is the one with a calculator. And so on.

Over the spring, there were a lot of predictions about who would suffer the most damage if the British decided to vote to leave the European Union. The U.K. economy would be plunged into recession, we were told. The banking system would go down. The eurozone would take a terrible hit. And yet the real casualty turns out to be something quite different: The reputation of professional economists. With a very few exceptions, they forecast the U.K. would go straight into recession as a result of Brexit. As it turns out, however, Britain is doing just fine, and so is the rest of Europe. That is surely a calamity for which the profession deserves a beating – and at the very least should start asking itself some serious questions.

If you rewind a few weeks, and listened seriously to some of the predictions made about the likely consequences of Brexit, you would imagine that the U.K., and indeed the rest of the world, would be sliding into recession by now. In the immediate aftermath of the vote, number-crunchers from all the main investment banks, and from the policy and regulatory authorities, were unanimous in forecasting that the slowdown in economic activity would be sharp and sudden.

Dividends are why people hold stocks. Yeah, that’s short-termism.

• Companies Must Sort Pension Black Holes Before Paying Out Dividends (Tel.)

British companies are slashing their dividends, which, if you own their shares, either directly or through your pension scheme, is bad news. With companies like Wm Morrison, Anglo American and Standard Chartered cutting their payouts, underlying UK dividends fell 3.3pc year-on-year in the second quarter – the worst performance among the world’s seven richest economies. But here is another, possibly more staggering, statistic: UK companies threw five times as much cash at their shareholders as they did at their pension deficits last year. I would wager that the first stat (which comes courtesy of Henderson Global Investors) will be more worrisome to most investors, especially at a time of evaporating yield in the fixed income market and question marks hovering over property.

But I would argue that the second (from the actuarial consultants Lane Clark & Peacock) should give them greater pause for thought. Because, although the search for yield (and the lack thereof) has become one of the defining issues in the investment landscape, the pensions crisis is posing an almost existential question for corporate Britain. Many of the big corporate stories over the summer – BHS, Tata Steel, BT and Openreach – have been united by a single theme: pensions. And, with negative yields on many government (and some corporate) bonds blowing blackholes in schemes, expect the pain to get worse before it gets better. And yet many companies are still hosing their shareholders down with dividends.

Even if you know damn well you can’t make anywhere near 7.5%, please keep pretending.

• Illinois Governor’s Office Warns Of Crippling Pension Payment Hike (R.)

Potential action this week by Illinois’ biggest public pension fund could put a big dent in the state’s already fragile finances, Governor Bruce Rauner’s administration warned. A Monday memo from a top Rauner aide said the Teachers’ Retirement System (TRS) board could decide at its meeting this week to lower the assumed investment return rate, a move that would automatically boost Illinois’ annual pension payment. “If the (TRS) board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services,” Michael Mahoney, Rauner’s senior advisor for revenue and pensions, wrote to the governor’s chief of staff, Richard Goldberg.

When TRS lowered the investment return rate to 7.5% from 8% in 2014 the state’s pension payment increased by more than $200 million, according to the memo. Illinois’ fiscal 2017 pension payment to its five retirement systems was estimated at $7.9 billion, up from $7.617 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March report by a bipartisan legislative commission. The country’s fifth-largest state’s unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55% of that gap. The funded ratio was a weak 41.9%.

85 donors contributed $156 million. Plus 16 foreign governments donated another $170 million.

• Many Donors To Clinton Foundation Met With Her At State Department (AP)

More than half the people outside the government who met with Hillary Clinton while she was secretary of state gave money — either personally or through companies or groups — to the Clinton Foundation. It’s an extraordinary proportion indicating her possible ethics challenges if elected president. At least 85 of 154 people from private interests who met or had phone conversations scheduled with Clinton while she led the State Department donated to her family charity or pledged commitments to its international programs, according to a review of State Department calendars released so far to The Associated Press. Combined, the 85 donors contributed as much as $156 million. At least 40 donated more than $100,000 each, and 20 gave more than $1 million.

Donors who were granted time with Clinton included an internationally known economist who asked for her help as the Bangladesh government pressured him to resign from a nonprofit bank he ran; a Wall Street executive who sought Clinton’s help with a visa problem; and Estee Lauder executives who were listed as meeting with Clinton while her department worked with the firm’s corporate charity to counter gender-based violence in South Africa. The meetings between the Democratic presidential nominee and foundation donors do not appear to violate legal agreements Clinton and former president Bill Clinton signed before she joined the State Department in 2009.

But the frequency of the overlaps shows the intermingling of access and donations, and fuels perceptions that giving the foundation money was a price of admission for face time with Clinton. Her calendars and emails released as recently as this week describe scores of contacts she and her top aides had with foundation donors. The AP’s findings represent the first systematic effort to calculate the scope of the intersecting interests of Clinton Foundation donors and people who met personally with Clinton or spoke to her by phone about their needs. The 154 did not include U.S. federal employees or foreign government representatives. Clinton met with representatives of at least 16 foreign governments that donated as much as $170 million to the Clinton charity, but they were not included in AP’s calculations because such meetings would presumably have been part of her diplomatic duties.

Don’t act surprised!

• ECB Secretly Hands Cash to Select Corporations (DQ)

In June, the ECB began buying the bonds of some of the most powerful companies in Europe as well as the European subsidiaries of foreign multinationals. This pushed the average yield on euro investment-grade corporate debt to 0.65%. Large quantities of highly rated corporate debt with shorter maturities are trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations. By August 12, the ECB had handed out over €16 billion in freshly printed money in exchange for corporate bonds. Throughout, the public was given to understand that the ECB was buying already-issued bonds trading in secondary markets. But the public has been fooled.

Now it has been revealed by The Wall Street Journal that the ECB has also secretly been buying bonds directly from companies, thus handing them directly its freshly printed money. It has been doing so via “private placements.” These debt sales are not open to the broader market. There’s no need for a prospectus. Only a small number of institutional investors participate. It allows companies to raise cash quickly, without jumping through the normal hoops. Private placements are not unusual. What’s new is that the ECB used them to buy bonds. There have been two of these secretive private placements. And Morgan Stanley arranged them. The Wall Street Journal determined this by analyzing data from Dealogic and national central banks.

The two companies involved were the Spanish energy giants Repsol and Iberdrola. The Bank of Spain, now no more than a local branch of the ECB, was among the select buyers of a €500 million bond issued by Repsol. It is also the owner of part of a €200 million bond issued by Iberdrola. Among the advantages of issuing debt in a private placement is that it allows companies to raise cash quickly. According to Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling, cited by The Wall Street Journal: because there is no prospectus or the other formalities required in a normal bond offering, “there won’t be any transparency, there won’t be a press release. It’s all done discreetly.”

Stone. Squeeze. “Plans [..] that will see foreclosures and auctions for 55% of debtors are already in progress.”

• Troika Prompts Greece To Tighten Debt Repayments (Kath.)

The Greek government’s plans for allowing taxpayers to make debt repayments to the state in 100 installments has been halted by the country’s lenders, who are refusing to consent to the scheme on the grounds that it will inflate debts to the state coffers. Alternate Finance Minister Tryfon Alexiadis told Skai there will be no new regulation for the reypayments, and called on debtors either to service their debts or make use of the existing framework of 12 or 24 installments. Greece’s lenders had been increasing the pressure recently to make the debt repayment process for those who owe money to the state more rigorous.

As of July 1, the legal framework was tightened for those with debts to the state. As a result, those who were already in the 100-installment scheme learned they would have to pay any debts incurred after that date no later than 15 days after the deadline. If they have not paid after 15 days, they are thrown out of the 100-installment scheme and will face the same penalties as anyone else. From January 1, 2018, the precondition for the continuation of the arrangement will be that they have repaid any new debts by the date they were due. According to figures from the Ministry of Finance, debts to the state are growing at a rate of €1 billion per month. In the first half of the year, the amount of new taxpayer debt to the state came to €6.8 billion.

In order to reduce the growth rate of the debt and increase state revenues, the government, in agreement with its creditors, has moved to coercive measures against state debtors. Plans by the General Secretariat of Public Revenue that will see foreclosures and auctions for 55% of debtors are already in progress.

What if complying is prohibitively expensive?

• Investors Controlling $13 Trillion Want G20 Leaders To Ratify Paris Deal (G.)

A group of 130 institutions that control US$13tn of investments have called on G20 nations to ratify the Paris agreement this year and accelerate investment in clean energy and forced disclosure of climate-related financial risk. Countries that ratified the Paris agreement early would benefit from better policy certainty and would attract investment in low-carbon technology, the signatories said in a letter before the G20 heads of government meeting in September. They called for strong carbon pricing to be implemented, as well as regulations that encouraged energy efficiency and renewable energy. Plans for how to phase out fossil fuels also needed to be developed, they said.

Financial regulators needed to force companies to disclose how climate change, and climate-related policies, would impact their bottom line, the group said. “So investors are asking companies: tell us what the implementation of the Paris agreement means for your business so that we can price that risk and invest accordingly,” said Emma Herd, the chief executive of the Investor Group on Climate Change (IGCC) – one of the six organisations that represent the 130 investors on the letter. Herd said that required not only mandatory reporting but also for that reporting to be standardised so that investors can compare between companies and between industries.

The signatories of the letter wrote: “The Paris agreement on climate change provides a clear signal to investors that the transition to the low-carbon, clean energy economy is inevitable and already under way. “Governments have a responsibility to work with the private sector to ensure that this transition happens fast enough to catalyse the significant investment required to achieve the Paris agreement’s goals.”

“..the US has squandered a fantastic sum of money fattening up its notoriously corrupt defense establishment ..”

• A Thousand Balls of Flame (Dmitry Orlov)

“Russia is ready to respond to any provocation, but the last thing the Russians want is another war. And that, if you like good news, is the best news you are going to hear.”

[..] There is exactly one nation in the world that nukes other countries, and that would be the United States. It gratuitously nuked Japan, which was ready to surrender anyway, just because it could. It prepared to nuke Russia at the start of the Cold War, but was prevented from doing so by a lack of a sufficiently large number of nuclear bombs at the time. And it attempted to render Russia defenseless against nuclear attack, abandoning the Anti-Ballistic Missile Treaty in 2002, but has been prevented from doing so by Russia’s new weapons. These include, among others, long-range supersonic cruise missiles (Kalibr), and suborbital intercontinental missiles carrying multiple nuclear payloads capable of evasive maneuvers as they approach their targets (Sarmat).

All of these new weapons are impossible to intercept using any conceivable defensive technology. At the same time, Russia has also developed its own defensive capabilities, and its latest S-500 system will effectively seal off Russia’s airspace, being able to intercept targets both close to the ground and in low Earth orbit.mIn the meantime, the US has squandered a fantastic sum of money fattening up its notoriously corrupt defense establishment with various versions of “Star Wars,” but none of that money has been particularly well spent. The two installations in Europe of Aegis Ashore (completed in Romania, planned in Poland) won’t help against Kalibr missiles launched from submarines or small ships in the Pacific or the Atlantic, close to US shores, or against intercontinental missiles that can fly around them. The THAAD installation currently going into South Korea (which the locals are currently protesting by shaving their heads) won’t change the picture either.

Debt Rattle June 14 2016

Jun 142016

June 14, 2016 Posted by Raúl Ilargi Meijer at 8:00 am Finance Tagged with: Assange, asylum, Brexit, China, freeloaders, Libor, mammal, Merkel, stocks, Troika, visa 2 Responses »

G. G. Bain Metropolitan Opera baritone Giuseppe De Luca, New York 1920

• Donald Tusk: Brexit Could Destroy Western Political Civilisation (BBC)

• Dutch PM Says He’s ‘Totally Against Referendums’ (EuA)

• ECB Says Oil-Price Slump Not the Global Boon It Might Have Been (BBG)

• What American Consumers Owe Uncle Sam (BBG)

• There’s a Seismic Change Coming to Money Markets (BBG)

• Silicon Valley’s Audacious Plan to Create a New Stock Exchange (BBG)

• How China Tamed Stocks (WSJ)

• Bringing the Troika to Paris (Weisbrot)

• Executive Pay Is Obscene (Mason)

• More Freeloaders Than Free Market (G.)

• Rethinking Robin Hood (Angus Deaton)

• Wikileaks To Publish ‘Enough Evidence’ To Indict Hillary – Assange (RT)

• First Mammal Species Wiped Out By Human-Induced Climate Change (G.)

• Merkel Ready To Give In To ‘Blackmail’ Over Turkish Visas (BB)

• Stranded Refugees Line Up For Greek Asylum Cards (Kath.)

On June 24, you will see pigs fly! Tusk wants Cameron to lose, I guess.

• Donald Tusk: Brexit Could Destroy Western Political Civilisation (BBC)

European Council president Donald Tusk has warned that a UK vote to leave the EU could threaten “Western political civilisation”. Mr Tusk said a vote to leave the EU would boost anti-European forces. “As a historian I fear Brexit could be the beginning of the destruction of not only the EU but also Western political civilisation in its entirety,” he told the German newspaper Bild. UKIP MP Douglas Carswell said the Remain campaign was “falling apart”. He tweeted: “Why hasn’t Western civilisation come to an end already seeing as how most countries are self governing?” The UK votes on whether to remain in the EU or leave on 23 June. Mr Tusk said everyone in the EU would lose out economically if Britain left.

“Every family knows that a divorce is traumatic for everyone,” he said. “Everyone in the EU, but especially the Brits themselves, would lose out economically.” In the interview he also said Turkey would not become a member of the European Union “in its current state”. Leave campaigners have regularly accused Remain of scaremongering after repeated warnings from high-profile figures against leaving the EU. Employment Minister Priti Patel said: “This is extraordinary language from the EU president, and serves only to reveal his own desperation. “The only thing that is destroying civilisations is the euro, which has ruined economies and led to youth unemployment soaring to nearly 50% in southern Europe.”

Not sure you could say anything less appropriate as a PM of a democracy. But he’ll keep trying.

• Dutch PM Says He’s ‘Totally Against Referendums’ (EuA)

Dutch Prime Minister Mark Rutte today (13 June) admitted a referendum called by eurosceptic groups on whether to back closer ties between Ukraine and the EU had been “disastrous” after voters soundly rejected the pact. “I’m totally against referenda, and I’m totally, totally, totally against referenda on multilateral agreements, because it makes no sense as we have seen with the Dutch referendum,” Rutte told a conference of European MPs. “The referendum led to disastrous results,” he added. His comments were his toughest since the 6 April Dutch referendum, which had been closely watched by eurosceptic groups in Britain, who hailed the results as a blow to EU unity.

Although the Dutch referendum only scraped past the 30% voter turnout to be valid, over 60% of those who cast ballots rejected the EU-Ukraine cooperation accord. The Netherlands, which currently holds the rotating presidency of the European Union, is the only country in the 28-nation bloc which has still not ratified the deal. Even though April’s vote is non-binding Rutte’s coalition government is now left with a dilemma of how to proceed. Although Rutte did not mention the June 23 referendum when British voters will choose whether to leave the EU, Britain’s eurosceptic parties have seized upon the Dutch results as supporting their own campaign to leave the European Union.

You heard it here first. Oil is such an integral part of so much of the economy that any large price swing will have outsize consequences.

• ECB Says Oil-Price Slump Not the Global Boon It Might Have Been (BBG)

Cheaper oil prices since 2014 have probably been of little net benefit to the global economy and may even have been a drag on growth, according to the ECB. “While most of the oil-price decline in 2014 could be explained by the significant increase in the supply of oil, more recently the lower price has reflected weaker global demand,” the ECB said on Monday in an article from its Economic Bulletin. “Although the low oil price may still support domestic demand through rising real incomes in net oil-importing countries, it would not necessarily offset the broader effects of weaker global demand.”

The analysis strikes at the ECB’s debate over whether it should be adding monetary stimulus to the euro-area economy as lower heating and fuel bills give consumers more spending power. President Mario Draghi has argued that as well as depressing inflation — the ECB’s main challenge – a drop in energy prices can be a sign of subdued economic activity that needs to be countered. “Assuming that, for example, 60% of the oil price decline since mid-2014 has been supply driven and the remainder demand driven, the models suggest that the combined impact of these two shocks on world activity would be close to zero, or even slightly negative,” the ECB report showed.

The economy can survive only by digging itself ever deeper into debt.

• What American Consumers Owe Uncle Sam (BBG)

U.S. consumers have long had an impressive propensity to get into debt. Lately, though, one lender has been playing a much bigger role in enabling them: Uncle Sam. Total U.S. consumer credit – which includes credit cards, auto loans and student debt, but not mortgages – stood at $3.54 trillion at the end of March, according to the latest data from the Federal Reserve. That’s the most on record, both in dollar terms and as a share of GDP. What’s really unusual, though, is the source of the money: The federal government accounted for almost 28% of the total. That’s up from less than 5% before the 2007-2009 recession, thanks in large part to the government’s efforts to promote education by making hundreds of billions of dollars in student loans directly, rather than going through banks. Here’s how that looks:

To some extent, the government’s growing role makes sense. Amid a deep economic slump and slow recovery, it was best equipped to satisfy the demand for credit among Americans looking to improve their job prospects through education. Without the government’s involvement, consumer credit as a share of gross domestic product would still be well below the pre-recession level (all else equal). Here’s how that looks:

That said, the government assist has helped push total student debt to a record $1.3 trillion, much of which has been spent on rising tuition costs or on courses that didn’t do much to improve people’s earning potential. Because student debt is extremely difficult to discharge through bankruptcy, it will weigh on the borrowers – and on the U.S. economy – for many years to come.

Seismic? A Libor successor?

• There’s a Seismic Change Coming to Money Markets (BBG)

Bankers seeking to manipulate the London Interbank Offered Rate with a flurry of tactless messages probably had little idea that the impact of their actions would be felt all the way to the Federal Reserve target rate. But—like bubbles from a bottle of Bollinger champagne—the effects of the Libor scandal are still emanating across money markets many years later. In 2014, the Financial Stability Oversight Council (FSOC) asked U.S. regulators to look into creating a replacement for Libor—one that would prove more immune to the subjective, scandalous, scurrilous whims of traders. The Alternative Reference Rates Committee (ARRC), as the resulting body is known, last month suggested two potential replacements for the much-maligned Libor.

While the new reference rate would be important simply by dint of underpinning trillions of dollars worth of derivatives contracts, its significance could go much further. Fresh research from Credit Suisse Securities USA LLC suggests the chosen rate could also become the new target rate for the Federal Reserve, replacing the federal funds rate that has dominated money markets for decades but has been neutered by recent regulation and asset purchase programs. “The question of alternative reference rates and alternative policy rates are [sic] intertwined: ideally, they would be the same,” writes Zoltan Pozsar, director of U.S. economics at the Swiss bank. “So it is likely that the rate the ARRC will ultimately choose will also be the Fed’s new target rate. But there are problems with both alternatives.”

“..compensation plans designed to make sure executive pay is not tied to short-term stock performance..”

• Silicon Valley’s Audacious Plan to Create a New Stock Exchange (BBG)

Five years ago, when Eric Ries was working on the book that would become his best-selling entrepreneurship manifesto “The Lean Startup,” he floated a provocative idea in the epilogue: Someone should build a new, “long-term” stock exchange. Its reforms, he wrote, would amend the frantic quarterly cycle to encourage investors and companies to make better decisions for the years ahead. When he showed a draft around, many readers gave him the same piece of advice: Kill that crazy part about the exchange. “It ruined my credibility for everything that had come before,” Ries said he was told. Now Ries is laying the groundwork to prove his early skeptics wrong.

To bring the Long-Term Stock Exchange to life, he’s assembled a team of about 20 engineers, finance executives and attorneys and raised a seed round from more than 30 investors, including venture capitalist Marc Andreessen; technology evangelist Tim O’Reilly; and Aneesh Chopra, the former chief technology officer of the United States. Ries has started early discussions with the U.S. Securities and Exchange Commission, but launching the LTSE could take several years. Wannabe exchanges typically go through months of informal talks with the SEC before filing a draft application, which LTSE plans to do this year. Regulators can then take months to decide whether to approve or delay applications. If all goes according to plan, the LTSE could be the stock exchange that fixes what Ries sees as the plague of today’s public markets: short-term thinking that squashes rational economic decisions.

It’s the same stigma that’s driving more of Silicon Valley’s multi-billion-dollar unicorn startups to say they’re not even thinking of an IPO. “Everyone’s being told, ‘Don’t go public,'” Ries said. “The most common conventional wisdom now is that going public will mean the end of your ability to innovate.” [..] A company that wants to list its stock on Ries’s exchange will have to choose from a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance. Ries complains that it’s common to see CEOs or top management getting quarterly or annual bonuses tied to certain metrics like earnings per share, which pushes them to goose the numbers. Ries wants to encourage companies to adopt stock packages that continue vesting even after executives have left the company, which will push them to make healthy long-term moves.

It’s a really bright idea for a government to control its markets whenever it doesn’t like what they do. Kill price discovery. Why should anyone want to know what things are really worth?

• How China Tamed Stocks (WSJ)

Chinese stocks are at an odd crossroads this week: A key decision by index provider Morgan Stanley Capital International could make them a bigger part of international investors’ portfolios, even as a regulatory clampdown drives local traders away. Average daily trading turnover of shares on China’s two main markets, in Shanghai and Shenzhen—so-called A-shares—plunged last month to less than one-third of its level at its peak in June 2015. The amount of money that investors are borrowing from brokers to trade, known as margin debt, has dropped to its lowest level since December 2014.

And despite a 3.2% drop on Monday, the Shanghai stock market has just passed one of its least-eventful months ever, having moved less than 1% either way on all but two trading days in the past three weeks. Observers attribute the calm to heavy-handed intervention by Chinese officials who have tried to tame the country’s roller-coaster stock markets with support from state funds, curbs on some trading and direct hints to investors. All of that presents a forbidding backdrop for global investors ahead of MSCI’s decision, due Tuesday evening in New York, on whether to include mainland-listed shares in a key index tracked by international fund managers.

French protests are not over.

• Bringing the Troika to Paris (Weisbrot)

I have argued for years, and in my last post on this blog, that a big part of the story we have seen in Europe over the past eight years is a result of social engineering. This has involved a major offensive by the European authorities, taking advantage of an economic crisis, to transform Europe into a different kind of society, with a smaller social safety net, lower median wages, and – whether intended or not – increasing inequality as a result. In recent weeks France has faced strikes and protests as the battle has come to their terrain, over a new, sweeping labor law. Among other provisions, the law would weaken workers’ protections regarding overtime pay, the length of the work week, and job security. But most damaging of all are the provisions that would structurally weaken unions and undermine their bargaining power.

These would push collective bargaining away from the sectoral level, and toward the level of individual companies, thus making it more difficult for unions to establish industry standards for wages, hours and working conditions. Such structural “reforms” have been promoted by the European authorities (including the IMF) for years, and the ostensible rationale is to reduce unemployment. Economist Thomas Piketty succinctly sums up the major flaw in that argument: In the labor law you find the same mixture of lack of preparation and cynicism. If unemployment hasn’t stopped climbing since 2008, with an additional 1.5 million unemployed workers (and 2.1 million category A jobseekers in mid 2008, 2.8 million in mid 2012, 3.5 million in mid 2016) it’s not because the [current] labor law has suddenly become more rigid.

It’s because France and the Eurozone have provoked, through excessive austerity, an absurd slowdown of activity from 2011 to 2013, contrary to the U.S. and to the rest of the world, thereby transforming the financial crisis that came from the other side of the Atlantic into an interminable European recession. In a recent discussion, economist Yanis Varoufakis recounts a conversation that he had with his German counterpart Wolfgang Schäuble. It was at the height of the conflict between Greece and the European authorities last summer: “I had many interesting conversations with the Finance Minister of Germany, Dr. Wolfgang Schäuble. At some point, when I showed him this ultimatum, and I said to him… “Would you sign this? Just, let’s take off our hats as Finance Ministers for a moment. I’ve been in politics for five months. You’ve been in politics for 40 years.

You keep barking in my ear that I should sign it. Stop telling me what to do. As human beings, you know that my people, now, are suffering a Great Depression. We have children at school that faint as a result of malnutrition. Can you just do me the favor and advise me on what to do? Don’t tell me what to do. As somebody with 40 years, a Europeanist, somebody who comes from a democratic country, just Wolfgang to Yanis, not Finance Minister to Finance Minister.” And to his credit, he looked out of the window for a while. .. and he turned around and he said, “As a patriot I wouldn’t.” Of course the next question was, “so why are you forcing me to do it?” He said, “Don’t you understand?! I did this in the Baltics, in Portugal, in Ireland, you know, we have discipline to look after. And I want to take the Troika to Paris.” The Troika has arrived.

Shock doctrine in the UK.

• Executive Pay Is Obscene (Mason)

[..] if you want to prevent wealth flowing from productive people to the elite, you have to restructure the economy. You have to stop believing £24m annual paydays are the result of an accident. You have to make property speculation a crime and pursue policies that can suppress boom and bust, whether it is in the property market, the stock market or any other market. And you have to tax assets, not just income. Executive pay is structured around share options, not just salaries and bonuses, because it is more “tax efficient”. A tax on shares held; a tax on the value of property designed to stop it rising faster than GDP – these are the measures that would actually work. Plus, make a positive case for rent controls.

If Jeremy Corbyn’s Labour can become the first advanced-country government to suppress the causes of obscene executive pay, it will reap a massive first-mover advantage. The property market will stabilise; housing will become affordable as billionaires – foreign and domestic – take their money elsewhere. The stock market then will move in line with the real economy, not the fantasy economy created by a shortage of housing and a glut of money. Finally, the overpaid elite will drag their sorrows through the world to another jurisdiction. Personally, I cannot wait to see them go.

Still surprised Britain will vote against anything Cameron does or says?

• More Freeloaders Than Free Market (G.)

On Wednesday, two very different men will have to explain themselves. Both appear in London, to a room full of authority figures – but their finances and their status place them at opposite ends of our power structure. Yet put them together and a picture emerges of the skewedness of today’s Britain. For the Rev Paul Nicolson, the venue will be a magistrate’s court in London. His “crime” is refusing to pay his council tax, in protest against David Cameron’s effective scrapping of council tax benefit, part of his swingeing cuts to social security. In order to pay for a financial crisis they didn’t cause, millions of families already on low incomes are sinking deeper into poverty. In order to pay bills they can’t afford, neighbours of the retired vicar are going without food.

The 84-year-old faces jail this week, for the sake of £2,831. Meanwhile, a chauffeur will drive Philip Green to parliament, where he’ll be quizzed by MPs over his part in the collapse of BHS. A business nearly as old as the Queen will die within a few weeks, leaving 11,000 workers out of a job and 22,000 members of its pension scheme facing a poorer retirement. There the similarities peter out. Nicolson was summoned to court; Green wasn’t going to bother showing up at Westminster. When the multibillionaire was invited by Frank Field to make up BHS’s £600m pension black hole, he demanded the MP resign as chair of the work and pensions select committee.

But then, Green is used to cherry-picking which rules he plays by. Take this example: he buys Arcadia, the company that owns Topshop, then arranges for it to give his wife a dividend of £1.2bn. Since Tina Green is, conveniently, a resident of Monaco, the tax savings on that one payment alone are worth an estimated £300m. That would fund the building of 10 large secondary schools – or two-thirds of the annual cut to council tax benefits.

Sorry Angus, but “cosmopolitan prioritarianism” sounds like a real silly term. Maybe you should talk to people in words they can understand.

• Rethinking Robin Hood (Angus Deaton)

International development aid is based on the Robin Hood principle: take from the rich and give to the poor. National development agencies, multilateral organizations, and NGOs currently transfer more than $135 billion a year from rich countries to poor countries with this idea in mind. A more formal term for the Robin Hood principle is “cosmopolitan prioritarianism,” an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most. Those who have less have priority over those who have more. This philosophy implicitly or explicitly guides the aid for economic development, aid for health, and aid for humanitarian emergencies.

On its face, cosmopolitan prioritarianism makes sense. People in poor countries have needs that are more pressing, and price levels are much lower in poor countries, so that a dollar or euro goes twice or three times further than it does at home. Spending at home is not only more expensive, but it also goes to those who are already well off (at least relatively, judged by global standards), and so does less good. I have thought about and tried to measure global poverty for many years, and this guide has always seemed broadly right. But I currently find myself feeling increasingly unsure about it. Both facts and ethics pose problems. Huge strides have undoubtedly been made in reducing global poverty, more through growth and globalization than through aid from abroad.

The number of poor people has fallen in the past 40 years from more than two billion to just under one billion – a remarkable feat, given the increase in world population and the long-term slowing of global economic growth, especially since 2008. While impressive and wholly welcome, poverty reduction has not come without a cost. The globalization that has rescued so many in poor countries has harmed some people in rich countries, as factories and jobs migrated to where labor is cheaper. This seemed to be an ethically acceptable price to pay, because those who were losing were already so much wealthier (and healthier) than those who were gaining.

Can’t wait.

• Wikileaks To Publish ‘Enough Evidence’ To Indict Hillary – Assange (RT)

Wikileaks co-founder Julian Assange warns more information will be published about Hillary Clinton, enough to indict her if the US government is courageous enough to do so, in what he predicts will be “a very big year” for the whistleblowing website. Expressing concerns in an ITV interview about the Democratic presidential candidate, who he claims is monitoring him, Assange described Republican presumptive nominee Donald Trump as an “unpredictable phenomenon”, but predictably, given their divergent political views, didn’t say if he preferred the billionaire to be president.

“We have emails relating to Hillary Clinton which are pending publication,” Assange told Peston on Sunday when asked if more of her leaked electronic communications would be published. About 32,000 emails from her private server have been leaked by Wikileaks so far, but Assange would not confirm the number of emails or when they are expected to be published. Speaking via video link from the Ecuadorian Embassy in London, Assange said that there was enough information in the emails to indict Clinton, but that was unlikely to happen under the current Attorney General, Obama appointee Loretta Lynch. He does think “the FBI can push for concessions from the new Clinton government in exchange for its lack of indictment.”

Well done, boys. Next!

• First Mammal Species Wiped Out By Human-Induced Climate Change (G.)

The Bramble Cay melomys has become extinct, Australian scientists say (/span)

Human-caused climate change appears to have driven the Great Barrier Reef’s only endemic mammal species into the history books, with the Bramble Cay melomys, a small rodent that lives on a tiny island in the eastern Torres Strait, being completely wiped-out from its only known location. It is also the first recorded extinction of a mammal anywhere in the world thought to be primarily due to human-caused climate change. An expert says this extinction is likely just the tip of the iceberg, with climate change exerting increasing pressures on species everywhere. The rodent, also called the mosaic-tailed rat, was only known to live on Bramble Cay a small coral cay, just 340m long and 150m wide off the north coast of Queensland, Australia, which sits at most 3m above sea level.

It had the most isolated and restricted range of any Australian mammal, and was considered the only mammal species endemic to the Great Barrier Reef. When its existence was first recorded by Europeans in 1845, it was seen in high density on the island, with sailors reporting they shot the “large rats” with bows and arrows. In 1978, it was estimated there were several hundred on the small island. But the melomys were last seen in 2009, and after an extensive search for the animal in 2014, a report has recommended its status be changed from “endangered” to “extinct”.

Led by Ian Gynther from Queensland’s Department of Environment and Heritage Protection, and in partnership with the University of Queensland, the survey laid 150 traps on the island for six nights, and involved extensive measurements of the island and its vegetation. In their report, co-authored by Natalie Waller and Luke Leung from the University of Queensland, the researchers concluded the “root cause” of the extinction was sea-level rise. As a result of rising seas, the island was inundated on multiple occasions, they said, killing the animals and also destroying their habitat.

It’s starting to look like Merkel no longer understands the limits of her powers.

• Merkel Ready To Give In To ‘Blackmail’ Over Turkish Visas (BB)

According to a British diplomat, Chancellor Angela Merkel is ready to give visa-free travel in the Schengen zone to 75 million Turkish citizens despite the failure to meet key EU conditions. In starkly undiplomatic language, British Ambassador to Germany Sir Sebastian Wood has said that Chancellor Merkel’s officials are ready to strike a “compromise formulation” on the Turkish terrorism law which was a sticking point to the proposed EU-Turkey migrant deal. The Turkish leader, President Erdogan, recently said that telling his country to soften its counter-terror laws was tantamount to asking it to give up its struggle against terrorism. In saying so he was threatening to scupper the deal which is designed to give Turks visa-free travel to Europe in return for stemming the flow of illegal migrants to the continent.

At first the EU said it would not give in to Turkish pressure, but now The Daily Telegraph reports that a leaked diplomatic telegram (‘DipTel’) written last month by Sir Sebastian suggests otherwise. In the May 13 memo, Sir Sebastian said President Erdogan’s pursuit of German satirist Jan Böhmermann “only strengthened the view that he is an authoritarian bully who is trying to blackmail Europe.” He also wrote, regarding the migrant deal: “Despite the tough public line, there are straws in the wind to suggest that in extremis the Germans would compromise further to preserve the EU-Turkey deal. “Merkel has begun to paint the deal in humanitarian terms, (pointing out that since it came into force, only 9 people have drowned), to pre-empt human rights opposition. Officials here have shown some interest, behind the scenes, about possible compromise formulations on the anti-terror law.”

As I said before: the plan is to leave them all stranded in Greece.

• Stranded Refugees Line Up For Greek Asylum Cards (Kath.)

Greece aims to register 1,400 people a day in its new asylum access system in a bid to expedite asylum applications by refugees, to relocate them to other EU member-states or reunite them with their families. The operation, which began last Wednesday, seeks to deal with the some 48,000 migrants – many with expired papers – who got stranded on the Greek mainland after the Balkan route into Europe was closed. So far, 1,200 people have been “pre-registered” – as the process has been dubbed – in Athens and Thessaloniki. Pre-registration will grant refugees and migrants the legal right to stay in Greece for one year and access to basic services.

According to the head of Greece’s asylum service, Maria Stavropoulou, “pre-registration” will be “a first step either for relocation to other member-states, or for family reunification, or to apply for international protection in Greece.” Once they are registered, refugees receive an asylum applicant’s card which means they will get an interview in the next few months with the asylum service. The program will last for two months and aims to pre-register all applicants that arrived in Greece from January 1 2015 until March 19, 2016, the day before the treaty between the EU and Turkey to stem their flow went into effect. The process is open to three different groups: those with the right to move to EU countries where they have relatives as part of the family reunion program, those that will be part of the resettlement program (Syrians and Iraqis), and those who want to apply for asylum in Greece.

Debt Rattle June 2 2016

Jun 022016

June 2, 2016 Posted by Raúl Ilargi Meijer at 8:21 am Finance Tagged with: Brexit, China, genocide, hard landing, homeless, housing, Troika, Trump, Turkey 3 Responses »

Gottscho-Schleisner New York City views. Looking down South Street 1933

• China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)

• China’s Latest Export: Broken Deals (WSJ)

• US Construction Spending Collapses – Worst April Since 2009 (ZH)

• Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)

• Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)

• Donald Trump To Visit UK On Day Of EU Referendum Result

• Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)

• Greece Under Troika Rule (Wren-Lewis)

• Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)

• OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)

• Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)

• EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)

• The ECB’s Illusory Independence (Varoufakis)

• German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little..”

• China’s Hard Landing Began Last Year, And It’s Going To Get Worse (SCMP)

Economist and financial author Richard Duncan believes China’s economy entered into a hard landing in 2015, with the slowdown set to deepen into a slump that will prove to be “severe and protracted”. At its core, a growth model that relied too heavily on investment and exports has left the economy deeply imbalanced, with few drivers that can now take up the slack. Duncan has published a series of videos explaining why, in his opinion, China’s economic development model of export-led and investment-driven growth is now in crisis. The South China Morning Post brings you the second video in that series.

“Perhaps not since the Pharaohs built the pyramids with slave labour has investment made up such a large share of a country’s economy and household consumption made up so little,” Duncan said. “This enormous gap between investment and consumption means China’s economy is now wildly unbalanced.” Underscoring the scale of China’s reliance on investment as an engine of growth, consider how much it has ramped up spending in this area in just a few short years, compared to that of the US, the world’s largest economy. In 2014, investment in the US was US$177 billion higher than 2007, a growth rate of 6%. In 2014, the level of investment in China was US$3.2 trillion more than it was in 2007, representing growth of 236%.

Too much capital is fleeing.

• China’s Latest Export: Broken Deals (WSJ)

China’s global deal-making boom is coming undone. The mystery-shrouded Anbang Insurance is leading the way. It moved a step closer to hitting the trifecta of broken deals this week, just days after a major Chinese construction-equipment maker bailed on its bid to buy U.S. crane maker Terex. Announced overseas deals by Chinese companies topped 2015’s record before this year was half over, which would make China the world’s biggest buyer of foreign companies for the first time ever, according to Dealogic. Chinese companies have also failed to close on more deals than ever before, according to Dealogic.

It’s not a coincidence that the boom in Chinese overseas deal making occurred while businesses and individuals were pouring cash overseas, either to avoid an expected depreciation of the yuan or just to get assets out of the reach of Beijing. And the recent failures have happened while Beijing acts to stem the flow of these funds. That is just part of the weirdness that surrounds many of these deals, and their demise. Another is the opaque nature of the companies involved and the government owners or regulators that determine what is and isn’t allowed. Last are the reasons behind the deals, which have foreign regulators on edge. The latest deal on the ropes is Anbang’s planned $1.57 billion acquisition of U.S. insurer Fidelity & Guaranty Life, one of the biggest sellers of fixed indexed annuities.

Regulators in the U.S. have demanded but haven’t gotten detailed financial information from Anbang. Fidelity says it expects Anbang will try again to get the deal approved. It isn’t surprising that the company hasn’t provided the requested information. Efforts to figure out Anbang’s corporate structure or where its cash came from have so far failed to yield much clarity. This is the third proposed Anbang deal to run into trouble. First was its effort to buy Starwood Hotels & Resorts Worldwide Inc. After bidding up the price and threatening a rival deal, Anbang pulled out suddenly with little explanation.

Weather.

• US Construction Spending Collapses – Worst April Since 2009 (ZH)

Following a hope-strewn bounce in February and March, US Construction Spending plunged 1.8% in April (massively worse than the expected 0.6% rise). This is the biggest monthly drop since January 2011 as while religious construction surged 9.6%, Commercial, Healthcare, and Education construction all plunged with Communications and highway building collapsing 7.7% and 6.5% respectively. We are sure weather will be blamed but the 1.5% drop in residential construction is rather notable for an April – it is the weakest April since 2009.

Lend only to the rich.

• Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics (WSJ)

Last decade’s financial crisis left many losers in banking. One winner is the jumbo. The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era. These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis, a Wall Street Journal analysis found.

For banks, “it’s one of those damned if you do, damned if you don’t situations,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J. The Journal analyzed data on every mortgage approval reported to the federal government for home purchases in 2007 and 2014, the most recent available, including borrower race or ethnicity. In that period, each of the 10 biggest U.S. retail banks increased the share of its mortgage approvals that are jumbos. Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren’t linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.

Note: it’ll take the entire weekend.

• Brexit, Spexit, Grexit and Frexit Could All Collide In June 23 Weekend (MW)

The hedge funds will have prepped their positions. The investment banks will have ordered in pizza and extra coffee ready for a long night of dealing. Exit polls will have been commissioned, and currency traders will be ready to buy or sell sterling as soon as they start getting a clear idea of whether Britain has voted to stay in or get out of the EU on June 23. But hold on. In fact, it is not just the risk of Brexit that the markets need to be worrying about. In truth, the real drama is going to come over a long and difficult weekend, leading up to potentially wild day in European assets on Monday, June 27. Why? Over that weekend, Spanish voters will go back to the polls in another attempt to settle on a government, which may well see the far-left Podemos group make big gains.

Greece will be struggling to find the money to pay back its latest debts. And if the strikes in France escalate, the country may be close to running out of its strategic fuel reserves – and approaching a total meltdown. Brexit, Spexit, Grexit, and Frexit could all collide. The result? A car crash for the European markets. Brexit remains the most pressing worry for investors, and rightly so. With three weeks until the vote, the polls remain very close. The latest sample for the Daily Telegraph showed a five-point lead for “Remain,” and most have showed the two camps within five to 10 points of each other. But who knows what is going on? The UK hasn’t had a referendum like this for a generation. No one knows what questions to ask, what demographics to target and which side will be better at getting its people to the polling booths on the day.

Either side could win comfortably. Here is the interesting point, however. It may take until the weekend to work out what has happened. The TV networks have decided against an extensive exit poll, on the grounds that they don’t know how to make it accurate. The hedge funds are reported to be spending a lot of money on private exit polls, and the currency markets will tell us what those results look like.

Brilliant: “I think I would be a great uniter. I think that I would have great diplomatic skills; I would be able to get along with people very well,” Trump said. “I had great success [in my life]. I get along with people. People say, ‘Oh gee, it might be tough from that standpoint’, but actually I think the world would unite if I were the leader of the United States.”

• Donald Trump To Visit UK On Day Of EU Referendum Result

Donald Trump, the presumptive Republican nominee in the US presidential election, has confirmed he is to visit the UK later this month to attend the official reopening of his hotel and golf resort in Scotland. The billionaire property developer will be at the Turnberry hotel at the golf course in Ayrshire on 24 June for its official relaunch following a £200m redevelopment. Trump’s announcement throws up the question of whether David Cameron will meet him, as the visit comes the day after the UK’s referendum on EU membership on 23 June – a vote some polls suggest the prime minister faces losing. The Turnberry hotel, which Trump bought in 2014 for £35m, opened to guests on Wednesday. It features a £3,500-a-night presidential suite and, from August, the Donald J Trump ballroom – “the most luxurious meeting facility anywhere in Europe”, according to his publicists.

“Very exciting that one of the great resorts of the world, Turnberry, will be opening today after a massive £200m investment. I own it and I am very proud of it,” Trump said in a statement. He will not be officially confirmed as Republican nominee until the party’s convention in July. And his campaign did not say whether he planned any political activity while in the UK – or whether his trip was a coincidence. Trump has often weighed in on the referendum, and believes the UK should leave the EU. He told Fox News in May: “I know Great Britain very well. I know the country very well. I have a lot of investments there. I would say that they’re better off without it. But I want them to make their own decision.” He recently told Hollywood Reporter, “Oh yeah, I think they should leave”, after being initially unfamiliar with the term “Brexit”.

Ambrose on Brexit. I’m sure many Britons feel this has nothing to do with them, it’s just a bunch of middle-aged right wingers squaring off.

• Leave Camp Must Accept That Norway Model Is The Only Safe Way To Exit EU (AEP)

There have been two excellent reports on the EEA option, one by the Adam Smith Institute and another entitled ‘Flexcit’ by Richard North from the EU Referendum blog. The Adam Smith Institute starts from the premise that the EU is “sclerotic, anti-democratic, immune to reform, and a political relic of a post-war order that no longer exists.” It says the EEA option lets the public judge “what ‘out’ looks like” and keeps disruption to a minimum. “The economic risks of leaving would thus be neutralised – it would be solely a disengagement from political integration. All the business scare stories about being cut off from the single market would fade away,” it said. The report argues that everybody could live with an EEA compromise, whether the Civil Service, or the US, or the EU itself.

Britain would then be a sovereign actor, taking its own seat on the global bodies that increasingly regulate everything from car standards, to food safety, and banking rules. “As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle,” it says. David Cameron disparages the Norwegian model as a non-starter. “While they pay, they don’t have a say,” he says. Actually they do. As our forensic report on Norway by Szu Ping Chan makes clear, they have a de facto veto over EU laws under Article 102 of the EEA agreement. Their net payments were £106 a head in 2014, a trivial sum.

They are exempt from the EU agricultural, fisheries, foreign, defence, and justice policies, yet they still have “passporting” rights for financial services. Their citizens can live in their Perigord moulins or on the Costa Del Sol just as contentedly as we can. They do not have to implement all EU law as often claimed. Norway’s latest report shows it has adopted just 1,349 of the 7,720 EU regulations in force, and 1,369 out of 1,965 EU directives. The elegance of the EEA option is that Britain would retain access to the EU customs union while being able to forge free trade deals with any other country over time.

Not the biggest fan of Wren-Lewis, but this is good.

• Greece Under Troika Rule (Wren-Lewis)

“The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.” – Karl Polanyi (1944), “The Great Transformation” (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong. I therefore used in a 2014 post an earlier example of where one country allowed another to suffer for what was thought to be sound economics and their own ultimate good (‘a sharp but effectual remedy’): the British treatment of Ireland during the famine. The British held back relief because of a combination of laissez-faire beliefs and prejudice against Irish catholics. Replace famine relief with debt relief and Irish operating an inefficient agricultural system with lazy Greeks and an economy in need of structural reform, and the two stories have strong similarities, although of course the scale of the suffering is different.

To understand why the Greek crisis goes on you need to understand its history. That the Greek government borrowed too much is generally agreed. What is often ignored is that the scale of the excess borrowing meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government. The money the Eurozone lent to Greece largely went to pay off Greece’s creditors. There was absolutely nothing that obliged Eurozone leaders to lend their voters money to bail out these creditors. Pretty well all the analysis I saw at the time suggested it would be money that Greece would be unable to pay back.

If European leaders felt their banking systems needed support, they could have done this directly. But instead they convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting. To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy. Whereas the Irish and Spanish economies are beginning to recover and regain market access, Greece is miles away from that, and the Troika’s structural reforms are partly to blame.

When will the Chinese start buying?

• Greek Home Prices Down 45%, Seen Dropping Another 20-25% By 2018 (Kath.)

Property market professionals are expecting house prices in Greece to drop further by up to 25% in the next few years, reporting a sudden rise in supply of properties owing to the upcoming repossessions, while demand will continue to fall due to the recessionary measures of the new bailout agreement. Since end-2008, house prices in the country’s two main cities, Athens and Thessaloniki, have fallen by an average of 45%, according to data from the Bank of Greece. The decline for the country as a whole comes to 41%. Therefore if the above estimate proves right, by the time the bailout period is supposed to be completed (in May 2018), the loss in residential properties’ market value will amount to 65-70%, or even more in some cases.

Giorgos Litsas, the head of chartered surveyors GLP Values, tells Kathimerini that “just under a year ago, when the agreement between the government and its creditors became known in the context of the capital controls, we estimated that the new bailout deal would entail a further 18% drop in home prices. Now, after the measures passed and under the threat of repossessions, we have had to revise the estimated drop in prices over the next couple of years to 20% or even 25%, particularly when taking into account the shift in supply of houses in a saturated market with no demand.”

You don’t say: “We’re a little concerned about housing prices in the greater Vancouver area and Toronto..”

• OECD Warns Of “Disorderly Housing Market Correction” In Canada (ZH)

With regulators and local authorities unable or unwilling to crack down on the unprecedented housing bubble in select Canadian cities, increasingly used by Chinese oligarchs to park hot cash offshore, the local banks are starting to take action into their own hands. Case in point, Bank of Nova Scotia has decided to ease off on mortgage lending in Vancouver and Toronto due to soaring prices, Chief Executive Officer Brian Porter said. “We’re a little concerned about housing prices in the greater Vancouver area and Toronto,” Porter, 58, said Tuesday in an interview on Bloomberg TV Canada. “We just took our foot off the gas the last couple quarters in terms of mortgage growth for the reasons I cited, in terms of Vancouver and Toronto.”

Nationwide home sales in April jumped 10.3% from a year earlier, the most activity for that month and the second-highest level ever, according to the Canadian Real Estate Association. In Vancouver, prices rallied 25% in the month to an average of C$844,800 ($643,000) and sales climbed 15%. Toronto prices jumped 13% to C$614,700 and sales rose 7%, the association said. Then again, while Porter did tacitly admit that soaring housing prices are a threat, he also added that “generally, Canadians have a strong ability to self regulate and they’ve demonstrated that before.”

That may be in doubt, because none other than the OECD itself rang a alarm bells over the frothy nature of the Toronto and Vancouver housing markets and high levels of consumer debt. “Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market,” the Organization for Economic Co-operation and Development warned again today in its latest outlook quoted by the Globe and Mail.

Just drive up home prices high enough. And then there’s people saying: ‘we have to build our way out of this’. Oh, lord.

• Number Of Homeless People In Vancouver Reaches 10-Year High (G&M)

The number of homeless people in Vancouver is the highest in a decade, underscoring an affordability crunch that has worsened even as the local government has spent millions on new housing. Vancouver recorded 1,847 people without permanent housing during its annual homeless count in March – a 6-per-cent increase from a year earlier – in a city whose mayor came to office promising to end homelessness by the end of 2015. In releasing the tally on Tuesday, the city highlighted steps it had taken in recent years to build new homes and protect affordable housing, including changing its bylaws to make it more difficult for the owners of single-room occupancy hotels to evict low-income tenants.

But critics say those measures aren’t enough, especially when skyrocketing real estate prices make it tempting for building owners to evict tenants so they can sell or redevelop their properties. “We are not surprised by the numbers. What we are seeing in the Downtown Eastside – and it is happening across [Metro Vancouver] – is the loss of low-income housing,” Maria Wallstam, a spokeswoman for Carnegie Community Action Project, said Tuesday after the city released its report. “The existing low-income housing stock is being demolished, the rents are going up, or it’s being developed,” she added. “There are simply no options for people to live.” The homeless count, conducted over two nights in March, found 1,847 people who were homeless, compared with 1,746 in 2015.

The total comprises less than 1% of Vancouver’s population – 603,500 in the 2011 census – but is slightly higher than the level in several other Canadian cities, including Toronto and Saskatoon, the report said. The count showed that 61% had been homeless for less than a year and 78% were facing at least one physical or mental-health concern, or both. “What jumps out at me is the complexity of the issues behind these numbers,” said Jonathan Oldman, executive director of the Bloom Group, a non-profit organization that provides housing and support services in the Downtown Eastside.

All pigs are equal.

• EU Gives Budget Leeway To France ‘Because It Is France’ – Juncker (R.)

The European Commission has given France leeway on fiscal rules “because it is France,” the president of the EU executive Jean-Claude Juncker said on Tuesday, in a remark that may not go down well in Germany and other more thrifty euro zone states. The EU is debating how to best apply its fiscal rules, which require a budget deficit under 3% of GDP and public debt to fall, at a time when some argue that more public spending would help boost economic growth. The Commission, which is in charge of monitoring national budgets and recommending corrective measures, is sometimes accused by Germany and other northern euro zone governments of being to lenient in applying EU budget rules.

The EU executive arm gave France in 2015 two more years to bring its deficit below 3% of GDP, even though Paris appeared to miss agreed targets. Asked why the Commission, on several occasions, had turned a blind eye to French infractions, Juncker admitted candidly in an interview with the French Senate television Public Senate that it did so “because it is France”. “I know France well, its reflexes, its internal reactions, its multiple facets,” Juncker said, adding that fiscal rules should not be applied “blindly”. He then reiterated that France should respect its current commitment to bring its deficit below 3% next year.

It’s politics all the way down.

• The ECB’s Illusory Independence (Varoufakis)

A commitment to the independence of central banks is a vital part of the creed that “serious” policymakers are expected to uphold (privatization, labor-market “flexibility,” and so on). But what are central banks meant to be independent of? The answer seems obvious: governments. In this sense, the ECB is the quintessentially independent central bank: No single government stands behind it, and it is expressly prohibited from standing behind any of the national governments whose central bank it is. And yet the ECB is the least independent central bank in the developed world. The key difficulty is the ECB’s “no bailout” clause – the ban on aiding an insolvent member-state government. Because commercial banks are an essential source of funding for member governments, the ECB is forced to refuse liquidity to banks domiciled in insolvent members. Thus, the ECB is founded on rules that prevent it from serving as lender of last resort.

The Achilles heel of this arrangement is the lack of insolvency procedures for euro members. When, for example, Greece became insolvent in 2010, the German and French governments denied its government the right to default on debt held by German and French banks. Greece’s first “bailout” was used to make French and German banks whole. But doing so deepened Greece’s insolvency. It was at this point that the ECB’s lack of independence was fully exposed. Since 2010, the Greek government has been relying on a sequence of loans that it can never repay to maintain a façade of solvency. A truly independent ECB, adhering to its own rules, should have refused to accept as collateral all debt liabilities guaranteed by the Greek state – government bonds, treasury bills, and the more than €50 billion ($56 billion) of IOUs that Greece’s banks have issued to remain afloat.

Storm, teacup: 11 of the EU’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

• German Vote on Armenian Genocide Riles Tempers, and Turkey (NY Times)

If modern Germany has a mantra, it is that people should learn from their history. Yet Berlin’s latest attempt at reconciliation with the past focuses on the mass killing of Armenians by Ottoman Turks a century ago. And that gesture toward atonement has riled tempers on all sides of the already strained European relations with Turkey. The argument is set to peak on Thursday in a debate in the German Parliament, which is expected to overwhelmingly approve a resolution that officially declares the century-old Armenian massacres to be genocide — and condemns the then-German Empire, allied with Ankara, for failing to act on information it had at the time about the killings.

President Recep Tayyip Erdogan of Turkey said late Tuesday that he had warned Chancellor Angela Merkel of Germany in a telephone call that there could be consequences if the resolution passes. For Turkey, there is scarcely a more sensitive topic than what German and international historians say was the murder of more than a million Armenians and other Christian minorities from 1915 to 1916. The Turkish government has long rejected the term genocide, saying that thousands of people, many of them Turks, died in the civil war that destroyed the Ottoman Empire. For Germany, the resolution comes at a delicate time for Ms. Merkel.

She is relying on Turkey to stem the flow of migrants from the Middle East to Europe, a policy that has earned her criticism for allying with the increasingly authoritarian Mr. Erdogan. “If Germany is to be deceived by this, then bilateral, diplomatic, economic, trade, political and military ties — we are both NATO countries — will be damaged,” Mr. Erdogan told Turkish reporters before leaving on an official trip to Africa. To date, 11 of the European Union’s 28 members have recognized the Armenian killings as genocide and, despite initial protests, Turkey has maintained good relations with several of those countries.

Debt Rattle August 11 2015

Aug 112015

August 11, 2015 Posted by Raúl Ilargi Meijer at 9:23 am Finance Tagged with: China, currency war, deflation, devaluation, food, Greece, refugees, spending, Troika, yuan 1 Response »

Howard Hollem Assembly and Repairs Department Naval Air Base, Corpus Christi 1942

• China Slashes Yuan Reference Rate by Record 1.9% (Bloomberg)

• How To Anger Asia And The Fed In One Go: Devalue The Yuan (CNBC)

• Emerging Stocks Head for Two-Year Low After China Devalues Yuan (Bloomberg)

• China Joins The Global Devaluation Party (Coppola)

• Chinese Spurn Unprecedented 30% Car Discounts Amid Slowdown (Bloomberg)

• U.S. Consumers Rein in Spending Growth Plans, New York Fed Says (Bloomberg)

• Greece And Lenders Reach Deal On Third Bailout (Kathimerini)

• Germans And Slovaks Stand Ready To Scupper Greek Deal (Telegraph)

• Germany Gained €100 Billion From Greece Crisis, Study Finds (AFP)

• Greek Military: Armed and Financially Dangerous (Zeit)

• Deflation Stalks the Euro Zone (Bloomberg)

• Bank of Russia Gets Putin’s Praise as Ruble Rebounds With Crude (Bloomberg)

• Impeaching Rousseff Would Set Brazil On Fire: Senate Chief (Reuters)

• UK Farming Unions Call For ‘Seismic Change’ In Way Food Is Sold (Guardian)

• New Zealand A ‘Virtual Economic Trade Prisoner Of China’ (Nz Herald)

• EU To Provide $3.6 Billion Funding For Migrant Crisis Over 6 Years (Reuters)

• French Police Say Time To ‘Bring In British Army’ To Calais (RT)

• History In Motion (Pantelis Boukalas)

• Japan Restarts Sendai Nuclear Reactor Despite Public Opposition (Fairfax)

• A Good Week For Neutrinos (Butterworth)

I haven’t seen anyone in the US whine about currency manipulators yet. Da Donald?

• China Slashes Yuan Reference Rate by Record 1.9% (Bloomberg)

China devalued the yuan by the most in two decades, ending a de facto peg to the dollar that’s been in place since March and battered exports. The People’s Bank of China cut its daily reference rate for the currency by a record 1.9%, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. The change was a one-time adjustment, the central bank said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing. “It looks like this is the end of the fixing as we know it,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group. “The one-off devaluation of the fix and allowing more market-based determination takes us into a new currency regime.”

The PBOC had been supporting the yuan to deter capital outflows and encourage greater global usage as China pushes for official reserve status at the IMF. The intervention contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters and made the yuan the best performer in emerging markets, eroding the competitiveness of Chinese exports. [..] The currency’s closing levels in Shanghai were restricted to 6.2096 or 6.2097 versus the dollar for more than a week through Monday and daily moves has been a maximum 0.01% for a month. The devaluation triggered declines of at least 0.9% in the Australian dollar, South Korea’s won and the Singapore dollar, while Hong Kong’s Hang Seng Index of shares rose 0.7%.

China has to balance the need to boost exports with the risk of a cash exodus, Tom Orlik, chief Asia economist at Bloomberg Intelligence, wrote in a research note. He estimates a 1% depreciation in the real effective exchange rate boosts export growth by 1 percentage point with a lag of three months. At the same time, a 1% drop against the dollar triggers about $40 billion in capital outflows, he wrote. “The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system,” Orlik wrote. The calculation from China’s leaders is that with their $3.69 trillion of currency reserves “they can manage any risks from capital flight,” he said.

The Fed must have been expecting this.

• How To Anger Asia And The Fed In One Go: Devalue The Yuan (CNBC)

A new Asian currency war and a delayed Federal Reserve rate hike; these are the potential market-shaking implications of Beijing’s decision to devalue the yuan, strategists told CNBC. “If they are true to their word today and this is a new regime for the fixed mechanism, we might think about using the word ‘floating’ associated with the Chinese exchange rate—that’s a massive change,” noted Richard Yetsenga, head of global markets research at ANZ, referring to Tuesday’s announcement by the People’s Bank of China to allow the yuan to depreciate as much as 2% against the U.S. dollar.

The move took global traders by surprise, with many pointing to weak July trade data, the recent stock market rout’s spillover impact on consumption, and aspirations for inclusion into the IMF’s Special Drawing Rights basket as factors motivating Beijing. “It’s an interesting move which means several things: when the People’s Bank of China first started lowering interest rates and reserve requirements, that freed up bank lending, which likely went to stocks. Now this yuan re-engineering will help companies that represent the greater economy, i.e. exporters, not just companies heavily weighted in stock markets,” explained Nicholas Teo, market analyst at CMC Markets.

China may be focused on becoming more market-oriented, but Tuesday’s announcement is the latest in a series of competitive devaluations in Asia and other emerging markets, traders said. “Clearly, this is a shock to the rest of Asia. If you look at China’s top trading partners—Korea, Japan, the U.S. and Germany—this is a competitive hit to the exports of those countries. China is exporting disinflation to countries who receive Chinese exports. This is especially negative for Asia currencies,” noted Callum Henderson, global head of FX Research at Standard Chartered.

There never was another option.

• Emerging Stocks Head for Two-Year Low After China Devalues Yuan (Bloomberg)

Emerging-market stocks headed for a two-year low and currencies sank after China devalued the yuan amid a deepening slowdown in its economy. China Southern Airlines and Air China sank at least 12% in Hong Kong on concern a weaker yuan will boost the value of their dollar-denominated debt. Indonesian stocks fell to a 17-month low. China’s currency slid the most in two decades versus the dollar. South Korea’s won fell 1.3% and Malaysia’s ringgit extended declines to a 1998 low. Russia’s ruble lost 0.6%. The MSCI Emerging Markets Index slid 0.4% to 884.02 at 3:28 p.m. in Hong Kong. China’s central bank cut its reference rate by 1.9%, triggering the yuan’s biggest one-day loss since the nation unified official and market exchange rates in 1994.

Data on Tuesday showed China’s broadest measure of new credit missed economists’ forecasts last month. “This is another effort by China to boost economic growth as a weaker currency could increase exports,” said Rafael Palma Gil, a trader at Rizal Commercial Banking Corp., which has $1.8 billion in trust assets. Investors should favor companies that earn dollars over those with large dollar-denominated debts, he said. MSCI’s developing-nation stock index has fallen 7.3% this year and trades at 11.2 times projected 12-month earnings, data compiled by Bloomberg show. The MSCI World Index has added 3.3% and is valued at a multiple of 16.4.

Eight out of 10 industry groups fell, led by industrial shares. China Southern Airlines tumbled 17% and Air China was poised for the biggest drop since April 2009. Hong Kong’s Hang Seng China Enterprises Index fell 0.6%, erasing earlier gains. The Shanghai Composite Index was little changed. Indonesia’s Jakarta Composite Index tumbled 2% on concern the yuan devaluation may weaken exports from Southeast Asia’s largest economy. Shipments to China, Indonesia’s third-largest trading partner, had already dropped 26% in the first half of 2015, according to government data.

Beggar thy neighbor to the bottom of the barrel.

• China Joins The Global Devaluation Party (Coppola)

As Chinese economic performance has worsened in recent months there has been a growing divergence between RMB “central parity” (the unofficial official exchange rate) and the RMB’s market rate. This increased sharply when the most recent statistics were released. Maintaining a higher parity than the market wants is costly, as Russia could tell you: China has been unloading its foreign reserves at a rate of knots to support its currency. Maintaining too high a parity is costly in other ways too. China’s precious export-led growth strategy is at risk from the rising dollar. The “macroeconomic and financial data” referred to by the PBOC includes sharply falling exports, particularly to the EU and Japan. July’s export figures were dismal, and the trade surplus was well below forecast.

Add to this the massive over-leverage of the Chinese economy – overtly engineered by the government – and recent stock market volatility, and devaluation was inevitable. The only surprise is that the PBOC has not acted sooner. Indeed, why hasn’t it acted sooner? After all, the Fed has been passively tightening monetary policy for a year now, ending QE and repeatedly signalling that rate hikes are on the horizon. This is principally why the yuan REER has been rising. Furthermore, both the ECB and the Bank of Japan are doing QE, depressing the Euro and the yen and forcing smaller countries to defend their currencies. Emerging market economies are particularly badly affected, but we shouldn’t forget about Switzerland, which is still trying to prevent its currency appreciating as capital flows in from the troubled Eurozone. Capital inflows can be every bit as damaging as capital outflows. Reuters has an explanation for the PBOC’s reluctance to join the devaluation party:

Analysts say Beijing has been keeping its yuan strong to wean its economy off low-end export manufacturing. A strong yuan policy also supports domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency.

This brings us back to the liberalization of the Chinese financial economy. China needs the yuan to be widely accepted OUTSIDE China if it is to have any chance of becoming one of the IMF’s SDR basket currencies – the essential prelude to becoming a global reserve currency. Hence PBOC’s reluctance to devalue. So now, having been forced to devalue because of bad economic news, the PBOC is making a virtue out of necessity. Devaluing the yuan is presented as part of its liberalization strategy. Not that the PBOC has any intention of moving to a free float any time soon, though its statement does signal that it might widen the band.

Might as well give them away. Next year’s models are on the way.

• Chinese Spurn Unprecedented 30% Car Discounts Amid Slowdown (Bloomberg)

Bill Shen wants to upgrade his 8-year-old Citroen to something fancier, maybe an Audi or a BMW. But the Shanghai resident is in no hurry. Cars keep getting cheaper. Facing the slowest growth in new car sales in four years, dealerships in China have chipped away at retail prices in the past several months. Now discounts of at least 30% are being offered in major cities on hundreds of models. Audi’s top-of-the-range A8L luxury sedan, originally listed for 1.97 million yuan ($317,000), is now going for 1.28 million yuan, according to Autohome, a popular car-pricing portal. “Prices are getting lower all the time, even as cars are getting better,” said Shen, 37, who works for an auto parts company. “If it’s not urgent, one can wait.”

Consumers like Shen represent the biggest threat to China’s new-vehicle market, which overtook the U.S. in 2009 to become the world’s biggest. With the Chinese economy flagging, and government curbs on car registrations and stock market volatility deterring would-be car buyers, the auto industry is pulling out unprecedented offers to drum up sales. Their success may be reflected in industry sales figures for July slated for release on Tuesday by both the Passenger Car Association and China Association of Automobile Manufacturers. “This round of price cuts is the worst in China’s auto industry history in terms of the number of models involved and the depth of the cuts,” said Su Hui, a deputy division head at the state-backed China Automobile Dealers Association and a 26-year veteran of the trade.

“Nobody saw it coming, not the government, not the automakers, not the dealers.” Besides discounting prices, carmakers and dealers are offering incentives such as subsidized insurance, zero down-payments, interest-free financing and boosting trade-in prices, according to brokerage Sanford C. Bernstein. Peugeot Citroen and Mazda. have warned of a looming price war that will damage profit margins. BMW said this month that slowing sales in China may force it to revise this year’s profitability goals.

They’re broke just like the Chinese?!

• U.S. Consumers Rein in Spending Growth Plans, New York Fed Says (Bloomberg)

U.S. consumers last month envisioned the slowest rate of growth in their planned spending in at least two years, according to a survey by the Federal Reserve Bank of New York released on Monday. The New York Fed’s July Survey of Consumer Expectations found that households expect to increase spending by 3.5% over the next year, down from the 4.3% gain seen in June, according to the median response. It was the lowest reading since the survey started in 2013. Median expected inflation over the next year was unchanged at 3%. The monthly New York Fed survey comes ahead of the release of a Commerce Department report on Thursday that is forecast to show U.S. retail sales rose 0.6% in July after falling 0.3% in June.

The Fed is looking for signs that the labor market and inflation have returned to normal before beginning to raise its benchmark federal funds rate. Most economists expect policy makers will act at their next meeting on Sept. 16-17. The Fed has kept rates near zero since 2008 to combat the worst economic crisis since the Great Depression. Spending data are important because the consumer underpins the Fed’s optimism that economic growth will accelerate. “That’s really fundamental to our improved outlook,” Chicago Fed President Charles Evans said during a breakfast with reporters last month. “We are really counting on the consumer playing a strong role.”

Tentatively for now.

• Greece And Lenders Reach Deal On Third Bailout (Kathimerini)

Greece and its lenders have reached an agreement on the terms of a third bailout, government sources said early on Monday. The deal appears to have been concluded shortly after 8 a.m. local time following a marathon last session of talks that began on Monday morning. Emerging from the Hilton hotel, where the negotiations were taking place, Finance Minister Euclid Tsakalotos suggested a deal is in place. “We are very close,” he told reporters. “There are a couple of very small details remaining on prior actions.”

Kathimerini understands that the agreement involves the government having to immediately implement 35 prior actions. The measures demanded include changes to tonnage tax for shipping firms, reducing the prices of generic drugs, a review of the social welfare system, strengthening of the Financial Crimes Squad (SDOE), phasing out of early retirement, scrapping tax breaks for islands by the end of 2016, implementation of the product market reforms proposed by the OECD, deregulating the energy market and proceeding with the privatization program already in place.

Should the agreement be finalized, it is likely to be voted on in Greek Parliament on Thursday. This would be followed on Friday by a Eurogroup and the process of other eurozone parliaments approving the deal. The European Stability Mechanism would then be in a position to disburse new loans to Athens before August 20, when Greece has to pay €3.2 billion to the ECB. Greece is aiming to receive €25 billion in the first tranche, allowing it to pay off international lenders, reduce government arrears and have €10 billion left for bank recapitalization.

Good. We wouldn’t want anything to run smoothly, would we? Where’s the fun in that?

• Germans And Slovaks Stand Ready To Scupper Greek Deal (Telegraph)

Eurozone creditor governments raised fresh concerns about the viability of a new Greek rescue package on Monday despite hopes from Athens that an agreement to unlock vital rescue funds was inching ever closer. Greeca and its creditor partners reportedly agreed on fiscal targets the country will need to hit over the next two years, on Monday evening. They would amount to a baseline of 0pc in 2015, followed by a primary surplus of 0.5pc the following year, and 1pc in 2017, according to an official quoted by Reuters. The targets would represent significant easing of the initial austerity measures demanded from Athens Leftist government, and reflect the severity of the damage that has been wrought to the economy by capital controls.

Creditors projections assume Greece will contract by another 0.5 pc in 2016, before returning to a 2.3% growth in 2017, the official added. However, in a sign of continued dissent among the ranks of Europe’s creditor nations, both Germany and Slovakia stood firm on the tough conditions Athens must accept as its price to stay in the eurozone. Sloviakian prime minister Robert Fico, who represents one of the most hardened member states against further eurozone largesse to Greece, insisted his government would not stump up a “single cent” in debt write-offs on Greece’s €330bn debt mountain. Without debt relief, the IMF has said it will pull out of talks with Athens until there is an “explicit and concrete agreement”, jeopardising the entire basis of a new three-year rescue package.

But Mr Fico said Slovakia would reject any attempt to cut the value of Greece’s debt and was “nervous” about the current status of talks between the Syriza government and its creditors. “Slovakia will not adopt a single cent on Greek sovereign debt, as long as I am prime minister”, he told Austria’s Der Standard. “There are other options: You can drag redemption dates but this also has limits: We can not wait 100 years until Greece repays its debts.” The IMF has recommended a maturity extension of another 30 years on Greece’s debt mountain; the country will already be paying back its creditors in 2057. Mr Fico added that he “wholeheartedly” supported German finance minister Wolfgang Schaeuble’s proposal for a “temporary” eurozone exit for Greece during eleventh hour summit talks in July.

“There are no rules in the EU over a euro exit…But that does not mean however, that you can not create the rules. The proposal with a fixed-term euro exit has advantages. I support the agreement reached for Greece, but we will be watching very closely what is happening now. We are nervous.”

Meanwhile, in the real world..

• Germany Gained €100 Billion From Greece Crisis, Study Finds (AFP)

Germany, which has taken a tough line on Greece, has profited from the country’s crisis to the tune of €100 billion, according to a new study Monday. The sum represents money Germany saved through lower interest payments on funds the government borrowed amid investor “flights to safety”, the study said. “These savings exceed the costs of the crisis – even if Greece were to default on its entire debt,” said the private, non-profit Leibniz Institute of Economic Research in its paper. “Germany has clearly benefited from the Greek crisis.” When investors are faced with turmoil, they typically seek a safe haven for their money, and export champion Germany “disproportionately benefited” from that during the debt crisis, it said.

“Every time financial markets faced negative news on Greece in recent years, interest rates on German government bonds fell, and every time there was good news, they rose.” Germany, the eurozones effective paymaster, has demanded fiscal discipline and tough economic reforms in Greece in return for consenting to new aid from international creditors. Finance Minister Wolfgang Schaeuble has opposed a Greek debt write-down while pointing to his own government’s balanced budget. The institute, however, argued that the balanced budget was possible in large part only because of Germany’s interest savings amid the Greek debt crisis.

The estimated €100 billion euros Germany had saved since 2010 accounted for over 3% of GDP, said the institute based in the eastern city of Halle. The bonds of other countries – including the United States, France and the Netherlands – had also benefited, but “to a much smaller extent”. Germany’s share of the international rescue packages for Greece, including a new loan being negotiated now, came to around €90 billion, said the institute. “Even if Greece doesn’t pay back a single cent, the German public purse has benefited financially from the crisis,” said the paper.

And on top of the €100 billion German profit from Greece, there are the secret side deals with German arms industry. That the Troika will refuse for Syriza to cut.

• Greek Military: Armed and Financially Dangerous (Zeit)

The Bonn International Center for Conversion has listed Greece among the most militarized countries since 1990. It was ranked ninth in 2014, ahead of all other NATO members – despite Greece’s financial crisis. “Athens’ high arms expenditures and extensive weapons purchases over the past years have contributed to the desolate budget situation,” according to BICC. The figures show that Greece invested nearly €6 billion in its military in 2000. Eight years later, the figure was €8.6 billion. In 2009, Europe’s NATO member countries spent an average of 1.7% of their GDPs on defense – Greece was at 3.1%. The country was among the world’s five biggest arms importers between 2005 and 2009, according to the Stockholm International Peace Research Institute.

Athens’ high arms expenditures and extensive weapons purchases over the past years have contributed to the desolate budget situation. In May 2010, Greece had to be saved from financial ruin, and eventually received a loan package of hundreds of billions of euros. The government used some of this money to buy more weapons. Now, even more cash is on the table. The Greek government, led by Alexis Tsipras, has accepted a number of conditions connected to the deal. Greece must save money. The value-added tax has been increased, pension payments are to decrease, state-owned companies are to be privatized, and corruption weeded out. But only marginal consideration has been given to the country’s huge military expenditures. The army remains sacrosanct.

Politicians and others in Germany have often harshly criticized Mr. Tsipras. But the critics seem to forget that debt-ridden Greece until recently was ordering armaments worth billions of euros from Germany. Between 2001 and 2010, Greece was the most important customer for the German defense industry. During this period, Greece bought 15% of all of Germany’s exports, SIPRI estimates. Greece’s armed forces have nearly 1,000 German-developed model Leopard 1 and 2 combat tanks. Including models from other countries, Greece has 1,622 tanks. The German military has 240 Leopard tanks in service. (That number is to increase by around 90 because of the crisis in Ukraine.) While the German armed forces have been shrinking and phasing out military equipment for years, Greece has gone the other way. No other E.U. country has more combat tanks today.

A very flawed article that presents predictions by Bloomberg Survey economists as fact.

• Deflation Stalks the Euro Zone (Bloomberg)

The euro zone is poised to record its ninth quarter of economic growth, with economists predicting that gross domestic product figures scheduled for release Friday will show the economy expanded by 0.4% in the second three months of the year. Unfortunately for the ECB, that revival isn’t dispelling the risk that disinflation will worsen into deflation. For reasons that future historians of economic policy may struggle to unravel, modern central bankers have decided that the Goldilocks rate of acceleration for consumer prices to run not too hot, not too cold, is 2%. And while forecasts compiled by Bloomberg suggest that economists expect the U.S. to achieve that state of inflationary nirvana in the first three months of next year, prices in the euro region are seen languishing at 1.5% in the first quarter of 2016 and then decelerating.

That outlook helps to explain why almost a quarter of the market for euro-zone government bonds has negative yields, meaning investors are paying for the privilege of keeping their money in $1.5 trillion of securities, according to data compiled by Bloomberg reporters Lukanyo Mnyanda and David Goodman. It has been almost a year, for example, since German two-year notes paid more than zero. The disparity in the inflation outlooks for the euro region and the U.S. is also driving a divergence in borrowing costs. As Bloomberg strategist Simon Ballard points out, investment-grade borrowers are paying more to borrow dollars than euros, and the gap has reached its widest level since at least December 2009.

I said it before: Elvira Nabiullina is a smart cookie. Moreover, Russian debt levels are very low compared to western nations. The demise of Putin is greatly exaggerated in the western press.

• Bank of Russia Gets Putin’s Praise as Ruble Rebounds With Crude (Bloomberg)

Russian President Vladimir Putin commended the central bank for its efforts to keep the ruble stable after policy makers called for calm as the currency bounced back from a six-month low. “The central bank is doing a lot to strengthen the national currency or in any case to ensure its stability and the stability of the financial system as a whole,” Putin said at a meeting with Governor Elvira Nabiullina. “I see how persistent you are in going down that path.” The Bank of Russia said on Monday that corporate debt payments in 2015 won’t overwhelm the foreign-exchange market with “excessive demand” after redemptions last year helped spark the worst currency crisis since 1998.

Companies and lenders have to repay as much as $35 billion out of the $61 billion that falls due from September to December, the central bank said on its website. The rest may be rolled over or refinanced because some of it is owed to affiliated companies, it said. [..] Policy makers are short on instruments as they try to avert another ruble collapse after a rushed switch to a freely floating currency in November. While the central bank has faced questions about its commitment to allow the market to set the ruble’s exchange rate, the Russian leadership has been more unabashed in acknowledging a measure of control over the currency market as the economy succumbs to a recession. Putin said in June that a weaker ruble was helping Russian companies weather the economic crisis.

The central bank last month halted foreign-currency purchases, started in mid-May to boost reserves, after a renewed slide in commodity prices triggered further ruble declines. It defended the operations as compatible with its free float and has pledged to avoid interventions unless the ruble’s swings threatened financial stability. With its statement on Monday, the central bank is conducting “verbal intervention aimed at stabilizing market sentiment regarding the ruble,” Dmitry Dolgin, an economist at Alfa Bank in Moscow, said by e-mail. “There are concerns on the market that the looming repayment of external debt will exert significant pressure on the balance of currency demand and supply on the domestic market, especially under the conditions of falling oil prices.”

Her popularity rate is at 8%.

• Impeaching Rousseff Would Set Brazil On Fire: Senate Chief (Reuters)

The president of Brazil’s Senate said on Monday that attempting to impeach President Dilma Rousseff was not a priority and warned that seeking her removal in Congress would “set the country on fire.” Renan Calheiros, who is often critical of the administration, struck a more positive tone amid a deepening political crisis after seven months into Rousseff’s second term. Many of the president’s opponents in Congress have called for her impeachment for allegedly breaking the law by doctoring fiscal accounts to allow her government to spend more in the run-up to her re-election in October. Calheiros, a leader of the country’s biggest party, the PMDB, spoke to reporters after meeting with Finance Minister Joaquim Levy to discuss the government’s fiscal austerity plan.

He promised to bring to a vote this week a bill that rolls back payroll tax breaks, which would save the government nearly 13 billion reais ($3.78 billion) a year. The rollback is the last key bill to be approved in an austerity package aimed at preserving the country’s investment-grade rating. The Brazilian real, buffeted by political uncertainty in recent weeks, added some gains after Calheiros’ comments. The lower chamber of Congress, whose speaker recently defected to the opposition, decides whether to start an impeachment process, which then goes to the Senate for a final ruling. Rousseff would be suspended as soon as the lower chamber agrees to impeach her, which requires two-thirds of the votes.

Rousseff’s support in Congress is rapidly fading as the economy heads toward a painful recession and a widening corruption scandal at state oil company Petrobras rattles the country’s political and business elite. Her popularity is at record lows and opponents plan a nationwide anti-government protest on Sunday. Congress has resisted Rousseff’s austerity efforts by watering down measures to cut expenditure and raise taxes, while passing bills that raise public spending.

But.. but.. that’s protectionism…!

• UK Farming Unions Call For ‘Seismic Change’ In Way Food Is Sold (Guardian)

Farming is in a “state of emergency” and a “seismic change” is needed to the way food is sold in Britain, agriculture leaders have warned after a crisis summit on falling milk prices. Leading farming unions called on the government to introduce long-term contracts between farmers, distributors and supermarkets and to force retailers to clearly label whether their products are British or imported. The emergency summit in London followed days of protests from farmers over the sharp fall in the prices they are being paid for milk. Asda and Morrisons distribution centres have been blockaded, farmers have removed cartons of milk from supermarkets and cows were paraded through the aisles of an Asda store in Stafford.

Figures from AHDB Dairy, the trade body, show that the average UK farmgate price for milk – the price that farmers are paid – has fallen by 25% over the last year, to 23.66p per litre. Industry experts claim it costs farmers 30p per litre to produce milk, meaning farms have been thrown into chaos by the drop in prices. Farmers have blamed the fall in prices on a supermarket price war but retailers claim the drop reflects declining commodity prices and an oversupply of milk, partly caused by Russia’s block on western imports. Farmers For Action, the campaign group behind the milk protests, is scheduled to meet representatives from Morrisons on Tuesday to discuss the crisis.

The farming unions warned of “dire consequences for the farming industry and rural economy” if the way in which food is sold does not change in the near future. The presidents of the NFU, NFU Scotland, NFU Cymru, Ulster Farmers Union and four other unions, said: “We would urge farm ministers across the UK to meet urgently. They need to admit that something has gone fundamentally wrong in the supply chain and take remedial action. “In general, voluntary codes are not delivering their intended purpose. Government needs to take action to ensure that contracts to all farmers are longer-term and fairer in apportioning risk and reward. “Government also needs to urgently ensure that rules are put in place regarding labelling so that it is clear and obvious which products are imported and which are British.”

Sold their soul.

• New Zealand A ‘Virtual Economic Trade Prisoner Of China’ (Nz Herald)

No one doubts the benefits of extending our trade opportunities – but many are alarmed at a dangerous naivety in what passes for our trade policy. That policy reflects our unfortunate dependence on a single commodity; our anxiety to maximise our one trading advantage by currying favour with powerful trading partners has led us into some treacherous waters. We have, for example, rapidly built up a Chinese market for our dairy produce with the result that – without any assurance that that market will remain open to us – we are now virtually economic prisoners, forced to meet almost any Chinese demand in order to retain a market that has become our life blood.

We have chosen, for example, to avert our gaze from the obvious effects of Chinese intervention in the Auckland property market for fear of offending Chinese opinion. More importantly, we have apparently not recognised that the Chinese interest goes beyond merely buying our products in a normal trading relationship, but extends to obtaining control of the productive capacity itself. Dairy farms themselves, processing plants, manufacturing capacity, expertise of various sorts are now owned by Chinese operators; their production increasingly by-passes New Zealand economic entities and suppliers and is marketed by Chinese companies directly to the Chinese consumer.

There are of course many instances of Chinese capital being deployed across the globe in pursuit of assets and capacity. This is not a cause for criticism – the Chinese are entitled like anyone else to pursue their own interests. It is simply a statement of fact. We, however, seem unaware of what is happening. It is no accident that this direct supply to the Chinese market has accompanied a fall in the proportion of New Zealand dairy production handled by Fonterra. While the proportion of our dairy production under Chinese control is still quite small, there can be little doubt that it will grow.

Low dairy prices will force the sale of a number of farms to foreign owners. As the Chinese increasingly control their own sources of supply, their reduced requirements for dairy produce on international markets will inevitably mean downward pressure on prices. Nor is it just the ownership of the physical product that has passed into foreign and often Chinese hands. The decision to allow non-farmer ownership of “units” (or, in other words, shares) in Fonterra has meant that we must now face the prospect of a significant part of the income stream from our most important industry to pass into private and often foreign hands.

Over 6 years?! How about right now, and handle the issue properly?

• EU To Provide $3.6 Billion Funding For Migrant Crisis Over 6 Years (Reuters)

The European Commission on Monday approved €2.4 billion of aid over six years for countries including Greece and Italy that have struggled to cope with a surge in numbers of immigrants. Italy is to receive the most aid – nearly €560 million, while Greece will receive €473 million. Tensions have escalated this year as thousands of migrants from the Middle East and Africa try to gain asylum in the European Union. In Calais, a bottleneck for migrants attempting to enter Britain illegally through the Eurotunnel from France, has seen several migrant deaths this month.

Britain has already received its €27 million from the commission in emergency aid funding, which it applied for in March. France will receive its €20 million later this month. Neither country has requested additional aid for security in Calais and will not receive funds from the latest aid program. “We are now able to disburse the funding for the French national program and the UK has already received the first disbursement of its funding,” Natasha Berthaud, a European Commission spokeswoman, said. . “Both of these programs will, amongst other things, also deal with the situation in Calais.” The Commission plans to approve an additional 13 programs later this year, which will then be implemented by EU member states.

The only answer Europe ever seems to have.

• French Police Say Time To ‘Bring In British Army’ To Calais (RT)

Police in Calais, from where thousands of illegal immigrants from Africa and the Middle East risk their lives trying to cross the English Channel to make it to the UK, have suggested bringing in the British army to curb the crisis. The head of the Alliance union for police deployed to the French port and Eurotunnel site, Bruno Noel, has warned that the situation could soon get out of control if additional help is not provided. He complained that his unit is “doing Britain’s dirty work.” “We have only 15 permanent French border police at the Eurotunnel site,” the Daily Telegraph quoted him as saying. “Can you imagine how derisory this is given the situation? “So I say, why not bring in the British Army, and let them work together with the French?” Mr Noel added.

According to different estimates, between 2,000 and 10,000 migrants in Calais are trying to cross the English Channel. Many have attempted to reach Britain by boarding trains through the tunnel or on lorries bound for UK destinations. Twelve people have died this year attempting to reach the UK. The numbers of migrants in the Calais camp, known as The Jungle, have soared over the past few months from 1,000 in April to nearly 5,000 by August. The first call to use British troops was made by Kevin Hurley (former Head of Counter Terrorism for City of London Police, an ex-Paratrooper and an expert on international security), who is currently Police and Crime Commissioner for Surrey. He said the problems stemming from the crowds of migrants trying to enter the UK from Calais through the Channel Tunnel could be dealt with efficiently by Gurkha regiments, based close by in Hythe, a small British coastal market town on the south coast of Kent.

The 700-strong 2nd Battalion of the Royal Gurkha Rifles has been based in the Shorncliffe and Risborough barracks just outside Hythe since 2000, according to Office of the Police and Crime Commissioner for Surrey. “I am increasingly frustrated by the huge numbers of illegal migrants who jump out of the backs of lorries at the first truck stop – Cobham Services in Surrey – and disappear into our countryside. There were 100 in the last month alone,” Mr Hurley said late last month. “But, while the UK and French governments decide their next prevention strategy we, the British police, have to deal with the immediate problem. The Gurkhas are a highly respected and competent force, and are just around the corner. They could help to ensure that our border is not breached,” he added.

Mass migrations cannot be stopped.

• History In Motion (Pantelis Boukalas)

Throughout the history of mankind the walls protecting cities under siege were never able to keep a determined enemy away forever – a first wave would be followed by a second, and so on. But when that enemy conquered those cities, the waves would stop. However, the overwhelming waves of migrating people that are reaching our shores today, mobilized by the desperate need for survival as opposed to the desire to conquer, will simply keep coming. These desperate people are trying to escape Middle Eastern, Asian and African countries where poverty, war and a lack of freedom threaten their very existence. What has been set in motion now is not the persecution of certain populations, but history itself.

This process cannot be halted, no matter how many fences are erected, no matter how many high walls are put up, such as the ones under construction by Hungary at its border with Serbia, or those envisioned by controversial mogul Donald Trump, a candidate for the Republicans’ presidential ticket, at the US-Mexico border. As for the Channel Tunnel, do the British truly believe that 50,000 – instead of 5,000 – determined refugees in Calais could be prevented from crossing at the mere sight of police officers and weapons? A recent editorial in The New York Times was poignant: “Residents on the island of Lesbos – where many refugees from the Middle East land because of its proximity to Turkey – have responded generously, providing meals, blankets and dry clothing.

Their response should shame others in Europe, particularly the British government, which is panicking over the prospect that a mere 3,000 migrants in Calais, France, might make it across the English Channel.” So far, despite officials’ meetings, the positions of Central and Northern Europe with regard to the refugee issue leaves a lot to be desired. As if Italy’s southern borders and Greece’s eastern borders were not the European Union’s own borders.

“..only two of 85 medical institutes and 15 of 159 nursing and other care facilities within a 30-kilometre radius of the Sendai plant had proper evacuation plans.”

• Japan Restarts Sendai Nuclear Reactor Despite Public Opposition (Fairfax)

Japan has restarted its first nuclear reactor since new safety rules were ordered in the wake of the 2011 Fukushima disaster, despite vocal public opposition and anxiety. After months of debate about safety, the No 1 reactor at the 30-year-old Sendai nuclear power plant, on the southwest island of Kyushu, became the first to be brought back to life on Tuesday morning. The reactor, one of 25 which have applied to restart, will begin generating power by Friday and reach full capacity next month. Prime Minister Shinzo Abe has made the restart of the country’s nuclear energy industry a priority of his administration, with the hiatus sending electricity bills soaring, providing a drag on his so-called Abenomics reforms, and serving to highlight Japan’s dependence on energy imports.

But with the scars of Fukushima yet to fade, newspaper polls have shown a majority of Japanese oppose the restart. Mr Abe’s personal approval ratings have also plumbed new depths, having also come under fire for pushing through a controversial new national security bill that will see Japanese troops fight overseas for the first time since World War II. “I would like Kyushu Electric to put safety first and take utmost precautions for the restart,” he said. Yoshihide Suga, the chief cabinet secretary, said “it is important for our energy policy to push forward restarts of reactors that are deemed safe”.

But local residents said they are worried about potential dangers from active volcanoes in the region, and there was no clarity around the evacuation plans for nearby hospitals and schools. An Asahi Shimbun newspaper survey found only two of 85 medical institutes and 15 of 159 nursing and other care facilities within a 30-kilometre radius of the Sendai plant had proper evacuation plans. About 220,000 people live within a 30-kilometre radius – the size of the Fukushima no-go zone – of the Sendai plant. “You will need to change where you evacuate to depending on the direction of the wind. The current evacuation plan is nonsense,” Shouhei Nomura, a 79-year-old former worker at a nuclear plant equipment maker, who now opposes atomic energy and is living in a protest camp near the plant told Reuters.

A little physics fascination.

• A Good Week For Neutrinos (Butterworth)

Neutrinos are made by firing protons into a target. This produces lots of mess, including charged particles called pions (made of a quark and an antiquark), which travel a while and can be focussed into a beam. They eventually decay to neutrinos, which remain in a collimated beam and, mostly, just carry on without interacting with anything. Crucially though, a few of them will, by random luck (maybe bad luck from the neutrinos point of view) collide with normal matter, some of it (by good luck from the physicists point of view) the matter inside the NOvA far detector, which can measure what kind of neutrinos they were.

The vast majority of neutrinos produced when a pion decays are so-called “muon neutrinos”. This means when they interact they should produce muons (a heavier version of the electron). If the neutrinos did nothing odd during their 800 km journey to NOvA, about 200 of them should have been seen by now. However, only 33 turned up. Also, six electron neutrinos turned up, when only about one would be expected.

This is evidence that the neutrinos transmogrify, or “oscillate”, during their journey. That is, they change types. This behaviour is already known; it is how we know neutrinos have mass (in the original version of the Standard Model of particle physics they were massless), and it may be connected with mysterious fact that there is so much matter around and so little antimatter. Studying this kind of mystery is what Nova was built for, and this confirmation of neutrino oscillations is just the start.

What Happens When Economists Talk Politics

Jul 282015

July 28, 2015 Posted by Raúl Ilargi Meijer at 6:38 pm Finance Tagged with: ECB, economists, Greece, IMF, lawyers, Nowotny, politicians, Troika, Varoufakis 6 Responses »

Jack Delano Chicago & North Western Railroad locomotive shops 1942

As the “Varoufakis Files” provide everyone interested in the Greek tragi-comedy with an additional million pages of intriguing fodder -we all really needed that added layer of murky conspiracy, re: the Watergate tapes-, a different question has been playing in my head. Again. That is: Why are economists discussing politics?

Why are the now 6 month long Greece vs Troika discussions being conducted by the people who conduct them? All parties involved are apparently free to send to the table whoever they want, and while that seems nice and democratic, it doesn’t necessarily make it the best possible idea. To, in our view, put it mildly.

For perspective, please allow me to go back to something I wrote 3,5 months ago, May 12 2015:

Greece Is Now Just A Political Issue

[..] the EU/troika anno 2010 decided to bail out German and French and Wall Street banks (I know there’s an overlap) – instead of restructuring the debts they incurred with insane bets on Greece and its EU membership- and put the costs squarely on the shoulders of the Greek population.

This, as I said many times before, was not an economic decision; it was always entirely political. It’s also, by the way, therefore a decision the ECB should have fiercely protested, since it’s independent and a-political and it can’t afford to be dragged into such situations. But the ECB didn’t protest. [..]

The troika wants the Syriza government to execute things that run counter to their election promises. No matter how many people point out the failures of austerity measures as they are currently being implemented in various countries, the troika insists on more austerity. Even as they know full well Syriza can’t give them that because of its mandate. Let alone its morals.

It’s a power game. It’s a political game. It always was. But still it has invariably been presented by both the –international- press and the troika as an economic problem. Which has us wondering why this statement by ECB member and Austrian central bank head Ewald Nowotny yesterday, hasn’t invited more attention and scrutiny:

ECB’s Nowotny: Greece’s Problem Isn’t Economic

The Greek problem is more a political question than an economic one, a member of the European Central Bank said Monday. Discussions with political parties such as Greece’s left-wing Syriza and Spain’s Podemos may be refreshing by bringing in new ideas, “but at the end of the day, they must [end in] results,” ECB member Ewald Nowotny said, adding discussions are “not about playing games.”

The central banker declined to speculate on how to solve Greece’s financial problem saying the issue “is much more a political question than an economic question.” Mr. Nowotny also doesn’t see the ECB’s role as creating a federalized financial government inside the euro zone. “We cannot substitute the political sphere,” he said.

That seems, from where we’re located, to change the discussion quite a bit. Starting with the role of the ECB itself. Because, for one thing, and this doesn’t seem to be clear yet, if the Greek problem is all politics, as the central bank member himself says, there is no role for a central bank in the discussions. If Greece is a political question, the ECB should take its hands off the whole Greek issue, because as a central bank, it’s independent and that means it’s a-political.

The ECB should provide money for Greece when it asks for it, since there is no other central bank to provide the lender of last resort function for the country. Until perhaps Brussels calls a stop to this, but that in itself is problematic because it would be a political decision forced on an independent central bank once again. It would be better if the ‘union’, i.e. the other members, would make available what Greece needs, but they -seem to- think they’re just not that much of a union.

In their view, they’re a union only when times are good. And/or when all major banks have been bailed out; the people can then fight over the leftover scraps.

The IMF has stated they don’t want to be part of a third Greek bailout. Hardly anyone seems to notice anymore, but that makes the IMF a party to political decisions too. Lagarde et al claim they can’t loan to countries that don’t take the ‘right’ measures, but who decides which measures are the right ones? [..] Moreover, if we take Mr. Nowotny on his word, why are there still finance ministers and economists involved in the Greek issue negotiations? Doesn’t that only simply lead to confusion and delay?

It seemed crystal clear to me then, and does even more so today, but nothing has really changed, other than Greece having replaced one economist with another as finance minister. Which never really could help discussions in the eurogroup alone, because, as Ian Parker writes in his long must read “V” (for Vendetta) portrait, the rest of them are still not economists, and therefore have no appetite for discussing matters from that angle:

The Greek Warrior

At the level of the Eurogroup, Varoufakis told me, the conversation was “all about the rules.” It was not a forum in which to discuss debt unsustainability, or the rarity of economic growth under austerity conditions. Varoufakis told me that he was “accused of talking about economics.” Once, Varoufakis was asked what Greece’s target surplus should be, if not 4.5% of GDP. He “had to give a lecture” about the variables that made the question unanswerable in that form. “They’re not economists,” Varoufakis said. “Most of them are lawyers.”

At a certain point, it’s hard to escape the idea that it’s all like if you have a politically volatile discussion about building an airport, or ‘just’ a runway (commonplace issues), and the entire discussion is controlled by architects, or builders, instead of politicians. It makes no sense, and it can only possibly lead to undesirable outcomes. Because you got the wrong people in the wrong venue.

Moreover, unlike architecture, economics has huge credibility issues to begin with. Which is why politicians need to provide very specific instructions to their economists, or the entire exercise risks being watered down in no time to a battle between one economic stream of faith vs another. Keynes vs Mises, that kind of thing.

If we can agree with Nowotny (and I very much do) that this is a political issue, it’s the politicians who should make the decisions, on political grounds, and the economists should fill in the specifics after the fact.

Economists, and eventually lawyers, should fill in the details, but lawyers and economists posing as finance ministers should not be left in charge of the political decisions.

And no, here’s looking at Athens, naming an economist as finance minister does not make him a politician. Nor should it. An economist has his/her own place in the proceedings. But then, that’s where we hit upon the major conundrum: what makes a body a politician?

Turns out, that’s a hard one to answer. Because anyone can pretend to be a politician, and many do pretend just that. But how then, when we can agree that a certain issue is a political rather than an economical one, do we select the proper people to make decisions on the issue?

The simplest bit of deduction teaches us that putting economist Yanis Varoufakis on opposite ends of the same table with eurogroup finance ministers who are lawyers and don’t know diddly-squat about economics, doesn’t work. All a lawyer knows how to do is point to pre-conceived rules and regulations. It’s what lawyers do, it’s what enabled them to get their law degree.

But you might as well put a Chinese farmer and a West Virginia gun dealer together. They don’t speak the same language. Other then perhaps possibly that of compassion, but that’s the one quality lawyers are sure to lack once they get to be finance ministers.

Still, once you acknowledge that something is a political issue, you must make sure that only political arguments drive the talks, not economic ones, not even legal ones. And that’s what seems to be the little big 800-pound thingy, doesn’t it? They all just choose to pretend they speak the same language even if they know they don’t.

So all the eurogroup only possibly can do is to vent as little flexibility as possible. If they veer even an inch off the prescribed path, they would be instantly lost. Lawyers…

But that also, and very much so, means we need to wonder why Syriza insisted on prolonging the eurogroup talks all this time. The eurogroup, whatever it may be, and whatever we may think of it, is not a political forum. It’s evidently not an economic one, either, but that’s another story altogether.

Why did Varoufakis go back into that forum time after time, even after Nowotny said what he did? He must have known from that moment, and long before, that as an economist he had nothing to gain there. He might as well have sent his cleaning lady. And she might have come up with a better result to boot.

Why did Syriza never insist that the people involved be changed, and the venue, to be limited to Merkel and Hollande and Tsipras?

The question that lingers is why these talks are set up the way they are, where failure is all but certain. Is that intentional, as in where the lawyers are sent in because they are supposed to halt all sensible discussion no matter what?

Or, arguably more interesting, is it that when it comes to purely political issues, nobody really knows who to put forward? Who can really discuss exclusively political issues other than actual political leaders?

Well, we know it’s not economists, and we can count out cleaning ladies (though we could get lucky). We also know we shouldn’t let lawyers do the trick. They’re too narrow in their range. So who? I would almost say there’s no-one, but that automatically leads to the only possible option: the highest political ‘functionaries’.

Which in the case of the Troika vs Greece means Merkel, Hollande, perhaps Renzi, and Tsipras. The people who’ve been elected (or quasi) to be their nations’ top-notch political leaders. No Dijsselbloem, or Schäuble, or any of those guys. No Varoufakis either.

The ECB is both a participant in the talks and a creditor, a stakeholder. That pushes it painfully close to being a political participant, something a central bank should never ever be.

But the breaching of red lines and grey areas has become so ubiquitous in the whole ‘discussion’ that nobody seems to notice anymore, or wants to notice, for that matter.

The same goes for the role of the IMF. What do they think they’re doing? The Fund should stay far away from any political discussion, or it loses its credibility.

Both the ECB and the IMF try to keep up the illusion that their decisions are a-political and within their respective mandates, but that idea can only be maintained if and when the Greece issue were an economical one. We’ve already seen it’s not.

We end up concluding that the entire process has been a disaster, unless one’s aim from the get-go was to gut the Greek economy even more, and the outcome is -therefore- a disaster too.

But it’s still economists who keep holding the talks. The “technical experts” from the Troika that re-enter Athens as we speak may be a bit more knowledgeable when it comes to economics that the EU finance ministers, but still, they are loaded with their own issues.

If I were Tsipras I’d refuse to have any of my people talk to any Troika ‘negotiators’ from here on in, and insist on direct talks with Merkel and Hollande only (I’d have done that a long time ago, too). See what the real intentions are amongst those that have real power, and only after that, have staff, like economists and lawyers, discuss specifics and fill in details.

Things have been moving the 180º other way around now, and it could never even possibly have led to a positive result. You can’t start with the details.

Here’s still wondering why they all insist on doing things that way. Isn’t it obvious? Or has the whole thing simply been intentional all along?

Oh, and before I forget, most commentaries on the Greek issue in the media also come from economists. Some of those are palatable, even smart. But at the same time, they haven’t yet gotten the message either: it’s all about politics. If it were just economics, Greece would be solved in 2 seconds flat.

But it’s not. And there’s a reason for that which lies way beyond economics.

Debt Rattle July 27 2015

Jul 272015

July 27, 2015 Posted by Raúl Ilargi Meijer at 10:19 am Finance Tagged with: Australia, China, coercion, debt, oil, refugees, stocks, Troika, Tsipras, Varoufakis 4 Responses »

DPC Maumee River waterfront, Toledo, OH 1910

• China Stocks Suffer Biggest One-Day Loss In Eight Years (Reuters)

• China Stocks Post Biggest Plunge Since 2007 (Bloomberg)

• Varoufakis Reveals Cloak And Dagger Greece ‘Plan B’, Awaits Treason Charges (AEP)

• Tsipras Under Pressure Over Covert Syriza Drachma Plan Reports (Reuters)

• Greece Rocked By Alleged Secret Plan To Raid Banks For Drachma Return (Guardian)

• The Politics of Coercion in Greece (Zoe Konstantopoulou, Speaker)

• The Make Believe World Of Eurozone Rules (Wolfgang Münchau)

• Capitalism, Engineered Dependencies and the Eurozone (Urie)

• Debt Conundrum To Keep Greek Banks In Months-Long Freeze (Reuters)

• Escaping the Greek Debt Trap (Eichengreen et al)

• Tsipras’s Paradox Is Six Months of Pain and Enduring Popularity (Bloomberg)

• The Greek Warrior: “Molon Labe” (New Yorker)

• Troika Technical Teams Return To Athens, New Prior Actions On Agenda (Kath.)

• Migrants Left Looking For Shelter As Greece Struggles In Crisis (Reuters)

• French Farmers Block Spanish and German Borders In Foreign Food Protest (AFP)

• The Italian Job Market Is So Bad That Workers Are Giving Up in Droves

• Spain Mayors Spin Tale of Two Cities With Anti-Austerity Stance (Bloomberg)

• Draghi Sets Sights On Reviving Economy With Greece On Back Seat (Bloomberg)

• What Does Australia Have in Common With Colombia and Russia? (Bloomberg)

• Oil Groups Have Shelved $200 Billion In New Projects As Low Prices Bite (FT)

It’s still just the start. If you’re a mom and pop investor in China, the only way to go is out.

• China Stocks Suffer Biggest One-Day Loss In Eight Years (Reuters)

Chinese shares tumbled more than 8% on Monday amid renewed fears about the outlook for the world’s No. 2 economy, reviving the specter of a full-blown market crash that prompted unprecedented government intervention earlier this month. Major indexes suffered their largest one-day drop since 2007, shattering a period of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that began in mid-June. The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen plunged 8.6%, to 3,818.73, while the Shanghai Composite Index .SSEC lost 8.5%, to 3,725.56 points. While the falls followed lackluster data on profit at Chinese industrial firms on Monday and a disappointing private factory sector survey on Friday, there was little to explain the scale of the sell-off.

Some analysts said fears that China may hold off from further loosening of monetary policy had contributed to souring investor sentiment. “The recent rebound had been swift and strong, so there’s need for a technical correction,” said Yang Hai, strategist at Kaiyuan Securities. He said the trigger was “a sluggish U.S. market amid stronger expectations of a Fed rate rise in the fourth quarter. That, coupled with China’s rising pork prices, fuels concerns that China would refrain from loosening monetary policies further.” In late June and early July, Chinese authorities cut interest rates, suspended initial public offerings, relaxed margin-lending and collateral rules and enlisted brokerages to buy stocks, backed by central bank cash, to support share prices.

The battery of stabilization measures followed a peak-to-trough slump of more than 30% in China’s benchmark indexes, which had more than doubled over the preceding year. Chinese share markets had recovered around 15% since then, before Monday’s renewed sell-off. Stocks fell across the board on Monday, with 2,247 companies falling, leaving only 77 gainers.

Blood. Bath.

• China Stocks Post Biggest Plunge Since 2007 (Bloomberg)

The biggest slump in Chinese shares in eight years led equities lower worldwide and selling spread to the dollar as the turmoil bolstered the case for keeping U.S. interest rates lower for longer. Stocks fell in Europe for a fifth day after the Shanghai Composite Index tumbled 8.5% as Chinese industrial company profits decreased in June. The dollar weakened 0.8% to $1.1069 per euro at 10:22 a.m. in London while Italian and Spanish bonds pared losses. Gold futures rose the most in a month as the drop in equities spurred haven demand and investors speculated that recent losses have been overdone. “Today’s rout in China poured cold water on investor sentiment,” said Mari Oshidari at Okasan Securities. “This also revealed the market is still too fragile without government support.”

The profit decline is the latest evidence of a deteriorating economic outlook for China, while the slump in stocks will be a blow to policy makers who enacted unprecedented measures to stem a $4 trillion rout. A gauge of Chinese stocks in Hong Kong slumped 3.8% Monday, while the city’s benchmark Hang Seng Index slid 3.1%. The report on industrial profits from the statistics bureau followed data Friday showing a private manufacturing gauge unexpectedly declined in July to a 15-month low. Chinese officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes, restricted short selling and suspended initial public offerings, spurring a 16% rebound on the Shanghai measure through last week from a low on July 8.

The IMF has urged the nation to eventually unwind the support measures, according to a person familiar with the matter.

“I have a strong suspicion that there will be no deal on August 20..”

• Varoufakis Reveals Cloak And Dagger Greece ‘Plan B’, Awaits Treason Charges (AEP)

A secret cell at the Greek finance ministry hacked into the government computers and drew up elaborate plans for a system of parallel payments that could be switched from euros to the drachma at the “flick of a button” . The revelations have caused a political storm in Greece and confirm just how close the country came to drastic measures before premier Alexis Tsipras gave in to demands from Europe’s creditor powers, acknowledging that his own cabinet would not support such a dangerous confrontation.

Yanis Varoufakis, the former finance minister, told a group of investors in London that a five-man team under his control had been working for months on a contingency plan to create euro liquidity if the ECB cut off emergency funding to the Greek financial system, as it in fact did after talks broke down and Syriza called a referendum. The transcripts were leaked to the Greek newspaper Kathimerini. The telephone call took place a week after he stepped down as finance minister. “The prime minister, before we won the election in January, had given me the green light to come up with a Plan B. And I assembled a very able team, a small team as it had to be because that had to be kept completely under wraps for obvious reasons,” he said.

“The context of all this is that they want to present me as a rogue finance minister, and have me indicted for treason. It is all part of an attempt to annul the first five months of this government and put it in the dustbin of history,” he said. “It totally distorts my purpose for wanting parallel liquidity. I have always been completely against dismantling the euro because we never know what dark forces that might unleash in Europe,” he said. The goal of the computer hacking was to enable the finance ministry to make digital transfers at “the touch of a button”. The payments would be ‘IOUs’ based on an experiment by California after the Lehman crisis. A parallel banking system of this kind would allow the government to create euro liquidity and circumvent what Syriza called “financial strangulation” by the ECB.

“This was very well developed. Very soon we could have extended it, using apps on smartphones, and it could become a functioning parallel system. Of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma,” he said. Mr Varoufakis claimed the cloak and dagger methods were necessary since the Troika had taken charge of the public revenue office within the finance ministry. “It’s like the Inland Revenue in the UK being controlled by Brussels. I am sure as you are hearing these words your hair is standing on end,” he said in the leaked transcripts. Mr Varoufakis said any request for permission would have tipped off the Troika immediately that he was planning a counter-attack.

Mr Varoufakis said that Mr Schauble has made up his mind that Greece must be ejected from the euro, and is merely biding his time, knowing that the latest bail-out plan is doomed to failure. “Everybody knows the IMF does not want to take part in a new programme but Schauble is insisting that it does as a condition for new loans. I have a strong suspicion that there will be no deal on August 20,” he said. He said the EU authorities may have to dip further into the European Commission’s stabilisation fund (EFSM), drawing Britain deeper into the controversy since it is a contributor. By the end of the year it will be clear that tax revenues are falling badly short of targets – he said – and the Greek public ratio will be shooting up towards 210pc of GDP. “Schauble will then say it is yet another failure. He is just stringing us along. he has not given up his plan to push Greece out of the euro,” he said.

Lafazanis is part of the picture too.

• Tsipras Under Pressure Over Covert Syriza Drachma Plan Reports (Reuters)

Some members of Greece’s leftist government wanted to raid central bank reserves and hack taxpayer accounts to prepare a return to the drachma, according to reports on Sunday that highlighted the chaos in the ruling Syriza party. It is not clear how seriously the plans, attributed to former Energy Minister Panagiotis Lafazanis and former Finance Minister Yanis Varoufakis, were considered by the government and both ministers were sacked earlier this month. However the reports have been seized on by opposition parties who have demanded an explanation. The reports came at the end of a week of fevered speculation over what Syriza hardliners had in mind as an alternative to the tough bailout terms that Tsipras reluctantly accepted to keep Greece in the euro.

Around a quarter of the party’s 149 lawmakers rebelled over the plan to pass sweeping austerity measures in exchange for up to €86 billion euros in fresh loans and Tsipras has struggled to hold the divided party together In an interview with Sunday’s edition of the RealNews daily, Panagiotis Lafazanis, the hardline former energy minister who lost his job after rebelling over the bailout plans, said he had urged the government to tap the reserves of the Bank of Greece in defiance of the ECB. Lafazanis, leader of a hardline faction in the ruling Syriza party that has argued for a return to the drachma, said the move would have allowed pensions and public sector wages to be paid if Greece were forced out of the euro.

“The main reason for that was for the Greek economy and Greek people to survive, which is the utmost duty every government has under the constitution,” he said. However he denied a report in the Financial Times that he wanted Bank of Greece Governor Yannis Stouranaras to be arrested if he had opposed a move to empty the central bank vaults. In comments to the semi-official Athens News Agency, he called the report a mixture of “lies, fantasy, fear-mongering, speculation and old-fashioned anti-communism”.

The Guardian seems to be sitting on the fence. Has any western press eevr before referred to Kathimerini as a “conservative newspaper”?

• Greece Rocked By Alleged Secret Plan To Raid Banks For Drachma Return (Guardian)

Some members of Greece’s leftist-led government wanted to raid central bank reserves and hack taxpayer accounts to prepare a return to the drachma, according to reports that highlighted the chaos in the ruling Syriza party. It is not clear how seriously the government considered the plans, attributed to former energy minister Panagiotis Lafazanis and ex-finance minister Yanis Varoufakis. Both ministers were sacked earlier this month, however, the revelations have been seized on by opposition parties who are demanding an explanation. The reports on Sunday came at the end of a week of fevered speculation over what Syriza hardliners had in mind as an alternative to the tough bailout terms Tsipras has reluctantly accepted to keep Greece in the eurozone.

About a quarter of the party’s 149 lawmakers rebelled over proposals to pass sweeping austerity measures in exchange for up to €86bn in fresh loans. Tsipras has been struggling to hold the party together. In an interview with Sunday’s edition of the RealNews daily, Lafazanis said he had urged the government to tap the reserves of the Bank of Greece in defiance of the ECB. Lafazanis, the leader of a hardline Syriza faction that has argued for a return to the drachma, said the move would have allowed pensions and public sector wages to be paid if Greece were forced out of the euro. “The main reason for that was for the Greek economy and Greek people to survive, which is the utmost duty every government has under the constitution,” he said.

In a separate report in the conservative Kathimerini newspaper, Varoufakis was quoted as saying that a small team in Syriza had prepared plans to secretly copy online tax codes. It said the “plan b” was devised to allow the government to introduce a parallel payment system if the banks were closed down. In remarks the newspaper said were made at an investors’ conference on 16 July, Varoufakis said passwords used by Greeks to access their online tax accounts were to have been duplicated secretly and used to issue new PIN numbers for every taxpayer to be used in transactions with the state. “This would have created a parallel banking system, which would have given us some breathing space, while the banks would have been shut due to the ECB’s aggressive policy,” Varoufakis was quoted as saying.

A woman to watch.

• The Politics of Coercion in Greece (Zoe Konstantopoulou)

This is a transcript of Speaker Zoe Konstantopoulou’s important July 22nd speech in the Hellenic Parliament.

I confess that the consciously, politically and personally painful moments which we are being called on to experience in parliament during this parliamentary term are multiplying. From my capacity as Speaker of the House, I have just sent a letter to the President, Mr. Prokopis Pavlopoulos and to Prime Minister Alexis Tsipras noting that it is my institutional responsibility to emphasize and underline that the conditions this bill is being introduced under allow no guarantees of compliance with the constitution, no protection of the democratic process or the exercise of legislative power of parliament, nor a conscience vote by members of parliament, under conditions of blatant blackmail, which is aimed by foreign government of EU member States at this government and the members of parliament and which is in fact introduced without any possibility of amendment by the parliament as was confessed by the Minister, whom I honor and respect deeply, as he knows, a statute through which a major intervention in the functioning of justice and the exercise of the fundamental rights of the citizens is being attempted, in a manner that tears down both the functioning of Greek democracy as a social state under the rule of law and in which there is a separation of powers according to the constitution, as well as the preservation of the principle of fair trial.

Ministers are being coerced to introduce a legislation whose content they do not agree with, and the statement made by the Justice Minister was characteristic, but who are directly opposed to it and members of parliament are being coerced to vote for it who are also opposed to its content, and the statements made by members of parliament in the two parliamentary groups, which make up the parliamentary majority were also characteristic, every one of them. All this is happening under the direct threat of a disorderly default and reveal that, in truth, this bill which foreign governments and not the Greek government have chosen as a prerequisite, is an attempt at the completion of a dissolution. Because this bill contains a major intervention into the third independent function, which is justice. This bill attempts to undermine the functioning of justice and is lifting basic guarantees to a fair trial and basic and fundamental rights of citizens.

Münchau wakes up: “If so many important people say it, then surely it must be true, mustn’t it? Actually, as it turns out, there is no such rule.”

• The Make Believe World Of Eurozone Rules (Wolfgang Münchau)

Whenever you are in a room with European officials and discuss the euro, there is usually somebody who raises his finger and says: “This is all well and good, but it is ‘against the rules’.” It then gets very quiet. “Against the rules” is a big thing in Europe. Most people do not really know what the rules are. But they do know that rules have to be followed. The situation reminds me of a short story by Franz Kafka, Before the Law, where a man tries to seek entrance to a courthouse. A door keeper tells him that this is possible in principle, but not at the moment. The man spends his entire life in front of the court waiting to be admitted. At the end of his life he was told that he could have gone through the door at any time. That man followed the wrong set of rules — rules of the mind, not of the law.

Rules of the mind is what we are dealing with in the European debate about the single currency. Many of these rules either do not exist, or they constitute some rather far-fetched interpretation of existing rules. During the recent Greek crisis, I came across a completely new rule. I first heard it from Wolfgang Schäuble, the German finance minister. It says that countries are not allowed to default inside the eurozone. But a default was perfectly fine once they leave the euro, on the other hand. I later read that Otmar Issing, the former chief economist of the European Central Bank, used almost exactly the same phrase as Mr Schäuble in an Italian newspaper interview. If so many important people say it, then surely it must be true, mustn’t it? Actually, as it turns out, there is no such rule.

There is only Article 125 of the European Treaty on the Functioning of the European Union. Article 125 says that countries should not take on the debt of other countries. This is also known as the “no-bailout” clause — though that, as it turns out, is a rather loaded interpretation. In its landmark Pringle ruling — relating to an Irish case in 2012 — the European Court of Justice said bailouts are fine, even under Article 125, as long as the purpose of the bailout is to render the fiscal position of the recipient country sustainable in the long run. In another landmark ruling, from June this year, the ECJ supported Mario Draghi’s promise to do whatever it takes to help a country subject to a speculative attack.

The ECB president’s pledge had previously been challenged by the German constitutional court. In both cases, the ECJ did not support the predominant German legal interpretation. So what then can we infer from the previous ECJ rulings in the absence of an explicit ruling from the court on debt relief? An interesting article by three authors from Bruegel, a European think-tank, concludes that debt relief is almost certainly consistent with current law. The argument goes as follows: in the Pringle case, the court gave the go-ahead for bailouts in principle as long as they are intended to stabilise public finances. In the ruling on the ECB’s backstop, the court accepted the principle that the ECB could incur a loss on its asset purchases, as long as the bank follows its own mandate.

What is really happening is that Germany does not want to grant Greece debt relief for political reasons, and is using European law as a pretext. Likewise, when Mr Schäuble proposes a Greek exit from the euro, ask yourself what rule that is consistent with. The fact is they are making up the rules as they go along to suit their own political purposes.

View from the left.

• Capitalism, Engineered Dependencies and the Eurozone (Urie)

Near-term technological considerations aside, the question that the Greeks and other peoples of the West may wish to ask is why banks and bankers whose livelihoods derive from the public grant to create and allocate money should be allowed to use it to rule the world? The quote from economist Joan Robinson that ‘The only thing worse than being exploited by capitalism is not being exploited by capitalism’ refers to precisely this type of engineered dependency, not to a natural state of the world. Was the intent of the European Union a partnership of equals then Syriza would have been granted a distinctive voice. With its mandate to remain within the union it is but another set of bodies warming the chairs at ‘negotiation’ tables listening to the dictates of the Troika.

The pragmatic difficulties of following the democratic mandate from the July 5th referendum derive from complexities that were sold as simplifications. Instead of multiple currencies the EMU would have only one— a simplification. However, any exit from the currency union will require the rapid constitution / reconstitution of a monetary infrastructure now rendered infinitely more complex through the broader project of joining finance capital’s ways of conducting business. A long-term exit plan assumes that Syriza can either stay in, or regain, power when political control has already been acceded to the Troika through economic control. An unplanned exit that allows the engineered complexity of monetary integration to quickly destroy the Greek economy would most likely find desperation leading to restoration of a compliant Greek government in dramatically worsened economic conditions.

What isn’t being put forward in the present, as best I can determine, is a left vision of possible economic organization either after a well-planned exit from the monetary union has been accomplished or after the broader EMU project has imploded from its own capitalist / banker-friendly design. The Western criticism that the European periphery is destined for permanent second-class status grants primacy to the wholly unsustainable political economy of the Western ‘center’ and to ‘first-world’ capitalism as a habitable form of social organization. Economic complexity is being used as a tool of social repression leaving either simplification or complexity that serves a social purpose as alternatives.

Real relief in any form is not on the agenda.

• Debt Conundrum To Keep Greek Banks In Months-Long Freeze (Reuters)

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe. Rehabilitating the country’s banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece’s debt mountain? Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks. The longer it takes, the more critical the banks’ condition becomes as a €420 weekly limit on cash withdrawals chokes the economy and borrowers’ ability to repay loans.

“The banks are in deep freeze but the economy is getting weaker,” said one official, pointing to a steady rise in loans that are not being repaid. This cash ‘freeze’ is unlikely to thaw soon, although capital controls may be slightly softened, such as the loosening on Friday of restrictions on foreign transfers by businesses. “Ultimately, you can only lift the capital controls when the banks are sufficiently capitalized,” said Jens Weidmann, the head of Germany’s Bundesbank, which pushed the ECB to pare back bank funding, leading to their three-week closure. The debate is interlinked with a wrangle over reforms, about Greek sovereignty in the face of European controls and whether the country can recover with ever rising debts that have topped €300 billion, far bigger than its economy.

Were another €25 billion to be piled on top – the amount foreseen for the recapitalization of Greek lenders – it would add to debts that the IMF has argued are excessive. Greek officials, alarmed by a downward spiral in the economy, want an urgent release of funds for their banks. Four big banks dominate Greece. Of those, National Bank of Greece, Eurobank and Piraeus fell short in an ECB health check last year, when their restructuring plans were not taken into account. The situation is now dramatically worse. “We want, if possible, an initial amount to be ready for the first needs of the banks,” said one official at the Greek finance ministry, who spoke on condition of anonymity. “That should be about €10 billion.”

Others, including Germany, however, are lukewarm and could push for losses for large depositors with more than 100,000 euros on their accounts, or bondholders. There are more than €20 billion of such deposits in Greece’s four main banks, dwarfing the roughly €3 billion of bonds the banks have issued. Imposing a loss, something the Greek government has repeatedly denied any planning for, would be controversial, not least because much of this money is held by small Greek companies rather than wealthy individuals. “This is not like Cyprus where you can say these are just Russian oligarchs,” said an insolvency lawyer familiar with Greece. “It’s the very community everyone is hoping will resuscitate Greece, namely the corporates. You’ll end up depriving them of their cash.”

Eichengreen proves incapable of solving the issues. Writedowns are inevitable. A poorly structured workaround won’t do the trick.

• Escaping the Greek Debt Trap (Eichengreen et al)

Greece’s debt is unsustainable. The IMF has said so, and it’s hard to find anyone who disagrees. The Greek government sees structural reform without debt reduction as politically and economically toxic. The main governing party, Syriza, has made debt reduction a central plank of its electoral platform and will find it hard to hold on to power – much less implement painful structural measures – absent this achievement. Moreover, tax increases and spending cuts by themselves will only deepen the Greek slump. Other measures are needed to attract the investment required to jump-start growth. Reducing the debt and its implicit claim on future incomes is an obvious first step. But Wolfgang Schaeuble and Chancellor Angela Merkel refuse to consider any cut in the nominal stock of Greece’s debt to the EU.

They refuse to agree to debt-service reductions without prior structural reforms. In their view, lower interest rates, grace periods and more generous amortization terms should be a reward for prior action on the structural front. If they are offered now, Greece will only be let off the hook. There’s an obvious way of squaring this circle: Greece and the EU should contractually link changes in the terms of the country’s EU loans to milestones in structural reform. Think of the result as structural-reform-indexed (SRI) loans, akin to former Greek Finance Minister Yanis Varoufakis’s gross-domestic- product-indexed bonds. Under the new loan terms, if Greece implements more reforms, future interest payments would be permanently lower and principal payments would be extended indefinitely.

Full implementation of the specified reforms would turn Greece’s debt into the equivalent of zero-coupon, infinitely lived bonds that drain little if anything from the public purse. Greece should welcome this arrangement, because it would receive a guarantee of debt reduction, not just vague reassurances. The German government and other creditors should welcome it as well, because debt reduction would only be conferred if Greece follows through with structural reform. Both sides would appreciate that Greece’s incentive to push ahead with reforms would be heightened insofar as successful reform conferred an additional reward. Even better, Euro-group members could convert their bilateral loans and European Financial Stability Facility/European Stability Mechanism funding for Greece into SRI bonds.

Pundits don’t understand how Greece works. Tsipras’ popularity is actually growing, but that’s too much for them to report. They go instead for ‘enduring’.

• Tsipras’s Paradox Is Six Months of Pain and Enduring Popularity (Bloomberg)

His party is split, government undermined and the economy lies in tatters. Yet in the rubble of Greece, Prime Minister Alexis Tsipras reigns supreme. In the six months since he became prime minister, Tsipras breezed past challengers at home, new and old, as he followed an election victory with backing for his anti-bailout message in a referendum. After yielding to his European peers, next month he may be signing a third financial rescue that he opposed, while capital controls keeping money in Greece remain. The paradox reflects how punch-drunk Greece has become after years of spending cuts and tax increases by successive governments allied to the euro region’s austerity hawks.

For all his doomed brinkmanship, Tsipras’s popularity is unblemished as Greeks blame Europe for their financial punishment, or others in his Coalition of the Radical Left. “His rhetoric of defiance, resistance and regaining sovereignty flies well with Greek public opinion,” said Wolfango Piccoli, of consulting company Teneo Intelligence “He is by far the most popular politician across the whole spectrum.” A poll by Kapa Research published on July 14 showed 51.5% of Greeks backed the new terms Tsipras agreed to in return for staying in the euro. The blame for the pension cuts and higher taxes rested with the Europeans, 49% said, while 68% said Tsipras should lead the country. For now, he has to deal with the party that he brought to power.

Tsipras, who turns 41 this week, purged his government of dissenters after bringing home the deal that promised the exact opposite of what he pledged to voters in January. Even as he clawed back some supporters in last week’s parliament vote, Syriza officials publicly worried about the chasm growing between dissident leftists and the more pragmatic group Tsipras leads, fearing a breakup of the party. “The question is whether Tsipras will remain the leader of Syriza or he will form his own party with those who support him in Syriza,” said George Tzogopoulos at the Athens-based Hellenic Foundation. “It is probably easier for him to purge Syriza.” For now, the focus is on filling in the outlines of the deal agreed with creditors on July 13. Tsipras could then move to consolidate his position by holding elections. [..]

Yanis Varoufakis, the former finance minister and face of successive failures to reach an accord with the euro region, garnered the most votes of any party candidate in the Jan. 25 election. He now has a popularity rating of 28%, compared with 59% for Tsipras in the Kapa poll. Comrades causing Tsipras headaches, such as former Energy Minister Panagiotis Lafanzanis and Speaker of Parliament Zoe Konstantopoulou, both polled lower than Varoufakis. “It is more and more a Tsipras government and party,” said Piccoli. “His U-turn has been justified with a narrative that argues that there was no other option.”

Long portrait.

• The Greek Warrior: “Molon Labe” (New Yorker)

After months at the center of a global political spectacle, Varoufakis still carried himself as an outsider: informal, ironic, somehow alone on the stage. This demeanor had sometimes given his tenure the air of a five-month-long TED talk. At the restaurant, Varoufakis’s commentary on the recent tumult, and on the likely catastrophic events to come, sometimes seemed amused almost to the point of blitheness. He asked after Galbraith’s children, then noted that, a few hours earlier, a member of Germany’s parliament had visited his apartment, confessing, “I don’t believe in what we’re doing to you.” The legislator was a Christian Democrat—the party led by Angela Merkel, the German Chancellor, who had it in her power to ease Greece’s crisis. On departing, the legislator said, “I know you’re an atheist, but I’m going to pray for you.”

Varoufakis made a call. Speaking Greek, he greeted Euclid Tsakalotos, a colleague and friend, as “comrade,” then speculated about Tsipras’s behavior in the event of a “yes” vote: “The wise guys in Maximos”—the Prime Minister’s residence—“have become nicely settled in their seats of power, and they don’t want to leave them.” Varoufakis seemed to be suggesting that Tsipras would not resign after losing the referendum. There would be a “strategic restructuring,” Varoufakis said, and then elections. As for himself, he said, “After tomorrow, I’m going to be riding into the sunset.” He spoke the last four words in English. A Roma boy came to the table, selling roses. “Varoufakis!” he said, amazed. “I saw you on the news.”

Varoufakis allowed himself to be teased for his habit of carrying a backpack, which, he was told, made him look like a schoolboy. He laughed and paid five euros for a rose, which he gave to Stratou. As the boy left, he shouted “Varoufakis! Varoufakis!” at a vender’s volume, and, a few tables away, the minister’s plainclothes security detail—two chic young men who bore a resemblance to George Michael at the time of “Faith”—turned around. Galbraith told Varoufakis that his instinct was wrong about the referendum results. “No” would prevail, despite the bank closures. Many Greeks had nothing left to lose, and many others had hedged their financial assets, perhaps by buying a car. “Maybe,” Varoufakis said.

Stratou glanced at her phone. “Jamie, you might be right,” she said. She showed Varoufakis her screen. A survey was showing “no” with a lead. “Don’t underestimate your countrymen—the most utterly fearless group of people,” Galbraith said. Although a “no” victory would complicate Varoufakis’s immediate political future, he allowed himself to marvel at the Greek electorate’s willingness to accept immediate economic hardship. Syriza had given Greeks no palpable relief since taking power, yet the party’s positions still had popular support. “What the hell is going on?” Varoufakis asked. The waiter brought a metal jug of wine. Galbraith raised his glass and, freighting an old shared joke with new emotion, quoted Che Guevara: “Hasta la victoria siempre?!?” (“Ever onward to victory!”) Varoufakis laughed.

Think they are capable of discussing actual economics?

• Troika Technical Teams Return To Athens, New Prior Actions On Agenda (Kath.)

Technical teams representing Greece’s lenders began arriving in Athens on Sunday, with the aim of talks with the government beginning on Tuesday. The mission heads are not expected in Athens until Wednesday or Thursday. The visiting officials have asked to have access to ministries, ministers and general secretaries. So far, the Greek side has only agreed for the meetings to take place in a hotel and for the visitors to be allowed access to the General State Accounting Office. One of the potential stumbling blocks is that the lenders are expecting the government to draft another bill with prior actions so it can be passed through Parliament in the next two or three weeks, despite already adopting two pieces of legislation with new measures in the past two weeks.

And still Europe hasn’t acted. Repugnant.

• Migrants Left Looking For Shelter As Greece Struggles In Crisis (Reuters)

Aid workers called for emergency accommodation for hundreds of migrants who are camped out in the streets of the Greek capital as it struggles back from the brink of financial collapse. Hundreds of refugees from Afghanistan and Syria have set up temporary camps in central Athens while waiting to move on to what they hope will be a more permanent home in Europe. There are two chemical toilets in the park for the migrants and they wash themselves by using a garden hose attachment at the park’s taps. Stagnant water and human waste attract mosquitoes, and some of the children who walk barefoot in the park are covered in insect bites. Strewn with old clothes, garbage and waste and with summer temperatures reaching as high as 38 degrees Celsius (100.4°F), the sites are unfit for habitation but remain because there is no alternative.

“We need a campus because more and more people are coming so they cannot live like this in the center of the city,” said Nikitas Kanakis, president of the Greek section of medical charity Doctors of the World. “It’s not good for them, it’s not safe for them, and it’s not good for the city,” he said. [..] “It’s a huge problem because there are families with young children in a really bad situation with no water, with no food,” Kanakis said, adding that his organisation tried to provide basic medical care but more was needed. “We need a place, a center where they can stay,” he said. Along with Italy, which has faced a massive influx of African migrants arriving by boat from Libya, Greece is at the front lines of a crisis that has threatened to overwhelm public services already worn down by years of recession.

According to figures from the United Nations High Commissioner for Refugees, migrant arrivals in Greece have leapt almost tenfold in the first six months of the year, jumping from 3,452 in the first six months of 2014 to 31,037 this year. A coordinated response from Europe has been slow in coming however, caught up by wrangling over how to distribute the arrivals among countries where anti-immigration parties have seen a steady rise in support. “This is an emergency for Europe not to tell that they will help, to help. Otherwise, the situation will become worse and worse and we will see in the middle of Athens pictures that the humanitarian doctors have seen back in the east or back in Africa,” Kanakis said.

TTIP, anyone?

• French Farmers Block Spanish and German Borders In Foreign Food Protest (AFP)

French farmers blocked roads from Spain and Germany on Sunday to stop foreign products entering the country, the latest protest against a fall in food prices that has brought them to the brink of bankruptcy. Farmers in the north-eastern Alsace region used tractors to obstruct six routes from Germany in a bid to stop trucks crossing the Rhine carrying agricultural goods, in a blockage that is expected to last until at least Monday afternoon. “We let the cars and everything that comes from France pass,” Franck Sander, president of the local branch of the powerful FDSEA union said, adding that more than a thousand agricultural workers were taking part in the roadblocks. A dozen trucks have been forced to turn back at the border since the blockage started at about 10pm on Sunday night.

Meanwhile, about 100 farmers ransacked dozens of trucks from Spain on a highway in the south-western Haute-Garonne region, threatening to unload any meat or fruit destined for the French market. They used 10 tractors to block the A645 motorway, not far from the Spanish border, causing traffic jams that stretched up to four kilometres, Guillaume Darrouy, secretary general of the Young Farmers of Haute-Garonne, told AFP. The action comes after a week that has seen farmers block cities, roads and tourist sites across France in protest at falling food prices, which they blame on foreign competition, as well as supermarkets and distributors. Farmers have dumped manure in cities, blocked access roads and motorways and hindered tourists from reaching Mont St-Michel in northern France, one of the country’s most visited sites.

Fearful of France’s powerful agricultural lobby, the government on Wednesday unveiled an emergency package worth €600m in tax relief and loan guarantees, but the aid has done little to stop the unrest. “The measures announced by the government … none of them deal with the distortion of competition” with farmers from other countries, said Sander, saying French farmers face higher labour costs and quality standards. A combination of factors, including changing dietary habits, slowing Chinese demand and a Russian embargo on western products over Ukraine, has pushed down prices for staples like beef, pork and milk. Paris has estimated that about 10% of farms in France – approximately 22,000 operations – are on the brink of bankruptcy with a combined debt of €1bn.

“The problem is that without work you stop living, you can’t start a family, you can’t have kids..”

• The Italian Job Market Is So Bad That Workers Are Giving Up in Droves

Seven years of economic setbacks can break one’s spirit. At least that seems to be the case in Italy, where many unemployed are losing hope of finding a job The International Labour Organization gives unemployment status only to people who made at least one job-seeking effort in the last 30 days. According to the European Union’s statistics agency, almost 4.5 million Italians who are willing to work failed to make such an effort in the first quarter. That’s the most since the series started in 1998. For every 100 working Italians there are 15 persons seeking a job and another 20 willing to work but not actively searching, the highest level among the 28 EU countries, according to statistics agency Eurostat.

Driven by survival necessity, Greeks are much more active compared to Italians, with a willing-to-work-but-not-seeking aggregate totaling only 3.1 percent of the extended labor force. That compares with 15 percent of Italians, as shown in the following chart, which covers the first three months of 2015. The main reason pushing up the Italian number seems to be discouragement: after seeking and not finding work, many Italians lose hope of securing a decent occupation and retreat toward family tasks or activities in the informal economy. Italy surpasses formerly communist Bulgaria in this discouragement tendency while Danes are the least discouraged based on numbers for 2014, the most recent figures available for this category.

Spain is getting set to boil.

• Spain Mayors Spin Tale of Two Cities With Anti-Austerity Stance (Bloomberg)

Ruling Madrid and Barcelona is a tale of two cities as their new mayors forge their own styles of government even though both emerged from the same anti-austerity movement as Podemos. In Barcelona, Ada Colau has frozen hotel openings in a bid to prevent the city from becoming overrun by hordes that afflict tourist hot spots like Venice. In Madrid, Manuela Carmena has ruled out a plan put forward by her own finance chief to levy a charge on visitors to the city and has said she welcomes investment in tourism.
Colau and Carmena swept to power in Spain’s two biggest cities in local elections held in May as voters gave their verdict on three years of austerity imposed by the pro-business People’s Party of Prime Minister Mariano Rajoy.

The way they run their cities will help investors parse the political climate in Spain, with polls showing that Podemos, an ally of Greece’s Syriza, may have a chance to shape national policy after general elections due by the end of the year. “A leader needs to be an example to follow to all,” Ismael Clemente, CEO of Merlin Properties, Spain’s largest real estate trust, said in Madrid. “We met with some of Carmena’s team and they were open minded, ready to listen and reasonable.” Colau, 41, who rose to prominence in Spain leading protests against evictions, won power as head of the Barcelona en Comu movement which includes Podemos. Podemos also backed the Ahora Madrid campaign of Carmena, a 71-year-old labor-rights lawyer, who ended 24 years of rule by Rajoy’s PP in the capital.

With the general election set to redraw Spain’s political map and Greece ravaged by Syriza’s failed attempt to overturn European austerity demands, the paths taken by Madrid and Barcelona may have ramifications for the rest of Europe. Both cities are under scrutiny from voters as the nation prepares to go to the polls, Antonio Barroso at Teneo Intelligence, said by phone. Colau’s decree freezing new investment threatens projects including the conversion for hotel use of the Agbar Tower operated by Hyatt Hotels and Deutsche Bank’s headquarters in the upscale Passeig de Gracia avenue. She said in a June 1 interview with El Pais that she wanted to put a moratorium on new hotels and tourist apartments to stop mass tourism getting out of control.

Not his job.

• Draghi Sets Sights On Reviving Economy With Greece On Back Seat (Bloomberg)

Mario Draghi can take a break from being a full-time Greek crisis firefighter and get back to the job of fostering economic recovery across the euro area. Although the 19-nation currency bloc has avoided losing a member and the market upheaval that might have entailed, reports this week will probably show the economy is hardly firing on all cylinders. Three years after Draghi promised to do “whatever it takes” to keep the union together, the ECB has its work cut out to speed up the pace of growth and inflation. A weaker euro and the ECB’s quantitative-easing program are helping the economy find its feet, with the second quarter forecast to show a ninth quarter of expansion. Consumer-price growth remains too low, however, and unemployment, particularly in southern European states, is stubbornly high.

“The Greek issue moves from page 1 to 2 or 3 in the minds of traders and economists,” said Holger Sandte, chief European analyst at Nordea in Copenhagen. “Now attention turns to more classic macro style things.” The euro-area jobless rate was little changed at 11% in June, while inflation held at 0.2% in July, according to surveys of economists before data this week. Economic confidence probably dipped this month, as did Germany’s Ifo business climate index. Due at 10 a.m. Frankfurt time, economists predict it fell to a five-month low of 107.2 from 107.4. The euro-area economy maintained its growth at the start of the third quarter, weathering strains on confidence from the crisis in Greece, judging by a closely watched manufacturing and services index.

Still, that barometer also showed German factory growth weakened, with exports falling for the first time in six months. In France, manufacturing has shrunk in all but one of the last 15 months. “It’s better but not good — we are improving from an extremely low level and have awful lot of catch-up to do,” especially on investment spending, said David Milleker, chief economist at Union Investment Privatfonds GmbH in Frankfurt. The ECB sees the economy growing 1.5% this year, picking up to 1.9% in 2016. Price growth will be almost non-existent this year, at 0.3%, though the ECB expects its bond buying to help push that to 1.5% in 2016.

Commodity currencies.

• What Does Australia Have in Common With Colombia and Russia? (Bloomberg)

Australia’s currency has had one of the most rapid depreciations of its real exchange rate, only beaten by a ragged bunch of troubled economies. Kieran Davies of Barclays Plc estimates that the Aussie’s 16% fall from 2013 to the end of the second quarter is the fastest after Colombia — where growth has halved; Russia, which is in recession; Brazil, which is also in a slump, and Japan. All these economies bar Japan are struggling with plunging oil and commodity prices as China’s economy slows. “Excluding the brief fall at the worst point of the global financial crisis, this is the lowest level since 2007” for the Australian dollar, said Davies, chief economist at Barclays in Australia, who reckons the real exchange rate has fallen a further 3% so far this quarter.

The depreciation should add half a %age point to growth this year and next, he said. Still, Davies, using the Reserve Bank of Australia’s fair value model, estimates the real exchange rate remains 6% overvalued this quarter given the larger fall in commodity prices over the period. The central bank’s own commodity price index has dropped 37% since the start of 2013 in U.S. dollar terms. As a result, he thinks the RBA is unlikely to alter its negative language on the currency. “I think they’d be comfortable with it still going lower,” said Davies, a former Treasury official. “Sometimes the RBA has dropped the reference to the currency drop being necessary and the market’s read too much into it and the RBA has then had to backtrack.”

TEXT

• Oil Groups Have Shelved $200 Billion In New Projects As Low Prices Bite (FT)

The world’s big energy groups have shelved $200bn of spending on new projects in an urgent round of cost-cutting aimed at protecting investors’ dividends as the oil price slumps for a second time this year. The sell-off in oil has been matched by a broader slump in copper, gold and other raw materials, pushing the Bloomberg commodities index to a six-year low over concerns of weaker Chinese growth and rising supplies across the board. The plunge in crude prices since last summer has resulted in the deferral of 46 big oil and gas projects with 20bn barrels of oil equivalent in reserves — more than Mexico’s entire proven holdings — according to consultancy Wood Mackenzie.

Among companies postponing big production plans while they wait for costs to come down are UK-listed BP, Anglo-Dutch Royal Dutch Shell, US-based Chevron, Norway’s Statoil, and Australia’s Woodside Petroleum. Research from Rystad Energy, a Norwegian consultancy, found in May that $118bn of projects had been put on hold, but the Wood Mackenzie study shows the toll is now much greater. The decline in Brent crude, which has more than halved in the past year, was triggered by Opec’s decision not to cut output in the face of a US supply glut and weaker than expected demand. After stabilising in March, oil prices have faced renewed pressure, with Brent falling below $55 a barrel this month — a 20% decline from a five-month high reached in early May.

More than half the reserves put on hold lie thousands of feet under the sea, including in the Gulf of Mexico and off west Africa, where the technical demands of extracting crude and earlier inflation have pushed up the cost of projects. Deepwater drilling rigs cost hundreds of thousands of dollars a day to hire and these projects could yet proceed if contractors’ costs fall far enough. Canada is the biggest single region affected, with the development of some 5.6bn barrels of reserves, almost all oil sands, having been deferred.

Debt Rattle July 26 2015

Jul 262015

July 26, 2015 Posted by Raúl Ilargi Meijer at 11:13 am Finance Tagged with: ag, Amazon, casino, Goldman, Konstantopoulou, laundering, olive oil, Puerto Rico, Troika, Varoufakis 8 Responses »

Jack Delano Jewish stores in Colchester, Connecticut 1940

• The Last Bubble Standing – Amazon’s Same Day Trip Through The Casino (Stockman)

• Europe Braces Itself For Revolutionary Leftist Backlash After Greece (Telegraph)

• Varoufakis – A New Kind Of Politics? (Paul Tyson)

• Varoufakis Claims He Had Approval To Plan Parallel Banking System (Kathimerini)

• Greece, The Sacrificial Lamb (Joe Stiglitz)

• Depression’s Advocates (J. Bradford DeLong)

• The Latest Rising Greek Political Star Who Says No To Austerity (HuffPo)

• How the Euro Turned Into a Trap (NY Times Ed.)

• Greek Bailout Talks Pushed Back By A Few Days On Logistics (Reuters)

• Renewed Bailout Talks Between Greece And Creditors Hit Snags (FT)

• Greek Gov’t Braces For Talks With Creditors Amid Upheaval In SYRIZA (Kath.)

• Greek Bank Boldholders Fear Portuguese-Style “Bad Bank” Split (Reuters)

• Chancellor George Osborne Takes EU Reform Campaign To Paris (Reuters)

• Puerto Rico: Austerity For Residents, But Tax Breaks For Hedge Funds (Guardian)

• What A Federal Financial Control Board Means To Puerto Rico (The Hill)

• Judge Finds Chicago’s Changes To Pension Funds Unconstitutional (Tribune)

• Foreign Criminals Use London Real Estate To Launder Billions Of Pounds (Guardian)

• The – Goldman-Related – Scandal That Ate Malaysia (Bloomberg)

• Olive Oil Prices Surge Due To Drought And Disease In Spain And Italy (Guardian)

• The Future of Food Finance (Barron’s)

• Archaeologists Find Possible Evidence Of Earliest Human Agriculture (Guardian)

“..the Wall Street brokers’ explanation for AMZN’s $250 billion of bottled air is actually proof positive that the casino has become unhinged.”

• The Last Bubble Standing – Amazon’s Same Day Trip Through The Casino (Stockman)

Right. Amazon is the greatest thing since sliced bread. Like millions of others, I use it practically every day. And it was nice to see that it made a profit -thin as it was at 0.4% of sales- in the second quarter. But the instantaneous re-rating of its market cap by $40 billion in the seconds after its earnings release had nothing to do with Amazon or the considerable entrepreneurial prowess of Jeff Bezos and his army of disrupters. It was more in the nature of financial rigor mortis – the final spasm of the robo-traders and the fast money crowd chasing one of the greatest bubbles still standing in the casino. And, yes, Amazon’s $250 billion market cap is an out and out bubble. Notwithstanding all the “good things it brings to life” daily, it is not the present day incarnation of General Electric of the 1950s, and for one blindingly obvious reason.

It has never made a profit beyond occasional quarterly chump change. And, what’s more, Bezos -arguably the most maniacal empire builder since Genghis Khan- apparently has no plan to ever make one. To be sure, in these waning days of the third great central bank enabled bubble of this century, GAAP net income is a decidedly quaint concept. In the casino it’s all about beanstalks which grow to the sky and sell-side gobbledygook. Here’s how one of Silicon Valley’s most unabashed circus barkers, Piper Jaffray’s Gene Munster, explains it: “Next Steps For AWS… SaaS Applications? We believe AWS has an opportunity to move up the cloud stack to applications and leverage its existing base of AWS IaaS/PaaS 1M + users. AWS dipped its toes into the SaaS pool earlier this year when it expanded its offerings to include an email management program and we believe it will continue to extend its expertise to other offerings. We do not believe that this optionality is baked into investors’ outlook for AWS.”

Got that? Instead, better try this. AMZN’s operating free cash flow in Q2 was $621 million -representing an annualized run rate right in line with its LTM figure of $2.35 billion. So that means there was no cash flow acceleration this quarter, and that AMZN is being valued at, well, 109X free cash flow! Moreover, neither its Q2 or LTM figure is some kind of downside aberration. The fact is, Amazon is one of the greatest cash burn machines ever invented. It’s not a start-up; it’s 25 years old. And it has never, ever generated any material free cash flow – notwithstanding its $96 billion of LTM sales. During CY 2014, for example, free cash flow was just $1.8 billion and it clocked in at an equally thin $1.2 billion the year before that.

In fact, beginning with net revenues of just $8.5 billion in 2005 it has since ramped its sales by 12X, meaning that during the last ten and one-half years it has booked $431 billion in sales. But its cumulative operating free cash flow over that same period was just $6 billion or 1.4% of its turnover. So, no, Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino. In an honest free market, real investors would never give a quarter trillion dollar valuation to a business that refuses to make a profit, never pays a dividend and is a one-percenter at best in the free cash flow department -that is, in the very thing that capitalist enterprises are born to produce. Indeed, the Wall Street brokers’ explanation for AMZN’s $250 billion of bottled air is actually proof positive that the casino has become unhinged.

We may hope so.

• Europe Braces Itself For Revolutionary Leftist Backlash After Greece (Telegraph)

A pre-revolutionary fervour is sweeping Europe. “The atmosphere is a little similar to the time after 1968 in Europe. I can feel, maybe not a revolutionary mood, but something like widespread impatience”. These were the words of European council president Donald Tusk, 48 hours after Greece’s paymasters imposed the most punishing bail-out measures ever forced on a debtor nation in the eurozone’s 15-year history. A former Polish prime minister and a politician not prone to hyperbole, Tusk’s comments revealed Brussels’ fears of a bubbling rebellion across the continent. “When impatience becomes not an individual but a social experience of feeling, this is the introduction for revolutions” said Tusk. “I am really afraid of this ideological or political contagion”.

His unease reflects a widespread conviction that Europe’s elites had no choice but to make an example out of Greece. Alexis Tsipras was forced to submit to a deal that punished his government’s insolence, so the argument goes, and destroy the fantasy that a “new eurozone” could be forged for the economies of the southern Mediterranean. Having emerged from the talks, Tusk declared victory, dismissing the “radical leftist illusion that you can build some alternative to this traditional European vision of the economy.” Syriza’s unprecedented rise to power in January marked a watershed in post-crisis Europe, hitherto dominated by conservative-leaning governments from Portugal to Finland.

The first radical-Left regime in Europe’s post-war history, Syriza vowed to tear up the Troika’s austerity contract, forge a Mediterranean alliance against the dominant creditor-bloc, and transform the terms of Greece’s euro membership. Seven months later, these dreams are in tatters. A tortuous 30-hour weekend in Brussels led to Tsipras capitulating to austerity terms more egregious than any negotiated by Greece’s previous centre-right and Socialist governments. Greek assets will now be sequestered into a private fund to pay off debts, external monitors will return to the country, and everything from the price of milk and bakery bread will be subject to Brussels’ scrutiny. “Syriza was the big Leftist experiment and it has gone disastrously wrong in a short period of time,” says Luke March, author of Radical Left Parties in Europe and lecturer at Edinburgh University.

“The Left elsewhere are now being forced to take stock and say “we are not Greece””. But the shadow of 1968 – a year when Europe was gripped by mass discontent, student rebellions, and labour strikes – looms over Europe’s institutions. Over the course of the next 10 months, the entire complexion of the European south could be transformed. General elections in Portugal, Spain and Ireland are poised to bring anti-austerity, Left leaning parties to power. It is the wildfire of political contagion that spooks Europe’s federalists. Greece’s humiliation, rather than cowing the revolutionary Left, is set to embolden the southern calls for mass debt relief and cease the enforcement of the euro’s contractionary dogma.

“..it seems all too likely that the ‘logic’ of Eurozone finance is a function of Thucydides’ description of primal human barbarity. Here the strong do as they will and the weak suffer as they must.”

• Varoufakis – A New Kind Of Politics? (Paul Tyson)

Strangely, one of the most disturbing aspects of Varoufakis’ stint as a Finance Minister concerns the fact that he is an economist. One thing we now readily assume is that economics is the language of power. This gives academic economists a status somewhat like a theologian in relation to the practical priestcraft of public office. However, there are very few professors of economics that actually get into office as politicians, just as you seldom get institutionally savvy bishops or mega-church leaders who are serious theologians. When an economist becomes a politician, this is going to be interesting.

In a few short months, Varoufakis completely exploded the idea that economics is the language of power. What we saw when an actual economist landed in the middle of the Eurozone crisis is that the most basic truths about economic reality have nothing to do with power. The idea that asphyxiating Greek banks and killing the Greek state is good for its economy makes no economic sense at all. The idea that continuing to pursue a savagely contractionary austerity agenda will make it possible to generate sustained state surpluses large enough to repay impossible debt burdens, defies any sort of economic rationality. The conviction that it is somehow both moral and necessary to fiscally execute the Greek polity or eject Greece in order to preserve the financial integrity of the Eurozone, is not a stance grounded in economic science.

Yet these agenda commitments are, obviously, immovable Eurogroup dogmas. When Varoufakis patiently, logically and persuasively sought to point out the economic problems with the sacred Eurozone dogmas, this got him into trouble for “lecturing” his peers. Somehow, the economic irrationality of what the Eurogroup must do was obvious to the Eurogroup, and they could not for the life of them see why Varoufakis didn’t understand this. So Varoufakis became branded as “combative” and “recalcitrant” due to his refusal to be on the same page as all the other European finance ministers, when all along it was the Eurogroup who would not talk about obvious economic realities with Varoufakis. Varoufakis’ failed attempt to negotiate even a modicum of constructive economic and political sanity with Brussels strongly suggests that the governing principles of financial power in Europe are not grounded in economic science or democratic politics.

Indeed, it seems all too likely that the ‘logic’ of Eurozone finance is a function of Thucydides’ description of primal human barbarity. Here the strong do as they will and the weak suffer as they must. The complete lack of impact which Varoufakis’ economic arguments achieved leads one to fear that when it comes to economics and politics, we are being conned: the main purpose of economic speak in politics is obfuscation. If that is indeed the case, then having someone point out the obvious elephant in the room – the economic impossibility of the prevailing dogmas governing high finance and domestic politics – is just too much. It looks like our ruling elites do not want a real economist meddling with power.

A story that seems to surprise many people. But V already told it ages ago. Only thing new is that it started in December.

• Varoufakis Claims He Had Approval To Plan Parallel Banking System (Kathimerini)

Former Finance Minister Yanis Varoufakis has claimed that he was authorized by Alexis Tsipras last December to look into a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could eventually work as a parallel banking system, Kathimerini has learned. In a teleconference call with members of international hedge funds that was allegedly coordinated by former British Chancellor of the Exchequer Norman Lamont, Varoufakis claimed to have been given the okay by Tsipras last December – a month before general elections that brought SYRIZA to power – to plan a payment system that could operate in euros but which could be changed into drachmas “overnight” if necessary, Kathimerini understands.

Varoufakis worked with a small team to prepare the plan, which would have required a staff of 1,000 to implement but did not get the final go-ahead from Tsipras to proceed, he said. The call took place on July 16, more than a week after Varoufakis left his post as finance minister. The plan would involve hijacking the AFMs of taxpayers and corporations by hacking into the General Secretariat of Public Revenues website, Varoufakis told his interlocutors. This would allow the creation of a parallel system that could operate if banks were forced to close and which would allow payments to be made between third parties and the state and could eventually lead to the creation of a parallel banking system, he said.

As the general secretariat is a system that is monitored by Greece’s creditors and is therefore difficult to access, Varoufakis said he assigned a childhood friend of his, an information technology expert who became a professor at Columbia University, to hack into the system. A week after Varouakis took over the ministry, he said the friend telephoned him and said he had “control” of the hardware but not the software “which belongs to the troika.” [..] The work was more or less complete: We did have a Plan B but the difficulty was to go from the five people who were planning it to the 1,000 people that would have to implement it. For that I would have to receive another authorisation which never came.”

“..The Germans say there is to be no debt write-off and that the IMF must be part of the program. But the IMF cannot participate in a program in which debt levels are unsustainable”

• Greece, The Sacrificial Lamb (Joe Stiglitz)

As the Greek crisis proceeds to its next stage, Germany, Greece and the triumvirate of the International Monetary Fund, the European Central Bank and the European Commission (now better known as the troika) have all faced serious criticism. While there is plenty of blame to share, we shouldn’t lose sight of what is really going on. I’ve been watching this Greek tragedy closely for five years, engaged with those on all sides. Having spent the last week in Athens talking to ordinary citizens, young and old, as well as current and past officials, I’ve come to the view that this is about far more than just Greece and the euro. Some of the basic laws demanded by the troika deal with taxes and expenditures and the balance between the two, and some deal with the rules and regulations affecting specific markets.

What is striking about the new program (called “the third memorandum”) is that on both scores it makes no sense either for Greece or for its creditors. As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the IMF for help. This resulted not just from austerity but also from so-called structural reforms, where too often the IMF was duped into imposing demands that favored one special interest relative to others. There were hundreds of conditions, some little, some big, many irrelevant, some good, some outright wrong, and most missing the big changes that were really required. Back in 1998 in Indonesia, I saw how the IMF. ruined that country’s banking system.

I recall the picture of Michel Camdessus, the managing director of the IMF at the time, standing over President Suharto as Indonesia surrendered its economic sovereignty. At a meeting in Kuala Lumpur in December 1997, I warned that there would be bloodshed in the streets within six months; the riots broke out five months later in Jakarta and elsewhere in Indonesia. Both before and after the crisis in East Asia, and those in Africa and in Latin America (most recently, in Argentina), these programs failed, turning downturns into recessions, recessions into depressions. I had thought that the lesson from these failures had been well learned, so it came as a surprise that Europe, beginning a half-decade ago, would impose this same stiff and ineffective program on one of its own.

Whether or not the program is well implemented, it will lead to unsustainable levels of debt, just as a similar approach did in Argentina: The macro-policies demanded by the troika will lead to a deeper Greek depression. That’s why the IMF’s current managing director, Christine Lagarde, said that there needs to be what is euphemistically called “debt restructuring” – that is, in one way or another, a write-off of a significant portion of the debt. The troika program is thus incoherent: The Germans say there is to be no debt write-off and that the IMF must be part of the program. But the IMF cannot participate in a program in which debt levels are unsustainable, and Greece’s debts are unsustainable.

Geez, I’m even quoting Brad DeLong now?

• Depression’s Advocates (J. Bradford DeLong)

Back in the early days of the ongoing economic crisis, I had a line in my talks that sometimes got applause, usually got a laugh, and always gave people a reason for optimism. Given the experience of Europe and the United States in the 1930s, I would say, policymakers would not make the same mistakes as their predecessors did during the Great Depression. This time, we would make new, different, and, one hoped, lesser mistakes. Unfortunately, that prediction turned out to be wrong. Not only have policymakers in the eurozone insisted on repeating the blunders of the 1930s; they are poised to repeat them in a more brutal, more exaggerated, and more extended fashion. I did not see that coming.

When the Greek debt crisis erupted in 2010, it seemed to me that the lessons of history were so obvious that the path to a resolution would be straightforward. The logic was clear. Had Greece not been a member of the eurozone, its best option would have been to default, restructure its debt, and depreciate its currency. But, because the European Union did not want Greece to exit the eurozone (which would have been a major setback for Europe as a political project), Greece would be offered enough aid, support, debt forgiveness, and assistance with payments to offset any advantages it might gain by exiting the monetary union. Instead, Greece’s creditors chose to tighten the screws.

As a result, Greece is likely much worse off today than it would have been had it abandoned the euro in 2010. Iceland, which was hit by a financial crisis in 2008, provides the counterfactual. Whereas Greece remains mired in depression, Iceland – which is not in the eurozone – has essentially recovered. To be sure, as the American economist Barry Eichengreen argued in 2007, technical considerations make exiting the eurozone difficult, expensive, and dangerous. But that is just one side of the ledger. Using Iceland as our measuring stick, the cost to Greece of not exiting the eurozone is equivalent to 75% of a year’s GDP – and counting.

It is hard for me to believe that if Greece had abandoned the euro in 2010, the economic fallout would have amounted to even a quarter of that. Furthermore, it seems equally improbable that the immediate impact of exiting the eurozone today would be larger than the long-run costs of remaining, given the insistence of Greece’s creditors on austerity. That insistence reflects the attachment of policymakers in the EU – especially in Germany – to a conceptual framework that has led them consistently to underestimate the gravity of the situation and recommend policies that make matters worse.

Tsipras can’t afford to lose her.

• The Latest Rising Greek Political Star Who Says No To Austerity (HuffPo)

Greece’s charismatic head of parliament, Zoe Konstantopoulou, is one of the most dynamic and outspoken members of the country’s ruling Syriza party. This week, she sent shockwaves through the party by refusing to approve a financial reform bill proposed by her supposed Syriza ally, Prime Minister Alexis Tsipras – for the second time. Konstantopoulou considers measures proposed by Tsipras as part of an agreement with Greece’s European lenders to unlock fresh loans for the country a “violent attack on democracy,” she wrote in a letter to Tsipras and Greek President Prokopis Pavlopoulos. Konstantopoulou’s adamant opposition to the newest austerity reforms is resonating with Greeks who feel the Europe-imposed reforms are excruciatingly harsh.

Konstantopoulou, 38, is the daughter of renowned lawyer Nikos Konstantopoulos, who led of one of Syriza’s largest factions, and well-known journalist Lina Alexiou. She studied law at the University of Athens, La Sorbonne in Paris and Columbia University in New York before becoming a lawyer in Greece in 2003, focusing on international criminal law and human rights. Konstantopoulou first ran for Syriza in 2009 and was elected to the Greek parliament in 2012. She was elected head of the parliament in 2015, the youngest person to hold the position. As parliament chief, her forthright remarks and dedication to formal legal procedure have gained her passionate praise as well as fierce opposition. Her forceful interventions have annoyed some politicians, especially those in opposition parties.

Stavros Theodorakis, leader of To Potami (The River), for example, has called her arrogant and has demanded her resignation. Others have praised her fiery energy, saying her forceful defense of her convictions is invigorating. Despite Konstantopoulou’s rising favor, she remains far less popular than other Syriza politicians, especially Tsipras. Her blunt rejection of the prime minister’s reforms has raised speculation she may leave the party and go her own way, according to Greek daily newspaper Kathimerini. Konstantopoulou denies that scenario. After a one-hour meeting with Tsipras on Thursday, she told reporters that both share “an understanding built on camaraderie and honesty, along with the common wish to protect the rights of the people as well as the unity of Syriza, which some would want to see shattered.”

NY Times ed staff changing its tack.

• How the Euro Turned Into a Trap (NY Times Ed.)

When they introduced the euro in 1999, European leaders said the common currency would be irreversible and would lead to greater economic and political integration among their countries. That pledge of permanence, long doubted by euro-skeptics, seems ever less credible. While the eurozone may have temporarily avoided a Greek exit, it is hard to see how a deal that requires more spending cuts, higher taxes and only vague promises of debt relief can restore the crippled economy enough to keep Greece in the currency union. On Thursday, the Greek Parliament passed a second set of reforms required by the country’s creditors. Other changes, like higher taxes on farmers, are expected later in the year.

The combative finance minister of Germany, Wolfgang Schäuble, has further undermined confidence in the euro’s cohesion by saying that Greece would be better off leaving the common currency for a five-year “timeout.” As a practical matter, an exit from the currency union would almost certainly be permanent, since readmission involves a grueling process. The eurozone requires new members to keep inflation below 2% and to have a maximum fiscal deficit of 3% of GDP and a public debt that is no more than 60% of GDP. The plight of the Greeks has made countries that do not use the euro, like Poland and Hungary, far less eager to join the currency union, which has come to mean a loss of sovereignty and a commitment to austerity, regardless of economic reality.

Of course, the euro was never entirely about economics. European leaders believed the single currency was a big step toward creating an irrevocable alliance among countries on the continent. But many experts warned that it could make its members less stable unless it was followed by a tighter political and budgetary union. Since that did not happen, the currency union was left fully vulnerable to economic crises and to the will of Europe’s more powerful economies. All those fears have played out in Greece, even as the threat of exits from the euro hangs over other weakened countries, like Italy, Portugal and Spain. Senior leaders in Germany, Finland and Slovakia who have publicly suggested a Greek exit seem to think it would scare weaker economies into accepting more austerity.

That may not be necessary; some radical parties in those countries are already openly talking about leaving the euro. The question now is what is the cost of leaving? Can a modern economy withstand the immediate damage of an abrupt currency change if the benefits of devaluation and regaining full control over fiscal and monetary policies could be limited and could take years to realize?

Not enough 5-star hotel rooms?

• Greek Bailout Talks Pushed Back By A Few Days On Logistics (Reuters)

Talks between Greece and its international creditors over a new bailout package will be delayed by a couple of days because of organisational issues, a finance ministry official said on Saturday. The meetings with officials from the EC, ECB and IMF were supposed to start on Monday after being delayed for issues including the location of talks and security last week. A finance ministry official, who declined to be named, said talks between the technical teams of the lenders will start on Tuesday, while the mission chiefs will arrive in Athens with a delay of a couple of days for technical reasons. “The reasons for the delay are neither political, nor diplomatic ones,” the official added.

Greeks have viewed inspections visits by the lenders in Athens as a violation of the country’s sovereignty and six months of acrimonious negotiations with EU partners took place in Brussels at the government’s request. Another finance ministry official denied earlier on Saturday that the government was trying to keep the lenders’ team away from government departments and had no problem with them visiting the General Accounting Office.. Asked if the government would now allow EU, IMF and ECB mission chiefs to visit Athens for talks on a new loan, State Minister Alekos Flabouraris said: “If the agreement says that they should visit a ministry, we have to accept that.”

The confusion around the expected start to the talks on Friday underlined the challenges ahead if negotiations are to be wrapped up in time for a bailout worth up to €86 billion to be approved in parliament by Aug. 20, as Greece intends. Already, Prime Minister Alexis Tsipras is struggling to contain a rebellion in his left-wing Syriza party that made his government dependent on votes from pro-European opposition parties to get the tough bailout terms approved in parliament. One of Tsipras’ closest aides said that the understanding with the opposition parties could not last long and a clear solution was needed, underlining widespread expectations that new elections may come as soon as September or October. “The country cannot go on with a minority government for long. We need clear, strong solutions,” State Minister Nikos Pappas told the weekly Ependysi in an interview published on Saturday.

Apart from the terms of a new loan, Greece and its lenders are also expected to discuss the sustainability of its debt, which is around 170% of GDP. Greece has repeatedly asked for a debt relief and the IMF has said this is needed for the Greek accord to be viable. [..] Tsipras, who is by far the most popular politician in Greece according to opinion polls, has said his priority is to secure the bailout package before dealing with the political fallout from the Syriza party rebellion.

“..the decision to pursue a new IMF program means euro zone leaders may have to open talks on granting Greece significant debt relief much earlier than originally anticipated..”

• Renewed Bailout Talks Between Greece And Creditors Hit Snags (FT)

Talks to agree a new €86bn bailout for Greece ran into trouble on Friday after Athens raised hurdles for negotiators in the Greek capital, forcing them to postpone their arrival amid renewed acrimony. Alexis Tsipras, the Greek prime minister, agreed last week to “fully normalize” talks with creditors on the ground in Athens after resisting their presence for months — a key demand made by euro zone leaders when they agreed to reopen rescue talks after coming close to pushing Greece out of the euro zone. But three senior officials from Greece’s bailout monitors said Athens had instead demanded restrictions on negotiators, including on whom creditors could meet and what topics were to be discussed in the talks.

Two of the officials said Greek authorities had also insisted negotiators no longer use the Athens Hilton as their base — a hotel close to central Syntagma Square and a short drive to the finance ministry — instead proposing hotels far from the capital’s government quarter. “It is fundamentally more of the same,” said a senior official from one of the bailout monitors,colloquially known as the “troika” after the three institutions originally involved in the talks, the EC, ECB and IMF. “They don’t want to engage with the troika.” Greek officials insisted the renewed stand-off was only a temporary delay and that talks would resume over the weekend or Monday at the latest.

George Stathakis, economy minister, said he was confident the negotiations would be finished by mid-August, when Athens needs the bailout cash to pay off a €3.2bn bond held by the ECB. Mr Stathakis said Greece and its creditors had already found common ground on many of the main issues,including fiscal targets, stabilizing the banking sector, liberalization of product markets and professions, labor market reforms and privatizations of state assets. “We have three weeks,and I’m confident that it’s enough for the existing agenda,” Mr Stathakis told the Financial Times. “We agree in certain areas. In others, there are different views and some distance needs to be covered. But the last European summit gave a framework that indicates which directions to follow, and that’s why I think three weeks will be enough.”

Still, one creditor official said negotiating teams were “sitting on their suitcases” and had no plans to go to Athens until the logistical issues were resolved. Adding another potential complication, the Greek government on Friday lodged a formal request with the IMF to begin discussions on a new, third bailout program. The request came after officials at the IMF determined that the current Greek program, which still has about €16.5bn to disburse and was due to expire in March, had become outdated. Those negotiations between Athens and the IMF could take months. But the decision to pursue a new IMF program means euro zone leaders may have to open talks on granting Greece significant debt relief much earlier than originally anticipated, since the IMF will not sign on to a new program unless euro zone lenders agree to restructure their bailout loans.

Syriza differences are being magnified by the press.

• Greek Gov’t Braces For Talks With Creditors Amid Upheaval In SYRIZA (Kath.)

Even as Prime Minister Alexis Tsipras grapples with serious divisions within SYRIZA, government officials are bracing for the launch of face-to-face negotiations with representatives of the country’s creditors which are expected to begin next week. The government is hoping to seal a deal with creditors by mid-August and certainly before August 20 when a €3.2 billion debt repayment to the ECB is to come due. Greece does not have the money to repay the debt and is hoping for a deal to be reached, allowing the partial disbursement of some funding, either from a new program or from residual funding from the recapitalization of Greek banks. But sources indicate that creditors are less optimistic about a deal being finalized so soon.

As a result officials are said to be considering the possibility of a second bridge loan to Greece, which would allow it to cover the ECB debt and other obligations, before an agreement on a third bailout is finalized. Although officials from countries that have taken a hard line opposite Greece, including Germany and some north European states, reportedly want Athens to commit to more prior actions, European Economy and Monetary Affairs Commissioner Pierre Moscovici has indicated that this will not be necessary. Creditors are expected to seek additional measures at some point, however, to plug a widening fiscal gap.

Tsipras is also struggling to keep a lid on dissent within SYRIZA as a bloc of around 30 of the party’s 149 MPs object to his compromise with creditors, which foresees more austerity. The premier has indicated that a party congress should be held in September to refocus SYRIZA. Early elections, which are considered inevitable in view of the upheaval within the party, are expected to take place immediately after the congress, either later in September or in October or even November. In comments on Saturday, State Minister Nikos Pappas acknowledged that the country cannot continue indefinitely with a minority government, referring to the mass defections by SYRIZA MPs in recent parliamentary votes. A meeting of SYRIZA’s political secretariat is due on Monday.

As long as small depositors are left alone, fine by me.

• Greek Bank Boldholders Fear Portuguese-Style “Bad Bank” Split (Reuters)

National Bank of Greece bondholders are nervous that they will suffer heavy losses if authorities decide to siphon off all of the bank’s healthy assets leaving a “bad bank” to deal with their claims, a source close to a creditor group said. A group of senior bondholders in NBG sent a letter to European institutions last week saying they were concerned about measures that may be taken to revitalise the Greek banking sector after months of economic upheaval. After drawn-out negotiations, Greece is close to clinching a third bailout deal but has kept in place the capital controls it used to prevent a bank run last month.

The investors, who hold a significant portion of a €750 million NBG senior bond issued last year, are worried the bank may be split into a good bank and a bad bank as was the case for Portugal’s Banco Espirito Santo last year. Portugal separated out and pumped money into the healthy part of the bank creating a new entity “Novo Banco”, while remaining BES shareholders and subordinated bondholders were left with near worthless investments in the remaining bad bank. NBG bondholders are concerned that such a split in Greece could require a level of recapitalisation that would also see senior bondholders left behind in the bad bank.

Under current Greek law, junior bondholders should contribute to a bail-in, while new legislation passed on Wednesday will also force senior bondholders to contribute from January 1 2016. Recapitalisations of Greek banks may be needed before then, however, leaving the option of a bad bank solution on the table. ECB governing council member Christian Noyer said an initial injection of capital for Greek banks would be preferable before stress tests in the autumn.

To talk to Le Pen?

• Chancellor George Osborne Takes EU Reform Campaign To Paris (Reuters)

Chancellor of the Exchequer George Osborne will take Britain’s case for European Union reform to Paris on Sunday, seeking support from his French counterpart for a deal the Conservative government can put before voters in a promised in-out referendum. British Prime Minister David Cameron has pledged to renegotiate ties with the European Union ahead of a vote on the country’s continuing membership by the end of 2017. Osborne’s trip to Paris, the first in a series of visits to European capitals, will seek to build on Cameron’s meetings with all 27 leaders of the bloc earlier this year, the government said. He will argue that with public support for reform rising across the EU, now is the time to deliver lasting change. “The referendum in Britain is an opportunity to make the case for reform across the EU,” he will say, according to excepts of his speech.

“I want to see a new settlement for Europe, one that makes it a more competitive and dynamic continent to ensure it delivers prosperity and security for all of the people within it, not just for those in Britain.” Cameron’s promise of a referendum was made before national elections in May to neutralise a threat from the anti-EU UK Independence Party and to pacify Euro sceptics in his own party. The possibility that Britain could leave the European Union as a result of the tactic has worried allies such as the United States and opposition parties in Britain. U.S. President Barack Obama said on Friday that a Britain within the European union gave Washington much greater confidence in the strength of the transatlantic union. Some lawmakers were angered by his intervention in the debate, saying he was lecturing Britain.

What a refreshing MO.

• Puerto Rico: Austerity For Residents, But Tax Breaks For Hedge Funds (Guardian)

Caught between the demands of billionaires, pro-bankruptcy activists and more than three million people plagued by unemployment, poverty and government debt, who would you choose? As Puerto Rico confronts the quagmire of its $72bn financial crisis, it has come up with an answer: humouring a few very wealthy people. The island has for three years courted some of Wall Street’s richest citizens, from solitary investors to hedge fund elites. Last year it sold at auction hundreds of millions of its debt to various funds, displeasing many who believe the “vulture funds” only want a quick profit off Puerto Rico as it desperately tries to repay debt with high local taxes and austerity cuts.

Hedge fund manager John Paulson, best known for making billions off the 2008 subprime loan market crash, led the charge last year when he declared the island “the Singapore of the Caribbean”. His fund bought more than $100m of Puerto Rico’s junk-rated bonds last year. The most visible effect has been a rush to buy property akin to the buying spree by two billionaires in Detroit as that city filed for bankruptcy. Detroit’s woes are often held up for comparison to Puerto Rico’s but the island lacks the statehood or permission from Congress it would need to file for bankruptcy and follow Michigan’s decision to declare Motor City bust. While funds have inched away from Puerto Rico’s debt debacle, Paulson has bought into land.

In 2014 he spent more than $260m to buy three of the island’s largest resort properties, and announced plans to develop $500m-worth of “residences and resort amenities” to add to the existing beachfront condos and golf courses. He has a fellow cheerleader in billionaire Nicholas Prouty, who has invested more than $550m into turning San Juan’s marina into a bastion of the elite that includes an exclusive club and slips for “megayachts of 200 feet or larger”. As in Detroit, ultra-high-end developments abut scores of empty buildings, either for sale or abandoned by owners searching for work. With unemployment more than twice the US national average, the island’s median household income is nearly $7,000 less than that in Detroit, and less than half the US average.

Feudalism?

• What A Federal Financial Control Board Means To Puerto Rico (The Hill)

Puerto Rico is spiraling out of control and the Federal government will not break the fall. Island leaders may not have the will, popular support, or financial tools to pay down the $72 billion debt. So it is no surprise that calls for a federal financial control board intensified after Governor Alejandro Garcia Padilla announced that Puerto Rico’s debt is unpayable. Establishing a control board may be the easy way out for a wary Congress but it is not as simple as it seems and could backfire. A federal financial control board for Puerto Rico was first proposed a year ago by supporters of Doral Bank in its dispute with the Puerto Rican government over a $230 million tax refund. Most of Doral’s supporters are affiliated with the conservative Koch brothers.

They include Republican Reps. Jeff Duncan (SC), Scott Garrett (NJ), Darrell Issa (CA) and Matt Salmon (AZ) who received Koch Industries PAC contributions and who prior to Doral had never been involved with Puerto Rico. Last month, Duncan recommended to his House colleagues that a control board be established. The 60 Plus Association, another Koch funding recipient, is lobbying for a control board. While frustrated Puerto Ricans are increasingly talking about the need for a control board, the majority of the Island opposes it with good reason. First, Puerto Ricans feel that given the right tools, they can fix the fiscal crisis on their own. Right now the most important tool is access to Chapter 9 federal bankruptcy. From 1933 until 1984, Puerto Rico could allow its municipalities and public corporations to declare bankruptcy in the same way as the 50 states.

In 1984 Congress amended the bankruptcy code and excluded Puerto Rico for reasons unknown. Most agree that overall losses to investors will be higher if Puerto Rico is not given access to Federal bankruptcy and defaults. To avoid this scenario Puerto Rico passed its own bankruptcy law which was challenged by bondholders of electricity provider PREPA which owes $9 billion. The law was recently struck down in Federal court. The Puerto Rican government may appeal to the U.S. Supreme Court. The same group of creditors is fighting bankruptcy legislation introduced in Congress. Issa, who sits in the subcommittee reviewing the bill, opposes it. The conservative Heritage Foundation calls it a bailout even though it supported Chapter 9 for Detroit.

Second, Puerto Ricans are distrustful of any financial control board established by a national government that has denied it political representation for 117 years. The distrust is heightened by knowledge that the chief supporters of a control board are members of the conservative Koch brothers’ network and creditors whose objective is to make money off Puerto Rico rather than enable Puerto Rico to remake itself.

It’s not easy being Rahm.

• Judge Finds Chicago’s Changes To Pension Funds Unconstitutional (Tribune)

Mayor Rahm Emanuel’s administration said it will appeal a Cook County judge’s decision Friday that ruled unconstitutional a state law reducing municipal worker pension benefits in exchange for a city guarantee to fix their underfunded retirement systems. The 35-page ruling by Judge Rita Novak, slapping down the city’s arguments point by point, could have wide-ranging effects if upheld by the Illinois Supreme Court. Her decision appeared to also discredit efforts at the state and Cook County levels to try to curb pension benefits to rein in growing costs that threaten funding for government services. The issue of underfunded pensions, and how to restore their financial health, is crucial for the city and its taxpayers.

The city workers and laborers funds at issue in Friday’s ruling are more than $8 billion short of what’s needed to meet obligations – and are at risk of going broke within 13 years – after many years of low investment returns fueled by recession and inadequate funding. Without reducing benefits paid to retired workers, or requiring current workers to pay more, taxpayers could eventually be on the hook for hundreds of millions of dollars more in annual payments to those city funds — before the even worse-funded police and fire retirement accounts are factored into the taxing equation. Friday’s ruling also could further harm the city’s rapidly diminishing credit rating. Even before the decision, Moody’s Investors Service had downgraded the city’s debt rating to junk status based on pension concerns.

And after Novak’s ruling, Standard & Poor’s Ratings Service warned that it would lower the rating on city debt within the next six months without a fix. Novak’s ruling was not unexpected because of a decision in May by the Illinois Supreme Court on a similar pension case. The state’s high court unanimously struck down a law changing state pensions, saying the Illinois Constitution’s protection against “diminished or impaired” pension benefits for public workers and current retirees was absolute. City officials had argued that an agreement reached with 28 of 31 labor unions to alter retirement benefits out of the municipal and laborers pension funds – two of the city’s four pension plans – was different from the plan struck down by the Supreme Court.

Color me stunned.

• Foreign Criminals Use London Real Estate To Launder Billions Of Pounds (Guardian)

Foreign criminals are using the London housing market to launder billions of pounds, pushing up house prices for domestic buyers, a senior police officer has warned. Donald Toon, the director of economic crime at the National Crime Agency, spoke after a spike in receipts from a tax on homes bought up by companies, trusts and investment funds rather than individuals. Such corporations, usually based in offshore tax havens, are sometimes used by buyers keen to hide ownership of assets from their own countries’ tax authorities. The secrecy they offer can equally be used to squirrel away ill-gotten gains. Toon told the Times: “I believe the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.”

He spoke after provisional tax receipts showed the Treasury had made £142m from the annual tax on enveloped dwellings in just the first three months of the financial year. The tax, introduced last year, is payable every year by companies that own a UK residential property valued above a certain amount. The City of Westminster and the Royal Borough of Kensington and Chelsea accounted for 82% of the revenue, but inflation at the top of the market is thought to ripple down to cheaper properties as wealthy buyers are pushed down the housing chain. Toon’s comments come amid increasing concern that billions of pounds of corruptly gained money has been laundered by criminals and foreign officials buying upmarket London properties through anonymous offshore front companies.

Experts say that London, with its myriad links to tax haven crown dependencies, is arguably the global capital of money laundering. This month a Channel 4 investigation found that estate agents in Britain’s wealthiest postcodes are willing to turn a blind eye to apparent money laundering by corrupt foreign buyers. In the documentary, titled From Russia With Cash, two undercover reporters posed as an unscrupulous Russian government official called Boris in London to purchase an upmarket property for his mistress. The couple viewed five properties ranging in price from £3m to £15m, on the market with five estate agents in Kensington, Chelsea and Notting Hill.

Despite being made aware they are dealing with apparently laundered money, the estate agents agreed to continue with a potential purchase. In several instances the estate agents recommended law firms to help a buyer hide his identity. The agents suggested that secretive purchases of multimillion-pound houses were common in the capital. One claimed that 80% or more of his transactions were with international, overseas-based buyers and “50 or 60%” of them were conducted in “various stages of anonymity … whether it be through a company or an offshore trust”.

Blowing up one country at a time.

• The – Goldman-Related – Scandal That Ate Malaysia (Bloomberg)

In the spring of 2013, Song Dal Sun, head of securities investment at Seoul-based Hanwha Life Insurance, sat down to a presentation by a Goldman Sachs banker. The young Goldman salesman, who had flown in from Hong Kong, made a pitch for bonds to be issued by 1Malaysia Development Bhd., a state-owned company closely tied to Malaysian Prime Minister Najib Razak. It was enticing. The 10-year, dollar-denominated bonds offered an interest rate of 4.4%, about 100 basis points higher than other A-minus-rated bonds were yielding at the time, he recalls. But Song, a veteran of 25 years in finance, sensed something was amiss. With such an attractive yield, 1MDB could easily sell the notes directly to institutional investors through a global offering.

Instead, Goldman Sachs was privately selling 1MDB notes worth $3 billion backed by the Malaysian government. “Does it mean ‘explicit guarantee’?” he recalls asking the Goldman salesman, whom he declined to name. “I didn’t get a straight answer,” Song says. “I decided not to buy them.” The bond sale that Song passed up is part of a scandal that has all but sunk 1MDB, rattled investors, and set back Malaysia’s quest to become a developed nation. Najib, who also serves as Malaysia’s finance minister, sits on 1MDB’s advisory board as chairman. The scandal’s aftershocks have rocked his office, his government, and the political party he leads, United Malays National Organisation, or UMNO.

A state investment company trumpeted as a cornerstone of Najib’s economic policy after he became prime minister in April 2009, 1MDB is now mired in debts of at least $11 billion. Former Prime Minister Mahathir Mohamad, a one-time political mentor who’s turned on Najib, says “vast amounts of money” have “disappeared” from 1MDB funds. 1MDB has denied the claim and said all of its debts are accounted for. From the moment in 2009 when Najib took over a sovereign wealth fund set up by the Malaysian state of oil-rich Terengganu and turned it into a development fund owned by the federal government, 1MDB has been controversial. Since the beginning of this year—with coverage driven by the Sarawak Report, a blog, and The Edge, a local business weekly—the scandal has moved closer and closer to the heart of government, sparking calls for Najib’s ouster and recalling Malaysia’s long struggle with corruption and economic disappointment.

“..a bacterial disease nicknamed “olive ebola”..”

• Olive Oil Prices Surge Due To Drought And Disease In Spain And Italy (Guardian)

Salads have rarely been so expensively dressed after a combination of drought and disease pushed the price of olive oil up 10% so far this year, amid warnings from suppliers that harvests are the worst they have seen. The Italian government has declared a “state of calamity” in the provinces of Lecce and Brindisi on the heel of the country, where olive groves are being attacked by a bacterial disease nicknamed “olive ebola”. Up to 1m centuries-old olive trees could be felled in one of the most picturesque tourist spots of Italy in an attempt to contain the problem. The cost of the raw material has been increasing for two years as crops have been hit by drought in Spain, the world’s biggest producer of the oil, and the bacterial disease Xylella fastidiosa, which is destroying trees in Italy.

Analysts are expecting prices to remain high in coming months as demand is increasing. Retailers and distributors wanted to buy 12% more olive oil than exporters were able to deliver last month, according to industry insiders. Buyers in Latin America have turned to Europe in the wake of poor harvests over the Atlantic, while eastern Europeans have also been using increasing amounts of olive oil. The next harvest from southern Europe is not expected until September, but fears of a third poor harvest in a row in Spain and Italy continue to push up wholesale prices of remaining stocks over the summer. The other two large olive oil producers, Greece and Tunisia, had good yield and production, but not enough to compensate for Spain and Italy.

In the UK, heavy price competition between retailers, led by the rise of discounters Aldi and Lidl, has helped keep prices relatively low for shoppers. But this year, retailers and processors have been forced to pass on increases as the cost of the raw material from Italy has hit a 10-year high. The average retail price of a litre of extra virgin olive oil has risen from £6.32 in December to £6.95 this month, according to data from trade journal the Grocer.

Humane society.

• The Future of Food Finance (Barron’s)

The way people produce and eat food is changing in major ways, presenting both risks and opportunities for those invested in the sustenance sector. Historically, much of our protein has come from animals, but producing just one pound of meat means feeding an animal up to 16 pounds of grains and other crops. The caloric conversion is weak, too: According to a recent report produced in collaboration with the World Bank, even the most efficient sources of meat convert only around 11% of gross feed energy into human food. As global population and per capita meat consumption have grown, this inefficient system has become overburdened. In 1950, the total number of farm animals in the U.S. was somewhere near 100 million; by 2007, that number was roughly 9.5 billion.

To accommodate the enormous demand, nearly all of those animals were moved from farms to factories. According to Agriculture Department data, during the same period that the number of farm animals increased by 9,400%, the number of farmers producing those animals decreased by 60%. So many more animals being reared by so few farmers has come with consequences for consumers, animals, producers, and investors. Take pig production. Over the past several decades, the vast majority of breeding pigs have been moved into “gestation crates,” which are tiny cages that confine animals so tightly they can’t even turn around. The cages are iron maidens for sows. Not surprisingly, some consumers have responded with anger. “Cruel and senseless” is what the New York Times called the cages. “Torture on the farm,” reported the American Conservative magazine.

This outcry has led major food companies to demand changes. More than 60 of the world’s largest food retailers – McDonald’s, Nestlé, Burger King, Oscar Mayer, Safeway, Kroger, Costco, and dozens more – have announced plans to eliminate gestation crates from their pork-supply chains. Addressing animal welfare in corporate-responsibility programs is becoming the norm. “Active concern about how we treat the world around us has moved from the left of center to the mainstream, and savvy businesses are playing a part,” noted an editorial in Nation’s Restaurant News. “The growing number of animal-welfare-related commitments made by companies large and small reflect well-thought-out business –strategies.”

“11,000 years before the generally recognised advent of organised cultivation..”

• Archaeologists Find Possible Evidence Of Earliest Human Agriculture (Guardian)

Israeli archaeologists have uncovered dramatic evidence of what they believe are the earliest known attempts at agriculture, 11,000 years before the generally recognised advent of organised cultivation. The study examined more than 150,000 examples of plant remains recovered from an unusually well preserved hunter-gatherer settlement on the shores of the Sea of Galilee in northern Israel. Previously, scientists had believed that organised agriculture in the Middle East, including animal husbandry and crop cultivation, had begun in the late Holocene period – around 12,000 BC – and later spread west through Europe. The new research is based on excavations at a site known as Ohalo II, which was discovered in 1989 when the water level in the sea of Galilee dropped because of drought and excessive water extraction.

Occupied by a community of hunter-gatherers at the height of the last ice age 23,000 years ago, it revealed evidence of six brush huts with hearths as well as stone tools and animal and plant remains. A series of fortuitous coincidences led to the site’s preservation. The huts had been built over shallow bowls dug by the occupants and later burned. On top of that a deposit of sandy silt had accumulated before the rising lake had left it under 4 metres of water. The study looked for evidence of early types of invasive weeds – or “proto-weeds” – that flourished in conditions created by human cultivation. According to the researchers, the community at Ohalo II was already exploiting the precursors to domesticated plant types that would become a staple in early agriculture, including emmer wheat, barley, pea, lentil, almond, fig, grape and olive.

Significantly, however, they discovered the presence of two types of weeds in current crop fields: corn cleavers and darnel. Microscopic examination of the edges of stone blades from the site also found material that may have been transferred during the cutting and harvesting of cereal plants. Prof Ehud Weiss, head of the archaeological botany lab at the Department of Land of Israel Studies, told the Guardian: “We know what happened ecologically: that these wild plants, some time in history, became weeds. Why? The simple answer is that because humans changed the environment and created new ecological niches, that made it more comfortable for species that would become weeds, meaning they only have to compete with one species.”

According to Weiss, the mixture of “proto-weeds” and grains that would become domesticated mirrors plant findings from later agricultural communities. The site also revealed evidence of rudimentary breadmaking from starch granules found on scorched stones, and that the community may have been largely sedentary, with evidence of consumption of birds throughout the year, including migrating species. “This botanical find is really opening new windows to the past,” Weiss said. “You have to remember Ohalo is a unique preservation. Between Ohalo and the beginning of the Neolithic we have a blank. And when the early Neolithic arrives people start [agriculture again] from scratch.

The Number One Lesson From Athens

Jul 262015

July 26, 2015 Posted by Raúl Ilargi Meijer at 8:57 am Finance Tagged with: Brussels, front, Grillo, periphery, Troika, Tsipras 16 Responses »

Harris&Ewing Balancing act, John “Jammie” Reynolds, Washington DC 1917

There’s arguably nothing that’s been more hurtful -in more ways than one- to Greece and its Syriza government over the past six months, than the lack of support from the rest of Europe. And it’s not just the complete lack of support from other governments -that might have been expected-, but more than that the all but complete and deafening silence on the part of individuals and organizations, including political parties.

It’s no hyperbole to state that without their loud and clear support, Syriza never stood a chance in its negotiations with the Troika. And it’s downright bewildering that this continues to get so little attention from the press, from other commentators, and from politicians both inside Greece and outside of it.

This gives the impression that Greece’s problems are some sort of stand-alone issue. And that Athens must fight the entire Troika all on its own, a notion the same Troika has eagerly exploited.

It’s strange enough to see the supposedly well-educated part of the rich northern European population stay completely silent in the face of the full demolition of the Greek state, of its financial system, its healthcare and its economy.

Perhaps we should put that down to the fact that public opinion in for instance Germany is shaped by that country’s version of the National Enquirer, Bild Zeitung. Then again, the well-educated in Berlin allegedly don’t read Bild.

That no massive support movements have risen up in “rich Europe” to provide at least financial and humanitarian aid, let alone political support, can only be seen as a very significant manifestation of what Europe has become.

Which is something that “poorer Europe” should take note of, much more than it has. There is no solidarity, neither at the top nor at the ground level, between rich and poor(er) in the EU.

That in turn greatly enhances the need for Europe’s periphery to support one another, whether at government level or in the streets of Madrid, Milan etc. But that’s not happening either.

There have been sporadic declarations of undoubtedly well-intended support for Syriza from the likes of Podemos in Spain and M5S in Italy, but it’s been words only, and only on occasion; that’s where solidarity stops.

Brussels likes it just fine that way. They can pick off the weaker nations one by one, instead of having to deal with a united front. And that should count as a tactical failure for all of these nations.

As Greece has shown, fighting Brussels on your own is simply not a good idea. But Greece had no choice, it was left abandoned and exposed by the other countries in similar conditions as itself.

We can speculate as to why that happened – and keeps on happening. Kindred spirits to Syriza in Portugal, Italy, Spain, Ireland may be too focused on their own economies and circumstances. Or on their own political careers. Alternatively, they may simply be too scared of the Troika to take a stand against it.

In that light, Beppe Grillo’s words this week denouncing Alexis Tsipras are utterly unfair and not at all helpful, even if perhaps to an extent understandable.

Italy’s Plan B For An Exit From The Euro

Tsipras couldn’t have done a worse job of defending the Greek people. Only profound economic short-sightedness together with an opaque political strategy could transform the enormous electoral consensus that brought him into government in January into the victory for his adversaries, the creditor countries, only six months later, in spite of winning the referendum in the mean time.

An a priori rejection of a Euroexit has been his death sentence. Like the PD, he was convinced that it’s possible to break the link between the Euro and Austerity. Tsipras has handed over his country into the hands of the Germans, to be used like a vassal. Thinking that it’s possible to oppose the Euro only from within and presenting oneself without an explicit Plan B for an exit, he has in fact ended up by depriving Greece of any negotiating power in relation to the Euro.

Now, it’s no secret that I appreciate Grillo, and I think people like him are sorely needed in order to get rid of what Beppe in his ‘flowery’ language calls the “Explicit Nazi-ism [..] by Adolf Schauble”. And I do understand that he must get the message across to -potential- M5S voters that he does not intend to fold in face of the Troika’s demands as Tsipras has supposedly done.

But at the same time he completely ignores his own lack of support for Tsipras, the fact that he left him to fight the entire Troika on his own. Sure, Grillo visited Athens on the day of the latest referendum, but that is woefully inadequate. If anything, it seems to depict a lack of vision.

Beppe Grillo seems unaware that his criticism of Tsipras risks isolating himself when it comes time for Rome to be in the position Athens has been in since at least January 2015.

Moreover, Grillo has never had the fully loaded Troika gun pointed at his head and that of his people, the way Tsipras did. As a matter of fact, one might well argue that Tsipras gave in to a large extent precisely because he could not be sure enough that the likes of Grillo would follow him, and support him, if he would have chosen Plan B.

That is to say, if he would have refused to give in to the Troika demands and elected to leave open the option of a Grexit, in whatever form that might have taken.

On top of that, Grillo seems to forget that Tsipras never came into the talks with a democratic mandate to leave the eurozone. And the other side of the table was well aware of that, and used it against him.

After the next round of Italian elections, Grillo may well find himself in a similar position, and if he does he will call undoubtedly on Tsipras for support.

Podemos, Syriza, M5S and others should present themselves, very publicly, as a front. That should hold regular well-publicized meetings, issue clear and strong declarations of solidarity and support for one another, and make sure all of it gets a prominent place in international media.

The ruling class has organized itself, and the ruled won’t be able to fight them unless they do the same. You either do it together, or it’s not going to happen.

Grillo calls on Italy to use its massive €2 trillion debt as a threat against Germany, suggesting that, once Italy leaves the eurozone, it can be converted into lira. That threat would be a lot more credible if the entire periphery would present itself as a front.

And that front should perhaps even include France’s Front National and Marine Le Pen, or Britain’s Nigel Farage. One could argue that they would be strange bedfellows, but battling Brussels alone, as Tsipras has been forced to do, hardly looks to be the best way forward.

And unless and until there is a viable way forward, the European periphery will continue to move backward. That’s the number one lesson from Athens. Where the Troika is about to re-enter its trenches.

Debt Rattle July 24 2015

Jul 242015

July 24, 2015 Posted by Raúl Ilargi Meijer at 8:48 am Finance Tagged with: Abenomics, austerity, casino, EU, euro, gold, Greece, Grexit, Grillo, nationalization, Plan B, Troika 3 Responses »

Harris&Ewing WSS poster, Washington DC 1917

• Why The Casino Is In For A Rude Awakening, Part I (David Stockman)

• Gold Is In Its Worst Slump Since 1996 (CNN)

• Cheap Money Is Here to Stay (Pesek)

• A 50% Stock Market Plunge Would Not Be A Surprise (Blodget)

• Forced Austerity Will Take Greece Back 65 Years (Jim Fouras)

• Greece Braces For Troika’s Return To Athens (Guardian)

• Italy’s Plan B For An Exit From The Euro (Beppe Grillo)

• Beppe Grillo Wants Nationalisation Of Italian Banks, Exit From Euro (Guardian)

• Grillo Calls For Italy To Throw Off Euro ‘Straitjacket’ (FT)

• Italy Leans While Greece Tumbles (Bloomberg)

• Interview: Yanis Varoufakis (ABCLateline)

• “Why I Voted ‘YES’ Tonight” (Yanis Varoufakis)

• Why I’ve Changed My Mind About Grexit (Daniel Munevar)

• The Eurozone’s German Problem (Philippe Legrain)

• The Return of the Ugly German (Joschka Fischer)

• Schäuble – The Man Behind the Throne (Martin Armstrong)

• German FinMin Schäuble’s Tough Tone Heightens Uncertainty Over Bailout (WSJ)

• Greece: Out of the Mouth of “Foreign Affairs” Comes the Truth (Bruno Adrie)

• Greek Store Closures Spike As Recession, Austerity Return (AP)

• A Few Thoughts On Greek Shipping And Taxes (Papaeconomou)

• Greek Financial Crisis Makes Its Migration Crisis Worse. EU Must Help. (WaPo)

• Abenomics Needs To Be ‘Reloaded’, Warns IMF (CNBC)

• Australia Weighs Steps to Rein In Sydney Property (WSJ)

“..to understand the potentially devastating extent of the coming asset deflation cycle, it is important to reprise the extent of the just completed and historically unprecedented global capital investment boom.”

• Why The Casino Is In For A Rude Awakening, Part I (David Stockman)

The reason that the Bloomberg index will now knife through the 100 index level tagged on both the right- and left-hand side of the chart is the law of supply and demand – along with its first cousin called variable cost pricing and a destructive interloper best described as zombie finance. The latter is what becomes of central bank driven bubble finance when the cycle turns, as it is now doing, from asset accumulation and inflation to asset liquidation and deflation. But to understand the potentially devastating extent of the coming asset deflation cycle, it is important to reprise the extent of the just completed and historically unprecedented global capital investment boom.

Thus, in the case of the global mining industries, CapEx by the top 40 miners amounted to $18 billion in 2001. During the original boom cycle it soared to $42 billion by 2008, and then after a temporary pause during the financial crisis, reaccelerated once again, reaching a peak of $130 billion in 2013. Owing to the collapse of commodity prices as shown above, new projects and greenfield investments have pretty much ground to a halt in iron ore, met coal, copper and the other principal industrial materials, but there is a catch. Namely, that big projects which were in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being carried to completion owing to the sunk cost syndrome. This means that available, on-line capacity continues to soar.

The poster child for that is the world’s largest iron ore port at Hedlund, Australia. The latter set another shipment record in June owing to still rising output in mines it services – a record notwithstanding the plunge of iron ore prices from a peak of $190 per ton in 2011 to $47 per ton a present. The ramp-up in E&P investment for oil and gas was similar. Global spending was $100 billion in the year 2000, but had risen to $400 billion by 2008 and peaked at $700 billion in 2014. In the case of hydrocarbon E&P investment, however,the law of variable cost pricing works with a vengeance because “lifting costs” even for shale and tar sands are modest compared to the front-end capital investment. Accordingly, the response of production to plunging prices has been initially limited and will be substantially prolonged.

“All of that is creating an anti-inflationary environment that sucks the air out of the gold market.”

• Gold Is In Its Worst Slump Since 1996 (CNN)

So much for predictions that gold would spike to $2,000 an ounce. The yellow metal is in a deep slump. It’s down more than 40% from its 2011 peak and crashing back toward $1,000. The slide just keeps getting worse. Gold has declined for 10 straight days. That’s the longest losing streak for gold since September 1996. To put that into perspective, back then oil prices were fetching just $19 a barrel, New York Yankees rookie shortstop Derek Jeter was nearing his first World Series title and rap fans were mourning the death of Tupac Shakur. So why is gold getting creamed? It comes down to three key factors: a strong U.S. dollar, China slowing down its gold purchases and little worry about inflation anymore.

1. Strong dollar: A strong greenback hurts commodities that are measured in dollars because it makes them more expensive for overseas buyers. It’s a double negative for gold because the precious metal is supposed to be a hedge against inflation and the devaluing of currency. “Gold has taken it on the chin with the strength in the dollar. Over the past week or so, it was almost like a perfect storm,” said Bob Alderman, head of wealth management at Gold Bullion International, a provider of precious metals. The U.S. dollar lost ground against most currencies on Thursday, giving gold a short reprieve. Gold prices ticked up 0.2% to $1,093 an ounce. But over the coming months, the dollar is expected to keep climbing.

2. China, Iran & Greece: Gold plummeted by as much as $40 an ounce in mere minutes after China’s central bank gave a rare update on how much gold it’s hoarding. The numbers showed the world’s largest gold producer has been stockpiling gold reserves at a slower pace than previously thought, spooking gold investors. Gold has also been hurt by easing tensions in Europe and the Middle East. Iran’s landmark nuclear agreement with the West has lessened some fears about a conflict in that volatile region. Those fears had allowed gold, and more so oil, to trade at a premium. Likewise, Greece landed a last-minute deal with its creditors that allows the crisis-ravaged country to stay in the euro. Investors are no longer speculating about a Greek exit or the long-term implications for the currency union. “The new bailout softened the fear of contagion. That was not a good thing for gold,” said Alderman.

3. What inflation? Inflation worries also remain muted. When gold topped $1,900 in September 2011, some investors bought gold because they feared the Federal Reserve’s money printing would cause runaway inflation. But inflation continues to undershoot the Fed’s goals despite extremely low interest rates and years of massive bond purchases. “Over the last 5,000 years gold has been a store of value that will be there for a time when there is inflation. There is no inflation now,” said George Gero at RBC Capital Markets. In fact, the recent collapse in the commodities complex is only lowering inflation and inflation expectations. Everything from coffee, sugar, beans to crude oil is heading south. Industrial metals like copper and aluminum have renewed their tumble in recent days as soft global economic growth hurts demand and supply gluts deepen. All of that is creating an anti-inflationary environment that sucks the air out of the gold market.

Does China have a choice?

• Cheap Money Is Here to Stay (Pesek)

For decades, central banks lorded over markets. Traders quivered at the omnipotence of monetary authorities – their every move, utterance and wink a reason to scurry for safe havens or an opportunity to score huge profits. Now, though, markets are the ones doing the bullying. Take New Zealand and Australia. Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.” Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero.

But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6%) and Australia (2.3%), it’s hard not to conclude that ultralow rates will be the global norm for a long, long time. Indeed, the major monetary powers that are easing – Europe, Japan, Australia and New Zealand – have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile – the Fed and Bank of England – are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus.

“As interest rates continue to fall across most of the globe, central banks are also united in their main message: Once rates have come down, they’re likely to stay down,” says Simon Grose-Hodge of LGT Bank. “And when they finally do tighten, the ‘normal’ rate is going to be a lot lower than it used to be.” Could the People’s Bank of China be next? “With underlying GDP growth still looking weak, more monetary policy moves are likely,” says Adam Slater of Oxford Economics. “And China may even face the prospect of short-term rates dropping towards the zero lower bound.”

But Henry expects a resurge. On what basis, though?

• A 50% Stock Market Plunge Would Not Be A Surprise (Blodget)

As regular readers know, for the past ~21 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise. I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash. So don’t say no one warned you! So far, these concerns have just made me sound like Chicken Little. The S&P 500 is up strongly from where I first sounded the alarm. That’s actually good for me, because I own stocks. But my concerns haven’t changed. Earlier this year, for the first time, I even put (some) money where my mouth is!

In February, I changed the “dividend reinvestment” policy on my S&P 500 fund. (I’m an indexer — I think stock-picking is generally a lousy strategy for individuals.) Specifically, I stopped reinvesting dividends. I’m a long-term investor, so I don’t really care what stocks do next. This dividend change was a bet that, at some point in the future, I will be able to reinvest the cash from these dividends in stocks at lower prices than today. If stock prices never fall below today’s level, this will cost me money. It will also make me feel dumb for (sort of) trying to time the market. But at some point you’ve got to put some money behind what your analysis is telling you. What my analysis is telling me is:

1) stocks are extremely expensive and will eventually revert toward historical means, probably via a sharp correction of 30% to 50%

2) long-term stock returns from today’s level will be about 2% per year — nothing to write home about

So if I think there’s risk of a crash, why don’t I just sell everything? For the reasons outlined below. Again, I don’t care if the stocks I own tank, as long as they don’t tank permanently. A crash will just give me a chance to buy more at lower prices.

Jim Fouras is a former speaker of the Queensland Parliament.

• Forced Austerity Will Take Greece Back 65 Years (Jim Fouras)

It’s hard to believe that in the last five years, Greece’s financial situation is comparable to those dark days when Germany invaded Greece. For example: a 25% decline in GDP; 25% unemployment (50% among youth); 40% of children living below the poverty line; soaring suicides rates; people cannot afford basic medicines and health care. Austerity measures are suffocating Greece and causing a brain drain that will damage it for generations. German leader Angela Merkel, in unison with the Troika, has forced austerity programs on the Greeks. For five years, Merkel has dominated the crisis management of the Greek economy through her insistence on fiscal rigour and cuts despite a huge economic slump and impoverishment of Greek society.

The IMF has argued internally for at least three years that the organisation was breaching its own rules by taking part in any bailout that held little prospect of achieving the debt sustainability that the IMF rescues prescribed. IMF boss Christine Lagarde ignored this advice. Nobel prize-winning economist Joseph Stigliz argues that “when the IMF arrives in a country, they are only interested in one thing. How do we make sure that banks and the financial institutions are paid … they are not interested in development or what helps a country get out of poverty”. The Troika has assumed their bailout programs would reduce Greece’s debt to well below 110% (of GDP) by 2022. The Guardian has published IMF documents showing that under the best-case scenario, which includes a growth projection of 4% per year for the next five years (a ridiculous assumption), the country’s debt level will drop to 124% Greece’s debt level is now 175% and the nation slid back into recession.

The Greek economy will continue to slide unless there is a significant reduction of its debt and policies that allow Greece to grow at a rate to service those debts. Two days before the recent referendum, the IMF conceded that the crisis-ridden country needs up to 60 billion euros of extra funds over the next three years and large-scale debt relief. Germany will not accept debt relief, consequently it is not the Troika’s agenda. Greece is being forced to sell assets worth €50 billion with the proceeds earmarked for a trust fund supervised by its creditors — foreign leaders demanding almost total surrender of its national fiscal sovereignty. It would be difficult to imagine any sensible seller taking part in such a fire sale. The Greek Parliament will now vote for their country to be poorer.

“How Greeks will react remains unclear, with much depending on media coverage.”

• Greece Braces For Troika’s Return To Athens (Guardian)

Greece is bracing for the return to Athens of officials representing the reviled “troika” of creditors as the debt-stricken country prepares to start negotiations for a third bailout. Mission chiefs with the EU, ECB and IMF fly into the Greek capital on Friday for talks on a proposed €86bn (£60bn) bailout, the third emergency funding programme for Athens since 2010. The return of the triumvirate, a day after internationally mandated reforms were pushed through the parliament by MPs, marks a personal defeat for the prime minister, Alexis Tsipras, who had pledged never to allow the auditors to step foot in Greece again. How Greeks will react remains unclear, with much depending on media coverage.

“The press will almost certainly make a big deal out of this and the government will try to play it down,” said Aristides Hatzis, a leading political commentator. “But given what people have gone through recently it might seem rather trivial and that is to Tsipras’ advantage. Their presence will definitely reinforce the realisation that another bailout is here.” Much has changed for Tsipras, the young firebrand catapulted into office on promises to eradicate the biting austerity policies that over five years have created record levels of unemployment and poverty. In the six months since his election, the radical leftist has been brought face-to-face with the brute force of fiscal rectitude and a German-dominated Europe.

Addressing parliament ahead of the crucial vote, Tsipras, who succumbed to the demands of foreign lenders earlier this month – accepting an ultimatum to find €12bn of savings, by far the heaviest austerity package to date – conceded that his government had been defeated. But he insisted the alternative – bankruptcy and exit from the euro – would have been catastrophic. He told MPs: “We chose a difficult compromise to avert the most extreme plans by the most extreme circles in Europe.” [..] “We are turning our back on our common battles when in essence we say … austerity and giving into blackmail is a one-way street,” said Panagiotis Lafazanis, who heads the Left Platform, the far-left faction around which mutinous MPs rally around. “Greece does not have a future as a blackmailed eurozone colony under memorandum [bailout],” added the former minister who now advocates a return to the drachma.

” The drama of the Euro will keep going as long as the Americans want it to, that is until the definitive approval of the TTIP by which the USA will place Europe in subjugation..”

• Italy’s Plan B For An Exit From The Euro (Beppe Grillo)

Tspiras couldn’t have done a worse job of defending the Greek people. Only profound economic short-sightedness together with an opaque political strategy could transform the enormous electoral consensus that brought him into government in January into the victory for his adversories, the creditor countries, only six months later, in spite of winning the referendum in the mean time. An a priori rejection of a Euroexit has been his death sentence. Like the PD, he was convinced that it’s possible to break the link between the Euro and Austerity. Tsipras has handed over his country into the hands of the Germans, to be used like a vassal. Thinking that it’s possible to oppose the Euro only from within and presenting oneself without an explicit Plan B for an exit, he has in fact ended up by depriving Greece of any negotiating power in relation to the Euro.

So it was clear from the beginning that Tsipras would have crashed even though Varoufakis did try to react a few times. Only Vendola, the PD and the media inspired by the Scalfari-style lies (among many) of the United States of Europe and of those who are nostalgic about the Ventotene Manifesto could have believed in a Euro without Austerity. And they are obliged to go on believing in this so as not to have to admit that there is an exit opportunity after seven years of economic disasters. The consequence of this political disaster is before everyone’s eyes:
– Explicit Nazi-ism on the part of those that have reduced the periphery of Europe to a protectorate by using the debt, with alarming echoes of historical parallels.
– Mutism or explicit support for Germany by the oher European countries perhaps because of opportunism (north) or because of subordination (periphery).
– Financial markets that are celebrating the end of democracy with new highs.
– Expropriation of the national wealth by mortgaging €50 billlion of Greek property that ended up in the fund created by Adolf Schauble so as to get to rake in the cash from the war debts.

It was all thought out, foreseen, and planned down to the last detail. The drama of the Euro will keep going as long as the Americans want it to, that is until the definitive approval of the TTIP by which the USA will place Europe in subjugation in a way that is not dissimilar to how Germany is subjugating the periphery. By now the Euro is an explicit battle between the creditors and the debtors. It’s not useful for our government to try to appear to be on the virtuous side of the winners – those supporting the Euro – and supporting reform. It’s not possible to reform the Euro from within but the fight must be fought on the outside and we must abandon this anti-democratic straitjacket. Our debt and lack of growth together with deflation, place us neatly in the category of those who are beaten by debt. Thus we’d do well to prepare ourselves with a government that is explicitly anti-Euro to defend ourselves from the final assault on the wealth of the Italian people who are ever more at risk, unless we reclaim our monetary sovereignty.

“[This] is how not to lose the first battle we will face when the time comes to break away from the union and the ECB..”

• Beppe Grillo Wants Nationalisation Of Italian Banks, Exit From Euro (Guardian)

The populist leader of Italy’s second largest political party has called for the nationalisation of Italian banks and exit from the euro, and said the country should prepare to use its “enormous debt” as a weapon against Germany. Former comedian-turned-politician Beppe Grillo, who transformed Italian politics when he launched his anti-establishment Five Star Movement in 2009, has long been a bombastic critic of the euro. But his stance hardened significantly in a blogpost on Thursday in which he compared the Greek bailout negotiations to “explicit nazism”. Grillo constructed what he called a “Plan B” for Italy, which he said needed to heed the lessons of Greece so that it was ready “when the debtors come round”.

His plan called for Italy to adopt a clear anti-euro stance and to shake off its belief that – if forced to accept tough austerity – other “peripheral” countries would come to its aid. Grillo said Italy had to use its enormous €2tn (£1.4bn) debt as leverage against Germany, implying that the potential global damage of an Italian default would stop Germany from “interfering” with Italy’s “legitimate right” to convert its debt into another currency. He said Greece’s hand had been forced by the threat of bankruptcy to its banks, and that Italy therefore needed to nationalise its banks and shift to another currency. “[This] is how not to lose the first battle we will face when the time comes to break away from the union and the ECB,” Grillo wrote.

Setting aside Grillo’s colourful language and analogies, analyst Vincenzo Scarpetta of Open Europe said there was some merit to his arguments. “That blogpost does have some elements of truth,” Scarpetta said. “The lesson from Greece was that if you want to be in the eurozone you have to agree to rules of austerity.” The strength of anti-euro sentiment in Italy is easy to overlook since Matteo Renzi, the centre-left prime minister and head of the Democratic party, is a strong defender of Italy’s role in the eurozone. But Scarpetta pointed out that supporters of the Five Star Movement, coupled with supporters of the rightwing Northern League, which is also anti-euro, means that about 40% of Italians are at least sympathetic to anti-euro sentiments.

No, really, M5S was the biggest single party in the latest elections. Renzi got in because of a ‘vote link’ between his party and another one.

• Grillo Calls For Italy To Throw Off Euro ‘Straitjacket’ (FT)

Beppe Grillo, the leader of Italy’s populist Five Star Movement, has launched a full-throated attack on the euro, saying Rome should abandon what he called an “anti-democratic straitjacket”. Mr Grillo, whose party is the second most popular in Italy, demanded the government formulate a “plan B” to exit the single currency and “take back our monetary sovereignty”. The comedian has become an increasingly trenchant critic of the euro at a time of rising euroscepticism across the Italian political landscape, spurred in part by the agonies of Greece and its prolonged bailout talks. But his attack on the single currency in an extensive blog post was nonetheless remarkable for its ferocity.

It suggests Mr Grillo sees a political opportunity in doubling down on his anti-euro message in the wake of Greece’s last-minute acceptance of exacting terms for a third bailout. It is also a sign of political contagion, or concerns that populist forces might gain traction from the Greek crisis. The Five Star Movement has been rising steadily in the polls since March. It is now garnering the support of nearly 25% of Italian voters and has narrowed the gap with the ruling centre-left Democratic party led by Matteo Renzi, the prime minister. Mr Grillo was particularly scathing about Alexis Tsipras, the Greek prime minister, whom he had professed to admire before the deal was reached. “It would be difficult to defend the interests of the Greek people worse than Tsipras did,” Mr Grillo wrote.

“His refusal to exit the euro was his death sentence. He was convinced that he could break the marriage between the euro and austerity, but ended up delivering his country into Germany’s hands, like a vassal.” To avoid that fate, Mr Grillo said Italy should use its heavy debt load — worth more than €2tn, or 130% of GDP — as a threat. “[The debt] is an advantage that allows us to be on the offensive in any future negotiation, it is not a bogeyman that should make us bite at any request from our creditors,” he said.

“Its €2.3 trillion debt, more than 132% of GDP, is second only to Greece in the euro area. Italy has lost a quarter of its industrial output, and GDP has contracted by 9% since 2007.“

• Italy Leans While Greece Tumbles (Bloomberg)

Viewed from Berlin or London, the financial woes of Italy and Greece can look dangerously similar. Both sit on mountains of public debt and suffer from double-digit unemployment. So why hasn’t Italy had to shutter banks, submit to austerity measures in return for emergency loans, and contemplate an exit from the euro? For now Italy is chugging along, paying its debts and selling bonds. Its benchmark stock index is up 25% this year. It’s emerging from a record recession even as Greece enters a new slump after a brief rebound in 2014. Rome-based Eni, Europe’s No. 4 oil company, is pumping 1.7 million barrels per day globally and says output will keep rising. Finmeccanica sells helicopters to corporations and armed forces from the U.K. to China. Carnival cruise liners are made in Fincantieri’s Trieste shipyard.

Italian luxury goods, from Fendi to Ferrari, are at the top of consumer shopping lists. Among European manufacturers, Italy trails only Germany in production. The Greeks? They’ve got tourism and shipping and little else, says Marc Ostwald, a fixed income strategist at ADM Investor Service in London. Greek exports fell 7.5% in the first quarter, while Italy’s rose more than 3%. Tourism in Italy generated about €34 billion last year, almost triple what it did in Greece. With 60 million residents, Italy is more than five times as populous as Greece. History makes a difference, too. Rebuilding from World War II, Italy set off on the Dolce Vita boom years, popularizing the Vespa scooter and making a mark in international design.

Nutella, a nut-based chocolate spread introduced after the war, had annual sales of €8.4 billion last year, making the Ferrero family one of Italy’s richest. Greece, by contrast, went from government by junta in the 1960s and 1970s to a republic run by a political elite and a bloated government in the 1980s. Cutting its civil service and pension costs down to an appropriate size lies at the heart of the struggle between Greece and Europe on economic reform. Italy’s strength as an industrial exporter has provided stability, helping the country build up gold reserves of $90 billion—the world’s third-biggest stash after the U.S. and Germany and more than 20 times what Greece holds. Just a single Italian bank needed a public bailout after the 2008 crisis, even as dozens of lenders in northern Europe had to dip into state coffers to stay open.

[..] Italy may yet become another Greece. Aside from the recent uptick in growth, its numbers are grim. The global financial crisis of 2008-09, followed by the euro debt crisis, triggered the deepest and longest recessions in Italy’s postwar history. Its €2.3 trillion debt, more than 132% of GDP, is second only to Greece in the euro area. Italy has lost a quarter of its industrial output, and GDP has contracted by 9% since 2007. As a member of the euro zone, Italy can’t counter falling foreign demand by devaluing its currency, as it often did when the lira was in use. Unemployment is 12.5%, and 45% among youth—many of whom flee abroad. “Some of my best pupils, who speak English and other languages, have had to move to the U.K. or Germany to find jobs and a better future,” says Ivo Pezzuto at Università Cattolica in Milan

“..we don’t believe in it and we should not be trying to implement a program whose logic we contest.”

• Interview: Yanis Varoufakis (ABCLateline)

EMMA ALBERICI: What was the point of the referendum then? The Greek people told you they didn’t want you to cave in to the demands from your eurozone partners and the IMF, but then that’s exactly what you’ve ended up doing.

YANIS VAROUFAKIS: That’s an excellent question, isn’t it? Let me remind you that on that night, the night of the referendum when I discovered that my prime minister and my government were going to move in the direction that you’ve mentioned, I resigned my post. That was the reason why I resigned, not because anybody else demanded it.

EMMA ALBERICI: So would it surprise you if you were forced back to the polls and indeed if you lost the next election?

YANIS VAROUFAKIS: Nothing would surprise me these days in Europe. We seem to be doing the wrong thing consistently. It’s a comedy of errors, from 2010 onwards. It’s my considered opinion that the responsible thing to do for our party will be to hand over the keys of government to those who believe in this program, in this fiscal consolidation reform program and the new loan, ’cause we don’t believe in it and we should not be trying to implement a program whose logic we contest.

EMMA ALBERICI: And it’s curious because at a time when Australia is debating a rise in the GST from 10 to 15%, the Greek people have seen their GST go up from 13 to 23% on public transport and processed foods. I mean, you didn’t get voted in to government – you actually got voted into government promising the opposite: no more austerity.

YANIS VAROUFAKIS: Precisely. It’s the reason why I resigned. To increase VAT in a broken economy like Greece to 23%, in an economy where the problem is not that the tax rates were too low, but the tax take was too low because of tax evasion. I spent five months in the Ministry of Finance trying to devise ways of having a new social contract between the state and the Greek people, the basis of which would be: we will reduce the rates for you, but you will pay it and you will not evade. And then you have the troika of lenders, the creditors, ruthlessly, effectively implementing the policies of a coup d’etat and putting our Prime Minister in a position where he had to choose between measures like the ones you mentioned, pushing VAT up to exorbitant heights, and therefore condemning our tax take to be reduced significantly or having our banks remain shut forever. This is a major assault both on rationality and on European democracy.

“with the hope that my comrades will gain some time, and that we, all of us, united, will plan a new resistance to autocracy, misanthropy, and the (facilitated) acceleration and deepening of the crisis.”

• “Why I Voted ‘YES’ Tonight” (Yanis Varoufakis)

[..] .. in the document that I had sent to the institutions, I was merely accepting the responsibility of a “new Civil Code” and certainly not the one they would dictate. Nor would I have ever imagined that our government (under the supervision of the Troika) would accept to submit all those changes to the Parliament under the label “urgent”, thus negating all the adjustments and annulling the Parliament. Last Wednesday I had no other choice but to vote with a thunderous NO. Mine came to stand beside the NO that 61.5% of our compatriots answered to a capitulation under the infamous TINA (there is no alternative). I

have denied this for the past 35 years in all 4 continents where I have lived. Today, tonight, those two measures, which I had myself proposed on February, are introduced to the Greek Parliament in a manner that I had never imagined; a manner which adds no credit to the government of SYRIZA. My disagreement with the way we handled the negotiations after the referendum is essential. And yet, my main goal is to protect the unity of SYRIZA, to support A.Tsipras, and to stand behind E.Takalotos. I have already explained all that in my article with the title Why I voted NO published in EfSyn .

Accordingly, today I will vote YES, for two measures that I, myself, had proposed, albeit under radically different conditions and requirements. Unfortunately I am certain that my vote will not be of any help to the government towards our common goals. And that is because the Euro Summit “prior actions’ deal was designed to fail. I will, however offer my vote with the hope that my comrades will gain some time, and that we, all of us, united, will plan a new resistance to autocracy, misanthropy, and the (facilitated) acceleration and deepening of the crisis. (i) This morning, while participating at the Financial Committee of the parliament, I ascertained that no colleague of mine, not even the Minister of Justice, agreed with the new civil code. It was a sad spectacle.

Daniel Munevar is a 30-year-old post-Keynesian economist from Bogotá, Colombia. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis”

• Why I’ve Changed My Mind About Grexit (Daniel Munevar)

What do you make of the latest bailout agreed between Greece and its creditors? Well, first of all it’s still not clear that there will be an actual agreement – there are several parliaments that need to approve their country’s participation in an ESM bailout. And even if they somehow reach an agreement, there is simply no way it can work. The economics of the program are just insane. They haven’t announced the precise fiscal targets yet, but if we look at the Debt Sustainability Analyses (DSAs) published by the IMF and the Commission, they both state that the target should be a 3.5% primary surplus in the medium term.

But if you look at what has happened over the course of the past five years, Greece has managed to ‘improve’ its structural balance by 19 points of GDP. During that same time, GDP has collapsed by about 20% – that’s an almost one-to-one relation. So if you start from -1% – which is the general assumption for this year – to make it to 3.5 means you need an adjustment of over 4% of GDP, which means GDP will collapse by another 4 points between now and 2018. This brings us to another point, which is that the current agreement is just a taste of things to come. The final Memorandum of Understanding (MoU) is definitely going to contain much harsher austerity measure than the ones currently on the table, to offset the drop in GDP that we have witnessed in the past months as a result of the standoff with the creditors.

The problem is that these Memorandums are turning Greece into a debt colony: you’re basically creating a set of rules which, as the government misses its fiscal targets – knowing for a fact that it will –, will force the government to keep retrenching even more, which will cause GDP to collapse even further, which will mean even more austerity, etc. It’s a never-ending vicious circle. This underscores one of the core problems of this whole situation: i.e., that the institutions have always disentangled the fiscal targets from the debt sustainability analyses. The logic of having debt relief is that it allows you to basically have lower fiscal targets and distribute over time the impact of fiscal consolidation. But in Greece’s case, even if there is debt relief on the scale that they are suggesting – which is unlikely – Greece will still have to implement massive consolidation, on top of everything that has been already done.

“.. in exchange for these loans, Merkel obtained much greater control over all eurozone governments’ budgets through a demand-sapping, democracy-constraining fiscal straitjacket..”

• The Eurozone’s German Problem (Philippe Legrain)

The eurozone has a German problem. Germany’s beggar-thy-neighbor policies and the broader crisis response that the country has led have proved disastrous. Seven years after the start of the crisis, the eurozone economy is faring worse than Europe did during the Great Depression of the 1930s. The German government’s efforts to crush Greece and force it to abandon the single currency have destabilized the monetary union. As long as German Chancellor Angela Merkel’s administration continues to abuse its dominant position as creditor-in-chief to advance its narrow interests, the eurozone cannot thrive – and may not survive. Germany’s immense current-account surplus – the excess savings generated by suppressing wages to subsidize exports – has been both a cause of the eurozone crisis and an obstacle to resolving it.

Before the crisis, it fueled German banks’ bad lending to southern Europe and Ireland. Now that Germany’s annual surplus – which has grown to €233 billion, approaching 8% of GDP – is no longer being recycled in southern Europe, the country’s depressed domestic demand is exporting deflation, deepening the eurozone’s debt woes. Germany’s external surplus clearly falls afoul of eurozone rules on dangerous imbalances. But, by leaning on the European Commission, Merkel’s government has obtained a free pass. This makes a mockery of its claim to champion the eurozone as a rules-based club. In fact, Germany breaks rules with impunity, changes them to suit its needs, or even invents them at will. Indeed, even as it pushes others to reform, Germany has ignored the Commission’s recommendations.

As a condition of the new eurozone loan program, Germany is forcing Greece to raise its pension age – while it lowers its own. It is insisting that Greek shops open on Sundays, even though German ones do not. Corporatism, it seems, is to be stamped out elsewhere, but protected at home. Beyond refusing to adjust its economy, Germany has pushed the costs of the crisis onto others. In order to rescue the country’s banks from their bad lending decisions, Merkel breached the Maastricht Treaty’s “no-bailout” rule, which bans member governments from financing their peers, and forced European taxpayers to lend to an insolvent Greece. Likewise, loans by eurozone governments to Ireland, Portugal, and Spain primarily bailed out insolvent local banks – and thus their German creditors.

To make matters worse, in exchange for these loans, Merkel obtained much greater control over all eurozone governments’ budgets through a demand-sapping, democracy-constraining fiscal straitjacket: tougher eurozone rules and a fiscal compact.
Germany’s clout has resulted in a eurozone banking union that is full of holes and applied asymmetrically. The country’s Sparkassen – savings banks with a collective balance sheet of some €1 trillion ($1.1 trillion) – are outside the European Central Bank’s supervisory control, while thinly capitalized mega-banks, such as Deutsche Bank, and the country’s rotten state-owned regional lenders have obtained an implausibly clean bill of health.

Fischer (German Foreign Minister and Vice Chancellor from 1998-2005) is still a major voice in Germany. But he’s been awkwardly silent.

• The Return of the Ugly German (Joschka Fischer)

In terms of foreign policy, Germany rebuilt trust by embracing Western integration and Europeanization. The power at the center of Europe should never again become a threat to the continent or itself. Thus, the Western Allies’ aim after 1945 – unlike after World War I – was not to isolate Germany and weaken it economically, but to protect it militarily and firmly embed it politically in the West. Indeed, Germany’s reconciliation with its arch-enemy, France, remains the foundation of today’s European Union, helping to incorporate Germany into the common European market, with a view to the eventual political unification of Europe. But in today’s Germany, such ideas are considered hopelessly “Euro-romantic”; their time has passed.

Where Europe is concerned, from now on Germany will primarily pursue its national interests, just like everybody else. But such thinking is based on a false premise. The path that Germany will pursue in the twenty-first century – toward a “European Germany” or a “German Europe” – has been the fundamental, historical question at the heart of German foreign policy for two centuries. And it was answered during that long night in Brussels, with German Europe prevailing over European Germany. This was a fateful decision for both Germany and Europe. One wonders whether Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble knew what they were doing. To dismiss the fierce criticism of Germany and its leading players that erupted after the diktat on Greece, as many Germans do, is to don rose-tinted glasses.

Certainly, there was nonsensical propaganda about a Fourth Reich and asinine references to the Führer. But, at its core, the criticism articulates an astute awareness of Germany’s break with its entire post-WWII European policy. For the first time, Germany didn’t want more Europe; it wanted less. Germany’s stance on the night of July 12-13 announced its desire to transform the eurozone from a European project into a kind of sphere of influence. Merkel was forced to choose between Schäuble and France (and Italy). The issue was fundamental: Her finance minister wanted to compel a eurozone member to leave “voluntarily” by exerting massive pressure.

Greece could either exit (in full knowledge of the disastrous consequences for the country and Europe) or accept a program that effectively makes it a European protectorate, without any hope of economic improvement. Greece is now subject to a cure – further austerity – that has not worked in the past and that was prescribed solely to address Germany’s domestic political needs. But the massive conflict with France and Italy, the eurozone’s second and third largest economies, is not over, because, for Schäuble, Grexit remains an option. By claiming that debt relief is “legally” possible only outside the eurozone, he wants to turn the issue into the lever for bringing about a “voluntary” Grexit.

“Behind the curtain, the federalization of Europe is the ultimate goal, although politicians always denied that in front of the curtain.”

• Schäuble – The Man Behind the Throne (Martin Armstrong)

Many Europeans are starting to see a very hard-line German position championed by Schäuble, which they are characterizing behind the curtain as a more selfish edge by demanding painful measures from Athens and resisting any firm commitment to granting the Greek relief from crippling debt, despite the fact that it was such debt relief that enabled Germany to recover. Yet the position of Schäuble from the outset was his vision that the other nations must coordinate with the core, of which the other nations were not actually regarded. That perception of a selfish Germany has been fueled by Schäuble’s statement suggesting that Greece would get its best shot at a substantial cut in its debt ONLY if it was willing to give up membership in the European common currency. Schäuble is expected to take his tough stance once again with the next crash candidate. For many, that appears to be Italy, which is now considered the greatest risk within Euroland. Yet, his views are spelled out in his 1994 paper.

Schäuble seems to have foresaw the crisis back in 1994, distinguishing between core members and non-core members. Therefore, his thinking is quite different from that of France. Paris has jumped the gun after the Greece disaster and now want a core Europe push, but clearly with Italy as a full-fledged member into a new federalized Europe. Behind the curtain, the federalization of Europe is the ultimate goal, although politicians always denied that in front of the curtain. The curtain is starting to be drawn, but the equal federalization of Europe was never part of the German mindset. There seems to be a conflict emerging between Germany and France because France wiped out its economy with insane taxation. It too will fall in this next downward cycle.

Schäuble has of course been at least as detrimental as Varoufakis to the conversation, but he’s still in place. Go figure.

• German FinMin Schäuble’s Tough Tone Heightens Uncertainty Over Bailout (WSJ)

Germany’s finance chief departed for his annual vacation on a posh North Sea island on Thursday, leaving the capital to mull a summer mystery that could decide Greece’s fate: What’s going on with Wolfgang Schäuble? Over the past two weeks, the 72-year-old Mr. Schäuble has puzzled even German officials who know the finance chief well with remarks questioning the wisdom of a new bailout for Greece. He has also hinted he might resign over differences with Chancellor Angela Merkel. The comments mark a shift to a more hawkish tone for Germany’s longest-serving national politician, whose career has been defined by loyalty to his political allies and to the idea of European integration.

They also underscore the fragility of last week’s agreement among eurozone leaders to work toward a new bailout deal for Greece, which governments will need to sign off on as early as next month. A person who works closely with Mr. Schäuble said the minister remained guided by a commitment to European interests—and that giving in to Greek demands, for instance, by forgiving debt would damage the EU’s credibility. The Finance Ministry is working to lay the groundwork for a new bailout, the person said, even though Mr. Schäuble’s preferred solution would have been for Greece to agree to a temporary “timeout” from the euro.

But Mr. Schäuble’s open skepticism over whether a new bailout would work has heightened uncertainty over what would happen once officials representing international creditors reached a preliminary deal with Athens, which is expected in the middle of next month. Over the weekend, Mr. Schäuble mused in response to a German magazine interviewer’s question about his differences on Greece with Ms. Merkel that he would resign if someone forced him to violate the responsibilities of his office. “I could go to the president and ask for my dismissal,” Mr. Schäuble told Der Spiegel, before adding that he wasn’t, in fact, considering resigning.

“Greece was only a pipe through which French and German banks, for the most part, saved themselves.”

• Greece: Out of the Mouth of “Foreign Affairs” Comes the Truth (Bruno Adrie)

In an article by Mark Blyth titled “A Pain in the Athens: Why Greece Isn’t to Blame for the Crisis” and published on July 7th 2015 in Foreign Affairs, one discovers surprising statements, which are all the more surprising when one knows that this magazine is published by the Council on Foreign Relations that gathers the American élite, the New-Yorker banking élite being there for the most part. According to the author, “Greece has very little to do with the crisis that bears its name”. And, to make us understand this, he invites us to “follow the money—and those who bank it”. According to him, the origins of the crisis are not to be looked for in Greece but “in the architecture of European banking”.

Indeed, during the first decade of the euro, European banks, attracted by easy money, granted massive loans in what the author calls “the European periphery”, and, in 2010, in the middle of the financial crisis, banks had accumulated impaired periphery assets corresponding to €465 billion for French banks and €493 billion for German banks. “Only a small part of those impaired assets were Greek”, but the problem is that, in 2010, Greece published a revised budget equivalent to 15% of the GDP. Nothing to be afraid of actually since it only represented 0.3% of the Eurozone’s GDPs put together. But, because of their periphery assets and above all a leverage rate* twice as high—that is to say twice as risky—as the American banks’, European banks feared that a Greek default would make them collapse.

This is what really happened. The banks’ insatiable voracity led them, as always, to act carelessly, and, as they did not accept their failure, as always, they made sure that others would foot the bill. Nothing new under the golden sky of the Banking Industry, unless, this time, it went a bit further than usual. These banks set up the Troïka program in order to “stop the bond market bank run”. And no matter if it increased unemployment by 25% and destroyed the third of the country’s GDP. It doesn’t make much difference to the bankers. This is what the rescue plans have been used for. Apparently aimed at Greece, they were created by and for the major European banks. Today, given that the Greek can no longer pay French and German banks, even the European taxpayers are solicited.

Greece was only a pipe through which French and German banks, for the most part, saved themselves. On the total amount of €203 billion that represents the two rescue plans (2010-2013 and 2012-2014), 65% went right to the banks’ vaults. Some people even go so far as to say that 90% of the loans did not pass through Greece. This approach, expressed in the columns of Foreign Affairs, cannot be seen as heterodox. It is even confirmed by the ex-director of theBundesbank, Karl Otto Pöhl, who acknowledged that the rescue plan was meant to save the banks, and especially the French banks, from their rotten debts.

The idea is to get the whole population on its kness.

• Greek Store Closures Spike As Recession, Austerity Return (AP)

Running a business in Koukaki is becoming a struggle. Shop-owners in the central Athens neighborhood, one of the capital city’s most financially diverse, are finding it a lot more difficult to get by. They could be cutting hair or selling extra-large shirts – it makes no difference. Their tales of hardship can be repeated up and down the country of nearly 11 million people. Empty storefronts are again a feature of Greeces towns and cities amid a crisis that put Greece’s future in the euro in doubt. The downturn worsened after the late-June decision by the Greek government to impose a series of strict controls on the free flow of money, with a paltry 60-euro a day limit on daily withdrawals from ATMs. Though banks reopened this week for the first time in more than three weeks, the ATM withdrawal limit is unchanged and cash is becoming scarce.

For an economy where cash payments are the norm, that’s a problem. In Koukaki, about 2 kilometers south of downtown Athens, 65-year-old mechanic Giorgos Prasinoudis is angry. His wife and 11-year-old daughter have already moved to Germany – the country that’s ironically blamed for many of the economic and social problems afflicting Greece. On Wednesday, he sat drinking coffee on the sidewalk outside his motorcycle repair shop, with posters of bikes and children’s drawings pinned to the wall. Hes closed the store after 32 years. A “For Sale” sign is taped to the window. “It’s over for Greece. We won’t recover for another 50 years,” he said. “The country borrowed so much money, those who benefited left the country, and ordinary people have been handed the bill …

I hope my daughter learns German and doesn’t come back. Not even for a holiday.” Prasinoudis is one of the countless victims of Greeces economic crisis. Locked out of international bond markets in the spring of 2010, the country has relied on foreign rescue money to pay its debts – on condition that tough austerity measures, such as cuts to spending and increases in taxes were imposed. The cost has been huge. A million jobs, mostly in the private sector, have been lost since then ? around a fifth of the country’s workforce. But after appearing to stabilize last year, the Greek economy has gone into reverse but unemployment remains high. At last count, unemployment was still over 25% and more than 50% for the under-25s.

Alongside the capital controls, the government imposed a new round of austerity, raising sales taxes and levies on businesses, while maintaining emergency taxes on households that have eaten up disposable incomes. Early Thursday, parliament approved a second round of measures demanded by rescue creditors for a new bailout. Retail associations fear a return to the peak levels of unemployment around 2012 when they were hit by a surge of business failures.

“The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.”

• A Few Thoughts On Greek Shipping And Taxes (Papaeconomou)

We have all witnessed a lot of Greek drama during the past few weeks as the impasse between the Greek government and its international creditors reached its climax. It now appears that after months of terse negotiations between the two parties, Greece has finally agreed to pass and implement austerity measures in exchange for financial aid. One of the innocent bystanders in all this has been the Greek shipping community. As part of the broad agreement between Athens and the Eurozone, the Greek government has undertaken to increase the tonnage tax, a flat tax that is assessed each year on all ships that are managed by shipping companies based in Greece.

As expected the shipping community has been up in arms crying foul over the proposed tax and threatening to leave to more tax-friendly locales like Monaco, Dubai, or Singapore. This has made me wonder: what would be the effect of increased tonnage tax on a shipping company’s running costs?

[..] Let’s assume for example that the Greek government unilaterally doubles the tonnage tax in accordance with the agreement provision. Star Bulk Carriers will have to pay an additional $129 per ownership day. Is this amount really the straw that will break the camel’s back and force a mass exodus of Greek shipping companies to greener pastures? I don’t think so. But let’s further assume that Greek shipping companies do decide to move to Monaco, Dubai, Singapore, or even London or New York. Have shipping executives done a cost of living comparison between say Monaco or New York City and Athens? The argument that shipping companies will migrate to substantially higher cost locations to avoid tonnage taxes seems ludicrous.

I believe the lobbying on behalf of Greek ship-owners is not about tonnage taxes, but about keeping their income tax-free status. Greek ship-owners are some of the hardest-nosed traders you can find. I don’t believe a tempest in a teapot will cloud their business acumen. I suspect that they will cut a deal with the taxman sooner or later, and if I may add, for the benefit of both sides.

EU doesn’t want to help.

• Greek Financial Crisis Makes Its Migration Crisis Worse. EU Must Help. (WaPo)

Greece’s problems are many. Thanks to the financial crisis, citizens have endured long ATM lines and shortages in stores. Greece may be the last place in Europe equipped to handle its newest problem: record numbers of migrants, particularly Syrians, arriving daily by boat. Since the beginning of 2015, an astounding 79,338 migrants have arrived by sea, 60% of whom are Syrian. Slightly more migrants have transited to Greece than to Italy, a reversal from 2014, when Italy received 170,100 migrants and Greece only 34,442 total, according to estimates from the International Organization for Migration. These migrants pay traffickers exorbitant fees and risk their lives on dangerous journeys. Once arrived, they find the small communities on Greece’s many islands totally overwhelmed and unable to help. Most try to move northwards, to states like Hungary, via the Balkans.

Other migrants remain in hungry squalor throughout Greece. UNHCR recently reported more than 3,000 refugees in makeshift accommodations at a site on the northern Aegean island of Lesbos. Refugees kept in detention centers have limited access to electricity and water. Dozens sleep on makeshift pallets in the Kos police station courtyard. Greece’s financial crisis exacerbates xenophobia and discrimination against migrants. While many Greeks have rallied to help the migrants, the far-right portrays these migrants as taking precious resources and sullying Greek culture. Golden Dawn, a far-right party, said “We will do everything we can to protect the Greek homeland against immigrants.” Even before the 2015 surge, 84% of adults in Greece wanted decreased immigration — the highest proportion in the world — according to 2012 and 2014 Gallup interviews.

And Greece’s No. 1 industry, tourism, could suffer. Migrants crowd the sidewalks of island resort towns beside vacationers, but the contrast could hardly be starker between the wet and hungry arrivals from Iraq, Afghanistan and Syria, and the European tourists who dine on fine meals and rest in posh surroundings. Many migrants fleeing conflict-ridden states have walked almost 40 miles across Greece, sick, exhausted and sometimes pregnant, because they were not allowed to take public or private transportation due to a law that equated anyone assisting migrants with human smugglers. The law — overturned this month — kept both private citizens and public buses from driving migrants that landed in Greece without being rescued by coast guards.

It needs to be abandoned.

• Abenomics Needs To Be ‘Reloaded’, Warns IMF (CNBC)

Japan needs to reduce its reliance on a weak yen to reflate its economy, the IMF warned, as it called on authorities to speed up “high impact” structural reforms and prepare for further monetary easing. “The Bank of Japan needs to stand ready to ease further, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2% inflation target in a stable manner,” the IMF said in its 2015 Article IV Consultation with Japan published late Wednesday. Under current policies, the central bank won’t meet its 2% inflation target in the medium-term, or over a five-year horizon, according to the international lender. After rising to 1.5% in mid-2014, core inflation – excluding fresh food and the effects of the consumption tax increase – has declined rapidly and has been close to zero since February 2015.

“Abenomics needs to be reloaded so that policy shortcomings do not become a drag on growth and inflation,” the IMF said. Abenomics refers to three-pronged economic revival plan launched by Prime Minister Shinzo Abe in late 2012, consisting of monetary easing, fiscal expansion and structural reforms. Deeper structural reforms must accompany further easing if the government is to achieve its inflation goal, the IMF stressed. “With the exception of corporate governance and some progress on female labor force participation, structural reforms have not yet been in areas that could provide the biggest bang for the buck,” it said.

Much too late.

• Australia Weighs Steps to Rein In Sydney Property (WSJ)

Fast-rising house prices are prompting regulators in New Zealand and Australia to try, or consider, measures to prick nascent bubbles in single cities, an unusual move for any country. In Auckland, New Zealand’s biggest city, property prices have jumped 17% over the past year, compared with a nationwide average of 9.3%, and now are more than 50% higher than eight years ago. Sydney prices have risen about four times as fast as those in almost all other Australian state capitals in the past 12 months. It is rare for countries to focus tough new clamps on a single city or district. But a surge in homegrown speculators, and of buyers from countries such as China, has left too many people chasing too few properties in Sydney and Auckland.

Policy makers are increasingly concerned that a sudden crash could derail their economies. In Australia, Sydney-specific regulation is merely under discussion. But in New Zealand, measures to limit the impact of a price surge in Auckland are in place already: From October, real-estate investors in the city will be required to put down deposits of at least 30% on properties they want to purchase. No such rules will apply to property investment in other cities. Until now, Australian policy makers have sought to temper house-price growth by restricting lending to speculators and making it costlier to provide mortgages to residential buyers generally, anywhere in the country. In the past several weeks, however, the central bank has made clear it sees the issue as essentially a local one, describing soaring prices in the nation’s most populous city as “crazy.”

The narrowing focus on Sydney has triggered speculation that similar moves to New Zealand’s may be in the offing, steered by the banking regulator. “The boom is now quite singularly in Sydney,” said George Tharenou at UBS. “It’s difficult and very micro to target Sydney house prices, but it’s getting to the point where it needs to be considered.” Earlier this month, Citigroup said the risk of a crash had become so real that it was time to stop banks lending so freely to Sydney property investors specifically. “The horse has already bolted,” said Paul Brennan at Citi Research, Australia. “Additional prudential measures directed at the Sydney market may be unavoidable, even if it is late in the cycle.”

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