Ireland’s sovereign debt monetisation

Flag - Ireland_0By G. R. Steele for IEA:

Little more than three years ago, Ireland’s taxpayers were saddled with around 40 billion euros of debt, after their government had been pushed by the European Central Bank into rescuing its largest commercial banks, which had been left floundering in the wake of Ireland’s property price collapse; but there was not enough ‘cash’ to finance the rescue.

Instead, promissory notes were issued to the value of 30 billion euros. Those notes served as collateral to raise a 30 billon euro loan from Ireland’s independent central bank. The proceeds were then used to reimburse the creditors (largely northern European banks and other financial institutions) of Ireland’s failed banks.

Ireland’s loss was Europe’s gain and so a very bad deal for Ireland’s taxpayers, who faced a commitment to honour promissory notes, with annual payments of around 3 billion euros. At those magnitudes and bearing 8 percent interest, the burden was untenable. So, last year a ruse had a trial run. Instead of 3 billion euros in cash, government bonds bearing 3 percent interest were issued and swapped for the promissory notes then due. No one seemed to give the move much attention.

Last week, the ruse was applied full on. This time, bonds to the value of 30 billion euros were issued (and all remaining promissory notes withdrawn) so that Ireland’s failed banks could be placed into liquidation. This was apparently achieved without prior approval from the European Central Bank; but the impending move was leaked to the press. To preclude a possible court injunction, Dáil Éireannsat through a long night to pass the necessary legislation. At a press conference on Thursday, a somewhat bemused ECB President Mario Draghi made the following remarks:

‘On Ireland, let me say this, there wasn’t a decision to take. The Governing Council unanimously took note of the Irish operation and I’m going to refer you to the Irish government and the Irish central bank for the details of this operation which was designed and undertaken by the Irish government and the Irish central bank. I can only say today that we took note of this.’

Sovereign debt within the eurozone has been openly monetised and will remain so pending a schedule of debt repayments beginning only in 2038 and running through until 2052; which is not something that the Governing Council would wish to make clear.


Merkel’s Walking a Tightrope… If She Falls, the EU Could Implode

By Phoenix Capital Research:

The single most important issue for Europe today remains Germany on both an economic and political front.

German Chancellor Angela Merkel has walked a tightrope over the last few years of keeping the EU together without infuriating the German populace to the point of having to abandon ship.

To do this, Merkel has maintained a firm stance of “we’ll write the check provided conditions are met” much as a parent would give a child his or her allowance provided the child performed its chores satisfactorily. In the case of German, the “chores” are required conditions of austerity measures and budgetary requirements in exchange for bailout funds.

By doing this, Merkel is able to play hardball on an economic front (having failed to meet its German-required financial targets Greece had to wait an additional six months to receive another installment of its Second bailout) without appear too hard-nosed on a political front (she continually pushes to keep the Euro together, expressing a willingness to help other nations… as long as they meet her budgetary requirements).

The policy has thus far been a success with Merkel’s approval rating soaring to its highest level since 2009 (before her re-election bid). However, the latest state election in Germany might upset this situation.

Germany’s center-left opposition won a wafer-thin victory over Chancellor Angela Merkel’s coalition in a major state election Sunday, dealing a setback as she seeks a third term at the helm of Europe’s biggest economy later this year.

The opposition Social Democrats and Greens won a single-seat majority in the state legislature in Lower Saxony, ousting the coalition of Merkel’s conservative Christian Democratic Union and the pro-market Free Democrats that has run the northwestern region for 10 years. The same parties form the national government.

The 58-year-old Merkel will seek another four-year term in a national parliamentary election expected in September. She and her party are riding high in national polls, but the opposition hoped the Lower Saxony vote would show she is vulnerable.

The outcome could boost what so far has been a sputtering campaign by Merkel’s Social Democratic challenger, Peer Steinbrueck.

“This evening gives us real tailwind for the national election,” said Katrin Goering-Eckardt, a leader of Steinbrueck’s allies, the Greens. “We can and will manage to replace the (center-right) coalition.”

However, the close outcome also underscores the possibility of a messy result in September, with no clear winner.

To understand the significance of this, you need to understand a key difference between the US and Europe. In the US, the economy often drives politics (often but not always). In Europe, politics drives everything.

You will never hear a discussion of “how involved should the Government be in the economy?” in most of Europe; it is just assumed that the Government should always be involved to a significant degree. The question is whether it should be a lot (the public sector accounts for 30% of jobs in Germany) or almost entirely (the public sector accounts for 56% of jobs in France).

With that in mind, Merkel is up for re-election in the fall of this year (likely in September). Her bid for re-election will be a major issue for the future of the EU and the Euro in 2013.

The other two candidates for the job are Peer Steinbrück, former Finance Minister to Merkel who has been extremely critical of Merkel’s handling of the EU Crisis and Rainer Brüderle who believes that Greece leaving the EU would not be a “calamity.”

Obviously whoever wins this election will change the political landscape for Europe significantly. As a result, the run up to this election will have a significant impact on the markets for 2013, much as the Obama-Romney Presidential campaigns had significant impacts on the US markets in 2012.

An important issue for this campaign will be the German economy. Germany is the second largest exporter of goods in the world behind China. And the German economy is getting slammed due to:

  1. The EU economy collapsing.
  2. The ECB’s interventions have pushed the Euro higher hurting export profits.

By most counts Europe is an economic disaster. Southern countries such as Spain and Greece have begun to resemble third world countries with commensurate poverty and malnutrition. However, even when we include stronger economies such as Germany, the EU as a whole is back in recession as of September 2012. With 71% of German exports going to the EU, this is a real problem for the German economy.

Regarding #2, every tick higher in the Euro means less profits for Germany. And the Euro has been rising dramatically since July when the ECB first hinted at providing unlimited bond buying to backstop the EU banking system.

As a result of this, the German economy is estimated to have shrunken 0.5% in the fourth quarter of 2012. If things continue to worsen here, Germany’s population will grow increasingly unhappy with the prospect of more EU bailouts. And with Merkel battling for re-election this year, this could potentially upset her high wire act of balancing German voter sentiment with a pro-EU agenda.

With that in mind, the recent state election loss is a bad omen for Merkel. True, the loss occurred by a razor thin margin. But as we mentioned before, politics is everything in Europe. The more energy Merkel has to devote to wooing German voters the less energy she will have to focus on maintaining her “we’ll backstop the EU” policy.

This will make for a very volatile year in European markets as the markets will be hinging on German officials’ statements throughout the campaign trail. With that in mind, the German economy will be an absolutely critical issue both for the German Federal elections and the solidarity of the EU as a whole in 2013.

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This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.

It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.

Best of all, this report is 100% FREE. You can pick up a copy today at:

EU threatens to punish Norway for breaching EEA agreement

In the Commission draft report , which looks into the functioning of the EEA, the Scandinavian country is being criticized for imposing tariffs on EU products from 2013 and “resisted EU efforts for ambitious liberalization” of the EU’s single market.

According to the draft, obtained by EurActiv, 427 acts whose compliance date in the EU has expired, also remained to be incorporated in Norway by October 2012.

“This situation might thus lead to competitive advantages for operators based in the EEA-EFTA countries, and more fundamentally risks undermining the legal certainty and homogeneity of the single market,” the report reads.

“This problem is of great concern for the EU side and should be solved as a matter of urgency,” the report states.

‘Selfish Norway’

Moreover, the EU also dislikes the fact that Norway has rejected several directives coming from Brussels. The Norwegian government has for example warned it won’t implement the EU’s postal directive about competitiveness for letter mail weighting less than 50 grams.

Danish MEP Bendt Bendtsen (European People’s Party), who has been closely following the trade issues with Norway, told EurActiv the problems started in 2012 when Norway raised the price of hydrangeas from the EU by 72%.

Eventually, the extra taxes spread to EU food products such as cheese and meat.

Bendtsen said Norway is acting “selfishly” and that the taxes were put on EU goods “deliberately” as the Norwegian Centre Party, which is part of the Norwegian government, has for a long time pushed for the extra taxes.

“Norway only wants the cream on the cake,” the MEP said.

Threaten with punishment

The EU’s foreign service and the Commission, which have the formal responsibility for the relationship with Norway through the EEA agreement, have confirmed that there is an increasing disapproval with Norway.

“This development worries us. We don’t like the backlog on implementing directives, and this is a case we are trying to deal with now,” Maja Kocijancic, spokesperson of Catherine Ashton, the European Union High Representative for Foreign Affairs and Security Policy, told Norwegian TV2 .

She confirmed that the EU is looking into the possibilities for sanctions within the EEA agreement’s frame.

Leader of the pro-EU organisation Europabevegelsen Paal Frisvold said Norway risks exclusion from the European marine and cargo market and could lose cooperation on mobile roaming prices, making them more expensive in Norway.

However, Bendtsen said that the right EU punishment would be to hit Norway’s fishing industry, or to take the step even further: “The consequence should be kicking Norway out of the EEA,” the MEP said.

Stupid situation

Norway’s Prime Minister Jens Stoltenberg said the country has a good relationship with the EU, but the fact that there are disagreements over individual directives is nothing new.

Erna Solberg, leader of the biggest opposition party, the Conservatives, said the Norwegian government doesn’t understand the EEA’s mutual obligations. She said Norway isn’t active enough when it comes to its Europe policy and doesn’t use the opportunities in effecting the EU legislation enough.

“It is stupid that we have put ourselves in a situation where our closest partners obviously are frustrated with us,” Solberg said .

Potential impact on British EU debate

Bendtsen said the problems in the EU-Norway relations could eventually affect the ongoing British debate on whether to stay in or leave the EU.

Norway has previously been mentioned as a positive example of a non-EU member which still gets advantages and benefits of being part of the EU’s single market.

However, in his EU speech last Wednesday, British Prime Minister David Cameron asked whether it was in Britain’s best interest and desirable for Britain to be like Norway or Switzerland – with access to the single market, but outside the EU.

“While Norway is part of the single market – and pays for the principle – it has no say at all in setting its rules: it just has to implement its directives,” Cameron said.

[Emerging Events Comment: A reflection of the polarization and splitting effect of ongoing negative social mood that will ultimately bring the EU down]


As The Euro Soars, This Is Where The “Max Pain” In Europe Is

Zerohedge submits:

Determining the “pain threshold” beyond which the euro appreciation would significantly impair the recovery is crucial at this juncture. Deutsche Bank’s quantification of this “pain threshold”, is not fixed but depends critically on the pace of global growth. If world demand accelerates from a current pace of 1.3% YoY to 4.2% YoY by Q3 2013 (30% below trend), as per OECD forecasts, the EURUSD exchange rate which would be consistent with maintained competitiveness would stand at 1.37 (not far from where we are).

However, if growth is lower (as we humbly suspect) the threshold for currency strength to hamper growth is considerably below current levels. What is more concerning, as a dysfunctional union of economies might be suspected of, is the divergences between member states and their pain thresholds.

Crucially, the fact that Italy and France are already facing problems as the current EURUSD rate is well above their pain threshold, while Germany remains below (despite its protestations) may be fuel for more Franco-German instability as the push-pull of easier monetary policy places Draghi between a rock of core stability and a hard place of depression.

EURUSD at 12-month highs…

Via Deutsche Bank, Euro appreciation: the moving pain threshold

Exchange rate issues have made a spectacular come-back in European policy debate this week, on the back of speculations on “currency wars” emanating from emerging economies and Japan. While market sentiment towards the Euro area and specifically on the periphery has improved significantly over the last few months, a higher euro is seen as a potential “spanner in the works” which could rekindle doubts surrounding debt sustainability there, if the expected export led recovery is postponed by several quarters by a loss in competitiveness.

When controlling for the pace of world demand and when looking at the Euro area as an aggregate, we are according to our estimates currently in or near the “danger zone” where the exchange rate is effectively undermining competitiveness.

We apply our model to the four largest economies of the Euro area. We find that while the pain threshold for Germany, and probably more counter-intuitively for Spain, now stands higher than any level ever reached since the beginning of monetary union, it is actually quite low for France (1.24) and Italy (1.17), for a world demand pace of 4.2%.

It is therefore surprising, at first glance, to observe that most of the recent flurry of comments on exchange rate issues came from Germany. We suggest that the German concerns over currency wars do not primarily stem from a fear of the consequence for German exporters, but rather from the fact that further euro appreciation could unduly delay the normalization of the ECB monetary policy framework.

What these comments from Germany reflect in our view is a concern that currency wars ultimately generate global inflation which the ECB could not easily resist given the persistent fragility of the periphery.

It follows from these considerations that on balance further euro appreciation is the likeliest path, short of a rapid relapse in widespread doubts in the periphery’s sustainability (which would be likely if the Euro area “misses the recovery” in 1H 2013. This means that France and Italy must make rapid progress on productivity and flexibility (as well as possibly off-shoring) to enhance their resilience to currency appreciation.


The ECB will come under pressure in the currency wars

Mohamed El-Erian of Pimco writing for FT:

I was reminded recently that there is an important distinction between a problem and a dilemma. A problem has a solution while a dilemma must be continuously managed. The euro’s situation has evolved from being a severe problem to posing a dilemma for eurozone countries seeking to grow and secure debt sustainability.

Six months ago, stress on the European financial system led to existential questions about the euro. The financial system was fragmenting, deposits were pouring out of the weaker countries, and high interest rates were converting liquidity problems into solvency ones, adding to the regional headaches caused by countries already in vicious debt cycles.

Bold policy reactions stopped this dynamic – so much so that, today, several investors are again emphasising rate convergence for many eurozone bond markets. And while harmful credit rationing persists, especially for small- and medium-sized companies in peripheral economies, banks are less fragile.

The immediate solution to the euro’s existential problem came in the form of the European Central Bank’s “outright monetary transactions “. The ECB was supported by the progress made by governments in agreeing to reinforce monetary union with greater fiscal union, political integration and banking union.

Having solved its urgent problem, the eurozone needs to deal with a new dilemma: that of an appreciating currency. There is a growing number of countries seeking to weaken their own currencies. Indeed, in the last six months, the euro has appreciated by 11 per cent against the US dollar and by 8 per cent in nominal trade weighted terms. It has appreciated by a lot more against the Japanese yen.

With growth already sluggish, the eurozone can ill afford a stronger currency. Sharp appreciation undermines economic activity – not only for export powerhouses such as Germany but also for countries such as Spain where, for the past eight quarters, the contribution of net exports has been positive.

With budgetary concerns continuing to dominate mindsets, few countries are able and willing to stimulate their economies by loosening national fiscal policies. As a result, the number of unemployed citizens – which is 6m higher than at the outset of the global financial crisis – remains alarmingly high, and especially so among the young.

Given what other countries are doing around the world, European politicians need to significantly accelerate policy reforms if they wish to maintain competitiveness in a safe and orderly fashion. This involves quickly moving from the design to the implementation of key measures.

At the regional level, productivity-enhancing structural reforms need to accompany a renewed push on fiscal union, banking union and political integration; and, for starters, politicians should not wait for the June summit to press ahead with the “four presidents” report .

But, having averted an existential financial problem, politicians seem more interested to bask in their success than deal with remaining challenges. This understandable desire to savour the moment – and with it, the illusion of stability – is inevitably strong in the run-up to several key elections this year.

With politicians failing to manage the dilemma directly, it is only a matter of time until they again look to the ECB for help.

Expect the ECB to be pressed hard to join other central banks in actively seeking to depreciate the currency – by cutting the policy rate (currently 0.75 per cent) and quantitative easing of the type pursued by the Bank of England, the Bank of Japan and the US Federal Reserve.

This is not a road that the ECB will embark on easily. And if it does, it would seek to address a regional dilemma by adding to a global one.

Being a relative price, all countries cannot simultaneously weaken their exchange rates (except against gold, real estate and other “real” assets). And should the ECB feel forced to join collective attempts to do the impossible, the risks of a global currency war and related beggar-thy-neighbor outcomes would increase meaningfully.


Euro Crisis Seen Reaping Social Toll With Record Jobless

By Scott Hamilton writing for Bloomberg:

Euro-area jobless data this week will expose the social cost of last year’s debt crisis and recession on southern European economies as unemployment across the region probably rose to a record in December.

Unemployment in the 17-nation bloc climbed for a fifth month to 11.9 percent, according to the median of 34 economists’s forecasts in a Bloomberg News survey. That result due on Feb. 1 would show the highest jobless rate since records began in 1995. By contrast, German unemployment data the day before may show the jobless rate there held steady for a fourth month at 6.9 percent in January, a separate survey found.Euro Crisis Seen Taking Social Toll With Record Unemployment A sign reading “employment office” sits on the windows of an employment center in Barcelona. Photographer: David Ramos Vidal/Bloomberg

Euro Crisis Seen Reaping Social Toll With Record Unemployment Fran Lopez, a jobless electrician, checks his mobile phone on a street bench near his home in Madrid, Spain. Photographer: Photographer: Angel Navarrete/Bloomberg

While measures to stem the region’s debt turmoil have helped reduce sovereign bond yields from Spain to Greece, the recession and crisis have led to job cuts by companies and governments. The European Central Bank predicts the currency bloc’s economy will shrink 0.3 percent this year and President Mario Draghi said last week that the “jury is still out” on whether investor optimism can be reflected in economic momentum.

“The worst may be over for financial markets, but definitely not for the real economy,” Marco Valli, chief euro- area economist at UniCredit Global Research in Milan, said by telephone. “The unemployment situation is going to remain very poor at least for another year, if not longer.”

Spanish Unemployment

Spanish data last week showed a record 26 percent of the workforce without jobs in the fourth quarter, bringing the total close to 6 million people. In Greece, the rate was even higher in October, at 26.8 percent, also a record.

“Companies are still shedding labor, especially in southern Europe,” Martin Van Vliet, an economist at ING Groep NV in Amsterdam, said in an interview. “Unemployment will probably continue to trend higher in the next couple of months.”

While economists predict the German unemployment rate will stay unchanged, they still see an increase of 8,000 people without work this month from December, according to the median forecast of 31 economists in a Bloomberg news survey.

The euro-area economy has shrunk for two successive quarters and economists predict a further 0.4 percent decline in gross domestic product in the final three months of last year, according to the median of 26 estimates in a Bloomberg survey. The International Monetary Fund on Jan. 23 cut its global growth forecast and projected a second year of contraction in the euro region.

Tensions Ease

While investor confidence in Germany, Europe’s largest economy, rose to the highest in 2 1/2 years this month as debt tensions ease, high unemployment and continued austerity measures elsewhere are undermining household sentiment and spending. An index of euro-area economic confidence probably rose to the highest level since June, according to median estimate in a Bloomberg News survey of 30 economists.

“We’re in the phase of financial conditions improving and markets becoming more optimistic, but that has to feed through to the real economy,” ING’s Van Vliet said.

ECB Governing Council member Luc Coene said he would prefer the central bank’s as-yet-untapped bond-buying program to stay that way and it’s now up to governments to generate growth in the euro area.

‘Shallow’ Recovery

“There is only so much a central bank can do,” Coene, who heads Belgium’s central bank, said in an interview at the World Economic Forum in Davos, Switzerland, on Jan. 26. “Governments can make the adjustments that are needed to make the economy grow again. We are going to hear that message this year again and again. The next move won’t be from the ECB.”

No country has yet asked for a bailout that could trigger bond buying by the ECB after Draghi’s rescue plan, announced in July, ended a wave of panic in euro-region debt markets. The currency block will see a “shallow” recovery starting this year as long as leaders don’t hesitate to implement measures to reduce debt and increase competitiveness, Coene said.

France needs an economic overhaul to revive growth and help underpin the political union required to stabilize the euro region, Harvard economist Kenneth Rogoff said.

European governments’ policy responses to the debt crisis, such as a “half-hearted” banking union and national budget oversight by the European Commission, aren’t enough, Rogoff was quoted as saying in an interview published in German newspaper Die Welt today. Leaders need to start now with a push toward political integration that includes a European government with taxation powers, he told the Berlin-based daily.

‘Small Adjustment’

If governments follow through on their promises in the coming months, underlying momentum could mean the ECB will revise its prediction that the euro-area economy will contract by 0.3 percent this year, Coene said.

“When you look at the latest indicators in Germany, they point to a stronger underlying base of activity than was assumed,” he said. “If there is any adjustment to happen, it will be a small adjustment, and probably rather on the upside than the downside.”

Mark Carney, who is due to take over as Bank of England governor in July, said policy makers should secure “escape velocity” for their economies and there’s room for more monetary stimulus around the world. Policy in developed countries isn’t “maxed out” and central bankers can be flexible in meeting inflation goals, Carney, currently governor of the Bank of Canada, said on Jan. 26 in Davos.

‘Tough’ Conditions

Alongside the euro-area unemployment data, Eurostat, the European Union’s statistics office, will also release data on consumer prices for January. The annual inflation rate will remain at 2.2 percent compared with December, according to the median of 39 economists’ forecasts in a survey.

Euro-area economic conditions will be “tough” in the first half before a wider recovery takes hold in 2014, according to Patrick de Maeseneire, chief executive officer of Adecco SA (ADEN), the world’s biggest supplier of temporary workers.

This year “is not going to be a good year,” De Maeseneire said in an interview on Jan. 25. “The first six months will be tough, especially in France, especially in southern Europe,” he said. “Germany is also slowing down, we see automotive slowing down, and that’s going to have an effect on the surrounding economies.”

Job Cuts

PSA Peugeot Citroen (UG), Europe’s second-largest carmaker, said last month it will eliminate an additional 1,500 jobs by 2014, on top of 8,000 announced in July.

“Job shedding continues because it’s clear the euro zone economy is still in recession,” said UniCredit’s Valli. Still, “what we’re seeing right now is all the preconditions that are necessary in order to have some sort of economic improvement. Nothing in the near term, but down the road.”


Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State

By Lyubov Pronina for Bloomberg:

The biggest developing nations risk overturning the achievements of the past decade by increasing the state’s role in the economy, according to Nouriel Roubini.

Roubini — dubbed Dr. Doom for predicting hard times before the global financial crisis began in 2008 — said Brazil, Russia, India and China have been moving away from market economies recently.Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State Nouriel Roubini said, “BRICs have been hyped up too much.” Photographer: Simon Dawson/Bloomberg

“BRICs have been hyped up too much,” Roubini said in an interview today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Too much state role in enterprises, banks, resource nationalization, protectionism, lack of structural market-oriented reforms that increase the size of the private sector — this is happening in most of the BRICs.”

China maintained control of its biggest companies, Russian businesses spent shareholder money on projects favored by the government and Brazilian politicians intervened to cut utility rates last year.

State-owned OAO Gazprom (GAZP) may lose its monopoly on natural gas exports as long as the move doesn’t cut prices and damage Russia’s economic interests, Prime Minister Dmitry Medvedev said in a Jan. 23 interview in Davos. Gazprom is using its cash to finance the industry’s largest capital expenditure program, part of which goes to fund projects favored by President Vladimir Putin.

Downgrade Threat

It took the threat of a credit-rating downgrade for Indian Prime Minister Manmohan Singh’s administration to remove barriers on foreign investment in the retail and aviation industries and cut fuel subsidies. Roubini, a professor at New York University, said he favors the Philippines and Indonesia over China and India.

“They are actually doing more in terms of structural reform,” Roubini said. “The economies are growing more than 6 percent.”

Developing economies are set to grow by an average 5 percent worldwide this year, compared with 1 percent for advanced nations, according to Roubini.

In Latin America, Chile and Colombia “have done a lot of things to improve their potential for growth,” he said. “In central Europe, I see success stories like Poland and Czech Republic doing reforms.”


Europe’s ‘Bank Sector Involvement’

Zerohedge via Mark J. Grant, author Out of the Box:

How many European Union officials does it take to change a light bulb?

None. There is nothing wrong with the light bulb; its condition is improving every day. Any reports of its lack of incandescence are an illusional spin from the American media. Illuminating European rooms is hard work. That light bulb has served honorably, and any commentary not approved by the EU undermines the lighting effort.

One thing that is rationally learned from watching Europe is that what is said, what is fed to the media as fact, is often only factual in the minds of those that have created the fairy tale. Whether it is the debt to GDP ratios of the nations in Europe or the uncounted liabilities of a country or the loans to some bank that are recorded as investments and not liabilities; the drape of charade hangs resiliently over the entire spectacle. It is often a farce interwoven with a sham presented as fully cooked pie that is really half-baked and then we are all expected to eat it and rave about not just the recipe but the ingredients and the presentation. All well and good for the sheep and the herders leading them; but I have been to the top of Mt. Olympus and there are neither gods nor temples.

Now on January 30 the ECB will get paid back $182.2 billion from the European banks that borrowed the money in the LTRO operations. This is not 25% of the loans made, as touted in almost every headline, but about 10% of the loans outstanding as somehow it is conveniently forgotten that there were two loan packages totaling $1.3 trillion which were initiated in December 2011 and the second in February 2012. This is not two years ahead of schedule as headlined in the Press as about half of the loans ($655 billion) were made in the 2011 tranche. Let us begin then with a nod to accuracy and explore the rest of what we are told.

I have learned, over the last several years, that Europe is psychotic. They create an illusion, tell us that it is reality and then are angered when we question the validity of what we are told. This is not authenticity but pretense and this sort of pretense is concocted to lead you into places that no rational man wants to wander.

The interest rate, being paid by the European banks to the ECB is 0.75%, so one may rationally assume that no financial institution, in their right mind, would pay off such a loan for economic reasons. The banks cannot borrow on their own for three years at this level and so to pay them off early makes no economic sense. Yet they are being paid off and if it does not make sense economically then it must make sense for some other reason or reasons. If the agenda is devoid of common sense in its presentation then there must be a hidden agenda and a man working feverishly behind the curtains and manipulating the levers. Here it may well be the financial condition of the ECB itself which, without doubt, is stuffed with both loans and securitizations that given the wretched state of most economies in Europe, must be in very poor condition where the assets are only worth cents on the dollar or perhaps not even that if one considers the Real Estate markets in Greece, Spain, Portugal and Ireland. It is then quite obvious that the banks did not want to pay off the loans but that they were “encouraged” to do so for other reasons and one reason may well be to fund the ECB so that the central bank does not have to take on even more debt and inflate its own balance sheet as its assets values have deteriorated. Here we have a variation of the “Public Sector Involvement” which can be termed “Bank Sector Involvement” which may not cause losses on its face but which will certainly increase the funding costs for the European banks and so impair their balance sheets by the increased cost of funding which of course goes unmentioned in any European Press release and so uncommented upon by an accepting European media that blissfully accepts and willingly comments upon what it has been officially told.

“It is dangerous to let the public behind the scenes. They are easily disillusioned and then they are angry with you, for it was the illusion they loved.”

                 -W. Summerset Maugham

The Wall Street Journal, yesterday, published an article, “Europe’s Banks to Repay Aid Early,” which stated, “The data provide one of the clearest illustrations to date of the surprisingly swift healing of large swaths of the European banking system. It removes a major impediment to a gradual recovery of the broader European economy, which hinges on the health of its banks.” With great respect for the Journal I must say that they have it totally wrong. The banks, without doubt, will have higher funding costs in paying off these loans and less attractive balance sheets as a result and so it is neither Europe nor her banks that will benefit with the only possible beneficiary being the European Central Bank. All of this has been made possible not by healthier economies nor by particular cheaper funding rates for the European sovereigns or banks but by the continual and unobstructed flow of money created by the ECB and other central banks. The world has become addicted, like in Frank Herbert’s marvelous Science Fiction novel, “Dune,” where “The spice must flow.” Whether it is the global equity or debt markets, the troubled nations in Europe and even the economy in America; there is but one pillar supporting the construct and that is the printing of money and the use of the newly created pieces of paper that are supporting the various houses of cards where politics in America and on the Continent have no other answer other than to spew out money in such a torrent and at such a velocity that it puts Niagara Falls to shame.

The world seems devoid of politicians that sensibly lead though they have been quite adept at spending past what can be afforded. The worlds’ central banks have been left to pick up the bills. The balance sheets bulge, the quality of the assets, especially in Europe, deteriorate. More is spent, more money is created, the markets head higher, more money is created, there is no other answer or response than more new paper, more green ink, more blue ink, and the bubble is systemic and perilous and chock full of fiscal risks. Remember, this morning, what I have told you because there will come a time when you will wish that you had considered more carefully what I said.

“Try looking into that place where you dare not look! You’ll find me there, staring out at you!”

            -Frank Herbert, Dune


The EU’s tariffs are daylight robbery

(Or why Britain wants to leave)

By Sam Bowman for the Adam Smith Institute:

One attractive aspect of an EU exit would be the exit of the Common External Tariff. As Daniel Hannan has pointed out , the Single Market is more like a customs union than a free trade bloc. All goods coming into Britain from outside the EU are subject to tariffs, designed to protect European industries from cheaper competition.

Unlike VAT, which isn’t levied on essentials (although I’m not sure I like the idea that beer and wine aren’t essentials), the tariffs are highest on things like food and clothes. (Courtesy of the WTO, here is a list of goods affected by the Common External Tariff .)

There’s a 16% tax on bananas from outside the EU, a 17% tax on trainers, 12% on stoned fruit like peaches and plums, and 12% on shirts, suits, coats and school uniforms. Cars are taxed at 9.7%. Twine and string get a 9.2% hit. Knitted gloves carry an 8.8% tariff whereas non-knitted gloves are hit by 7.6%. You name it, they tax it.

The loser is the consumer. On its own, the European cucumber industry (protected by a 12.8% tariff) might not be very influential, but any threat to a tariff causes businesses and their lobbyists to circle the wagons.

The ‘bra wars ‘ ended with European consumers paying more for Chinese underwear – not because Big Brassiere is unbeatable, but because related industries recognised that, individually, they would fall, and marshalled their political representatives into action.

The most perverse part is that if we got rid of all these tariffs, many, if not most, producers would be better off too. They are consumers as well as producers, and tariffs make the inputs they use (like steel – 2.7%) more expensive. But they face exactly the same collective action problems as consumers at large do.

The old public choice problem holds: free-riding is more costly for members of small interest groups than for members of big ones. Ostracism from trade associations, and so on, is much easier (and more harmful) for firms that don’t go along with the lobbying. Unfortunately, there aren’t many people who will ostracise their fellow consumers for failing to renew their subscription to the Adam Smith Institute.

The public choice problem in politics is often overstated. Most of the people who march against austerity really do think the cuts are bad. Most of the people who want to keep out immigrants really do think that they’ll cost them jobs. And, no doubt, most people who support tariffs really do think that protecting native industries is a good idea.

But voters are not as aware of the Common External Tariff as they are of many other issues. It isn’t clear what the ‘left-wing’ position on taxing cheap clothes from China ought to be, nor the ‘conservative’ position on exposing native industries to the free market. It’s hard to escape the impression that the Tariff really is an example of businesses hijacking democracy. The External Tariff represents one of the biggest swindles of modern times: a collective theft from consumers by politically powerful producers.


On the Philippines

Tim Staermose, Sovereign Man’s Chief Investment Strategist writes:

When it comes to investing in Asia, the two countries which soak up the vast majority of investment chatter are India and China. And with good reason, they’re the two largest economies in the region.

Yet one of the most compelling stories in Asia right now is an often forgotten about corner– the Philippines.

With a population of almost 100 million, the Philippines has a much larger population than Thailand. It’s a huge, growing market.

I lived in the country for nearly 15 years, and I’ve never seen the economy in better shape than it is today. Optimism is high. The currency is strong. Inflation is modest.  And most importantly, the economy is generating loads of new jobs.  

Many of these jobs are in service sector industries such as calls centers, software development, and business process outsourcing firms that do accounting and administrative work for global businesses.  

Consequently, a whole new middle class of educated young people has emerged. The average Filipino is now a 22-year-old graduate who can earn a significant income.

Demographers and development economists call this “the sweet spot.” As these young people get married and start families, economic activity will accelerate even further.  

Moreover, the Philippines is uniquely buffered by its domestic economy. While some of Asia’s export-dependent economies are feeling the malaise in the US and Europe, the Philippines is thriving from local consumer spending.

And recently, something happened to the Philippines that will give the country an even bigger boost for years to come. In fact this one event may have been one of the biggest game changers in the country’s modern history. Yet it was barely mentioned in any mainstream newspaper outside of the Philippines.

Two weeks ago, after decades of instability and fighting, the Philippine government signed a landmark peace agreement with the Islamic separatists in the southern region called Mindanao.  

The Muslim majority in Mindanao has long campaigned for a separate state on the island. Now they’re getting an autonomous region, and they’re eager to cooperate in order to attract foreign investment.
The profound impact of this peace deal cannot be overstated. You see, Mindanao is exceedingly rich in metals, minerals, and fertile soil. In a US context, it’s as if California, Nevada, Texas, and Iowa had been off-limits for decades… but then suddenly became available to investors all at once. Major potential.

One way to capitalize on this potential is to own the Philippine peso (which you can do by opening a bank account in the country).

More specifically, though, there are a handful of companies that have been patiently investing in Mindanao for years, waiting precisely for this opportunity. They are about to benefit from the peace in a big way.


Eurocrats demand £8 billion in extra national payments to Brussels budget

Eurocrats are to demand £8 billion in extra national payments to the Brussels budget fuelling government anger at the “incontinence” of European Union spending.

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The European Commission will request increased contributions from national treasuries to plug a black hole in its budget. Photo: ALAMY

On October 23, the European Commission will request increased contributions from national treasuries to plug a black hole in its budget, a move that could lead to an additional 7.7 per cent increase in the cost of the EU this year.

To meet a shortfall in Brussels funded projects for 2012, British taxpayers will have to find as much as £976 million on top of the £12.7 billion already earmarked this year for payments to the EU from the Treasury.

The increase, which is well over twice the current rate of inflation, will trigger political protests from Britain and other governments, amid growing anger at demands for additional EU funding at the same time as painful cuts to national budgets.

Greg Clark, the financial secretary to the Treasury, attacked the double standard of “fiscal incontinence at the European level” while national budgets are cut and EU officials impose draconian spending restrictions on members of Europe’s single currency.

“When both in the UK and across European countries we’re advocating fiscal responsibility, we can’t possibly exempt EU institutions from that,” he said. “We have got be consistent.”

The fury of national governments will be stoked even further by European Parliament proposals to pile even more on to the cost of the EU bill by voting for an increase in the Brussels budget for 2013 of seven per cent.

MEPs are expected on 26 October to vote for extra spending worth £7 billion in the EU’s budget for 2013 in defiance of national governments.

The combined cost of the commission and parliament’s demands for Britain could total over £1.8 billion at a time when public spending is squeezed by national austerity and economic recession.

Nigel Farage, the leader of Ukip, contrasted the multi-billion EU spending requests to soaring unemployment and collapsing welfare provision in southern European eurozone countries.

“It must stick in the throat of decent people that while Spanish pensioners have to scavenge through bins, the European elite are trying to vote themselves another billion pound raid on the UK taxpayer cash register to fund their wasteful projects. Cameron must veto these ugly money grabs,” he said.



Eight signs the system is broken

Simon Black writing for sovereignman……

Here are a few interesting tidbits to chew on:

1) In the land of the free, there are now more than 760 incarcerated inmates for every 100,000 citizens. This is more than 5x the 1980 average, and it far surpasses the number (560 per 100,000) that Stalin threw in the Gulag at the peak of Soviet terror.

2) Apparently, Americans are getting more interested in snitching on each other. According to Google Trends, internet searches for terms such as “IRS reward” (and related keywords) have exploded since 2008, and especially this year.


3) Last month, a school district in California sold $164 million worth of bonds at 12.6% interest; this is more than Pakistan, Botswana, and Ecuador pay in the international bond market.

4) Based on the Treasury’s most recent statistics, US government interest payments to China will total at least $26.055 billion this year. The real figure may be much higher given that China has been purchased Treasuries for decades, back when interest rates were much higher. They’re still getting paid on those higher rates today.

Even still, this year’s interest payment to China totals more than ALL the silver that was mined in the world last year.

5) In August 2008, just before the Lehman Brothers collapse, the number of employed persons in the United States was 145.47 million persons. Over the subsequent years, the employment figure dipped to as low as 139.27 million. Today it stands at 142.1 million.

Even if this is considered recovery, to ‘rescue’ those 2.8 million jobs, it took the federal government an additional $6.421 trillion worth of debt ($2.3 million per job), and a $1.9 trillion (203%) expansion of the Federal Reserve balance sheet.

6) Meanwhile, despite trillions of euros in debt and bailouts, the unemployment rate in the eurozone just hit a record high of 11.4%… and a second Spanish bailout is now imminent.

7) Inflation in Zimbabwe (3.63%) is lower than inflation in the UK (3.66%, August 2011-July 2012).

8) Last week, the French government reached a ‘historic’ budget compromise, shooting for a budget deficit that’s ‘only’ 3% of GDP. This is based on an assumption that the economy will grow by 0.8%.

In other words, France’s official public debt (which is already at 91% of GDP) will increase by 2.2% of GDP next year amid flat growth. And this is what these people consider progress.


More Bureaucratic Lunacy from Brussels

Millions of modified and classic cars could be banned from the roads as meddling European Union try to shake-up MOT rules

  • ‘Ridiculous’ proposals suggest that cars cannot be modified once they leave the factory
  • Motoring organisations say most changes do not affect a car’s safety and potential rule is completely unnecessary
  • Changes that are made to make classic cars safer would be illegal
  • If new rules implemented it could cripple industry and thousands may lose their jobs

By ANNA EDWARDS from London’s Daily Mail:


Meddling Brussels bureaucrats want to make modified and most classic cars illegal under radical reforms which would affect millions of British drivers.

The European Commission has proposed a shake-up of the MOT which could cost thousands of jobs and cripple the industry that deals with modifying cars.

Under its plans, all vehicles would have to remain identical to the specification they were in when they left the factory – which would mean classic cars could not even be updated with safer equipment.

The proposed new rules would mean any modifications – from different windscreen wipers to newer brake lights – would mean the car would automatically fail its MOT test.


Banned: Driver Tommy Wareham with a SuperVettura modified Rolls Royce, which is the type of modified car which may fail to get an MOT if EU plans are approved to shake up the road licensing system

The proposed changes would affect millions of motorists who spend billions of pounds per year modifying cars for safety purposes or as a hobby.

One of the suggestions outlined is that all ‘components of the vehicle must comply with characteristics at the time of the first registration.

‘This may prevent most modifications to vehicles without further approval of the vehicle’.

A number of motoring organisations have now stepped forward to heap criticism on the EU’s ‘ridiculous’ proposals.

Vanessa Guyll, from the AA, said: ‘We don’t want this and we’re very much against it.

‘If every car with a modification was breaking down and having problems then that would be different but they don’t.


This stretched Ferrari 360 would automatically fail its MOT because of the changes made to it. Motoring organisations have heaped criticism on the new suggestions (Orlando limo services)

‘Most modifications don’t affect a car’s safety. This would affect everything from changing a car’s wheels to fitting a bodykit.

‘No one enjoys taking their car for an MoT but our system is pretty good. It would cost testing stations a lot and there is not much money to be made from an MoT. The plan is ridiculous.’

Barry Cornes, from the Association of Car Enthusiasts, added: ‘The implications would be massive.

‘It is unbelievable and it seems unworkable. You would need to know every minute detail about every model of car ever made.

‘There would need to be a database for every car otherwise it couldn’t work.

‘You can take an older car like the Jenson Interceptor and have it completely overhauled with modern components for £100,000. The inference is that it would then become illegal.

‘Lots of older cars underwent modifications like brake lights and wipers to make them safer. They would be illegal. How is that possible?

‘We think it is totally farcical. This is so frightening when you consider the amount of jobs which could be lost.

The EU also want to change the definition of a historic vehicle which would be exempt from an MOT.

It wants to exempt all cars more than 30-years-old from testing providing the vehicle ‘has been maintained in its original condition, including its appearance’.

This is based on the vehicle having not ‘sustained any change in technical characteristics of its main components such as engine, brakes, steering or suspension’.

Classic cars which don’t fit this criteria would then have to be subject to new regulations.

The Federation of British Historic Vehicle Clubs is furious at this proposal and has labelled it ‘unworkable and completely unacceptable’.

A statement from the FBHVC said: ‘We reject the suggestion that Roadworthiness Testing should relate to a vehicle’s ‘technical characteristics’, whatever the age of the vehicle.


Interfering: Officials at the European commission have suggested the already-loathed shake up

‘Modifications, alterations and improvements are all part of the history of the motor vehicles and the older the vehicle, the more likely it has been altered at some stage.

‘There is no database of original specifications for UK vehicles, so testing to original ‘technical specifications’ is simply pie-in-the-sky.’

More than 28,000 people are employed in the historic car industry in the UK, with the FBHVC estimating it contributes £4.3 billion to the economy.

The UK Independence Party has been inundated with letters from concerned motorists, claiming to have had ‘the biggest postbag in years’.

Ray Finch, press officer at UKIP, said: ‘This topic is massive and it’s just another example of the EU interfering.

‘It is a process of standardisation. Most people in Brussels are driven around in a brand new Mercedes so these things aren’t going to affect them.

‘British people are known for their hobbies and people who enjoy classic and modified cars hate this. It is interfering for the sake of interfering.

‘To anybody sane it is legislation for the sake of legislation and typical Brussels. They haven’t got anything else to do but make up some more laws. It’s a giant bureaucracy.’

The Department for Transport has now contacted 240 organisations and individuals regarding the proposals, with a large number expressing concerns.

It is now analysing the potential impact and says it will fight proposals which could affect people’s livelihoods.

A statement from the DfT said: ‘This document is a proposal rather than final legislation.

‘As such, all Member States will have the opportunity to negotiate the final legislation and everything within the current document may be subject to change.

‘The Department has sought views on the proposals from the industry.

‘We will be analysing the proposals to find out what impact they will have on businesses and motorists.

‘We will question rigorously any provisions that imply costs for Government, people or industry and seek to minimise these. We will be taking an active part in the Working Group meetings starting this autumn.

‘It is still far too early to comment on specifics of the legislation as a number of the proposals could be changed or dropped.’


[Emergingevents comment: It would not be surprising to learn that these new regulations are sponsored by European auto manufacturers].

The Israeli Crisis


Israel’s ability to influence events on its borders was never great, but events taking place in bordering countries are now completely beyond its control. While Israeli policy has historically focused on the main threat, using the balance of power to stabilize the situation and ultimately on the decisive use of military force, it is no longer possible to identify the main threat. There are threats in all of its neighbors, including Jordan (where the kingdom’s branch of the Muslim Brotherhood is growing in influence while the Hashemite monarchy is reviving relations with Hamas). This means using the balance of power within these countries to create secure frontiers is no longer an option. It is not clear there is a faction for Israel to support or a balance that can be achieved. Finally, the problem is political rather than military. The ability to impose a political solution is not available.

Against the backdrop, any serious negotiations with the Palestinians are impossible. First, the Palestinians are divided. Second, they are watching carefully what happens in Egypt and Syria since this might provide new political opportunities. Finally, depending on what happens in neighboring countries, any agreement Israel might reach with the Palestinians could turn into a nightmare.

The occupation therefore continues, with the Palestinians holding the initiative. Unrest begins when they want it to begin and takes the form they want it to have within the limits of their resources. The Israelis are in a responsive mode. They can’t eradicate the Palestinian threat. Extensive combat in Gaza, for example, has both political consequences and military limits. Occupying Gaza is easy; pacifying Gaza is not.

Israel’s Military and Domestic Political Challenges

The crisis the Israelis face is that their levers of power, the open and covert relationships they had, and their military force are not up to the task of effectively shaping their immediate environment. They have lost the strategic initiative, and the type of power they possess will not prove decisive in dealing with their strategic issues. They no longer are operating at the extremes of power, but in a complex sphere not amenable to military solutions.

Israel’s strong suit is conventional military force. It can’t fully understand or control the forces at work on its borders, but it can understand the Iranian nuclear threat. This leads it to focus on the sort of conventional conflict they excel at, or at least used to excel at. The 2006 war with Hezbollah was quite conventional, but Israel was not prepared for an infantry war. The Israelis instead chose to deal with Lebanon via an air campaign, but that failed to achieve their political ends.

The Israelis want to redefine the game to something they can win, which is why their attention is drawn to the Iranian nuclear program. Of all their options in the region, a strike against Iran’s nuclear facilities apparently plays to their strengths. Two things make such a move attractive. The first is that eliminating Iran’s nuclear capability is desirable for Israel. The nuclear threat is so devastating that no matter how realistic the threat is, removing it is desirable.

Second, it would allow Israel to demonstrate the relevance of its power in the region. It has been a while since Israel has had a significant, large-scale military victory. The 1980s invasion of Lebanon didn’t end well; the 2006 war was a stalemate; and while Israel may have achieved its military goals in the 2008 invasion of Gaza, that conflict was a political setback. Israel is still taken seriously in the regional psychology, but the sense of inevitability Israel enjoyed after 1967 is tattered. A victory on the order of destroying Iranian weapons would reinforce Israel’s relevance.

It is, of course, not clear that the Israelis intend to launch such an attack. And it is not clear that such an attack would succeed. It is also not clear that the Iranian counter at the Strait of Hormuz wouldn’t leave Israel in a difficult political situation, and above all it is not clear that Egyptian and Syrian factions would even be impressed by the attacks enough to change their behavior.

Israel also has a domestic problem, a crisis of confidence. Many military and intelligence leaders oppose an attack on Iran. Part of their opposition is rooted in calculation. Part of it is rooted in a series of less-than-successful military operations that have shaken their confidence in the military option. They are afraid both of failure and of the irrelevance of the attack on the strategic issues confronting Israel.

Political inertia can be seen among Israeli policymakers. Prime Minister Benjamin Netanyahu tried to form a coalition with the centrist Kadima Party, but that fell apart over the parochial Israeli issue of whether Orthodox Jews should be drafted. Rather than rising to the level of a strategic dialogue, the secularist constituency of Kadima confronted the religious constituencies of the Likud coalition and failed to create a government able to devise a platform for decisive action.

This is Israel’s crisis. It is not a sudden, life-threatening problem but instead is the product of unraveling regional strategies, a lack of confidence earned through failure and a political system incapable of unity on any particular course. Israel, a small country that always has used military force as its ultimate weapon, now faces a situation where the only possible use of military force — against Iran — is not only risky, it is not clearly linked to any of the main issues Israel faces other than the nuclear issue.

The French Third Republic was marked by a similar sense of self-regard overlaying a deep anxiety. This led to political paralysis and Paris’ inability to understand the precise nature of the threat and to shape their response to it. Rather than deal with the issues at hand in the 1930s, they relied on past glories to guide them. That didn’t turn out very well.

The Israeli Crisis is republished with permission of Stratfor.”