Wednesday, November 30, 2016

Alexis & Fidel & Augusto

The Greek Prime Minister honorably represented all of Europe at Fidel Castro's funeral. Or so it has to appear to those who are following the news. "Give me liberty or give me death!", Alexis Tsipras intoned in his speech suggesting that this was Castro's motto. In actual fact, this slogan was coined by the American patriot Patrick Henry back in 1775 when he was fighting for true liberty for his Virginian compatriots from the yoke of British colonial rule.

Tsipras vowed that his struggle for justice and dignity would "always have Fidel's example before us". One is inclined to hear "Give me Fidel or stay an infidel!"

A logical thinker could be inclined to think that anyone who admires Fidel should really adore Augusto!

Fidel staged a successful coup and so did Augusto, so they are even on that. Fidel caused a lot of casualties and so did Augusto, so they are even on that, too. So the question is: which of the two left a better legacy?

Cuba is economically in shambles and politically still a dictatorship. Chile, on the other hand, is doing well economically and politically it returned to democracy while Augusto was still alive. So wouldn't logical thought indeed suggest that if one admires Castro despite all his failures, one should adore Pinochet who had successes instead of failures.

Or put differently: if one despises Pinochet, one should be called upon to explain why one adores Castro!

Monday, November 21, 2016

ECB Supervises TBTF Banks? Really?

So we all thought the 120+ banks in EU countries which were directly supervised by the ECB were safe in the sense that their supervision was shielded from national interests and/or pressures? Well, think again!

The European Court of Auditors (ECA) has published a report on the new EU banking supervisory system which was established in 2014. The system identified 120+ banks which were deemed too-big-too-fail and which, therefore, has to be taken away from national banking supervision systems and transferred to the ECB. Much to my surprise, I now read the following paragraph in the auditors' report:

"ECB staff led only 12% of on-site inspections of these banks, and overall the inspection teams were predominantly staffed (92%) by the national competent authorities. Similarly, off-site supervision is heavily dependent on staff appointed by the Member State authorities, with the ECB having little effective say over the composition and skills of joint off-site supervisory teams."

Perhaps this is too short a time to pass judgment but somewhere along the line the expectation has got to be that 100% of inspection teams are led by ECB staffs!

Friday, November 18, 2016

A Growth Strategy For Greece?

When the NYT publishes some potentially good news about the new Republican administration under Donald Trump, one is well advised to read on. Everyone seems to agree that Greece needs a growth strategy if the country is ever to see the light at the end of the tunnel. Trump, too, has said that he will make major infrastructure investments in order to make America great again.

Spending money on infrastructure is far easier said than done. It doesn't make sense to spend money on bridges to nowhere. James B. Stewart, the author of the article under a column appropriately titled "Common Sense", writes the following:

"All he (Trump) needs to do is what he presumably does best: build something. And I don’t mean a few miles of asphalt or a paint job on a rusting bridge. Build something awe-inspiring. Something Americans can be proud of. Something that will repay the investment many times over for generations to come. Build the modern-day equivalent of the Golden Gate Bridge, the Hoover Dam, the Lincoln Tunnel or the Timberline Lodge. All of these are Depression-era New Deal public works projects started under President Franklin D. Roosevelt that are still in use."

What makes this article different from most others is that it doesn't only discuss infrastructure spending in a global way but it also proposes about a dozen specific investment objects ("shovel-ready or close to it"). Approving and funding spending is one thing. Spending the money wisely on wise projects can be quite another thing.

I don't think there is a single Greek politician who has not talked about the need for infrastructure spending in recent years. What I have not seen anywhere yet is a list of "shovel-ready or near it" projects where money could be spent quickly and wisely. There was a project some years ago about a new Formula 1 racing track. On the surface, that does not necessarily sound like money being spent wisely.

Wednesday, November 16, 2016

Varoufakis Not The Best Looking Greek In The World?

After I listened to this interview, I wondered why Yanis Varoufakis would have made such downgrading remarks about President Obama's visit to Greece. And I think I found the explanation.

Back in 2015, Varoufakis attended a White House reception in honor of Greek Independence Day. When Barack Obama was in conversation with Yanis Varoufakis, John Ramos, the handsome Greek-American entrepreneur, was the third person in the group. Stamos later told Jimmy Fallon on the latter's show about the meeting (see link). After making the comment that Obama was talking to 'that guy, the Finance Minister, Yanis, Yani...?' (couldn't remember the name), Stamos said:

"He (Obama) looks to me and he says 'John Stamos, how are you?' And then he looks to the room and says 'This is the best looking Greek in the world!'"

That, indeed, must have hurt to hear the most powerful man in the world call someone else the best looking Greek in one's presence! Hurt real bad!

"The Euro Is Murdering Europe!"

I reproduce the below article because it is a concise summary of the arguments of today's critics of the common currency AS WELL AS the European Union. If this were the America of the 1780's, the political elite of Europe would intensively and publicly debate these points to come up with better solutions. The EU elites are either unwilling or incapable of doing that. And perhaps the EU citizens are not all that interested, either.

The Euro Is Murdering Europe

By F. William Engdahl

November 13, 2016 "Information Clearing House" - "NEO" -  The Euro is murdering the nations and economies of the EU quite literally. Since the fixed currency regime came into effect, replacing national currencies in transactions in 2002, the fixed exchange rate regime has devastated industry in the periphery states of the 19 Euro members while giving disproportionate benefit to Germany. The consequence has been a little-noted industrial contraction and lack of possibility to deal with resulting banking crises. The Euro is a monetarist disaster and the EU dissolution is now pre-programmed as just one consequence.

Those of you familiar with my thoughts on the economy will know I feel the entire concept of globalization, a term which was popularized under the presidency of Bill Clinton to glamorize the corporativist agenda that had just come into being with creation of the World Trade Organization in 1994, is fundamentally a destructive rigged game of the few hundred or so giant “global players. Globalization destroys nations to advance the agenda of a few hundred giant, unregulated multinationals. It’s based on a disproven theory put forward in the 18th Century by English free trade proponent David Ricardo, known as the Theory of Comparative Advantage, used by Washington to justify removing any and all national trade protectionism in order to benefit the most powerful “Global Players,” mostly US-based.

The faltering US project known as Trans-Pacific Trade Partnership or the Trans-Atlantic Trade and Investment Partnership, is little more than Mussolini on steroids. The most powerful few hundred corporations will formally stand above national law if we are foolish enough to elect corrupt politicians that will endorse such nonsense. Yet few have really looked closely at the effect that surrender of currency sovereignty under the Euro regime is having.

Collapse of Industry
The nations of what today is misleadingly known as the European Union follow a concept ratified by a then-far-smaller number of European members–twelve versus 28 states today–of what had been the European Economic Community (EEC). A European version of giganto-mania appeared during the EEC Commission presidency of French globalist politician Jacques Delors when he unveiled what was called the Single European Act in February 1986.

Delors overturned the principle established by France’s Charles de Gaulle, the principle which de Gaulle referred to as “Europe of the Fatherlands.” De Gaulle’s concept of the European Economic Community–then six nations including France, Germany, Italy and the Benelux three–was one in which there would be periodical meetings of the premiers of the six Common Market nations. There, with elected heads of states, policies would be formulated and decisions made. An assembly elected from members of national parliaments would review the actions of the ministers. De Gaulle viewed the Brussels EEC bureaucracy as a purely technical administrative body, subordinate to national governments. Cooperation should be based on the “reality” of state sovereignty. Supranational acquisition of power over individual nations of the EEC was anathema for de Gaulle, rightly so. As with individuals so with nations—autonomy is basic and borders do matter.

Delors’ Single Act proposed to overturn that Europe of the Fatherlands through radical reforms to the EEC aimed at the destructive idea that the diverse nations, with diverse histories, cultures and diverse languages, could dissolve borders and become a kind of ersatz United States of Europe, run top down by unelected bureaucrats in Brussels. It in essence is a Mussolini-style corporativist or fascist vision of a non-democratic, non-responsible European bureaucracy controlling populations arbitrarily, answerable only to corporate influence, pressure, corruption.

It was an agenda developed by the largest multinationals of Europe, whose lobby organization was the European Roundtable of Industrialists (ERT), the influential lobby group of Europe’s major multinationals (by personal invitation only) such as Swiss-based Nestle, Royal Dutch Shell, BP, Vodafone, BASF, Deutsche Telekom, ThyssenKrupp, Siemens and other giant European multinationals. The ERT, not surprisingly, is the major lobby in Brussels pushing adoption of the TIPP trade deal with Washington.

The ERT was a major driver for the 1986 Delors Single Act proposals that led to the Frankenstein Monster called the European Union. The idea of the EU is creation of a top-down central unelected political authority that would decide the future of Europe without democratic checks and balances, at heart a truly feudal notion.

The concept of a single United States of Europe, dissolving national identities that went back more than a thousand years or more, can be traced back to the 1950’s when the Bilderberg Meeting of 1955 in Garmisch-Partenkirchen, West Germany, first discussed the creation out of the six member nations of the European Coal and Steel Community of “a common currency, and…this necessarily implied the creation of a central political authority.” De Gaulle was not present.

The project to create a monetary union was unveiled at a 1992 EEC conference in Maastricht, Holland following the unification of Germany. France and Italy, backed by Margaret Thatcher’s Britain, forced it through over German misgivings in order to “contain the power of a unified Germany.” British Tory press railed against Germany as an emerging “Fourth Reich,” conquering Europe economically, not militarily. Ironically, this is what has very much de facto emerged from the structures of the Euro today. Because of the Euro, Germany economically dominates the entire 19 Eurozone countries.

The problem with the creation of the European Monetary Union (EMU) prescribed in Maastricht Treaty is that the single currency and the “independent” European Central Bank were launched without being tied to a political single legal entity, a genuine United States of Europe. The Euro and the European Central Bank is a supranational creation without answerability to anyone. It was done in absence of a genuine organic political union such as that created when 13 states, with common English language and following a commonly-fought war of independence from Great Britain, created and adopted the Constitution of the United States of America. In 1788 the delegates from the 13 states agreed to establish a republican form of government grounded in representing the people in the states, with separation of powers between the legislative, judicial and executive branches. Not so the EMU.

The EU bureaucrats have a cute name for this disconnect between unelected central bank officials of the ECB controlling the economic destiny of the 19 member states with 340 million citizens of the so-called Eurozone. They call it the “democratic deficit.” That deficit has grown gargantuan since the 2008 global financial and banking crisis and the emergence of the not-sovereign European Central Bank.

Collapse of Industry
The creation of the Euro single currency since 1992 has put the Euro member states into an economic strait-jacket. The currency value cannot be changed to boost national exports during economic downturns such as that experienced since 2008. The result has been that the largest industrial power in the Eurozone, Germany, has benefited from the stable euro while weaker economies on the periphery of the EU, including most notably, France, have endured catastrophic consequences to the rigid Euro rate.

In a new report, the Dutch think-tank, Gefira Foundation, notes that French industry has been contracting since the adoption of the euro. “It was not able to recover after either of the 2001 or 2008 crises because the euro, a currency stronger than the French franc would be, has become a burden to France’s economy. The floating exchange rate works like an indicator of the strength of the economy and like an automatic stabilizer. A weaker currency helps to regain competitiveness during a crisis, while a stronger currency supports consumption of foreign goods.”

The study notes that because of this currency strait-jacket, ECB’s policy has created a Euro too high versus other major currencies to enable France to maintain exports since the economic downturn of 2001. The Euro has led to increased imports into France and because France had no exchange rate flexibility, her industry “could not regain international competitiveness in the world’s market after the 2001 crisis, so its industry has been slowly dying ever since.” They lost the economic stabilizing tool of a floating exchange rate.

Today, according to the Eurostat, industry makes up 14.1% of the French total gross value added. In 1995 it was 19.2%. In Germany it is 25.9%. Most striking has been the collapse of a once-vibrant French car industry. Despite the fact that world car production almost doubled from 1997 to 2015 from 53 million to 90 million vehicles annually, and while Germany increased its car production by 20% from 5 to 6 million, from the time France joined the Euro in 2002, French car production almost halved from nearly 4 million to less than 2 million.

Euro Bail-in Laws
The same Euro strait-jacket is preventing a serious reorganization of troubled banks across the Eurozone since the 2008 crisis. The creation of the supra-national, non-sovereign European central Bank has made it impossible for member countries of the Eurozone to resolve their banking problems created during the excesses of the pre-2008 period. The case of Italy with its request to make a state bailout of its third-largest bank, Monte dei Paschi, is exemplary. Though draconian layoffs and closings have for the moment eased panic, Brussels refused to permit a $5 billion Italian state rescue of the bank, instead demanding the bank revert to a new EU banking law called “Bail in.” While they may not yet dare to implement bail-in just yet in Italy, it is EU law and will certainly be the instrument of choice by the unelected Eurogroup when the next banking crisis hits.

Bail-in, while it sounds better than taxpayer bailout, actually requires that a bank’s depositors be robbed of their deposits to “rescue” a failed bank, if Brussels or the unelected Eurogroup decides such a bail-in of deposits is needed after bank bond holders and stock holders and creditors have not been able to meet the losses. This bail-in confiscation was applied in Cyprus banks in 2013 by the EU. Depositors there with over €100,000 either lost 40% of their money.

If you are a depositor in, say, Deutsche Bank, and the stock shares are tanking, as they have been, and legal troubles threaten their existence, and the German government refuses to talk bailout, but rather leaves the bank to potential bail-in, you can be sure every depositor with an account over €100,000 will begin to look to other banks, worsening the crisis for Deutsche Bank. Then all other remaining depositors would be vulnerable to bail-in as was initially proposed by the Eurogroup for Cyprus banks.

Surrender of monetary sovereignty
Under the Euro and the rules of Eurogroup and ECB, decisions are no longer sovereign but central, taken by not-democratically appointed faceless bureaucrats like Holland Finance Minister, Jeroen Dijsselbloem, President of Eurogroup. During the Cyprus bank crisis Dijsselbloem proposed confiscating all depositor money, big or small, to recapitalize the banks. He was forced to back down at the last minute, but it shows what is possible in the coming EU bank crisis that is pre-programmed by the defective Euro institution and its fatally flawed ECB.

Under current Eurozone rules, effective January, 2016, EU national governments are prohibited from taxpayer rescue of their banks, preventing orderly resolution of bank liquidity problems until too late. Germany has adopted a bank bail-in law as have other EU governments. The new bail-in rules are the result of a bureaucratic directive from the unelected, faceless bureaucrats of the EU Commission known as the EU Bank Recovery and Resolution Directive (“BRRD”).

In 1992 when Swedish banks went into insolvency as a real estate bubble popped, the state stepped in with Securum, a bad-bank/good bank rescue. The bankrupt banks were temporarily nationalized. Non-performing real estate loans in billions were put into the state corporation, Securum, the so-called bad bank. The risk-addicted bank directors were dismissed. The nationalized banks, minus bad loans, were allowed, under state management, to resume lending and return to profit before being reprivatized as the economy improved. The non-performing real estate became again profitable as the economy recovered over several years, and after five years the state could sell the assets for a total net profit and liquidate Securum. Taxpayers were not burdened.

ECB Prevents Bank Resolutions
Now, as the EU faces a new round of bank solvency crises with banks like Deutsche Bank, Commerzbank and major banks across the Eurozone facing new capital crises, because the EU lacks a central taxation power, no flexible tax-payer or bank nationalization is possible. New national bank rules adjusted to local circumstances are not possible. Measures to give troubled banks time such as allowing a temporary moratorium on foreclosures and repossessions if people fall behind on their payments, outsourcing national electronic payment system to commercial banks, are not possible.

The EuroZone has no central fiscal authority, so such solutions cannot be implemented. Banking system problems are only being solved by monetary authorities, by the insane ECB policy of negative interest rates, so-called Quantitative Easing where the ECB buys endless billions of Euros in dodgy corporate and state debt with no end in sight, and in the process making insurance companies and pension funds insolvent.

The answer is definitely not that proposed by the kleptocratic George Soros and others, namely to give the unelected Brussels super-state the central fiscal power to issue Brussels Euro bonds. The only possible solution short of destroying the economies of the entire Eurozone in the coming next European bank solvency crisis, is to dismantle the Frankenstein Monster called the European Monetary Union with its ECB and common currency.

The individual countries in the 19 country Euro Zone do not form what economists call an “optimum currency area,” never did. The economic problems of a Greece or Italy or even France are vastly different from those of Germany, or of Portugal or Spain.

In 1997 before his death, one of my least-favorite economists, Milton Friedman, stated, “Europe exemplifies a situation unfavorable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.” On that, I have to say, he was right. It’s even more so the case today. The Euro and its European Central Bank are murdering Europe as effectively as the Second World War did, only without the bombs and rubble.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook.”

Saturday, November 12, 2016

Ross Perot's "Giant Sucking Sound" Revisited

Ross Perot was my hero in America's 1992 Presidential campaign. As a common sense Texan businessman, he could explain complicated things is a way that people could easily understand them. Such as trade agreements.

Perot explained, in a rather convincing way, that manufacturing jobs are where manufacturing takes place. If a country makes trade agreements where it starts importing manufacturings which it previously manufactured domestically, there will be that 'giant sucking sound of jobs being shipped abroad'.

Warren Buffett, another American who can explain complicated things in a simple way, described the same phenomena in his story about Thriftville and Squanderville.

"If the Japanese want to work 18 hours a day in exchange for us signing promissory notes, that's fine with me", a young American told me back in 1974 when I asked him whether he wasn't concerned about the rapidly increasing American trade deficit. That, too, sounded convincing to me except that he didn't tell me about the consequences thereof, i. e. the giant sucking sound on one hand and the foreign indebtedness on the other.

I have written time and again about the overriding importance of current account balances in this blog. There are intra-border financial crises, i. e. crises which can be contained within the borders of a country and there are cross-border financial crises. Greece started out as a cross-border financial crisis (when the country lost access to capital markets) and it subsequently evolved into an intra-country financial crisis (when the banks had to be recapitalized on more than one occasion and when still more than half the loans of domestic banks are non-performing).

The external accounts of a country are summarized in the Balance of Payments (BoP). The BoP consists of a Current Account and a Capital Account. The critical formula is:

Current Account + Capital Account = Zero.

The current account measures a country's revenues from abroad and its expenses abroad. When foreign revenues exceed foreign expenses (current account surplus), the country is accumulating a surplus abroad. Vice versa, when foreign expenses exceed foreign revenues (current account deficit), the country is accumulating a cross-border deficit. Just like when a family spends more money than it earns, it has to cover the difference either with debt of with proceeds from the sale of assets or with proceeds from an inheritance. Spending more than earning is generally called 'living beyond one's means'. However, when some or most of the spending represents investment, it is actually good to spend more than one earns because the excess spending will, hopefully, lead to good returns on investments.

The point is, when you spend more than you earn, you have to get funding for it. It is a matter of arithmetic (and not economics!) that a current account deficit must have, in compensation, a surplus in the capital account. The latter means money flowing into the country. It can flow as debt or equity (foreign investment) or as gifts (EU subsidies). If it flows mostly in the form of debt, there will be trouble in the future.

Since the Vietnam war, the world has seen tectonic shifts in current account balances; gigantic centrifugal movements between manufacturing jobs and consumers. The consumers have contributed to the creation of jobs and wealth elsewhere. The price they paid for that is indebtedness to people elsewhere.

How does all this relate to Greece? Greece has 'exported' a lot of jobs by importing products which could just as well be made in Greece. And, in exchange, Greece has signed a lot of promissory notes...

Monday, November 7, 2016

Gross Financing Needs Capped At 15% of GDP? - A Silly Idea!

There are reports that the Greek government has now decided what it expects (or rather: hopes for) by way of acceptable debt relief. The key term is "gross financing needs" by which is meant the sum of budget deficits and funds required to roll over or pay debt that matures during any given year. Apparently, the Eurogroup had proposed, last May, to cap gross financing needs at 15% of GDP until 2030 and no more than 20% thereafter. The Greek government would now consider this acceptable.

Frankly, I think this is silly!

Two different items are being mixed here and put into the same bag: (1) debt maturities are funded out of refinancings and (2) interest payments are funded out of the budget. The latter funding is controlled by Greece; the former is not.

There are hardly any industrialized countries these days which actually repay debt in nominal terms (i. e. out of the budget). To expect that, of all countries, Greece would be the one which could accomplish that is a farce. With the present debt load, Greece could not even cover all interest at market rates with 15% of GDP.

The best that creditors can hope for (and that already is a BIG hope!) is that Greece will not have to increase its debt in nominal terms. Assuming Greece can achieve this miracle, then it follows logically that one should base projections on the assumption that debt will remain unchanged in nominal terms (i. e. maturities always rolled over and/or put on very, very long tenors).

The only question which really matters is how much interest Greece could be (or should be) expected to pay out of its budget. And since expenses in the budget are funded with budget revenues, the most logical formula would be to cap interest expense at a certain % of government revenues.

According to ELSTAT, total government tax revenues were 45 BEUR in 2015. The US spends 13% of tax revenues on interest. The equivalent of that rate for Greece would be 5,8 BEUR (roughly the same amount which Greece paid on interest in 2015). 5,8 BEUR sounds higher than any primary surplus projection which I have seen. Thus, it does not seem achievable. To lower it would be the debt relief.

What if one said that Greece should pay interest at half the level as the US, i. e. at 6% of tax revenues? That would have been 2,7 BEUR in 2015. And guess what! That would have been about 15% of GDP!

In short: the critical decision is to determine how much of total tax revenues a suffering economy like that of Greece can be expected to allocate to interest expense. That percentage will lead to a nominal amount available for interest and then it's only a matter of negotiations among creditors to agree on an arithmetic which creditor gets how much and when of that nominal amount.

Saturday, November 5, 2016

Death Of An Oligarch

Aged only 63, Andreas Vgenopoulos, the principal behind the Marfin Group, died earlier today. The question now is how many enterprises will cease to exist in the wake of his death.

A couple of years ago, I spent quite a bit of time researching the activities of the Marfin Group, the group's dealings with its principal bank (Piraeus) and the dealings of important Greek businessmen who were directly or indirectly associated with Mr. Vgenopoulos (such as George Provopoulos, the former governor of the Bank of Greece).

It often happens that large business groups which have the characteristics of a house of cards are held together only by the presence of an almighty founder, the person who can hold the group together by his sheer presence. In the presence of such a 'leader', all others become followers. If the 'leader' is a crook, the followers become accomplices. None of them has the courage to stand up and be counted.

When such a 'leader' suddenly disappears (sometimes because he has to go to jail), all hell can break loose. Suddenly, all the former followers find the courage to report about all the bad things which have been going on and which they always knew would drive the group into the ground. The classic Saul-Paul conversion.

The only trouble with the Marfin Group is that the skeletons which may come out from its closets could be rather huge, so huge that there could be consequences and threats to stability for other areas. Marfin and Piraeus Bank recorded transactions where the outside observer can only marvel how they came about (like the 3,4 BEUR profit which Piraeus took on the purchase of Greek branches of Cypriot banks). There seem to have been quite a few 'quid's'. The questions will be what were the 'quo's' and who received them.