Eurozone dodges triple-dip recession but submerges in 'lost decade'

Italian ex-minister warned that “Titanic Europe” is heading for a shipwreck, demanding an “orderly break-up” of the euro unless there is a radical change of course

By Ambrose Evans-Pritchard, International Business Editor

4:33PM GMT 14 Nov 2014

A former Italian finance minister said “Titanic Europe” is heading for a shipwreck Photo: ALAMY


The eurozone has averted a triple-dip recession but remains stuck in a deep structural slump, with too little momentum to create jobs or to stop a relentless rise in debt ratios.
 
The region eked out growth of 0.2pc in the third quarter, yet Italy’s economy shrank again and has now been in contraction for over three years.
 
Stefano Fassina, the former deputy Italian finance minister, said “Titanic Europe” is heading for a shipwreck without a radical change of course.
 
He warned that contractionary policies are destroying the Italian economy and called on the country’s leaders to “bang their fists of the table”. He said they should threaten an “orderly break-up” of the euro unless policies change. His comments have made waves in Rome since he is a respected figure in the ruling Democratic Party of Matteo Renzi.
 
While France rebounded by 0.3pc, the jump was due to a rise in inventories and a 0.8pc spike in public spending, mostly on health care. The previous quarter was revised down to minus 0.1pc.

“It flatters to deceive,” said Marc Ostwald from Monument Securities. “France was basically horrible. How anybody could celebrate this as a recovery story is beyond me.”
 
“A close reading of details is sobering. Just about all the drivers of growth are near-dead,” said Denis Ferrand, head of the French research institute Coe-Rexecode.
 
Michel Sapin, the French finance minister, said the economy remains "too weak" to make a dent on unemployment. France’s brief rebound in employment has already sputtered out. The economy shed 34,000 jobs in the third quarter. This will not be easy to reverse since Paris has pledged to push through a further €50bn of fiscal cuts over three years to meet EU deficit targets.




Maxime Alimi from Axa said France’s public debt is likely to reach 100pc of GDP by 2017, warning that investor patience may not last. He said bond yields could rise in a “non-linear, abrupt fashion” in the next downturn.
 
Europe is caught in limbo. The data is not weak enough to force a radical change in EMU policy, whether that might be a ‘New Deal’ blitz of investment or full-fledged quantitative easing by the European Central Bank.
 
The risk is that the currency bloc will drift into another year in near deflationary conditions, without any catalyst for real recovery. The US Treasury Secretary, Jacob Lew, warned this week that Europe faces a “lost decade” unless surplus countries such as Germany do more to stimulate demand.
 
“The eurozone is the epicentre of a global Keynes liquidity trap,” said Lena Komileva from G+Economics. “For the markets, the previous consensus of a periphery-led recovery has crumbled.”

Germany just scraped by without falling into a technical recession, growing 0.1pc after contracting by 0.1pc in the previous quarter. It is clearly suffering the brunt of Russia’s crisis and wilting demand in China, Brazil, and much of the emerging market nexus.
 
Jörg Krämer, chief economist at Commerzbank, said there was a surge of pent-up investment by German companies after the EMU debt-crisis subsided in mid-2012. This has faded, causing a “soft patch” that is coming to an end.
 
“We expect German growth to pick up next year. The depreciation of the euro against the dollar will lift GDP by at least 0.5pc over the next four quarters. On top of that, monetary policy is very loose for German conditions,” he said.
 
Any German recovery will have a double-edged effect. It will boost intra-EMU trade demand slightly, but it will also engender even more resistance from Berlin for fiscal stimulus or for sovereign bond purchases by the ECB. The net effect might be negative for those parts of southern Europe still trapped in debt-deflation.
 
Italy is now the country in deepest trouble, stuck in a fixed exchange rate system with a currency overvalued by at least 25pc. Output has fallen by almost 10pc since the peak, reverting to 1999 levels. Industrial output is down 24pc. Official youth unemployment is 42.9pc, but Italy also has the highest level of unreported jobless in the eurozone, according to the European Commission.


Italian industrial output


This is a deeper slump than during the Great Depression, and is almost certainly the worst episode in peacetime since the creation of the Italian state in 1859. An “internal devaluation” to claw back competitiveness is impossible in near deflationary conditions, since this would aggravate debt dynamics.
 
Italy’s public debt ratio is already rising at a rate of 5pc of GDP each year despite a primary budget surplus of 2.5pc. The debt stock is rising on a base of contracting nominal GDP, a poisonous dynamic known as the denominator effect.
 
A study by the Brussels think-tank Bruegel concluded that Italy must increase its primary surplus by 1.4pc of GDP for every 1pc drop in the inflation rate just to keep pace, a near impossible task.



“The data for the eurozone are awful,” said Simon Tilford from the Centre for European Reform. 
 
“It is a sign of just how bad things have become that Europe’s leaders will jump on any glimmer of hope to justify policies that they still cling to doggedly. But the fact is that output is still several percent short of where it was in 2008, and massively short of where it should be.

Moreover, we have probably passed the cyclical peak already,” he said.
 
“The electorates in Italy and Spain have been stoical so far, but this is predicated on the belief that things will get better. There is a false sense of complacency about what will happen if this depression goes on for year after year,” he said.
 

Group of Twenty IMF Note — G20 Leaders' Summit

IMF Note on Global Prospects and Policy Challenges

November 15–16, 2014

The Following executive summary is from a note by the Staff of the IMF prepared for the November 15–16, 2014 G-20 Leaders' Summit in Brisbane, Australia.

Executive Summary

An uneven and brittle global recovery continues, despite setbacks this year. With world growth in 2014H1 worse than expected in the spring, global growth forecasts have been lowered to 3.3 percent for 2014 and to 3.8 percent in 2015. Supportive financial conditions, moderating fiscal consolidation, and strengthening balance sheets should sustain the recovery in the remainder of 2014 and into 2015. Overall, slow growth highlights the importance of G20 commitments to raise global growth.

Key developments since the October WEO include a financial market correction, appreciably lower oil prices, and some further signs of weakness in activity. Sovereign bond yields in advanced economies, which had fallen since the spring, declined further in October. Equity prices, which trended up till late-September, have declined since, notably in emerging economies, where risk spreads have increased. The recent increase in financial market volatility is a reminder of potential risks and potential further corrections. While it is too early to identify the supply and demand factors at play, all else equal, the recent appreciable fall in oil prices, if sustained, will boost growth. Recent data releases also point to weak domestic demand in the euro area.

Downside risks identified in the October WEO remain significant. Heightened geopolitical tensions and potential corrections in financial markets, including due to monetary policy normalization, are the main short-term risks. Other risks are low inflation/deflation in the euro area and low potential growth.

Policy priorities are as follows:

• Advanced economies should keep accommodative monetary policies, given still large output gaps and very low inflation. Reflecting the uneven recovery, challenges are becoming increasingly different across major central banks. While monetary policy normalization will be coming to the forefront in the United States and the United Kingdom, accommodative monetary policy in the euro area and Japan should continue to fight low inflation. To prevent premature monetary tightening, macro-prudential tools to mitigate financial stability risks—for example, in the housing market—should be the first line of defense. Fiscal consolidation should continue to balance fiscal sustainability and growth within credible medium-term plans.

• In emerging economies the focus of macroeconomic policies should remain on rebuilding buffers and addressing vulnerabilities, in preparation for an environment characterized by tighter external financing conditions and higher volatility.

• A higher priority should be placed on growth enhancing structural reforms across G20 economies. Some countries with protracted current account surpluses should focus on boosting domestic demand or modifying its composition. Further labor and product market reforms are needed in much of the euro area. In a number of euro area countries severely affected by the crisis and emerging economies with protracted current account deficits, there is a need for reforms which increase competitiveness, together with wage moderation.

• Finally, in economies with clearly identified needs and economic slack, current conditions are favorable for increasing infrastructure investment. However, while this would support economic development, efficiency of the investment process is important to maximize the growth dividend.


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David Vine, A Permanent Infrastructure for Permanent War

by David Vine

8:11am, November 13, 2014

In a September address to the United Nations General Assembly, President Barack Obama spoke forcefully about the “cycle of conflict” in the Middle East, about “violence within Muslim communities that has become the source of so much human misery.” The president was adamant: “It is time to acknowledge the destruction wrought by proxy wars and terror campaigns between Sunni and Shia across the Middle East.” Then with hardly a pause, he went on to promote his own proxy wars (including the backing of Syrian rebels and Iraqi forces against the Islamic State), as though Washington’s military escapades in the region hadn’t stoked sectarian tensions and been high-performance engines for “human misery.”

Not surprisingly, the president left a lot out of his regional wrap-up. On the subject of proxies, Iraqi troops and small numbers of Syrian rebels have hardly been alone in receiving American military support. Yet few in our world have paid much attention to everything Washington has done to keep the region awash in weaponry.

Since mid-year, for example, the State Department and the Pentagon have helped pave the way for the United Arab Emirates (UAE) to buy hundreds of millions of dollars worth of High Mobility Artillery Rocket Systems (HIMARS) launchers and associated equipment and to spend billions more on Mine Resistant Ambush Protected (MRAP) vehicles; for Lebanon to purchase nearly $200 million in Huey helicopters and supporting gear; for Turkey to buy hundreds of millions of dollars of AIM-120C-7 AMRAAM (Air-to-Air) missiles; and for Israel to stock up on half a billion dollars worth of AIM-9X Sidewinder (air-to-air) missiles; not to mention other deals to aid the militaries of Egypt, Kuwait, and Saudi Arabia.

For all the news coverage of the Middle East, you rarely see significant journalistic attention given to any of this or to agreements like the almost $70 million contract, signed in September, that will send Hellfire missiles to Iraq, Jordan, Saudi Arabia, and Qatar, or the $48 million Navy deal inked that same month for construction projects in Bahrain and the UAE.

The latter agreement sheds light on another shadowy, little-mentioned, but critically important subject that’s absent from Obama’s scolding speeches and just about all news coverage here:

American bases. Even if you take into account the abandonment of its outposts in Iraq -- which hosted 505 U.S. bases at the height of America’s last war there -- and the marked downsizing of its presence in Afghanistan -- which once had at least 800 bases (depending on how you count them) -- the U.S. continues to garrison the Greater Middle East in a major way.  As TomDispatch regular David Vine, author of the much-needed, forthcoming book Base Nation: How U.S. Military Bases Overseas Harm America and the World, points out in his latest article, the region is still dotted with U.S. bases, large and small, in a historically unprecedented way, the result of a 35-year-long strategy that has been, he writes, “one of the great disasters in the history of American foreign policy.” That’s saying a lot for a nation that’s experienced no shortage of foreign policy debacles in its history, but it’s awfully difficult to argue with all the dictators, death, and devastation that have flowed from America’s Middle Eastern machinations. Nick Turse

The Bases of War in the Middle East  

From Carter to the Islamic State, 35 Years of Building Bases and Sowing Disaster  
By David Vine  
 
With the launch of a new U.S.-led war in Iraq and Syria against the Islamic State (IS), the United States has engaged in aggressive military action in at least 13 countries in the Greater Middle East since 1980. In that time, every American president has invaded, occupied, bombed, or gone to war in at least one country in the region. The total number of invasions, occupations, bombing operations, drone assassination campaigns, and cruise missile attacks easily runs into the dozens. 
As in prior military operations in the Greater Middle East, U.S. forces fighting IS have been aided by access to and the use of an unprecedented collection of military bases. They occupy a region sitting atop the world’s largest concentration of oil and natural gas reserves and has long been considered the most geopolitically important place on the planet. Indeed, since 1980, the U.S. military has gradually garrisoned the Greater Middle East in a fashion only rivaled by the Cold War garrisoning of Western Europe or, in terms of concentration, by the bases built to wage past wars in Korea and Vietnam. 
In the Persian Gulf alone, the U.S. has major bases in every country save Iran. There is an increasingly important, increasingly large base in Djibouti, just miles across the Red Sea from the Arabian Peninsula. There are bases in Pakistan on one end of the region and in the Balkans on the other, as well as on the strategically located Indian Ocean islands of Diego Garcia and the Seychelles. In Afghanistan and Iraq, there were once as many as 800 and 505 bases, respectively. Recently, the Obama administration inked an agreement with new Afghan President Ashraf Ghani to maintain around 10,000 troops and at least nine major bases in his country beyond the official end of combat operations later this year. U.S. forces, which never fully departed Iraq after 2011, are now returning to a growing number of bases there in ever larger numbers
In short, there is almost no way to overemphasize how thoroughly the U.S. military now covers the region with bases and troops. This infrastructure of war has been in place for so long and is so taken for granted that Americans rarely think about it and journalists almost never report on the subject. Members of Congress spend billions of dollars on base construction and maintenance every year in the region, but ask few questions about where the money is going, why there are so many bases, and what role they really serve. By one estimate, the United States has spent $10 trillion protecting Persian Gulf oil supplies over the past four decades. 
Approaching its 35th anniversary, the strategy of maintaining such a structure of garrisons, troops, planes, and ships in the Middle East has been one of the great disasters in the history of American foreign policy. The rapid disappearance of debate about our newest, possibly illegal war should remind us of just how easy this huge infrastructure of bases has made it for anyone in the Oval Office to launch a war that seems guaranteed, like its predecessors, to set off new cycles of blowback and yet more war. 
On their own, the existence of these bases has helped generate radicalism and anti-American sentiment. As was famously the case with Osama bin Laden and U.S. troops in Saudi Arabia, bases have fueled militancy, as well as attacks on the United States and its citizens. They have cost taxpayers billions of dollars, even though they are not, in fact, necessary to ensure the free flow of oil globally. They have diverted tax dollars from the possible development of alternative energy sources and meeting other critical domestic needs. And they have supported dictators and repressive, undemocratic regimes, helping to block the spread of democracy in a region long controlled by colonial rulers and autocrats. 
After 35 years of base-building in the region, it’s long past time to look carefully at the effects Washington’s garrisoning of the Greater Middle East has had on the region, the U.S., and the world. 
“Vast Oil Reserves” 
While the Middle Eastern base buildup began in earnest in 1980, Washington had long attempted to use military force to control this swath of resource-rich Eurasia and, with it, the global economy. Since World War II, as the late Chalmers Johnson, an expert on U.S. basing strategy, explained back in 2004, “the United States has been inexorably acquiring permanent military enclaves whose sole purpose appears to be the domination of one of the most strategically important areas of the world.” 
In 1945, after Germany’s defeat, the secretaries of War, State, and the Navy tellingly pushed for the completion of a partially built base in Dharan, Saudi Arabia, despite the military’s determination that it was unnecessary for the war against Japan. “Immediate construction of this [air] field,” they argued, “would be a strong showing of American interest in Saudi Arabia and thus tend to strengthen the political integrity of that country where vast oil reserves now are in American hands.”
By 1949, the Pentagon had established a small, permanent Middle East naval force (MIDEASTFOR) in Bahrain. In the early 1960s, President John F. Kennedy’s administration began the first buildup of naval forces in the Indian Ocean just off the Persian Gulf. Within a decade, the Navy had created the foundations for what would become the first major U.S. base in the region -- on the British-controlled island of Diego Garcia
In these early Cold War years, though, Washington generally sought to increase its influence in the Middle East by backing and arming regional powers like the Kingdom of Saudi Arabia, Iran under the Shah, and Israel. However, within months of the Soviet Union’s 1979 invasion of Afghanistan and Iran’s 1979 revolution overthrowing the Shah, this relatively hands-off approach was no more. 
Base Buildup 
In January 1980, President Jimmy Carter announced a fateful transformation of U.S. policy. It would become known as the Carter Doctrine. In his State of the Union address, he warned of the potential loss of a region “containing more than two-thirds of the world’s exportable oil” and “now threatened by Soviet troops” in Afghanistan who posed “a grave threat to the free movement of Middle East oil.” 
Carter warned that “an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America.” And he added pointedly, “Such an assault will be repelled by any means necessary, including military force.” 
With these words, Carter launched one of the greatest base construction efforts in history. He and his successor Ronald Reagan presided over the expansion of bases in Egypt, Oman, Saudi Arabia, and other countries in the region to host a “Rapid Deployment Force,” which was to stand permanent guard over Middle Eastern petroleum supplies. The air and naval base on Diego Garcia, in particular, was expanded at a quicker rate than any base since the war in Vietnam. By 1986, more than $500 million had been invested. Before long, the total ran into the billions
Soon enough, that Rapid Deployment Force grew into the U.S. Central Command, which has now overseen three wars in Iraq (1991-2003, 2003-2011, 2014-); the war in Afghanistan and Pakistan (2001-); intervention in Lebanon (1982-1984); a series of smaller-scale attacks on Libya (1981, 1986, 1989, 2011); Afghanistan (1998) and Sudan (1998); and the "tanker war" with Iran (1987-1988), which led to the accidental downing of an Iranian civilian airliner, killing 290 passengers.  
Meanwhile, in Afghanistan during the 1980s, the CIA helped fund and orchestrate a major covert war against the Soviet Union by backing Osama Bin Laden and other extremist mujahidin. The command has also played a role in the drone war in Yemen (2002-) and both overt and covert warfare in Somalia (1992-1994, 2001-).  
During and after the first Gulf War of 1991, the Pentagon dramatically expanded its presence in the region. Hundreds of thousands of troops were deployed to Saudi Arabia in preparation for the war against Iraqi autocrat and former ally Saddam Hussein. In that war’s aftermath, thousands of troops and a significantly expanded base infrastructure were left in Saudi Arabia and Kuwait. Elsewhere in the Gulf, the military expanded its naval presence at a former British base in Bahrain, housing its Fifth Fleet there. Major air power installations were built in Qatar, and U.S. operations were expanded in Kuwait, the United Arab Emirates, and Oman. 
The invasion of Afghanistan in 2001 and of Iraq in 2003, and the subsequent occupations of both countries, led to a more dramatic expansion of bases in the region. By the height of the wars, there were well over 1,000 U.S. checkpoints, outposts, and major bases in the two countries alone. The military also built new bases in Kyrgyzstan and Uzbekistan (since closed), explored the possibility of doing so in Tajikistan and Kazakhstan, and, at the very least, continues to use several Central Asian countries as logistical pipelines to supply troops in Afghanistan and orchestrate the current partial withdrawal. 
While the Obama administration failed to keep 58 “enduring” bases in Iraq after the 2011 U.S. withdrawal, it has signed an agreement with Afghanistan permitting U.S. troops to stay in the country until 2024 and maintain access to Bagram Air Base and at least eight more major installations. 
An Infrastructure for War 
Even without a large permanent infrastructure of bases in Iraq, the U.S. military has had plenty of options when it comes to waging its new war against IS. In that country alone, a significant U.S. presence remained after the 2011 withdrawal in the form of base-like State Department installations, as well as the largest embassy on the planet in Baghdad, and a large contingent of private military contractors. Since the start of the new war, at least 1,600 troops have returned and are operating from a Joint Operations Center in Baghdad and a base in Iraqi Kurdistan’s capital, Erbil. Last week, the White House announced that it would request $5.6 billion from Congress to send an additional 1,500 advisers and other personnel to at least two new bases in Baghdad and Anbar Province. Special operations and other forces are almost certainly operating from yet more undisclosed locations. 
At least as important are major installations like the Combined Air Operations Center at Qatar’s al-Udeid Air Base. Before 2003, the Central Command’s air operations center for the entire Middle East was in Saudi Arabia. That year, the Pentagon moved the center to Qatar and officially withdrew combat forces from Saudi Arabia. That was in response to the 1996 bombing of the military’s Khobar Towers complex in the kingdom, other al-Qaeda attacks in the region, and mounting anger exploited by al-Qaeda over the presence of non-Muslim troops in the Muslim holy land. Al-Udeid now hosts a 15,000-foot runway, large munitions stocks, and around 9,000 troops and contractors who are coordinating much of the new war in Iraq and Syria. 
Kuwait has been an equally important hub for Washington’s operations since U.S. troops occupied the country during the first Gulf War. Kuwait served as the main staging area and logistical center for ground troops in the 2003 invasion and occupation of Iraq. There are still an estimated 15,000 troops in Kuwait, and the U.S. military is reportedly bombing Islamic State positions using aircraft from Kuwait’s Ali al-Salem Air Base. 
As a transparently promotional article in the Washington Post confirmed this week, al-Dhafra Air Base in the United Arab Emirates has launched more attack aircraft in the present bombing campaign than any other base in the region. That country hosts about 3,500 troops at al-Dhafra alone, as well as the Navy's busiest overseas port.  B-1, B-2, and B-52 long-range bombers stationed on Diego Garcia helped launch both Gulf Wars and the war in Afghanistan. That island base is likely playing a role in the new war as well. Near the Iraqi border, around 1,000 U.S. troops and F-16 fighter jets are operating from at least one Jordanian base 
According to the Pentagon’s latest count, the U.S. military has 17 bases in Turkey. While the Turkish government has placed restrictions on their use, at the very least some are being used to launch surveillance drones over Syria and Iraq. Up to seven bases in Oman may also be in use. 
Bahrain is now the headquarters for the Navy’s entire Middle Eastern operations, including the Fifth Fleet, generally assigned to ensure the free flow of oil and other resources though the Persian Gulf and surrounding waterways. There is always at least one aircraft carrier strike group -- effectively, a massive floating base -- in the Persian Gulf. At the moment, the U.S.S. Carl Vinson is stationed there, a critical launch pad for the air campaign against the Islamic State. Other naval vessels operating in the Gulf and the Red Sea have launched cruise missiles into Iraq and Syria. The Navy even has access to an “afloat forward-staging base” that serves as a “lilypad” base for helicopters and patrol craft in the region. 
In Israel, there are as many as six secret U.S. bases that can be used to preposition weaponry and equipment for quick use anywhere in the area. There’s also a “de facto U.S. base” for the Navy’s Mediterranean fleet. And it’s suspected that there are two other secretive sites in use as well. In Egypt, U.S. troops have maintained at least two installations and occupied at least two bases on the Sinai Peninsula since 1982 as part of a Camp David Accords peacekeeping operation. 
Elsewhere in the region, the military has established a collection of at least five drone bases in Pakistan; expanded a critical base in Djibouti at the strategic chokepoint between the Suez Canal and the Indian Ocean; created or gained access to bases in Ethiopia, Kenya, and the Seychelles; and set up new bases in Bulgaria and Romania to go with a Clinton administration-era base in Kosovo along the western edge of the gas-rich Black Sea. 
Even in Saudi Arabia, despite the public withdrawal, a small U.S. military contingent has remained to train Saudi personnel and keep bases “warm” as potential backups for unexpected conflagrations in the region or, assumedly, in the kingdom itself. In recent years, the military has even established a secret drone base in the country, despite the blowback Washington has experienced from its previous Saudi basing ventures.  
Dictators, Death, and Disaster 
The ongoing U.S. presence in Saudi Arabia, however modest, should remind us of the dangers of maintaining bases in the region. The garrisoning of the Muslim holy land was a major recruiting tool for al-Qaeda and part of Osama bin Laden’s professed motivation for the 9/11 attacks. (He called the presence of U.S. troops, “the greatest of these aggressions incurred by the Muslims since the death of the prophet.”) Indeed, U.S. bases and troops in the Middle East have been a “major catalyst for anti-Americanism and radicalization” since a suicide bombing killed 241 marines in Lebanon in 1983. Other attacks have come in Saudi Arabia in 1996, Yemen in 2000 against the U.S.S. Cole, and during the wars in Afghanistan and Iraq. Research has shown a strong correlation between a U.S. basing presence and al-Qaeda recruitment. 
Part of the anti-American anger has stemmed from the support U.S. bases offer to repressive, undemocratic regimes. Few of the countries in the Greater Middle East are fully democratic, and some are among the world’s worst human rights abusers. Most notably, the U.S. government has offered only tepid criticism of the Bahraini government as it has violently cracked down on pro-democracy protestors with the help of the Saudis and the United Arab Emirates (UAE). 
Beyond Bahrain, U.S. bases are found in a string of what the Economist Democracy Index calls “authoritarian regimes,” including Afghanistan, Bahrain, Djibouti, Egypt, Ethiopia, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, UAE, and Yemen. Maintaining bases in such countries props up autocrats and other repressive governments, makes the United States complicit in their crimes, and seriously undermines efforts to spread democracy and improve the wellbeing of people around the world. 
Of course, using bases to launch wars and other kinds of interventions does much the same, generating anger, antagonism, and anti-American attacks. A recent U.N. report suggests that Washington’s air campaign against the Islamic State had led foreign militants to join the movement on “an unprecedented scale.” 
And so the cycle of warfare that started in 1980 is likely to continue. “Even if U.S. and allied forces succeed in routing this militant group,” retired Army colonel and political scientist Andrew Bacevich writes of the Islamic State, “there is little reason to expect” a positive outcome in the region. As Bin Laden and the Afghan mujahidin morphed into al-Qaeda and the Taliban and as former Iraqi Baathists and al-Qaeda followers in Iraq morphed into IS, “there is,” as Bacevich says, “always another Islamic State waiting in the wings.” 
The Carter Doctrine’s bases and military buildup strategy and its belief that “the skillful application of U.S. military might” can secure oil supplies and solve the region’s problems was, he adds, “flawed from the outset.” Rather than providing security, the infrastructure of bases in the Greater Middle East has made it ever easier to go to war far from home. It has enabled wars of choice and an interventionist foreign policy that has resulted in repeated disasters for the region, the United States, and the world. Since 2001 alone, U.S.-led wars in Afghanistan, Pakistan, Iraq, and Yemen have minimally caused hundreds of thousands of deaths and possibly more than one million deaths in Iraq alone.
The sad irony is that any legitimate desire to maintain the free flow of regional oil to the global economy could be sustained through other far less expensive and deadly means.  
Maintaining scores of bases costing billions of dollars a year is unnecessary to protect oil supplies and ensure regional peace -- especially in an era in which the United States gets only around 10% of its net oil and natural gas from the region. In addition to the direct damage our military spending has caused, it has diverted money and attention from developing the kinds of alternative energy sources that could free the United States and the world from a dependence on Middle Eastern oil -- and from the cycle of war that our military bases have fed.
 
David Vine, a TomDispatch regular, is associate professor of anthropology at American University in Washington, D.C. He is the author of Island of Shame: The Secret History of the U.S. Military Base on Diego Garcia. He has written for the New York Times, the Washington Post, the Guardian, and Mother Jones, among other publications. His new book, Base Nation: How U.S. Military Bases Abroad Harm America and the World, will appear in 2015 as part of the American Empire Project (Metropolitan Books). For more of his writing, visit www.davidvine.net.

China’s New World Order

Lee Jong-Wha

NOV 12, 2014

Newsart for China’s New World Order


SEOUL – China – already the world’s largest exporter, manufacturer, and international-reserve-asset holder – is poised to overtake the United States as the world’s largest economy (measured according to purchasing power parity) this year. Now, it is using its growing clout to reshape global economic governance. Indeed, the country’s days of following Deng Xiaoping’s injunction to “hide brightness and cherish obscurity” are long gone.
 
After decades of actively participating in international economic institutions – including the G-20, the International Monetary Fund, the World Bank, and the World Trade Organization – China has begun to resemble a revisionist power seeking to create a new world order. Last month, China and 20 other Asian countries signed a memorandum of understanding to establish a new multilateral development bank, the Asian Infrastructure Investment Bank.

Viewed as the first serious institutional challenge to the World Bank and the Asian Development Bank (ADB), the AIIB was proposed by China.
 
In a sense, this shift should not be surprising, given the widespread debate over the inherent weaknesses of existing international institutions and governance structures – in particular, China’s disproportionately small role in them. China accounts for a 3.8% voting share of the IMF and a 5.5% share of the ADB, compared to 16.8% and 12.8%, respectively, for the United States and 6.2% and 12.8% for Japan.
 
Moreover, the advanced economies have staked their claim to leadership in these institutions.

Europeans have led the IMF and Americans have controlled the World Bank since their establishment after World War II. Likewise, the ADB has had Japanese presidents since its founding in 1966.
 
Meanwhile, emerging economies like China face significant barriers to boosting their capital contributions to – and their status in – these institutions. And reforms, though widely discussed, have faced long delays. For example, IMF quota and governance reform, on which G-20 leaders agreed in 2010, has yet to be implemented.
 
Frustrated, China finally decided to push for the establishment of the AIIB, in which it will be the largest shareholder, with a stake of up to 50%. China will also provide the AIIB’s first president, and the bank’s headquarters will be in Beijing.
 
China can leverage its considerable influence over the AIIB to bolster its international image, particularly by strengthening its relationships with developing countries. Many developing Asian countries, for example, have significant unmet need for infrastructure investment to buttress their long-term economic growth.
 
The AIIB can not only channel more resources toward developing countries; it can do so in a way that is better suited to their needs, with fewer bureaucratic barriers and more flexibility than its more established counterparts. The AIIB would complement China’s rapidly increasing bilateral development financing, with the added benefit of a multilateral structure that ensures better governance and higher operating standards.
 
What the AIIB may not be able to do is contribute to improved economic governance in Asia – not least because Japan, Australia, Indonesia, and South Korea, whose total GDP is roughly equal to China’s, are not yet members. Without these economies to counterweigh China’s influence or a resident board of directors, the AIIB could allow China to impose its will on members and beneficiaries alike.
 
For example, as former Indian Minister of State for External Affairs Shashi Tharoor has suggested, China may use the AIIB to help finance a new Silk Road, an overland and maritime route connecting East Asia with Europe. While the project could have significant regional benefits, stimulating economic development by promoting integration and connectivity, it would serve primarily China’s interests, expanding the country’s international influence and reducing the gap between its eastern and western regions. At the same time, it could exacerbate geopolitical tensions and territorial disputes between China and its neighbors.
 
More generally, some development experts have raised concerns about whether the AIIB can operate according to international standards of governance and transparency, enforce safeguards, refuse to work with incompetent or corrupt governments, and follow effective procedures. They also worry that, by fragmenting international development finance, the AIIB could weaken its impact considerably.
 
To be sure, China has made an effort to address such concerns, emphasizing repeatedly that the AIIB aims to complement, not compete with, other institutions. Following the AIIB’s launch, Chinese President Xi Jinping declared that it “needs to follow multilateral rules and procedures” and should learn from “existing multilateral development institutions in their good practices and useful experience.”
 

Read more at http://www.project-syndicate.org/commentary/china-global-governance-by-lee-jong-wha-2014-11#LsoWG28O2E7IwQRx.99
 

miércoles, noviembre 19, 2014

ARE YOU PREPARING FOR $10,000 GOLD ? / SEEKING ALPHA

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Are You Preparing For $10,000 Gold?

by: Avi Gilburt

Nov. 16, 2014 5:57 AM ET


Summary
  • Should we begin to look to the long side of the market?
  • What are the long term implications?
  • Upcoming week's expectations.

If someone told you back in the year 2001, when gold was below $300, that within 10 years it would approach $2000, would you have thought them to be crazy?

What if someone now tells you that gold can go from the $1000 region to $10,000 within the next 10-15 years? Sounds just as crazy, right? Well, since many of you already think I am crazy, then I guess this will just be par for the course.

Yes, this article is being written by one of the very few who came into 2014 exceptionally bearish on the precious metals. Remember my line that "2014 will be the year of the whipsaw and the year the bulls die?" Again, the market has followed through very nicely on both. But, not all the bulls have been vanquished just yet, and it should only be a matter of time until they are.

However, I will likely be going into 2015 very bullish. You can consider it my alternative take on "2014 comes in like a lion . . . or . . . bear, and out like a lamb . . . or . . . bull." But, this is simply how contrarians invest. When a market becomes exceptionally bullish, as the metals market was when I called the top in 2011, it is time to look in the other direction. And, now that the market is turning exceptionally bearish, well, it is time to begin looking the other way too .

We learned this lesson from Baron Rothschild, an 18th century British nobleman. After the panic that followed the Battle of Waterloo against Napoleon, he was credited as saying "Buy when there's blood in the streets, even if the blood is your own." But, amazingly, I still don't think blood is running in the streets walked by precious metals investors just yet. I think pain is being felt, but I don't think blood is running. Sadly, I think we may see a number of miners go out of business to signal that there is blood in the streets. I am also going to want to see more formerly bullish analysts declaring the end to the bull market.

But, it is clear that the market is starting to turn quite bearish. Last weekend, I cited many popularly followed analysts who have declared the bull market in metals to be dead. This week, a very bearish Market Watch article written by Howard Gold was forwarded to me. In fact, it was the headline article the morning we went long the metals in our Trading Room at Elliottwavetrader.net, which ended the day with a 9% gain in GDX from the lows we bought at the open. Yes, death of the metals indeed.

Within the article, Mr. Gold clearly presented the sentiment of most in the precious metals world: "can anyone seriously believe this isn't a long-term bear?" In fact, he was suggesting readers to consider selling their gold. Yes, he is suggesting you sell your gold as we approach the bottoming of this market. However, I stand here today, loudly and proudly proclaiming "Mr. Gold, I seriously believe this is not a long-term bear." Moreover, Mr. Gold, I am looking to be a buyer and not a seller!

And, seeing more and more articles like this should come as no surprise to those that regularly read my articles. Last week, I provided you with an article which explains why people buy at the highs, and sell at the lows. Well, if Mr. Gold sells his gold soon, as he has suggested to others, then he will likely look back years from now and realize he sold near the market low. But, again, this is simply human nature.

Yet, many of the former bulls, who have now turned bears - some of whom publish articles on Seeking Alpha - noted last week that they were shorting the metals market. But, what happens when someone arrives late to the party? Well, as most of the 3 year bear-party is now over, these newly inaugurated bears are feeling some pain in their brand new short positions. I would imagine many of them have even stopped out of those newly inaugurated short positions on Friday. Again, this is simply how markets work, and should have been expected if you have been reading my articles. Once a break down is seen, everyone jumps on board the "short-train," but that is usually the time the train reverses, and throws the new riders off before finishing off the final capitulation drop.

For now, I still do expect lower lows to be seen, as it is quite clear to me that this correction has not yet completed. As I said before, we will likely see lower lows, and most likely by the end of 2014. Furthermore, I will be treating that low as "the low," even though there still is potential for a lower low to be seen at the end of the 1st Quarter of 2015. Either way, I am going to be expecting some kind of rally at the start of 2015, and will remain open minded as to whether it is the start of the new multi-year bull run, or if it is the final corrective rally before a potential lower low at the end of Q1 is to be seen.

Very Long Term Implications

Now, for those that are not interested in short term trading, and are looking for the next bigger long term investing opportunity, I don't believe there is one being presented in any market which represents greater wealth creation potential than the precious metals market over the next half a year.

When we look at the HUI - Gold Bugs Index, it is quite clear that further lows will likely be seen. However, when one compares the relative extent of those lower lows to the projections we have once this bull market re-asserts itself, well, your feelings of greed may make it hard for some you to maintain "dry-powder" to buy at the lower levels we still expect.

(click to enlarge)

As you can see from the chart, based upon our Fibonacci Pinball method of Elliott Wave analysis, and using log scale calculations, we see the potential for more than a ten-fold increase in price for the Gold Bug Index within the next 10 -15years, with the further potential of thirty-fold increases over the next 20-25 years. And, it seems that the initial parabolic stage does not occur until the 2018-2020 time frame.

For many of you, this is likely music to your ears since you have been dreaming about this potential for decades, as you have maintained your belief in the imminent collapse of the monetary system or whatever other reason you maintain for a strong move up in metals. Others are probably looking at this as nothing more than the ranting of some crazy analyst.

But, while past performance is clearly not indicative of future performance, I want to remind you of something I said back in 2011. In my first gold article on Seeking Alpha on August 22, 2011, I provided you my topping target for gold, in the face of the parabolic gold run, when everyone was so certain we would be easily seeing over $2000. And, if you remember, gold topped within a few dollars of the target I provided a month before the top was struck.

But, what someone just reminded me of the other day, in response to a question from a commenter to that article, and even BEFORE gold actually topped, I provided the downside targets on August 23, 2011:

Based upon the Elliott Wave Principle, I would expect a very large pullback. In fact, the target for such a pullback will probably be a minimum low of $1,400, it could fall as low as $1000, or even as low as $700. It will depend upon how the decline takes form. But those are very viable targets for gold on the downside.

And, if you remember, when gold was up at the $1400 region, I gave it an opportunity to prove that a low had been struck. And, when it invalidated that potential, we started looking much lower, towards the 95-105GLD region target I have maintained since that time. And, it seems that many others have only now adopted my target.

Based upon this same methodology which identified the 2011 top and the potential bottoming region before we even topped in 2011, I am now providing you with the long term upside targets I see for the next 10-30 years in metals and miners before we even bottom. So, you can do with it what you will, but I know how I will be handling this information.

Upcoming Expectations

Last week, I noted that, one way or another, the market was going to rally to the 114-116 region, with an outside potential to see the 118/119 region. Ideally, I did not want to see a lower low this past week, but, rather, I wanted to see us begin a rally to take us to the upside target zone. My expectation was that many of the "NEW" short positions that have been recently purchased would have to be squeezed out of the market before we are able to head to the lower lows I expect. And all those that have recently shorted the market have clearly felt the pain for their late arrival.

On the GLD chart we have in our Trading Room at Elliottwavetrader.net, our minimal target for this rally was the 114.78 level, which we came within 5 cents of striking on Friday. While the pattern I am seeing does not look quite completed to the upside as of the close on Friday, I will re-asses how much higher the market can head early next week, based upon the next upside move. However, I am not hopeful of further large extensions to be able to take us beyond the 116.50 region.

As long as we remain below the 116.50 region, I will be looking for the next cue to short the market with a minimal target of the 105 region in the GLD, with the potential to extend to even lower levels within our long term target zone before this segment of the correction has completed.

Furthermore, as I said last week, my primary expectation at this time is that the next decline phase can very well be the final decline phase within this 3+ year correction. However, I will not likely be able to confirm that with a high degree of probability until we see the next rally into early 2015. Should the next rally only be corrective in nature, we will likely be hedging the long-term long positions we intend on buying at the bottom of the next decline. One way or another, I am expecting the commencement of the next larger bull market phase in the precious metals to begin in 2015.


Ukraine faces economic breakdown as war returns

Analysts say the IMF has repeated the errors made in Argentina and Greece: lending large sums of money to a country charging headlong towards insolvency

By Ambrose-Evans-Pritchard

5:00AM GMT 14 Nov 2014

Ukraine's currency has been in freefall since it became clear that the Minsk ceasefire deal with rebels in the Donbass region was breaking down Photo: Reuters


The International Monetary Fund faces a fresh debacle as Ukraine burns through an $17bn rescue package agreed in April and spirals into a full-blown currency crisis, with credit markets already bracing for likely default.
 
The country's foreign reserves have dropped to $12.6bn, barely enough to cover six weeks worth of imports. Its currency has been in freefall since it became clear that the Minsk ceasefire deal with rebels in the Donbass region was breaking down.
 
The Hyvrnia has crashed 20pc against the dollar over the past week and has lost almost half its value this year, making it much harder for Ukrainian companies, banks and the state to service $60bn of foreign debt, mostly in dollars.
 
The economy is expected to contract by 10pc this year, twice what the IMF expected when it first approved the bailout. Ukraine still has another $10bn of IMF aid to come but the pace of disbursements is too slow to keep the country afloat.
 
Ukraine is in such dire straits that officials are holding back on pre-payments to Russia for gas imports, keeping their fingers crossed that the warm weather will last long enough for Ukraine to make it through the winter, relying on gas stocks and limited flows from Slovakia and Poland through “reverse pipelines”. This is a risky strategy since climate experts are predicting the coldest winter in more than 30 years.
 
It is unclear whether Ukraine will ever agree to pay a further $1.6bn of arrears to Russia's Gazprom still left from an EU-brokered deal, given the fresh violence on the ground. Nato officials and international peace monitors (OSCE) say Russian tanks, artillery and troops have been streaming across the border into eastern Ukraine. The United Nations Security Council said the country is at risk of “total war”.
 
“Ukraine desperately needs support and foreign exchange to defend the currency but there isn’t enough money left from the IMF. A sovereign default looks increasingly likely,” said Tim Ash, from Standard Bank.
 
Yields on three-year Ukrainian bonds spiked to 17.7pc on Thursday. Credit default swaps measuring bankruptcy risk soared to 1,485 basis points, a level that typically precedes a debt-restructuring. 
 
The central bank raised interest rates to 14pc this week to stem capital flight but this is pushing the country into a deeper depression. The economy is already reeling from the loss of its industrial core in the coal and steel regions of the Donbass, and from drastic austerity measures imposed by the IMF itself, including a 50pc rise in fuel bills.
 
A string of companies are trying to restructure their debts, including the steel group Metinvest, First Ukrainian International Bank and Mriya Agro, one of the world’s biggest food producers. “The country is bankrupt,” said Oleksander Cherniavskiy, Mriya’s chief financial officer.
 
Analysts say the IMF has repeated the errors made in Argentina and Greece, lending large sums of money to a country charging headlong towards insolvency. The alternative - more in keeping with IMF rules - would have been to impose a haircut on creditors and offer Ukraine a fresh start with debt relief. “The IMF massively under-estimated the damage done to the economy by the conflict,” said Neil Shearing from Capital Economics.
 
The IMF has unwittingly bailed out creditors - including Russian state banks, Austrian lenders, as well as protecting Western investors accused by critics of propping up the previous regime - at the expense of taxpayers. The global asset group Franklin Templeton held $7.3bn of Ukrainian bonds at the end of 2013, openly stating that it was relying on cosy ties with Russia to ensure credit-worthiness.
 
The IMF also rewarded “vulture funds” that bought Ukrainian debt cheaply for quick gain, betting that the country was too important in geopolitical terms to fail, and would always be rescued in the end by either Russia or the West.
 
Mr Ash said there are serious issues of moral hazard involved. “A lot of people feel that these bondholders were part of the problem, and should therefore be part of the solution. In the end, Ukraine must decide whether it wants to pay off creditors or buy weapons to defend itself,” he said.

Ashoka Mody, a former top bailout official for the IMF in Europe, said it was clear from the start that Ukraine would need “very deep debt relief” to return to viability, given the collapse in exports and external debt of 75pc of GDP.
 
It is unclear why the IMF has once again put itself in a position where it is seen to be coddling creditors. Ukraine’s economy is too small to pose any systemic risk to the global finance, an argument that at least had some validity in the case of Greece at the outset of the eurozone debt crisis, when there was no backstop machinery to prevent EMU-wide contagion.
 
The Fund has published lengthy mea culpas analyzing its own errors with great candour in Argentina and Greece. Top officials vowed that the IMF would never again kick the can down the road by lending to an insolvent state. The lessons appear not to have been heeded.

Pimco Paid Gross, El-Erian Over Half A Billion Dollars In 2013 Bonuses

by Tyler Durden

11/14/2014 07:16 -0500


And a stunner just out of of Bloomberg:
  • PIMCO PAID GROSS $290 MILLION BONUS FOR 2013, DOCUMENT SHOWS
  • PIMCO PAID FORMER CEO EL-ERIAN ABOUT $230 MLN BONUS IN 2013
More from the source:

Pacific Investment Management Co. paid its former Chief Investment Officer Bill Gross a bonus of about $290 million in 2013, a year in which his Total Return Fund trailed a majority of peers, according to documents provided to Bloomberg View by someone with knowledge of Pimco’s bonus policies.
 
Mohamed El-Erian, 56, the former chief executive officer who previously shared the title of CIO with Gross, received a 2013 bonus of about $230 million, according to figures first reported today by Bloomberg View columnist Barry Ritholtz.
 
By comparison, Laurence D. Fink, CEO of BlackRock Inc., the world’s biggest money manager, received $22.9 million in 2013 compensation, and Michael Diekmann, CEO of Pimco’s parent Allianz SE, was paid 7.2 million euros ($8.99 million), regulatory filings show.
 
“While Pimco does not comment on compensation, the figures provided to Bloomberg are not correct,” said Dan Tarman, a spokesman for Newport Beach, California-based Pimco, declining to specify the firm’s objections. “For more than three decades, Pimco’s managing directors have maintained a substantial interest in the firm, currently 30 percent of profits, and this provides an important means to attract and retain the best investment talent to serve our clients.”
 
...
 
Gross’s bonus -- 20 percent of the total bonus pool for 2013 -- places him in a compensation class of his very own. To put that figure into context, in 2013 Gross made just shy of what the next 20 publicly held finance company CEOs made combined.
In context:




Which begs the question: is one valued more on managing the world's largest bond fund (excluding the riskless Federal Reserve LLC hedge fund of course) and by its performance, or lack thereof, or on being the "straight to CNBC/BBG" pundit-slash-diva-slash-columnist-slash-blogger, i.e., marketer. Or an even bigger question: for that money can't one come up with more credible "departure" reasons. Recall:

A globally-respected financier has revealed that he quit his job running a $2 trillion investment fund after his young daughter wrote him a note pointing out that he had missed 22 landmark events in her life.
 
Mohamed El-Erian's ten-year-old told her dad that he had skipped her first day of school, Halloween parade, her first soccer game of the year and many recitals because he was too busy at work.
 
The California-based investment guru's resignation in May 2013 shocked the financial world. However in a recent interview, Mr El-Erian, who made $100 million in 2011 alone, explained that his young daughter and wife Jamie were at the heart of his decision.
...
In an essay for Worth in June, El-Erian, 56, explained his decision. He said: 'About a year ago, I asked my daughter several times to do something - brush her teeth, I think it was - with no success.  'I reminded her that it was not so long ago that she would have immediately responded, and I wouldn’t have had to ask her multiple times; she would have known from my tone of voice that I was serious.
One wonders how many Americans dads would miss every event of their child's upbringing for a tiny fraction of that bonus, and further to that, perhaps that very question is at the core of why there happens to be just a little "resentment" toward the bailed-out US financial class in the past 5 or so years.

The Elephant In The Room Makes Its Presence Felt - What Will Mario Do Next?
             


       
Summary
  • The flash GDP estimate for Q3 released on Nov. 14, together with final inflation data for October, confirm a bleak picture for the euro area.
  • Anemic growth of 0.2% over the quarter, and price rises of just 0.4% over the past 12 months hardly make for a happy state of affairs.
  • Above all, they do nothing to help the public finances – particularly in Italy, the proverbial ‘elephant in the room’. The ECB knows all of this.
  • Extending the maturity terms of TLTROs and buying non-financial corporate bonds are both on the table.
  • We expect to hear more in this regard after the next policy meeting, by which time policymakers will have a new set of staff forecasts.
By Laura Eaton

In the end, the ECB will opt for QE, something we expect to be announced in the first half of next year. In our view, the focus will be on Bunds - in accordance with the 'capital key'. QE will buy policymakers time, but it will not solve the crisis

According to Eurostat's flash estimate, released earlier today, the euro area economy grew by a mere 0.2% in Q3, after registering growth of 0.1% in Q2. Germany, once the common currency area's locomotive, appears to have run out of steam, with GDP essentially unchanged over the past six months. With a 0.1% fall in GDP for Q3, Italy chalked up a second consecutive negative quarter and entered a technical recession. There was some positive news from other peripheral economies. With quarterly, seasonally adjusted data published for the first time this morning, it now appears that Greece officially emerged from recession - one of the longest on record for any country - in Q1 2014.

The economy expanded by a further 0.7% in Q3. Spain also enjoyed a relatively high rate of growth - at 0.5%. At the same time, Eurostat confirmed the October annual inflation rate at 0.4% - still far from the ECB's stated target of "below, but close to, 2% over the medium term".



The currency union lacks a number of ingredients necessary for a meaningful acceleration in economic activity - a healthy banking system being the most important. As a result, downward pressure on prices will persist.

The elephant trumpets

In our latest quarterly forecast, we identified Italy as the elephant in the room. And the elephant is, at long last, beginning to trumpet. Nine out of fifteen Italian banks failed to reach the levels of capital required by the ECB's stress tests. Italian banks reported a capital shortfall of €9.7 billion that reduces to €3.3 billion euros when considering capital actions taken in 2014 - both figures being the highest among all countries. What is more, despite the fact that a few countries in the single currency bloc are already labouring under negative rates of inflation, regulators opted not to consider the consequences of a prolonged period of deflation - had they done so we expect that Italian banks would have fared worse still.

Although the cut-off date for the ECB's stress test and Asset Quality Review was December 2013, non-performing loans (NPLs) at Italian banks have been waxing since then, while lending to the private sector has been waning - month after month. Since December 2013, NPL levels have jumped by €21.0 billion and stood at €176.9 billion in September 2014.




The difficulty, of course, is that Italy is far too big to be given a bailout along the lines extended to Greece, Portugal and Ireland. Its sovereign debt stands at €2 trillion when the combined debt of the other three bailed out countries amounted to €710 billion. In Italy, the problem is the sovereign itself, rather than the banks. With an average maturity of around six years, the country has to refinance over €300 billion of BTPs every year - the same as the entire outstanding stock of Greek government debt.

The ECB, together with politicians across the single currency bloc, are fully aware of the brewing Italian debt crisis, and hopefully, the implications of not dealing with it. We expect them to act, and soon. The only question now is 'How?'.

Unanimity papers over dissent

Following the latest ECB policy meeting, Mario Draghi announced that the decision to raise the central bank's balance sheet by at least €1 trillion thereby returning it to 2012 levels, using further unconventional policy measures if these proved necessary, was unanimous. However, this does not mean that QE, by which we mean sovereign bond purchases, is just around the corner. According to a Reuters exclusive earlier this week, sources close to the ECB have admitted that "[the] current plan to buy private sector assets may fall short and pressure is likely to build for bolder action early next year, firstly moving into the corporate bond market." The news agency goes on to cite the same sources as claiming that perhaps one-third of the ECB's Governing Council members remain opposed to the idea of QE.

How might we square the evident dissent in the ranks, with the apparent determination of all concerned that the ECB's balance sheet must be returned at least to 2012 levels? In our view, the dissenting group of nations - led by Germany - sees the need for further action to halt the slide towards deflation, and thereby safeguard the very existence of the common currency. But they still believe that this can be achieved without the need for QE. So, they would rather explore all other options and attempt to make them work. These include improved TLTRO terms (such as extending the maturity over four years) and the inclusion of non-financial corporate (NFC) debt in the asset purchase remit.

Indicated moves unlikely to work

We believe that improved TLTRO terms, while desirable, would do little to alter the economic landscape of Europe. According to Frankfurt, NFC bond purchases would ease credit conditions for corporates, and stimulate demand for credit. We see two issues here. First, SMEs - largely unable to fund themselves in the bond market - would be left out. Second, large corporates - the main bond issuers - have no need of such largesse. Spreads are back almost to pre-crisis levels and corporate issuance has been buoyant since 2012. In fact, the current yearly growth rate of the outstanding amount of NFC bonds already stands at 9%.

Some might argue that supporting corporate issuance would force banks to channel funds towards SMEs. But if the BoE's Funding for Lending Scheme (FLS) scheme has taught us anything, it is that we cannot take this for granted. Despite reducing bank funding costs, the FLS has done little to arrest the decline in the amount of bank credit afforded to UK SMEs, as our chart shows. The fragile nature of the balance sheets of UK banks means that they were, and still are reluctant to lend to inherently risky, less well-established firms. The balance sheets of euro area banks are certainly in no better shape.



While a programme of corporate bond purchases might work well in a country with well-developed capital markets - such as the US, where the majority of the debt of non-financial firms is in the form of bonds - it stands a far smaller chance of success in the euro area. Non-financial firms in the euro area are far more reliant on banks. Across the region, bank debt accounts for some 90% of all non-financial corporate debt. In the periphery that figure is close to 100%



The main purpose of any asset purchase programme would surely be to give Frankfurt a means of creating more high-powered money, in turn forcing the exchange rate down and generating some upward pressure on inflation. But in our view only the sovereign bond market is large enough to achieve this objective. According to the ECB's Eurosystem Collateral Data, the amount of eligible corporate bonds, including those of financial corporations, is close to €1.4 trillion. At the same time, the "use of collateral" data for corporate bonds suggests that only 7% or €98 billion of these are actually employed as collateral - the corresponding percentage for ABS is 44%. However, the proportion of all eligible bonds that are senior rated is close to 40% of the €1.4 trillion figure - so roughly €560 billion. Considering that the ECB can buy only so much without distorting the market severely, then it becomes apparent that the corporate bond market is simply not large enough to allow the ECB to expand its balance sheet sufficiently.

QE buys time - it is not a solution in its own right

We have argued since the beginning of this year that the ECB will eventually have no option but to engage in a massive sovereign bond buying programme - despite the persistence of heavy political headwinds. The markets have moved closer to our view and - according to a Reuters poll - now assign a 50% probability to such a programme being launched. Like corporate bond purchases, QE would also work mainly through the exchange rate channel. Due to the far bigger size of the sovereign bond market, government bond purchases would put significant downward pressure on the euro. But even so, outright QE on its own would only buy time.

Even were the ECB to buy €1 trillion of sovereign debt from banks, this would not do enough to repair their balance sheets as they are labouring under a mountain of NPLs and are having to contend with ever tougher capital requirements. This week the Basel-based Financial Stability Board (FSB) announced that many of the 30 global, systemically-important banks - most of the ones in Europe - will have to find large amounts of capital to comply with new, tougher capital rules. What is more, even ignoring the banks' impaired ability to lend for the moment, the corporates and households that would borrow are labouring under their own debt overhang and trepidation over their future circumstances. As such, they are, understandably, reluctant to ask for loans in the first place.

The situation in Europe has all the hallmarks of a balance sheet recession. Hence, it should come as no surprise that a degree of balance sheet repair must take place before there are grounds for confidence in an improving outlook. QE would be a massive step forward - even if focused on Bunds, as is likely to be the case if Frankfurt chooses to base it off the ECB capital key. This would work chiefly through the exchange rate channel for the whole of the euro area, but would work to reflate the core countries specifically (something very desirable to ameliorate the imbalances within the common currency area) and be more politically palatable to Germany to boot.

QE is therefore a necessary condition for resolution, but not a sufficient one. It would remove a large part of the dross from European banks' balance sheets - namely periphery sovereign bonds - but will still leave them laden with plenty of NPLs stemming from NFC and household lending. To remove these, nothing short of a direct bank recapitalisation - allowing banks to write them off or offload them to a bad bank and then printing enough euros to cover the shortfalls - will do.