Fall of the Bond King: How Gross Lost Empire as Pimco Cracked

By Mary Childs

Dec 3, 2014

Bill Gross, the 70-year-old king of bonds, rushed through the offices of his $2 trillion empire on a Friday morning distributing hand-written notes. He knew his reign was over.

The billionaire co-founder of Pacific Investment Management Co. and its undisputed ruler for four decades was about to be overthrown. So just before 5 a.m. that day, on Sept. 26, he walked into Pimco’s headquarters in Newport Beach, California, and quietly placed notes on the desks of more than a dozen colleagues.

“Keep doing a great job,” Gross wrote on trade tickets used to buy and sell bonds. Of Pimco, he wrote: “Look after her.”

Gross’s exit -- an event that, not long ago, would have seemed unthinkable -- unleashed a crisis that Pimco is still trying to contain. His departure was followed by record withdrawals from the mutual fund he once ran, and which he built into the world’s biggest. Competitors swooped in, poaching clients from a firm that oversaw more assets in bonds than any competitor ever did.

The government reached out to financial firms to ensure Gross’s departure didn’t destabilize the $100 trillion bond market.

Balls, Thimons

Interviews with 25 current and former Pimco employees, who asked for anonymity to discuss internal matters, paint a complex picture of the events that led to Gross’s departure, including details that have never before been published. The resignation in January of Pimco Chief Executive Officer and Gross’s heir apparent Mohamed El-Erian, 56, had prompted media reports of infighting at Pimco, and resulted in a management reshuffle that strengthened some of the firm’s younger executives. At the same time, Gross’s main fund was trailing competitors and clients had started to pull money.

Gross spent much of the past year hunting down employees who he believed were leaking information about the internal clashes to the press, according to the interviews. Among them were money managers Andrew Balls, one of Gross’s newly appointed deputy investment chiefs, and Joshua Thimons. Gross tried to fire both but his effort was thwarted by Pimco’s new CEO Douglas Hodge, 57, and President Jay Jacobs.

On at least three occasions, Gross proposed to step back as tensions within Pimco worsened.

September Showdown

Behind closed doors, the billionaire also opposed the firm’s expansion into stocks and real estate, areas seen by others as crucial to position the firm as the bond rally on which Pimco’s growth had been built showed signs of waning. In pushing for a return to a simpler business model, he questioned why the firm needed some of the executives it had hired.

By September, as Gross revived plans to fire Balls, 41, Pimco’s new senior managers turned against him. Several of the firm’s key executives offered to resign. When Gross proposed again to take a smaller role, give up management responsibilities and hand over his main fund to a successor by the end of 2015, Pimco executives were considering his ouster.

Rather than suffer the humiliation of being fired, Gross decided to walk away from the firm that he had started in 1971. A few hours later on that Friday morning, he was on a plane bound for Denver to join Janus Capital Group Inc. (JNS), the money manager run by his former general counsel and operating chief Richard Weil, 51.

‘Enduring Legacy’

“Bill Gross left an enduring legacy at our firm and we are grateful for his contributions,” Pimco’s Hodge said in a statement. “At Pimco we are guided by a set of core values of putting our clients first, acting with integrity always, being respectful of each other and delivering excellence. This is the foundation upon which Pimco is built and these are the principles that will carry us forward into the future.”

Steven Shapiro, a spokesman for Janus with Communications Strategy Group, declined to comment.

Gross built Pimco with some of the best long-term investing track records, and was the face of the bond market with television appearances almost every day. Assets at the firm doubled between 2010 and 2013, making Gross one of the best-compensated money managers, with a bonus of about $290 million in 2013, a fortune even by Wall Street standards.

An Ohio native who graduated from Duke University with a psychology degree in 1966, Gross built a reputation unparalleled among mutual fund managers, with his main fund, the $162.8 billion Pimco Total Return (PTTRX), beating 96 percent of peers over 15 years, according to research firm Morningstar Inc. The fund has become a staple in the 401(k) retirement accounts of millions of Americans.

Vietnam Vet

His departure triggered a combined $60.5 billion in withdrawals in the past three months from Pimco Total Return, which at its peak in April 2013 was the world’s largest mutual fund, with $293 billion. Assets in the fund have since shrunk by 44 percent.

Gross, who spent three years in the Navy and served in Vietnam, was obsessed with performance. When his flagship fund trailed 77 percent of peers in 2011, he apologized to clients, calling it a “stinker” of a year and reassuring them he hadn’t lost his touch. After a rebound the next year, he examined his legacy in an investment outlook that said the careers of great investors were fueled by a credit expansion that may be ending, and that the real test of his investing prowess was yet to come.

“Am I a great investor?” he wrote in an April 2013 investment outlook. “No, not yet.”

Tensions Surface

A month later, the Federal Reserve indicated it would unwind its bond purchases. Gross miscalculated the impact of those actions, giving his fund its biggest loss in almost two decades. Pimco Total Return trailed 65 percent of peers in 2013, even as it beat its benchmark, according to data compiled by Bloomberg. Clients concerned that interest rates would rise started to pull money that month, in May 2013, and have continued redeeming every month since.

Around this time, tensions within Pimco were boiling to the surface. In June 2013, Gross lashed out at then-CEO El-Erian in front of a dozen members of the firm’s investment executives. He said he had an investing record of more than four decades, and asked El-Erian what he could point to.
El-Erian, who received a bonus of about $230 million in 2013, was seen by some within Pimco as a shock absorber between Gross and other employees, according to three people familiar with the matter. As their relationship deteriorated, Gross agreed in an executive committee meeting to hiring a mediator to try to mend it. After a search and a scheduled meeting with the mediator, Gross backtracked and said he had never agreed to a mediation.

El-Erian Resigns

As El-Erian informed the firm in December 2013 that he was going to leave, Gross offered to step back instead. El-Erian, a contributor to Bloomberg View, stuck with his decision and on Jan. 21 announced his resignation. Soon after, Marc Seidner, a high-profile generalist fund manager and member of Pimco’s investment committee who had worked with El-Erian at Harvard University’s endowment, quit. Seidner passed up an opportunity to serve as one of three deputies to Gross, along with Daniel Ivascyn, 45, and Balls, choosing instead to join Boston-based money manager Grantham Mayo Van Otterloo & Co.

Those departures strengthened others in the firm and weakened Gross. Pimco named six deputy chief investment officers -- Ivascyn, Balls, Mark Kiesel, Virginie Maisonneuve, Scott Mather, and Mihir Worah -- and Gross promised that each would have “some empowerment that probably was lacking to some extent in the past.”

Standing Ovation

In the weeks that followed, Gross tried to close ranks. He spent more than 20 minutes before a firm-wide meeting to discuss the media scrutiny that had beset the company, a speech in which he disparaged El-Erian, according to two people. When he ended to a standing ovation from the audience, including Hodge and Ivascyn, at least one executive declined to rise. Thimons, a managing director outspoken in his objections to Gross’s leadership, disagreed with his comments and refused to stand, according to a person who was present.

El-Erian’s departure had prompted media scrutiny and reports of clashes between El-Erian and Gross. The Wall Street Journal cited one example where Gross complained that El-Erian wouldn’t let him run the firm’s entire $2 trillion in assets.

“I’m Secretariat,” Gross said, referring to the famous racehorse, according to the Journal. “Why would you bet on anyone other than Secretariat?”

To stop the reports, Gross set up interrogations of members of the investment committee, managing directors, and lower-ranking money managers. He carried around a three-ring binder of printed-out e-mails and hand-written notes to find out who was talking to the press.

‘Mr. X’

Among his suspects were Balls, a former journalist, and Thimons, the executive who had remained seated during the standing ovation and who had organized a going-away party for El-Erian. Balls said in March that he had spoken to a few reporters to point out flaws in stories they were preparing, and did so after consulting with El-Erian, who was still CEO at the time.

El-Erian didn’t return a phone and e-mail seeking comment.

When Gross sought to fire Balls, Pimco’s new executives refused. Gross gave in and agreed not to pursue the matter at that time.

The push to oust Balls was opposed by Pimco’s new executives, and Gross eventually gave in and agreed not to pursue the matter at that time.

“Andrew and Josh are senior and respected professionals at our firm, and we have complete confidence in their leadership and integrity,” Daniel Tarman, a Pimco spokesman, said in a statement.

Balls and Thimons didn’t return e-mails seeking comment.

Gross later told DoubleLine Capital LP’s Jeffrey Gundlach that he had been chasing a “Mr. X,” a person sympathetic to El-Erian who was trying to sabotage him by revealing internal conversations.

Angering Management

While clamping down on leaks inside the firm, Gross called Reuters in early March, telling the news organization that El-Erian had been trying to undermine him and that he was responsible for the Wall Street Journal article.

Gross apologized internally for speaking to Reuters. A month later, in an interview with Bloomberg Television, he angered his colleagues again by calling on El-Erian to explain the reason for his departure. That interview prompted Jacobs to call an emergency meeting of the executive committee without telling Gross. After the meeting, Gross was told that he’d been suspended from media appearances indefinitely, provoking an outburst, according to a person with direct knowledge of the situation.

Bonds’ Bieber

Pimco managers worried that Gross was becoming increasingly uncontrollable in public appearances after he strolled on stage at Morningstar’s investment conference wearing sunglasses and referring to himself as the bond market’s Justin Bieber. He also made a lengthy allusion to the movie “The Manchurian Candidate,” suggesting he wished he could hypnotize journalists into writing positive things about him.

At one point, weeks after El-Erian’s departure, Gross was seen yelling at Hodge and Jacobs in a glass room just off the trading floor, in plain view of more than 60 people. Later, he told colleagues he’d staged the dressing-down publicly to intimidate others.

Amid the media scrutiny, Gross demanded public support from his colleagues for his role at Pimco. Hodge obliged in a “viewpoint” in August on the website extolling Gross’s investing prowess.

“We are unaware of any person who has created more wealth for more people in the history of fixed income investing than Bill Gross,” Hodge wrote.

Deep Divisions

The divisions within Pimco went beyond Gross’s media appearances and his management style. Gross’s view of Pimco’s future was increasingly diverging from that of management. He was unhappy with the expansion into equities and wanted to return to a simpler model.

Four years after a Bloomberg Markets article in which Gross said that stock-market returns would beat bonds, the firm’s equity business wasn’t meeting expectations, having gathered less than $3 billion into its four main mutual funds.

Gross argued the push wasn’t cost-efficient, that stocks and other assets were too expensive, that Pimco should retrench and didn’t need the staff it had hired to diversify.

During a strategy meeting in August, he criticized Wendy Cupps, a managing director and head of product management who was paid a bonus of about $50 million the year before, saying she was taking too much of a lead developing products without his consent. He said her products group was “stealing the firm,” according to a person who attended the meeting. The comments stunned other executives and prompted opposition.

Alaskan Cruise

Gross, who steered Pimco through the 2008 financial crisis unscathed, also criticized the acquisition of real estate assets, saying such assets would be difficult to sell.

The next day, on Aug. 20, Gross proposed to senior leaders he would step back if they agreed to his demand that Balls and Thimons, whom he referred to as “Mr. X” and “Mr.Y,” be fired. He asked for management to work on a formal proposal while he was on a two-week vacation.

In his absence, Pimco composed a power-point presentation, the first slide titled “What WHG Asked For,” listing Gross’s requests, among them fewer client-facing responsibilities and managing fewer accounts, according to two people familiar with the matter. Gross would later reject that proposal.

Gross had made efforts in the past to be a warmer boss. He chartered a cruise ship with his own money from San Francisco to Alaska and back in the summer of 2003, for more than a week of firm-wide bonding. The endeavor cost him about $10 million, according to one person who attended. Gross stayed up until dawn mingling with employees.

‘People Management’

Even that team-building effort, remembered fondly by many of Pimco’s long-term employees, was marred by his expectations. When some employees with children asked if they could arrive late or leave early, Gross expressed frustration in a meeting with the managing directors, saying the employees were spoiled.

“I’m not especially known for people management,” Gross said in an interview with Bloomberg News in June. “I am learning,” he said, comparing managing employees to raising children.

By September, as Gross returned from his vacation, tensions within Pimco were finally coming to a head. In a meeting with Pimco’s executive committee on Sept. 10, attended by executives including Hodge, Jacobs, Cupps, Worah and General Counsel David Flattum, Gross proposed that he would share his role with a co-chief investment officer and that they could start a search immediately.

Succession Plan

He would manage the Total Return fund with the co-CIO until Dec. 31, 2015 and then would transition his responsibilities to other managers before stepping down. He proposed that he would instead run Pimco’s Unconstrained and a few other select strategies. Gross also offered to step down from Pimco’s executive committee and the partner compensation committee that sets pay.
After Gross left the meeting, the executive committee continued talking and eventually discussed firing Gross, according to a person familiar with the contents of the meeting. The Pimco executives viewed the timeline offered by Gross as too long and lacking a clear succession plan for the remaining funds he managed.

That week, more than 100 investment professionals had gathered at Pimco for the quarterly Cyclical Forum, including Balls. Gross pulled Balls aside to urge him to resign for the good of Pimco. He also made his case to fire Balls at an executive meeting, and was told by Hodge that Gross wasn’t authorized to fire a managing director. His conduct angered senior leaders and was viewed by them as a final breach of trust.

Seating Arrangement

After the forum, Gross devised a seating plan for a meeting of portfolio managers, relegating Balls, Ivascyn and Mather to the rows of the conference room instead of at the main table. The arrangement was perceived as a snub, according to a person familiar with the matter.

By now, key employees including Ivascyn, Jacobs and Cupps individually had told Pimco they were ready to exit.

As management debated what to do about Gross, Ivascyn emerged as a favorite to succeed him as CIO. He had chaired a committee overseeing Pimco’s trade floors and money management teams around the world, and had been elected to represent money managers on the executive committee for several years.

His main mutual fund, Pimco Income Fund (PIMIX), had beaten 99 percent of peers in 2013. Private funds, those not sold to retail investors, run by Ivascyn’s teams had raked in $3 billion in profit between 2010 and 2013, according to a former employee. Ivascyn got a bonus of about $70 million last year, a quarter of Gross’s.

Diekmann Breakfast

The week of Sept. 15, Michael Diekmann, CEO of Pimco parent Allianz SE (ALV), had flown in from Munich and had breakfast with Gross at the Marriott Hotel in Newport Beach. He proposed a “sidecar” that Gross would manage under Pimco’s name in a separate structure, a proposal Gross agreed to, according to a person with knowledge of the matter. Diekmann, 59, said he would take the plan to Pimco’s management.

Later that day, Gross met with Hodge and Jacobs, who presented a plan to announce his retirement at year-end, praising his accomplishments over his long career. Gross asked about the “sidecar” structure he had discussed with Diekmann. Jacobs declined and instead offered that Pimco would help him start a new company or fund.

“That’s a bone even a dog wouldn’t pick,” Gross replied.

Allianz spokeswoman Petra Brandes declined to comment.

Gross knew he had lost control. He called DoubleLine co-founder Gundlach, a prominent bond investor who had been pushed out by TCW Group Inc. five years before. He also re-engaged in conversations with Janus’s CEO Weil about partnering with him.

Gundlach Meeting

When he met with Gundlach, 55, the next day, Sept. 17, at Gundlach’s house near Santa Monica, they discussed the possibility of employment. Gross said he’d be willing to work for $1, indicating they could work out details later, according to Gundlach. The two men parted without coming to a decision.

The following week, Gross’s last at Pimco, he was told there would be a meeting scheduled to discuss his future on Friday, Sept. 26, at 2 p.m. and management had all but decided to oust him.

He called Janus’s Weil, who said that the firm would have an office ready for Gross.

At 5:28 a.m. California time on Sept. 26, Janus announced that Gross was joining them to manage a start-up fund with about $13 million, surprising Pimco and Allianz and rattling markets.

Bonus Pool

Since then, some managers who had left under Gross have come back. Seidner rejoined Nov. 12. Jeremie Banet, who left in June to run a food-truck business, is back as an executive vice president. Nobel Laureate Michael Spence, who departed in February, is returning as a consultant.

Less than two weeks after Gross left, the firm announced it added five people to its equities team, reporting to Maisonneuve, CIO for equities. Hodge has said Pimco will announce more new hires in the near future.

The firm, which still has $1.87 trillion under management, has the money to pay for top talent. Gross and El-Erian together received about $520 million in bonuses last year, roughly a third of the entire payout pool.

Pimco has also introduced a 225 million-euro ($279 million) award program that applies to “all employees that are not participating in the Pimco profit pool,” Munich-based Allianz’s Chief Financial Officer Dieter Wemmer said on a Nov. 7 conference call.

Soros Backing

As Pimco’s leaders work to restore calm, the Total Return Fund has beaten 99 percent of peers in the past month, as bonds rallied. Redemptions from the fund slowed to $9.5 billion in November, Pimco said yesterday.

Gross has resumed some of his earlier routine. Since Sept. 29, he has driven from his cliffside mansion in Laguna Beach to an office in a not-yet-finished building that’s almost identical to Pimco’s new headquarters, a five-minute walk down the street.

His new fund has attracted more than $1.2 billion of client deposits since he started, according to a person familiar with the matter -- a fraction of the billions that flowed out of Pimco since his exit.

George Soros, the former hedge-fund manager famed for successfully betting against the Bank of England in 1992, committed $500 million to a separate account with a strategy similar to his unconstrained fund. Scott Bessent, Soros’s chief investment officer, visited Gross in Newport Beach the week after he joined Janus, according to a person familiar with the matter.

‘Pretty Messy’

Soros’s firm saw an opportunity to invest with a talented money manager while he was still running a small amount of money, according to the person.

“In the case of Pimco, which always seemed like this monolithic really good organization, when you go behind the screen you can see that it was pretty messy,” said Kurt Brouwer, chairman of Tiburon, California-based advisory firm Brouwer & Janachowski LLC, who has invested in Pimco funds since the 1980s.

“Money, big money, personal egos, differences of opinion, slights and disagreements built up over 10 or 15 years -- that’s a pretty explosive combination.”

December 2, 2014 7:17 pm

Two cheers for the sharp falls in oil prices

Martin Wolf

Abundant supply threatens to make economies more carbon intensive and less energy efficient

Ingram Pinn illustration
What does the decline in oil prices mean for the world economy? The answer depends on why it has happened and how long it might last. But overall it should be helpful, albeit with caveats. Particularly important might be the impact on net oil-exporting countries. Among vulnerable producers are regimes that one would dearly like to see weakened, Vladimir Putin’s Russia foremost among them.
But even here the silver lining has a cloud. As Kirill Rogov of Moscow’s Gaidar Institute has noted, lower oil prices might exacerbate Mr Putin’s revanchism.
Between late June and the beginning of this month, the price of crude oil fell by 38 per cent.

This is a big decline. But a bigger one occurred between the spring of 1985 and the summer of 1986. The sharp fall in the early to mid-1980s – not coincidentally, the event that preceded the collapse of the Soviet Union – was caused by two developments: the reduction in the energy intensity of consumption and production triggered by the two “oil shocks” of the 1970s; and the emergence of significant production in non-Opec countries, such as Mexico and the UK (see chart).
The story this time is not so different, particularly on the supply side. According to the International Energy Agency’s latest World Energy Outlook , supply of non-Opec oil and natural gas liquids might rise from 50.5m barrels a day (mbd) in 2013 to 56.1mbd in 2020. This would raise the share of non-Opec producers in global production from 58 per cent to 60 per cent. As much as 64 per cent of this increase is forecast to come from North America. Behind the rise in North American production is unconventional oil – so-called “tight oil” – in the US and oil sands in Canada. Meanwhile, Opec production is forecast to remain roughly constant.
The revolutionary developments in unconventional oil production have already made a substantial difference to production (see chart). US production of liquids has risen by 4mbd over the past four years. According to HSBC, US output is expected to rise by 1.4mbd this year.

Libya’s output is also recovering. Finally, unexpected economic weakness in the eurozone, Japan and China has cut estimates of global demand by 0.5mbd this year. To sustain oil prices, Opec needed to cut output by about 1mbd. But it – or, more precisely, Saudi Arabia – has refused to do so. This has triggered the recent fall in prices.

Will these low prices last, or might they go even lower? I am not foolhardy enough to forecast oil prices: the price elasticities are so low and the margins between supply and demand so fine that it is all too easy to forecast wrongly. The case that the decline will prove temporary is that Saudi Arabia’s desire to cripple production of unconventional oil, which demands a high level of capital expenditure, will swiftly succeed. Moreover, the lower oil prices, a hoped-for economic recovery and continuing rapid growth in emerging economies could boost demand for oil. In addition, argues HSBC, “global spare capacity is still very tight by historical standards and largely concentrated in Saudi Arabia”. Having made their point, the Saudis might yet cut production.

At this stage it seems unclear whether we are witnessing a lasting structural downshift in prices. But let us assume they last for quite a while. What would be the consequences? Here are six.

First, a $40 fall in the price of oil represents a shift of roughly $1.3tn (close to 2 per cent of world gross output) from producers to consumers annually. This is significant. Since, on balance, consumers are also more likely to spend quickly than producers, this should generate a modest boost to world demand.

Second, the fall in energy prices will lower already-low headline inflation. This creates two offsetting risks. One is that it might entrench expectations of ultra-low inflation. An opposite risk is that it might encourage central banks to ignore threats of rising underlying inflation. On balance, the former is at present a greater threat than the latter.

Third, the fall in energy prices will boost the profitability of energy intensive production. At the same time, it is cutting the profits and capital spending of oil producers. It could create significant bankruptcy risks in the energy sector, particularly among the more highly leveraged oil producers. How far that would also damage lenders is unclear.

Fourth, the fall in prices will redistribute income from net-exporting countries to net importers. Among the latter are the eurozone, Japan, China and India. The US is now a net exporter. But the important net exporters are countries that are heavily dependent on these revenues. Among them are Iran, Russia and Venezuela. It could not happen to nicer regimes! But there is also danger when despots are in a corner.

Fifth, the fall in energy prices will create shifts in asset prices. The exchange rates of energy-producing countries will be under downward pressure, already to be seen in the sharp fall in the Russian rouble. Shares in companies that benefit from lower oil prices, directly or indirectly, will rise. This might create new stock market bubbles.

Finally, falling oil prices threaten to make economies more carbon intensive and less energy efficient. But they also give an opportunity to raise taxes on oil or at least cut wasteful subsidies to consumption permanently. It is an opportunity that any sensible government would seize. Needless to say, the supply of such governments is rather small.

Much uncertainty remains over how low prices will go, and for how long. But to the extent that they reflect strong supply rather than reduced demand, they offer a welcome boost to the world economy. They also represent a welcome transfer of income from unattractive petro-despotisms. It is hard not to cheer that, even if the opportunity for lower subsidies and higher taxes will yet again be thrown away.

China’s Asia?

Minxin Pei

DEC 3, 2014  

Newsart for China’s Asia?

CLAREMONT – Distinguishing diplomatic rhetoric from official policy is never easy. But it is especially difficult in China, where the government’s actions so often fail to match its statements. Given this, it is worth asking whether the latest slogan adopted by Chinese officials – “Asia for Asians” – is merely nationalist posturing for domestic consumption or a signal of a genuine policy shift.
The most authoritative reference to an “Asia for Asians” occurred in May, during Chinese President Xi Jinping’s keynote speech at the Conference on Interaction and Confidence-Building Measures in Asia. In a carefully crafted statement, Xi laid out China’s vision for a new regional security order – one in which, as the slogan suggests, Asians are in charge.
According to Xi, at the fundamental level, “it is for the people of Asia to run the affairs of Asia, solve the problems of Asia, and uphold the security of Asia.” Fortunately, he declared, they have the “capability and wisdom” to build peace and security in the region through cooperation.
This vision, of course, entails an overhaul of the Asian security structure, with a drastically reduced role for the United States. Indeed, Xi implicitly criticized the existing US-dominated security architecture in Asia as stuck in the Cold War, and characterized “military alliance targeted at a third party” as “not conducive to maintaining common security.” Since the speech, lower-level officials and the Chinese media have reiterated similar lines.
At first glance, this vision seems entirely reasonable; after all, most countries prefer to manage domestic and regional affairs without the meddling of outside powers. But Xi’s statement marked a significant departure from China’s long-standing position on America’s presence in the Asia-Pacific region.
Since the US-China rapprochement four decades ago, China has maintained a studied ambiguity regarding America’s role as the guarantor of Asia’s security. China’s pragmatic leaders knew that the US presence helped to contain the Soviet Union (and subsequently Russia), prevented Japan from re-arming, and kept sea-lanes open. They also recognized that they lacked the power to challenge the US-led security order or offer a feasible alternative.
This may be changing. Though some analysts remain convinced that Xi’s “Asia for Asians” line is an empty attempt to bolster his nationalist credentials, an equally strong case can be made that it signifies a genuine policy shift. While the argument is not overwhelming, it should not be dismissed out of hand.
The most conclusive evidence of Xi’s readiness to challenge the established order lies in the economic sphere. Most notably, China has established new development institutions, the Asian Infrastructure Investment Bank and the new Silk Road Fund, to which it will channel tens of billions of dollars – clear challenges to the established Western-dominated multilateral institutions.
On the security front, however, China has made much less headway in turning its “Asia for Asians” vision into reality. To be sure, it has acquired some military capabilities to deter the US from intervening in the Taiwan Strait or the South China Sea, and it has improved its security cooperation with Russia and Central Asian countries through the Shanghai Cooperation Organization. But such modest gains are more than offset by the security setbacks that China has suffered as a result of its assertiveness in regional territorial disputes.
Indeed, after many months of increasingly forceful military moves – most notably, the unilateral declaration of an air-defense identification zone covering a large swath of the South China Sea, including disputed territories – China’s ties with Japan reached an all-time low. And concerned Southeast Asian countries have been entreating the US to remain in the region as a counterweight to China.
Underlying the “Asia for Asians” trope may be China’s belief that the US, not its own behavior, is to blame for its neighbors’ defiance. Some Chinese strategists believe that the US is using Asian states, particularly Japan, Vietnam, and the Philippines, as pawns to contain China. If this perspective has prevailed in the internal policy debate, Chinese leaders, including Xi, could have reached the fateful conclusion that, on balance, America’s security presence in Asia directly threatens Chinese interests and must be eliminated.
That would be a grave strategic error, based on a fundamental misreading of Asian security dynamics. Most of China’s neighbors, even North Korea, fear an unconstrained Chinese hegemon – and, if the US security presence were eliminated, that is precisely what they would face. “Asia for Asians” would be “Asia for the Chinese.”
It is difficult to imagine that Chinese policymakers, known for their sophistication and realism, could be pursuing a strategy that is not only unlikely to gain support from fellow Asians, but also is guaranteed to spark conflict with the US. Given this, it is likely – indeed, desirable – that “Asia for Asians” will remain a mere slogan. In fact, Xi has lately toned down his description of China’s aims, recently telling Communist Party leaders that, “We should increase China’s soft power, give a good Chinese narrative, and better communicate China’s message to the world.”
But, even as rhetoric, the phrase “Asia for Asians” is problematic for historical reasons. In the 1930s, Japanese militarists used the idea of an “East Asia Co-Prosperity Sphere” as a cover for their imperial ambitions and conquests. The slogan was widely ridiculed, particularly in China, for its transparent absurdity.
This may help to explain the lukewarm reception that the concept of “Asia for Asians” has received this time around. The smartest thing for Chinese leaders to do would be to drop it, once and for all.


Europe: When the Unthinkable Becomes Possible

Wednesday, December 3, 2014 - 16:47 

Europe's economic crisis is slowly but steadily eroding the political systems of many countries on the Continent. New actors are emerging and threatening the supremacy of the traditional players.

Alliances and events that seemed impossible only a few years ago are now being openly discussed across Europe. On Dec. 3, for example, Sweden announced it would hold early elections, partially because of political moves from the far right. In Spain, the ruling center-right party is openly discussing the possibility of entering an alliance with its traditional center-left rivals to prevent a protest party from taking over. Key members of the European Union, including Sweden, Spain, the United Kingdom and possibly Greece, will hold elections in 2015. In most cases, these countries will see outcomes nobody would have thought possible in 2008.


Swedish Prime Minister Stefan Lofven announced the snap elections after his center-left government lost a budget vote less than three months after coming to power. Lofven's announcement was precipitated by a decision by the far-right Sweden Democrats party to support the opposition during a budget vote. Sweden's early elections, the first for the country in almost 60 years, will be held March 22, with the anti-immigration Sweden Democrats likely playing a central role. In Sweden's parliamentary elections in September, no coalition managed to form a majority government, but the elections were marked by the strong performance of the far-right party, which received 12.9 percent of the vote, up from 5.7 percent in 2010, when it entered parliament for the first time.

While Sweden is one of the fastest growing economies in Europe, unemployment remains above pre-crisis levels. More important, Sweden has the largest number of asylum applications per capita in the European Union. Last year, violent riots shook Stockholm's immigrant-heavy suburbs, revealing Sweden's struggle to integrate its immigrants into mainstream society.

Opinion polls show that Swedes still largely support the idea of living in a country that is open to asylum-seekers, but they are also worried about the economic and cultural impact of increased immigration. If the Sweden Democrats hold their place as the country's third-largest party, they will probably become key in the formation of a new government. This would put a far-right party in a position of power in one of Europe's main economies.


Spain's general elections, which will be held in late 2015, will likely have an even greater impact on its political system. The country's enduring economic crisis and a series of corruption scandals involving the ruling party led to a dramatic rise in popular support for Podemos, a left-wing protest party that wants to renegotiate the European Union's debt and deficit targets and restructure the Spanish debt. Podemos was created less than a year ago, but recent opinion polls put its popularity at around 28 percent — above that of the mainstream center-right Popular Party and center-left Spanish Socialist Workers' Party, commonly known as PSOE.

Podemos' rise in Spain has been so resounding that on Dec. 2, Popular Party chief Maria Dolores de Cospedal said her party would consider an alliance with PSOE in order to form a government.

PSOE rejected the idea, while members of the Popular Party had backed away from it by Dec. 3. However, Cospedal's statements highlight the extent of the threat to Spain's two-party system, which was created after the end of the Franco dictatorship in the late 1970s. Before the crisis, Spain's mainstream parties normally captured between 70 and 80 percent of the vote.

The 2015 elections will probably mark the first time in modern Spanish history that their combined support falls below 50 percent. The situation is particularly awkward for PSOE, which recently moved slightly more to the left to appeal to some of Podemos' voters. The party has yet to decide whether it wants to risk losing voters to the left by siding with the Popular Party or risk losing moderate voters by siding with Podemos.


Greece offers an example of what Spanish politics could look like in the future. Like Spain, Greece had a relatively stable two-party system that saw the center-right and the center-left alternate periods in power. But the economic crisis led to the rapid rise of the left-wing Syriza party, which opposes the EU austerity measures supported by the mainstream parties. In 2012, it took two elections for the mainstream parties to form an alliance to keep Syriza at bay. In Greece, where political rivalries are old and deep, such an alliance would have seemed impossible before the crisis.

Greece will probably return to the center of the European crisis next year when the Greek parliament attempts to elect a new president. If the parliament fails, it will be forced to hold early elections. With Syriza still at the top of the opinion polls, it would be more difficult to keep the upstart party from power this time around. Syriza has promised to restructure Greece's debt, a move that would probably make financial markets nervous and generate uncertainty across the eurozone at a time when Europe thought it had found some stability.

When the European Central Bank promised to intervene in financial markets almost two years ago, the European Union lost the sense of urgency it had in the early stages of the crisis. The European Union, and particularly Germany, chose caution instead of action. Should Greece generate financial turmoil in Europe again, the Europeans will have to go back to the negotiating table and discuss all the issues that have so far been avoided.

United Kingdom

Finally, Euroskepticism will also be a key player in the United Kingdom, which will hold elections in May. Britain also had a functioning two-party system before the crisis, making coalitions relatively uncommon. But the rise of the anti-immigration UKIP party is seriously threatening this system. A coalition between the Conservative Party and the Labour Party or an agreement between the Tories and UKIP both seem impossible for now, but either would be conceivable if no party wins enough seats to govern on its own.

The current norm in Europe would have seemed impossible only five or six years ago. Most people would not have believed that unemployment in Spain or Greece could go above 25 percent or that nationalist, protest and Euroskeptical parties would become key players in European politics. More important, most Europeans would never have thought that the survival of the European Union would be under such a serious threat. For many Spaniards, Greeks, Swedes and Britons, the transformation of their political systems may still seem unlikely, but for some a surprise is likely coming next year.

Hedge Funds Shut as Managers Struggle in Year of Two Percent Returns

By Katherine Burton

Dec 2, 2014

Hedge funds are shutting at a rate not seen since the financial crisis, as many managers post disappointing returns and an elite group of firms dominate money raising.

The $37 billion Brevan Howard Asset Management LLP is the latest firm to close a fund. Last week it pulled the plug on its $630 million commodity fund managed by Stephane Nicolas after it had tumbled 4.3 percent this year through the end of October, according to a person with knowledge of the firm.

In the first half of the year, 461 funds closed, Chicago-based Hedge Fund Research Inc. said. If that pace continues, it will be the worst year for closures since 2009, when there were 1,023 liquidations.

“Most hedge funds have not performed extraordinarily well,” said Stewart Massey, chief investment officer at Massey Quick & Co. in Morristown, New Jersey, which invests in the private partnerships. He expects that redemptions will hit small-and medium-sized firms this year, reducing assets to a level where “they will have to make a decision whether to carry on or not.”

Hedge funds, on average, have returned just 2 percent in 2014, their worst performance since 2011, according to data compiled by Bloomberg. Smaller funds have struggled to grow as institutional investors flocked to the biggest players. In the first half of 2014, 10 firms including Citadel LLC and Millennium Management LLC accounted for about a third of the $57 billion that came into the industry.

Money Gathering

Dan Loeb’s Third Point LLC told investors it would open Oct. 1 for a limited amount of capital. It raised $2.5 billion. Bill Ackman’s Pershing Square Capital Management LLP gathered $2.7 billion in October with an initial public offering of a fund. Ackman has produced a 42 percent return for investors this year through November 25.

Many of the closures have been among macro funds, which have returned less than 1 percent this year, on average, according to Bloomberg data. Macro managers have complained that in an environment of low interest rates and muted swings in prices, it’s difficult to make money.

Josh Berkowitz’s Woodbine Capital Advisors LP said earlier this year that it was closing down after assets dwindled to $400 million from a peak of $3 billion four years ago. Keith Anderson’s Anderson Global Macro LLC and Kingsguard Advisors LP, started by two former Goldman Sachs Group Inc. traders, both shut after less than three years in business.

Oil Prices

Some commodity strategies have also struggled as oil prices have tumbled. Hall Commodities LLP, a London-based $100 million hedge-fund firm run by Tony Hall and Arno Pilz, told clients in October it’s shutting down after less than two years, citing poor performance.
Other managers have struggled to regain after years of losses. Dan Arbess said last month that he’s closing his Perella Weinberg Xerion Fund after failing to recoup a 21 percent loss dating from 2011. The fund, which focused on distressed credit and special situations, hadn’t been able to charge any performance fees since then.

The $740 million Archipel Asset Management AB told investors in October it was closing after its biggest backer, Stockholm-based Brummer & Partners, pulled out because of lackluster performance.

Archipel, which traded based on computer models, lost 3 percent in 2013 and 1.3 percent in the first nine months of this year.

Market Bets

Massey of Massey Quick expects to see more redemptions and closures among long-short equity funds, which have underperformed the bull market in stocks because they bet on falling shares as well as those they wager will rise. Stock hedge funds have climbed 41 percent since the end of 2008, according to data compiled by Bloomberg versus a 153 percent rise in the Standard & Poor’s 500 index.

Investors, he predicts, will end up pulling from funds at exactly the wrong time, giving up on their insurance just as stock markets tumble.

“I don’t think the next five will be like the last five,” he said. “But that’s classic investor behavior.”

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

sábado, diciembre 06, 2014



12/04/2014 05:35 PM

Stuck in the Middle

Polish Intellectuals Sound the Alarm on Russia

By Jurek Skrobala

Photo Gallery: Rising Fear in Poland

Poland has long seen itself as stuck between the East and West, resulting in plenty of historical suffering. Russian aggression in Ukraine has many in the country fearing the worst. Leading Polish writers worry that the West isn't doing enough.

Jacek Dehnel's apartment smells like mandarin oranges and gas heating. Two dozen walking sticks protrude from one corner of the room, the accessories of a young man with the airs of a wise old dandy. Books are stacked everywhere, right up to the ceiling, and they line the walls of the poet's three-room apartment, located in the heart of Warsaw, on the banks of the Vistula River.

The apartment offers a view of a tall, spiked high-rise -- the Palace of Culture and Science, a landmark of the Polish capital and a symbol of erstwhile Soviet imperialism. The people of Warsaw have given the building many colorful nicknames, including "Stalin's syringe."

Today, it is surrounded by prestigious buildings designed by Western architects. The spike and the skyscrapers around it, ghostly guests looming in the twilight between East and West, are vaguely reminiscent of one of Dehnel's poems: "Specters rise outside in the shadows, darkness comes to visit at my windows."

In front of the syringe stands a statue of the national Polish poet Adam Mickiewicz. On the street in front of Mickiewicz, brand names from the West shine in the night -- as if the iconic poet has a prickle of fear running down his neck while hope flashes before his eyes.

Warsaw reflects Poland's history like no other place. It is the city where Soviet architecture stands next to Western skyscrapers. Where psychology is taught in the building that once housed the SS. Where rubble from Nazi Propaganda Minister Joseph Goebbels' birth house was displayed for a few days in front of the Zacheta National Gallery of Art. Warsaw is where heavily made-up women and hipsters cross paths between McDonald's and milk bars. It is a city where pensioners on the street give away cardboard pictures of Pope John Paul II and the wind whirls brothel business cards across the cobblestones.

Warsaw is the capital of a country located in the heart of Europe, yet on the periphery, with a culture characterized by "western easternness or eastern westernness," as Polish intellectual Maria Janion once wrote -- a country that disappeared from the map for 123 years, was cut into pieces by its neighbors, and for decades was covered by the sheet of a ghost called communism. This journey leads us to important writers in Poland -- a country caught between East and West -- to talk about one thing: fear.

Sparking Anxiety

This fear is tangible everywhere. It stares out from the front pages of newspapers and magazines, crawls across TV screens and slips into barroom conversations. It nestles in people's minds. It is the fear of Vladimir Putin's Russia. It is the fear thatEurope is not reacting forcefully enough to the crisis in Ukraine, the fear that Putin will advance not only to the Donets River, but soon also to the banks of the Vistula. And it is the fear of Putin himself, who just a few days ago made reference to the "centuries old common history" that connects Poles and Russians, words that sparked anxiety among the Polish media, because they match the rhetoric of the cold embrace that the Russian president has reserved for Ukraine.

This fear is expressed in an open letter, "From Danzig to Donetsk," an appeal to Europe signed by 20 Polish intellectuals and published on Sept. 1 in the Gazeta Wyborcza, The Economist, Le Monde, La Libre Belgique, Die Welt and in the Ukrainian media. It says: "Anyone who will not say 'no pasarán' to Putin today (...) consents to the destruction of international order."

Furthermore: "Whoever follows today the policy of 'business as usual' with respect to the Russian/Ukrainian conflict is turning a blind eye (...) on attacks by Putin's imperialist forces on successive countries. Yesterday it was Danzig, today it is Donetsk: We cannot allow a situation where Europe will be living again for many decades with an open and bleeding wound."

The poet Dehnel is one of the letter's signatories. At age 34, he is already one of the best known authors in Poland. His poems are anachronisms, verses that could be a hundred years old and Dehnel's heroes are stacked all around him: Mickiewicz here, Dostoevsky there, and there is a plaque in front of these great authors' works that reads "Goethe was never here."

"The Germans," says Dehnel, "have to understand that our fear of Putin is no accident." Rather, this fear is the result of extensive observations of the country's neighbors to the East and the West. "Poland currently has very good relations with Germany. With our letter, we intend for it to remain that way."

Dehnel feels that Germany's position on the crisis in Ukraine is too weak, and he is not alone in this assessment. Journalist Anne Applebaum, the wife of former Polish Foreign Minister Radoslaw Sikorski, accused German Chancellor Angela Merkel of failing in her diplomatic efforts to resolve the crisis, and Polish journalists contended that Germany's judgment was clouded by its murky past: the bloodbath of World War II, mass murder in the Soviet Union and the battle of Stalingrad.

'The Next One Will Strike Berlin'

Dehnel crosses his arms and legs. He sums up his message to the Germans as follows: "If Putin drops a nuclear bomb on Warsaw, the next one will strike Berlin."

His reference to the most powerful weapon of all demonstrates the enormity, and familiarity, of the fear. It is fed by tales told by parents and grandparents. It is a fear that has grown out of experience. It is the fear that history will repeat itself.
Seventy-five years after the beginning of World War II, recent events have rekindled a memory that slumbers deep in the collective consciousness of the Polish nation: the secret protocol appended to the Hitler-Stalin Pact, in which the Germans and the Soviets agreed to the Fourth Partition of Poland as they divided Eastern European regions into spheres of influence -- an idea that Putin recently defended. On September 1, 1939, the Wehrmacht marched into Poland, followed by the Red Army on September 17, while the rest of Europe did nothing. This historic betrayal of Poland by the Europeans is mentioned in every interview during this trip.

The train from Warsaw to Krakow is called Kosciuszko, named after a Polish national hero who won a battle against the Russians over 200 years ago. Drunken men are traveling on board the train, dancing and telling jokes to the laughter of fellow passengers and to that of the conductors. At the bus station in Krakow, nearly 300 kilometers (185 miles) south of Warsaw, waiting passengers can see their own breath in the frigid air. Finally, the bus arrives -- an older model from Germany. The vehicle winds its way past historic Wawel Royal Castle, whose cathedral serves as the last resting place for many notable Poles, including Tadeusz Kosciuszko, Mickiewicz and all the Polish kings.

The bus drives on, out of Krakow and through the Lesser Poland Voivodeship, parts of which, until 1918, belonged to the Kingdom of Galicia and Lodomeria, a crownland of the Austro-Hungarian Empire, where one shtetl bordered the next. The bus stops in Gorlice. The Slovakian border is roughly half an hour to the south, and Ukraine is about a two-hour drive to the east.

Andrzej Stasiuk, 54, picks us up in an SUV. Stasiuk doesn't just drive, he races to his cabin.

Stasiuk, who also signed the open letter, is one of Poland's best known authors internationally.

Stasiuk also runs the Czarne publishing house, which publishes works translated into Polish by international authors such as German-Romanian writer Herta Müller and Ukrainian writer Yurii Andrukhovych. In Germany, the Suhrkamp publishing house publishes Stasiuk's books.

They tell of his travels, of the past and of the beauty and melancholy of the East. Stasiuk sounds just like his books: sometimes like a boy who has just discovered the meaning of irony, sometimes like an old man who gazes wistfully into the distance.

Deliver Us From Evil

Dry mud crumbles from the dashboard of the SUV -- perhaps Polish mud, perhaps Russian, Mongolian or Chinese mud -- in any case, mud from the East, united in Stasiuk's vehicle, which races through Lesser Poland, whizzing past remnants of the People's Republic of Poland, past former collective farms that today belong to a millionaire. The roadsides are dotted with religious symbols: Jesus Christ, messiah carved in stone, deliver us from evil.

Plum trees, coniferous forests, pine trees. Where the trees now grow around rectangular patches of grass, houses stood until the late 1940s. "Until 1947, the Lemken lived here, a Ukrainian minority," he says, his voice low and gravelly. "The Poles forcibly resettled them."

The Poles and the Ukrainians have a troubled common history. The Ukrainian Insurgent Army massacred thousands of Poles during World War II and Polish prejudices persist today. "Many Poles only see Ukrainians as laborers and cleaning ladies," says Stasiuk, "so it's important that I help. My publishing house publishes most of those Ukrainian authors who are translated into Polish." In front of Stasiuk's steering wheel, a metal horse has been glued to the dashboard, a present from Ukrainian friends, a talisman that shows what direction to take.

Stasiuk stops in front of a cabin at the edge of the forest. This is where he writes his books. He describes the cabin as "raw and simple," and so it is. In front of the cabin he has raised the flags of Kyrgyzstan, Tajikistan and Ukraine -- souvenirs from his travels -- but he has taken down the Russian flag.

"After the Soviet Union, everyone said the old business of East against West was over. What a bunch of nonsense, damn it!"

In August, the Gazeta Wyborcza ran a front-page story titled "The Germans Won't Defend Us" -- the old fear giving rise to new headlines. "The Germans wouldn't do so even if Putin attacks," says Stasiuk. "In Germany all you have to do is yell 'Russia' and everyone starts gushing about the place."

Stasiuk's travels have taken him far to the east, often through Russia. Last summer, he took his most recent trip to the country that must be visited, he says, to understand what makes the people tick, most of whom support Putin. "Putin is more clever than the West," says Stasiuk, "just as Russia has always been more clever. I genuinely fear that there will be a war. Before the UN Security Council convenes and expresses its concern, Putin will already be in Silesia."

The road from Gorlice to Silesia goes through Krakow before continuing westwards. It passes by the coal-fired power plant at Tarnow, the ideal backdrop for a film about the gloom of the East. It goes past Auschwitz; it goes through cities where the plaster flakes from building fronts -- facades like the faces of old people who have seen everything. Welcome to Upper Silesia, in southwest Poland, less than an hour's drive from the Czech border.

Tattoos and Fine Clothes

"I don't want to see any Russian tanks," says Szczepan Twardoch. Twardoch, 34, is Silesian and the enfant terrible of Polish literature. He lives in the village of Pilchowice, near the city of Gliwice.

One of the main streets of Gliwice is called Ulica Zwyciestwa, Victory Street, a gap between sooty gray buildings. A beautiful woman smiles from a façade, her teeth whiter than anything else in Gliwice - but it's just an advertisement for the fashion retail chain C&A. Only a few steps away, someone has sprayed "SS" and a hooligan slogan on the walls: "We destroy those to whom Silesia means nothing."

Twardoch drives down Victory Street. He also has an SUV, but his vehicle smells brand new.

Twardoch drives through Upper Silesia with the gray turning to green as we pass by cornfields, brick buildings and small shrines to the Virgin Mary -- through Twardoch's homeland, which has been the homeland of his ancestors for 300 years. During World War II, the area saw battles between the Wehrmacht and the Soviet Red Army.

Twardoch looks like an earl who subscribes to lifestyle magazines. He has tattoos and wears fine clothes. His Silesian origins have softened his Polish. "I know that I'm not German," he says. "And I know that I'm not a Pole."

It's a lonely identity, as Twardoch once described it in an essay, but he can still speak for the Poles, he says, and he was among the signatories of the open letter. Twardoch composed his novel "Morphine" in the Polish language, a book that caused uproar in Poland because it tells the tale of a Polish resistance fighter in the autumn of 1939 looking for drugs and sex as he wanders through war-torn Warsaw. "Morphine" became a bestseller and Twardoch used the royalties to build a house in Pilchowice. He walks inside.

"My Polish friends are genuinely afraid that their wonderful life could be destroyed by a big war." As he talks, Twardoch types away on his white iPhone, which is lying in his white kitchen. "They are afraid that they will have to fight, be thrown into jail, and that the women will no longer be dressed so well."

What Comes Afterward?

Twardoch sees the fear in his friends' faces. He sees parallels in the books that describe the situation 100 years ago. "Before World War I, many people thought that there would never again be war in Europe. We know what happened after that."

The fear of war is old, but it's important, as all of the authors agree. There is no end to history, as they say again and again. The crisis in Ukraine is just the beginning, they insist, and this statement flashes repeatedly like the red light of an alarm signal. But if this is merely the beginning, what comes afterward?

"This war will drag on, sometimes hot, sometimes cold," he says. "Either Putin will be forced to his knees, or he will get what he wants: the old borders of the Empire." Twardoch gazes for a long time at the terrace, where his children's toys are lying about.

The next stage of the journey takes us out of the villages with so many names -- Polish, German, Silesian -- to northwestern Poland, from the countryside to the cities. Some 180 kilometers from Twardoch's house comes Wroclaw, on the Oder, a river which becomes the Polish-German border further to the north. On the outskirts of Wroclaw, young Poles push baby carriages through parks next to apartment blocks. In the old city -- lovingly restored with EU funds -- German pensioners explore their roots. Wroclaw was once home to German poet Hoffmann von Fallersleben. It is also a city that Adolf Hitler declared a fortress in 1944, ordering that it must be defended at all costs.

A woman lies on a bed of skulls with milk shooting from her breasts and a baby lying on her stomach. "An unorthodox Madonna, wouldn't you say?", says Olga Tokarczuk, 52, one of Poland's most popular authors. The unorthodox Madonna is a painting hanging in Tokarczuk's kitchen, in her house in Wroclaw, built in 1912 and inhabited over the past 100 years by Germans, Jews and Poles.

Tokarczuk has also signed the open letter. Her texts are often parables set in the border region where Poland, Germany and the Czech Republic meet. Wherever there are borders, there are stories -- and they produce myths. "Unfortunately the crisis in Ukraine is reviving a myth in Poland," says Tokarczuk, "a myth that says that we should serve as a wall for the West, to protect it from the wild East."

Knowledge and Action

This myth is as old as Poland. It pervades the works of Adam Mickiewicz, whose statue stands in Warsaw, with Stalin's syringe sending a prickle of fear running down his neck. In Mickiewicz's poetic drama "Forefathers' Eve," for instance, written nearly 200 years ago at a time when the Poles had no state, Poland is portrayed as the Christ of Europe, which died for the sins of its neighbors. The Russian Czar is Satan and the Germans are the devil's acolytes.

This is the myth of Poland as the last uncorrupted bastion of freedom in Europe before the East begins. This myth legitimizes the fear.

Tokarczuk's study contains an altar. On it is a Korean Buddha with drooping shoulders, the corners of its mouth turned down. The Hindu goddess Durga stands upright next to it, representing knowledge and action.

"The European sanctions against Putin are beginning to have an impact, yes," she says. "But does this mean that Europe has voiced an unequivocal 'no' to Putin's actions? That is not my impression."

If Europe does not say no, who will? "I think that DonaldTusk will have an influence on the crisis," she replies. Until last September, Tusk was the Polish prime minister, but this week he became the president of the powerful EU Council -- and he has accused Putin of overstepping his power. "In their fear, the Poles are counting on Tusk -- and on Europe."

Tokarczuk presses her palms together and her fingers are pointing upwards, as if she were praying.

Translated from the German by Paul Cohen