Germany faces impossible choice as Greek austerity revolt spreads

"What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming," says Italy's Beppe Grillo

By Ambrose Evans-Pritchard

9:53PM GMT 11 Feb 2015

French and Greek political earthquakes point to rise of the anti-austerity movement

Only Germany's Angela Merkel can stop the coming train-wreck that has been initiated by Greece's recent election 
The political centre across southern Europe is disintegrating. Establishment parties of centre-
left and centre-right - La Casta, as they say in Spain - have successively immolated themselves enforcing EMU debt-deflation.
Spain's neo-Bolivarian Podemos party refuses to fade. It has endured crippling internal rifts. It has shrugged off hostile press coverage over financial ties to Venezuela. Nothing sticks.
The insurrectionists who came from nowhere last year - with Trotskyist roots and more radical views than those of Syriza in Greece - are pulling further ahead in the polls. The latest Metroscopia survey gave Podemos 28pc. The ruling conservatives have dropped to 21pc.
The once-great PSOE - Spanish Workers Socialist Party - has fallen to 18pc and risks fading away like the Dutch Labour Party, or the French Socialists, or Greece's Pasok. You can defend EMU policies, or you can defend your political base, but you cannot do both.
As matters stand, Podemos is on track to win the Spanish elections in November on a platform calling for the cancellation of "unjust debt", a reversal of labour reforms, public control over energy, the banks, and the commanding heights of the economy, and withdrawal from Nato.

Europe's policy elites can rail angrily at the folly of these plans if they wish, but they must answer why ex-Trotskyists with a plan to dismantle market capitalism are taking a major EMU state by storm. It is what happens 5.46m people lack jobs, when 2m households still have no earned income, when youth unemployment is still running at 51.4pc, and home prices are down 42pc, six years into a depression.

It is pointless protesting that Spain's economy is turning the corner, a contested claim in any case. There comes a point when a society breaks and stops believing anything its leaders say.
The EU elites themselves have run their currency experiment into the ground by imposing synchronized monetary, fiscal, and banking contraction on the southern half of EMU, in defiance of known economic science and the lessons of the 1930s. It is they who pushed the eurozone into deflation, and thereby pushed the debtor states further into compound-interest traps.
It is they who deployed the EMU policy machinery to uphold the interests of creditors, refusing to acknowledge that the root cause of Europe's crisis was a flood excess capital flows into vulnerable economies. It is they who prevented a US-style recovery from the financial crisis, and they should not be surprised that such historic errors are coming back to haunt.
The revolt in Italy has different contours but is just as dangerous for Brussels. Italians may not wish to leave the euro but political consent for the project but broken down. All three opposition parties are now anti-euro in one way or another. Beppe Grillo's Five Star movement - with 108 seats in parliament - is openly calling for a return to the lira.
Mr Grillo proclaims that Syriza is carrying the torch for all the long-suffering peoples of southern Europe, as it is in a sense.
"What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming," he said.

Premier Matteo Renzi's political fortunes rest on an economic recovery that hasn't come

Premier Matteo Renzi staked everthing on a recovery that has yet to happen. He is running out of political time. Deflationary dymanics are overwhelming the fiscal gains from austerity.

Italy's public debt has jumped from 116pc to 133pc of GDP in three years. The youth jobless rate is 44pc and still rising. Italian GDP has fallen almost 10pc in six years, and by 15pc in the Mezzogiorno. Italy's industrial production has dropped back to the levels of 1980.

Worse than the Great Depression

The leaders of Spain and Italy know that their own populists at home will seize on any concessions to Syriza over austerity or debt relief as proof that Brussels yields only to defiance. They have a very strong incentive to make Greece suffer, even if it means a cataclysmic rupture and a Greek ejection from the euro.
Yet to act on this political impulse risks destroying the European Project. Europe's Left would nurture a black legend for a hundred years if the first radical socialist government of modern times was crushed and forced into bankruptcy by Frankfurt bankers - acting at the legal boundaries of their authority, or beyond - choosing to switch off liquidity support for the Greek financial system.

It would throw the Balkans into turmoil and probably shatter the security structure of the Eastern Mediterranean. It is easy to imagine a chain of events where an embittered Greece pulled out of Nato and turned to Russia, paralysing EU foreign policy in a self-feeding cycle of animosity that would ultimately force Greece out of the union altogether.
The charisma of the EU - using the Greek meaning - would drain away if such traumatic events were allowed to unfold, and all because a country of 11m people wanted to cut its primary budget surplus to 1.5pc from 4.5pc of GDP, and shake a discredited Troika off its back, for that is what it comes down to.
One is tempted to cite Jacques Delors' famous comment that "Europe is like a riding bicycle: you stop pedalling and you fall off" but that hardly captures the drama of what amounts to civil war in a union built on a self-conscious ideology of solidarity.
"The euro is fragile. It is like a house of cards. If you pull away the Greek card, they all come down,” warned Greece's finance minister Yanis Varoufakis.

“Do we really want Europe to break apart? Anybody who is tempted to think it possible to amputate Greece strategically from Europe should be careful. It is very dangerous. Who would be hit after us? Portugal?" he said.

Greece's finance minister Yanis Varoufakis says the euro "is like a house of cards"

George Osborne clearly agrees. The worries have been serious enough to prompt a one-hour Cobra security meeting. "The risks of a miscalculation or a misstep leading to a very bad outcome are growing,” said the Chancellor.
Currency guru Barry Eichengreen - the world's leading expert on the collapse of the Gold Standard in 1931 - thinks Grexit might be impossible to control. "It would be Lehman Brothers squared,” he said. 
This is not the view in Germany, at least not yet. The IW and ZEW institutes both argue that Europe can safely withstand contagion now that it has a rescue machinery and banking union in place. It must not give in to "blackmail".

Such is the 'moral hazard' view of the world, the reflex that led to the Lehman collapse in 2008.

"If we knew then what we know now, we wouldn't have done it," the then-US treasury secretary Tim Geithner told EMU leaders in early 2011, the first time they were tempted to eject Greece.
The fond hope is that the European Central Bank can and will smooth over any turbulence in Portugal, Italy and Spain by mopping up their bonds, now that quantitative easing is on the way. Yet the losses suffered from a Greek default would surely ignite a political firestorm in Germany.
Bild Zeitung has devoted two pages to warnings that Grexit would cost Germany €65bn, or much more once the Bundesbank's Target2 payments though the ECB system are included. The unpleasant discovery that Germany's Target2 exposure can in fact go up in smoke - despite long assurances that this could never happen - might make it untenable to continue such support.
It is unfair to pick on Portugal but its public and private debts are 380pc of GDP - the highest in Europe and higher than those of Greece - making is acutely vulnerable to toxic effects of deflation on debt dynamics.

Portugal's net international investment position (NIIP) - the best underlying indicator of solvency - has reached minus 112pc of GDP. Public debt has jumped from 111pc to 125pc of GDP in three years. The fiscal deficit is still 5pc. The country's ranking in global competitiveness is close to that of Greece.
"The situation in Portugal is very different," says Paulo Portas, the deputy premier. Sadly it is not. Once you violate the sanctity of monetary union and reduce EMU to a fixed-exchange system, the illusion that Portugal is out of the woods may not last long. Markets will test it.

Can Angela Merkel save the day?

Only two people can now stop the coming train-wreck. Chancellor Angela Merkel and her finance minister Wolfgang Schauble, a man who masks his passion for the EU cause behind an irascible front.
Syriza have made a strategic blunder by turning their struggle into a fight with Germany, demanding Nazi war reparations, and toying with the Russian card at the very moment when Mrs Merkel is locked in make-or-break talks on Ukraine with Vladimir Putin. 
Mr Varoufakis is trying to limit the damage, praising Mrs Merkel as the "most astute politician" in Europe, and Mr Schauble as the "only European politician with intellectual substance" - a wounding formulation for the others. He has called on Germany to cast off self-doubt and assume its role as Europe's benevolent hegemon, almost as if he were evoking the glory days of the Holy Roman Empire when pious German emperors stood as guarantors for Christendom.
This is the only pitch that will work. Angela Merkel has risen above her narrow East German outlook and her fiscal platitudes to emerge as the soul-searching Godmother of Europe and the last credible defender of its unity. But even Mrs Merkel can be pushed too far.

February 10, 2015 3:09 pm

EM bond allure fades as US rate rise looms

Jonathan Wheatley

Turkey raids©EPA

Are we watching the last gasp of the carry trade? Yield-hungry investors have again been borrowing cheaply in developed markets and investing the proceeds in high-yielding emerging markets such as Turkey, where 10-year local currency government bonds, for example, offer yields in the high single-digits.

The emerging market carry trade has a proud history and has made the fortunes of many an EM specialist. They gained not only from generous yields on EM bonds but also from the winnings on EM currencies. Many of these appreciated steadily against the US dollar before and after the global financial crisis, driven by money pulled into EM economies by their fast growth and latterly pushed in by the tide of central bank bond buying, known as quantitative easing.

But the commodities supercycle and the US Federal Reserve’s QE programme are over and emerging market investors face a less certain world. Take Turkey. When the price of oil fell last year, Turkey was spotted as a winner. It has struggled for years with a current account deficit consisting almost entirely of energy imports. Cheap oil would ease that pressure, help tackle inflation and give a boost to consumer spending. Investors piled in. Yields (which move inversely to prices) on Turkey’s 10-year local currency bonds fell from about 9.8 per cent in September to about 6.8 per cent last month.

But the benefits of cheap oil were not enough to prop up the Turkish lira. It did strengthen periodically as carry traders came in, but over the past year it has been on a steady path of weakness.
Analysts blame severe political pressure on the central bank to cut interest rates even though inflation has failed to fall as much as expected. This month, the lira has gone from about 2.28 to the dollar to about 2.48 — a body blow to the earnings of carry traders. Bond yields have retraced to about 7.8 per cent.

“The lira remains vulnerable,” says Luis Costa, a strategist at Citi Research. “Given the inflation dynamics and the pressures on the central bank, you have to be a lot more cautious.”

Turkey is far from alone. In Brazil, previously a carry trade favourite, the real has begun to undo years of gains against the dollar as the country has failed to deliver its promise of growth and investors have lost faith in the government’s ability to turn the economy round. The central bank’s interest rate is expected to stay high over the next year. Even after discounting expected inflation, real returns look generous. But investors are nervous — not least because of a corruption scandal unfolding at Petrobras, the state oil company — and the real has devalued sharply against the dollar this month.
There are similar stories elsewhere. If we net inflation expectations (a proxy for currency fluctuations) out of expected interest rates in other carry trade countries, the returns rarely match the risks. In China, for example, foreign funds are flooding out.

“The heydays of the carry trade are largely behind us,” says Aroop Chatterjee, a currency strategist at Barclays. “A lot of funding was in dollars and with US interest rates potentially heading higher, the carry is less attractive. Although interest rates have risen in some emerging markets, most are under pressure of slower growth and falling inflation, so they will cut, and that puts downward pressure on their currencies and reduces the attraction.”

Carry traders have not given up yet. The European Central Bank has taken up the QE baton, providing an alternative source of funding. Simon Quijano-Evans, a strategist at Commerzbank, says bond markets in countries such as Austria, the Netherlands and even Germany may dry up under ECB QE, leaving pension funds and others looking elsewhere for investment opportunities. But yield is already hard to find.

“If you look at yields in places like Poland and even Hungary, they have come down to historically low levels,” he says. He points to the price of credit default swaps, a form of insurance against default, which for many emerging markets are already on a par with those in developed markets. “In terms of spread compression, we are really there already.”

Mr Quijano-Evans says carry traders have an opportunity between the start of ECB QE and when the US Fed starts raising interest rates, probably in the third quarter. Even in a low-yield environment, he says, investors will keep EM local currency bonds in their portfolios. And he expects them to keep moving in and out of riskier markets such as Turkey, Brazil and Russia. But for the carry trade as it used to be, “there are just too many moving parts blowing the story”.

The Greek Austerity Myth

Daniel Gros

FEB 10, 2015

Greece ship transport

BRUSSELS – Since the anti-austerity Syriza party’s victory in Greece’s recent general election, the “Greek problem” is again preoccupying markets and policymakers throughout Europe.
Some fear a return to the uncertainty of 2012, when many thought that a Greek default and exit from the eurozone were imminent. Then as now, many worry that a Greek debt crisis could destabilize – and perhaps even bring down – Europe’s monetary union. But this time really is different.
One critical difference lies in economic fundamentals. Over the last two years, the eurozone’s other peripheral countries have proven their capacity for adjustment, by reducing their fiscal deficits, expanding exports, and moving to current-account surpluses, thereby negating the need for financing. Indeed, Greece is the only one that has consistently dragged its feet on reforms and sustained abysmal export performance.
Providing an additional shield to the peripheral countries is the European Central Bank’s plan to begin purchasing sovereign bonds. Though the German government does not officially support quantitative easing, it should be grateful to the ECB for calming financial markets.
Now Germany can take a tough stance on the new Greek government’s demands for a large-scale debt write-off and an end to austerity, without fearing the kind of financial-market turbulence that in 2012 left the eurozone with little choice but to bail out Greece.
In fact, both of the Greek government’s demands are based on a misunderstanding. For starters, Syriza and others argue that Greece’s public debt, at a massive 170% of GDP, is unsustainable and must be cut. Given that the country’s official debt constitutes the bulk of its overall public debt, the government wants it reduced.
In fact, Greece’s official creditors have granted it long enough grace periods and low enough interest rates that the burden is bearable. Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios. With payments on Greece’s official foreign debt amounting to only 1.5% of GDP, debt service is not the country’s problem.
The relatively low debt-service cost also removes the justification for Syriza’s demands for an end to austerity. The last bailout program from the “troika” (the International Monetary Fund, the ECB, and the European Commission), initiated in 2010, foresees a primary budget surplus (which excludes interest payments) of 4% of GDP this year. That would be slightly more than is needed to cover interest payments, and would thus allow Greece finally to begin to reduce its debt.
The new Greek government’s argument that this is an unreasonable target fails to withstand scrutiny. After all, when faced with excessively high debt, other European Union member states – including Belgium (from 1995), Ireland (from 1991), and Norway (from 1999) – maintained similar surpluses for at least ten years each, typically in the aftermath of a financial crisis.
To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand. But only governments with access to market finance can use expansionary fiscal policy to boost demand. For Greece, higher spending would have to be financed by lending from one or more official institutions.
For the same reason, it is disingenuous to claim that the troika forced Greece into excessive austerity. Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity.
Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over. This typically happens when the government runs a primary surplus. When the government can finance its current spending through taxes – and might even be able to increase expenditure, if it does not have to pay interest – the temptation to renege on debt intensifies.
It was widely anticipated that Greece would be tempted to follow this route when the troika program was initiated. Last year, the new Greek finance minister, Yanis Varoufakis, confirmed the prediction, arguing that a primary surplus would give Greece the upper hand in any negotiations on debt restructuring, because it could just suspend repayments to the troika, without incurring any financing problems.
That approach would be a mistake. The practical problem for Greece now is not the sustainability of a debt that matures in 20-30 years and carries very low interest rates; the real issue is the few payments to the IMF and the ECB that fall due this year – payments that the new government has promised to make.
But, to follow through on this promise (and hire more employees), Greece will need more financial support from its eurozone partners. Moreover, the country’s financial system will need continuing support from the ECB.
In other words, Greece’s new government must now try to convince its European partners that it deserves more financial support, while pushing for a reduction of its existing debt and resisting the austerity policies on which previous lending was conditioned. For Syriza and its voters, the political honeymoon could be short.

Brazil: An Ocean Of Losses - Swimming Naked When The Tide Went Out...

  • Corruption destroys the jewel of Brazil.
  • Lower oil exposed a catastrophe.
  • A real problem for Brazil.
  • Petrobras and the price of oil in the future.
Warren Buffett said after the financial crisis in 2008 that it is only after the tide goes out that you can see who is swimming naked. When the tide went out in the oil market, the Brazilians wound up in their birthday suits. The bear market in commodity prices has had a negative impact on Brazil. Raw material prices turned south in 2011, and the prices of soybeans, oil and iron ore have all plunged. Brazil is a major exporter of these and other commodities that the nation depends on for cash flow.

Brazil is the number one producer and exporter of cane sugar in the world. The price has moved from north of 36 cents per pound in 2011 to under 15 cents today. During the almost decade-long great commodity bull market that ended in 2011, Brazil did well. Higher prices and increasing investment capital hid underlying issues within the country. Now that the bull has turned bear, the Brazilian economy is suffering. Add to that the fact that Sao Paulo, the capital, is running out of water due to the biggest drought in decades, and that the real has dropped the most among major currencies in the past six months. This past week, a scandal of epic proportions is rocking the former star of BRIC nations. The scandal hits right at the heart, the epicenter of Brazilian business, growth, politics and economic power.

Corruption destroys the jewel of Brazil

Petrobras, the state-run oil company, was the crown jewel of Brazil as it emerged from the global economic crisis. The company, Petroleo Brasileiro S.A. (NYSE:PBR), operates as an integrated oil and gas company in Brazil, and internationally is engaged in the exploration, development and production of crude oil, natural gas liquids and natural gas for sale in the domestic and international markets. As Petrobras grew, its international segment spanned the globe, with interests in the Americas, Africa, Europe and Asia. As of December 31, 2013, the company had proved and developed oil and gas reserves of more than 7.6 billion barrels of oil equivalent and proved undeveloped reserves of almost 5 billion barrels in Brazil. Measured by 2011 revenues, Petrobras was the largest company in the Southern hemisphere by market capitalization, and the largest in Latin America by revenues. Petrobras was the tenth-largest oil and gas company in the world by revenue. At its peak valuation in 2008, the company had a market capitalization of $310 billion.

Fast-forward to 2015. As the oil price cratered, falling from over $107 per barrel in June 2014 to around the $50 level today, the company has failed to meet growth targets, not just recently but for a number of years. Investors face enormous losses.

(click to enlarge)

PBR stock has dropped from highs of over $131 per share in 2008 to close Friday, February 6, at $6.54. Its market cap stands at under $43 billion. It seemed odd that Petrobras struggled even before oil prices crashed. Now, a vast corruption scandal at Petrobras provides the aha moment. Payoffs, embezzlement, and corruption has rocked Petrobras, and last week, the CEO and five top managers resigned in disgrace as police probes pick up steam.

Lower oil exposed a catastrophe

Like many corruption cases in the past, it is easy to keep the illegal activity going as long as cash flows into an entity. Consider the case of Bernie Madoff. The 2008 financial meltdown exposed his ponzi scheme when the cash stopped flowing in and investors asked for redemptions. When the financial tide went out, the game was up for Madoff, who admitted to stealing billions in a multi-decade game of fraud and deceit. In the case of Petrobras, lower oil revenues unmasked the years of corruption and payoffs. When oil and gas revenues flowed like water, it was easy to bury the ill-gotten gains for a select few far below the surface. When the gush of earnings turned to a trickle, those improprieties became apparent, destroying the market capitalization of the once-great South American energy giant. For Brazil, the destruction of the company that once stood as the emerging market nations' crown jewel is nothing short of an economic catastrophe.

A real problem for Brazil

The situation at Petrobras comes at a very bad time for the economy of Brazil, the nation's leadership, and citizenry. Lower commodity prices and a long-term drought have weighed heavily on the country recently. Wealth destruction in Brazil's energy industry is nothing new. OGX, Eike Batista's flagship oil-producing company, went bankrupt in 2013. Last week, a judge in Rio seized Batista's assets as part of an insider trading case brought against him.

On the governmental front, the budget gap in Brazil more than doubled from 3.25% of GDP in 2013 to 6.7% in 2014. Last March, S&P cut the country's credit rating to one level above junk, and it is likely that a further downgrade is in the cards. On the political front, the scandal may present special problems for President Dilma Rousseff. Maria das Gracas Foster, the now disgraced and deposed CEO of Petrobras, was a close friend and advisor to the president. For more than a decade, the two have had a relationship, dating back to when Rousseff herself was chairperson of Petrobras.

The citizens of Brazil take great pride in their country, and the scandal at Petrobras has rocked the nation. Protesters have descended on the company's headquarters in downtown Rio de Janeiro on a daily basis. As Carnival approaches, masks of Foster's face have become popular for protestors and partiers alike. While Petrobras continues to produce record amounts of oil and gas, it is difficult to imagine that the company will continue to thrive, given the extent of the scandal. The energy business is capital-intensive. The company is likely to find itself in a tough spot when it comes to raising capital in debt or equity markets anytime soon.

Petrobras and the price of oil in the future

During the great commodity bull market that commenced over a decade ago, Petrobras became a beacon of Brazilian economic strength for the nation with rich natural resource reserves. In the wake of the global economic crisis of 2008, Brazil emerged as an emerging market powerhouse - perhaps the strongest of all the BRIC nations.

A commodity bear market, drought, and now yet another scandal exposing graft and corruption that may reach to the highest levels of business and politics in Brazil has set the country's economy back many years. Petrobras, once seen as one of the strongest energy companies in the world, will find itself a shell of what it once was. The world counted on Petrobras for energy production for years to come. Now, that energy will have to come from elsewhere. Perhaps the only positive in the Petrobras saga is for the price of oil itself. Here is a major producer that will not produce anywhere near the levels expected in the years to come due to a lack of capital.

Commodity prices have moved considerably lower over the past months. Brazil stands to be one of the biggest losers, due to their position in the world as a major producer of many raw materials. The scandal at Petrobras just adds insult to injury for the nation and its people.

When the tide rolled out for commodity prices, Brazilian corruption was exposed. Perhaps the Chinese, the biggest commodity consumers in the world, will step in with a rescue package for Petrobras and its vast portfolio of reserves. The situation presents China with yet another opportunity to buy vast commodity resources for pennies on the dollar. If this comes to pass, it may leave the Brazilians with another couple of corrupt billionaires and the Chinese with perhaps the most important natural resource of Brazil.

The Dirtiest Secret of the War on Terror

13:25 06.02.2015(updated 14:07 06.02.2015)

Pepe Escobar

 Out of the bowels of a US maximum-security prison in Florence, Colorado, al-Qaeda operative Zacarias Moussaui, currently serving a life sentence, providentially has shed light on what amounts to the dirtiest secret of the “war on terror”.
In over 100 pages of testimony, filed in a federal court in New York earlier this week, Moussaui drops several House of Saud-related bombs. Not least that among leading al-Qaeda donors prior to 9/11 we find former Saudi intel chief Prince Turki al-Faisal (also a former great buddy of Osama bin Laden); notorious former ambassador to the US and failed sponsor of hardcore jihadis in Syria, Prince Bandar bin Sultan, aka Bandar Bush; darling of Western markets (and Rupert Murdoch) Prince al-Waleed bin Talal; and a who’s who of Saudi Arabia’s top Wahhabi clerics. 

None of this is any novelty for those among us who since Afghanistan in the 1980s have been following the extraordinarily murky adventures of Wahhabi-sponsored/derived jihadism.
The information is even more relevant when compared to an upcoming book by Michael Springmann — the former head of the US visa section in Jeddah, Saudi Arabia. In Visas for al-Qaeda: CIA Handouts that Rocked the World, Springmann essentially details how, “during the 1980s, the CIA recruited and trained Muslim operatives to fight the Soviet invasion of Afghanistan.
Later, the CIA would move those operatives from Afghanistan to the Balkans, and then to Iraq, Libya, and Syria, traveling on illegal US visas. These US-backed and trained fighters would morph into an organization that is synonymous with jihadist terrorism: al-Qaeda.”
"The political purpose of these revelations, from Washington's point of view, is to put pressure on the House of Saud to keep pumping their oil surplus. The recent rebound in oil is causing some hysteria in Washington, because it may be linked to the Saudis having second thoughts about their oil price war against, most of all, Russia."
Well, in the beginning there was not even an “organization”. By the mid-1980s, “al-Qaeda” was only a database in a computer linked to the communications department of the secretariat of the Islamic Conference. At the time, when Osama bin Laden was nothing but a proxy US agent operating in Peshawar, al-Qaeda’s intranet was a good communication system for fighters to exchange code messages. “al-Qaeda” was neither a terrorist organization – an Islamist army — nor personal property of Osama bin Laden.
Later on, in the mid-2000s in Iraq, Abu Musab al-Zarqawi – the Jordanian thug precursor of ISIS/ISIL/Daesh – was recruiting militants/fanatics/angry young men by himself, without any direct input by bin Laden. His set up was al-Qaeda in Iraq (AQI).
So al-Qaeda was and remains a brand, a successful franchising. It is not, and never was, an organization; rather a key operational element of an intel agency. Thus the categorical imperative; al-Qaeda is essentially a derivation of Saudi intel. The best evidence would be the murky role, from the beginning, of wily Prince Turki, the former, long-time director general of the Mukhabarat, the House of Saud intel (but Turki is not talking, and he never will). Turkish intel, for its part, has never bought the myth of an “al-Qaeda” organization. 
Al-Qaeda in the House
The Moussaui revelations become really explosive when dots are connected between the political ideology of the House of Saud, al-Qaeda’s political platform, and even the warped ideology of the fake Caliphate of ISIS/ISIL/Daesh. The matrix for all these is 19th century Wahhabism – and its medieval interpretation/appropriation of Islam.
They are all applying different methods – some much gorier than others – towards essentially the same goal: the proselytizing of Wahhabism. The key difference is that al-Qaeda and ISIS/ISIL/Daesh are Wahhabi renegades, who ultimately would like to replace the House of Saud – a puppet of the West — with an even more intolerant Salafi rule and/or Caliphate.

House of Saud equals al-Qaeda equals the Caliphate. Once this “secret” bombshell is out of its Arabian Pandora’s box, the whole US rationale behind that gift that keeps on giving, the “war on terror” – which for the Pentagon equals Infinite War — collapses. 
And that brings us to the new head of the House of Saud, Prince Salman, fast on his way to (literal) dementia. During the 1990s, he was a staunch supporter of Salafi-jihadism, and that of course included bin Laden. And later on, as Governor or Riyadh, he excelled on the hatred of Shi’ites department, which expanded to hatred of Iran as a whole – not to mention hatred of any vaguely remote democratic practices inside Saudi Arabia.
It’s useless to expect Salman to “reform” — as much as it’s useless to expect the Obama administration to let go of Washington’s love affair with “our” favorite bastards in the Persian Gulf. But now there’s a key new element; House of Saud desperation. 
It’s no secret in Riyadh and across the Gulf that the new King and his Western-educated advisors are completely freaking out. They see themselves surrounded by Iran – which, to top if off, may finally strike a nuclear deal with the “Great Satan” this summer.

They see the fake Caliphate of ISIS/ISIL/Daesh controlling a great deal of “Syraq” – with their sights set on Mecca and Medina. They see the pro-Iran al Houthi Shi’ites now controlling Yemen. They see the majority Shi’ites in Bahrain barely repressed by mercenary forces. They see substantial Shi’ite unrest in the Eastern Province of Saudi Arabia, where the oil is.

They are spread out all over the Middle East still possessed by their “Assad must go” psychosis (he’s not going anywhere though). They need to finance the military junta now in power in Egypt to the tune of tens of billions of dollars (Egypt is essentially broke.) To top it off, they foolishly bought Washington’s fight against Russia by embarking in an oil price war which is corroding their own budget.  
Substantially, what has happened so far in Riyadh is just a palace coup. Salman got rid of everyone associated with late King Abdullah. Notorious Bandar Bush – still fresh from his spectacular Syria fiasco – was fired from his post of Secretary-General for the National Security Council and special envoy of the King. Perhaps Dr. Ayman al-Zawahiri could find him a job. 
There is no evidence Salman will crack down on a rash of influential, demented clerics – and pious wealthy donors — who export Wahhabism as global jihad. There is no evidence that if the House of Saud is really serious about fighting ISIS/ISIL/Daesh, Salman will make the effort to cooperate with the Shi’ite majority government in Baghdad. Or at least let Iran take care of the problem (and they can, with their military advisors and support for selected militias like the Badr brigade).
There is no evidence the House of Saud will try to reach a compromise with Tehran; instead, paranoia reigns, because not only ideologically but politically they see themselves marginalized once Iran rises as a regional superpower in case a nuclear deal is clinched this summer. 
Most of all, there is no evidence the “Don’t Do Stupid Stuff” (Obama’s own words) administration has the capability to seriously review US-Saudi relations. What is certain is that the dirtiest secret of the war on terror will remain off-limits. All the “terror” we face, real or manufactured, springs out from just one source; not “Islam”, but intolerant, demented Wahhabism.
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