To Leave The Euro or Not to Leave The Euro, That is The Question

By: Julian D. W. Phillips

Friday, February 6, 2015

As we watched the Prime Minister and the Finance Minister of Greece travel though Europe in a failed attempt to re-negotiate the terms of the "Bailout" it received, we find ourselves thinking quite differently to the mainstream commentators. Ours is not a jaundiced view but a realistic one. Pragmatism demands we do so. The prime underlying factors that will be brought into play are the interests of each side.
After all, countries don't have friends they have interests, even with fellow members of the Eurozone. These will dictate the result and likely the tactics on each side. We do not see these as friendly negotiations at all. For Greece the stakes are higher than they are for the E.U.
    Not Friends, only interests!
Cutting through the rhetoric and cordiality we have been saw this week, the interests of each side are very clear.
  • Greece, while seeing the faults of the past since it joined the Eurozone, feels it has suffered enough punishment with a contraction of its GDP and what is now a perpetual debt crisis. It now believes the bailout has stripped the nation of its dignity.The 25% contraction of GDP together with 50% of its youth unemployed and its skilled workforce leaving to find employment in other countries, Greece is bankrupt with no ability to repay its debt. It has little to lose. The statistics point to growth appearing again, but this is little more than cosmetic, as the damage already done will take generations to take Greece back to where it was. It doesn't blame the E.U. entirely, which is why the new government will target the graft that has been a feature of Greek society for decades and enforce taxation on its very rich and until now, political classes who have 'ducked' paying up so far.
  • Greece has little more to lose as a default on their debt is imminent. They can't repay the debt even if they wanted to, which they don't. The election has committed the new government to that position. The question stands, "Is the new Government and the pain it now has, sufficient to take Greece back to the Drachma?"
  • With a new government voted in to clean up this mess and to give it room to recover through either the writing off or re-scheduling and restructuring of its debt, it has the mandate to do what is necessary to achieve this. The two leaders have to be determined to achieve these results for if they aren't they will commit political suicide and that of their party. This is what they are discussing this weekend.
  • We are reminded of 1919 when Germany itself felt the same when it had un-repayable reparation terms imposed on it at the end of the First World War and the impact it had on Germans then and for the next 25 years. Greece can't follow that road, but if they feel strongly enough they can exit the euro and potentially the Eurozone!
  • On the other side, Germany and the strong northern members of the E.U. need a weak euro. The southern member states ensure that through their economic weakness they will continue to enjoy a weak and weakening euro. So they would not be happy to see Greece leave the euro or the Eurozone.
  • If Greece did leave it would ensure a major loss of international trade competitiveness, as the price of a strong euro would suck out the competitiveness of German and Northern member states goods, as their prices would jump with the euro. If that were to happen the euro would likely go much higher than its $1.40 peak of last year. No, the interests of the E.U. lie in keeping Greece and other southern member states economically weak, while retaining them in the Eurozone.
If we were able to measure the financial benefits to the strong member States of the E.U. we are in no doubt that the €250 billion in loans to Greece are only a small fraction of the profits gained because the euro has been much weaker than a Deutschemark would have been. Even at current levels the E.C.B. wants to see further falls in the euro exchange rate against global currencies, to stave off imminent deflation.
Spain, Italy and France are watching the events riveted to the potential outcome, which could spell the future of the Eurozone, either way. The hoped for integration of Eurozone member states always was a pipedream and a distraction from the real intent of the union of member states. As to the financial union under common rules of behavior the patterns of behavior differed so much before the formation of the E.U. that integration of such differing people was at best a vague hope, no more.
Greece joined because of what it could get out of the Eurozone as did Germany and all other members. Austerity has not worked for Greece. It simply brought the country to today, close to leaving the Eurozone as a bad, bankrupt, debtor.
If Greece is successful in renegotiating its debt, or if it leaves the Eurozone and the euro, we believe that other economically weak member states will contemplate following it back to their old currencies. Then weighing the new price of German imports against, say, cheap Chinese alternatives could lead to a further decimation of exports from Northern Eurozone member states.
The history of Europe for the last 2,000 years shows that national integration, as is present in the U.S.A., is nigh on impossible. To think that that was ever a real intention was naïve. No, Greeks are Greeks, Germans are German. Never the twain shall meet. So financial realities now come to bear.
    No protection from Creditors for nations!

In the case of individuals, institutions and municipalities in the developed world, when an angry creditor chases a bankrupt debtor, credit protection measures slow down the creditor. The days when a debtor would go to prison are long passed. But in the Eurozone, at sovereign level, no such protections exist.

The realities facing creditor and debtor, in the case of Greece and the E.U. are that they must slug it out pushing their own interests first. When the bruising hurts and threatened damage real, then a settlement will be reached, not before then. The Eurozone can carry the loss of the Greek debt if need be and could even enjoy a much weaker euro thereafter, but only if they accede to Greece's terms to a large extent. Greece has now drawn a line in the sand that defines its stance and cannot afford to budge.

Writing off debt becomes the most pragmatic of options, but it seems that the Greek ministers have already ruled that out weakening their position right at the start of the negotiations by saying they did not want to write off that debt, just renegotiate it. As they sit at home this weekend they may well be contemplating a much more dramatic stance as they face the wall of resistance they saw in the E.C.B. and in Germany.

    No E.C.B. loans against Greek debt from January 11

The ECB and Germany have already started the chest beating with fear and volatility hitting Greece's financial sector, putting the government on the back foot.

The E.C.B. has stated it will not continue to give funding against Greek bonds from January 11th onwards. This threw pressure onto the Greek banking system who have put on a brave face so far. But with Greece's back now against the wall it appears that this first hostile act is giving a mandate to the two Greek Ministers to take very strong action at a potentially greater cost to the country, but an even greater cost to the Eurozone!

With E.U. Q.E. beginning in March, it appears that Greece will lose out there too. If the E.C.B. follows through by not accepting Greek Bonds in this program too [it seems more than likely that this is the next pressure the E.C.B. will impose] it could lead to the Greek population accepting a departure from the Eurozone and the euro.

Will Greece suffer more if it writes off its debt to the E.U.? After all, the big attraction to Greece of being a member of the E.U. was the major loans and finance it was to receive. It has had these and it seems they are now being cut off, so what more is there in it for Greece?

Perhaps a return to a weak Drachma will lead to a boost to the Greek economy and allow its politicians to blame the E.U. for its new woes. That way the new government would be heroes, no matter what the damage a failure to renegotiate its debt brings to Greece. To fail to achieve an acceptable renegotiated debt package would discredit the new government and the entire country's credibility, irrevocably. It would be political suicide for the new government.

The way forward for them is clear. They have to be fully prepared to leave the Eurozone, unless the benefits of staying in it bring huge new benefits to Greece and its people.

But that message has not got across to the E.U. or Germany, yet. Our only question of the Prime and Finance Minister of Greece is, "Do they have the personal resolve to walk out of the Eurozone or not?"

    Global consequences

A strong euro will hasten deflation in the Eurozone as well Draghi knows. The whole thrust of his quantitative easing policy is reliant on a weak euro. If a strong euro is seen, the entire globe will be affected. China sees the E.U. as its largest client, so a strong euro will see more Chinese goods flowing in or will deflation affect these no matter what their price is?

Deflation in the Eurozone will dampen that and affect the recovery in the U.S. The Fed is worried, as was seen in its statement of last week. The last time the FOMC statement made a direct reference to international turbulence was January 2013, when officials warned that "although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook." Translated it means that Eurozone troubles are a danger to the U.S.' recovery and could delay the raising of U.S. interest rates.

From now on, we expect growing currency volatility and a turning to gold and then silver, slowly but surely!

Shareholder activism

Capitalism’s unlikely heroes

Why activist investors are good for the public company

Feb 7th 2015


AS INVENTIONS go, the public company is one of capitalism’s greatest. Initial public offerings promote innovation, by providing an exit route for entrepreneurs; being listed makes a firm open to scrutiny; and ordinary people have a chance to invest in capitalism’s wealth-creating machines.

But the past 15 years have cast a shadow over the public company. There was not much sign of scrutiny or wealth creation in fiascos like Enron and Lehman Brothers. Governance has been weakened by the rise of passive index funds, which means that many firms’ largest shareholders are software programs. Institutional investors prefer to sell at the first sign of trouble rather than manage problems—so chief executives obsess about quarterly earnings and grab pay and power while they can. At the same time, tycoons in Silicon Valley have often turned outside investors into second-class citizens, by creating special voting rights for their own shares.

Private-equity barons say their model of concentrated ownership makes more sense. Some governments argue that companies need the steadying hand of the state. But there is a better way. Activist hedge funds take small stakes in firms and act like political campaigners, trying to win other shareholders’ support for their demands: representation on companies’ boards, cost-cutting, spin-offs and returning cash to shareholders. Mad, bad and dangerous to know, activists are often loathed by public-company bosses for their belligerence and opportunism. But the bosses are wrong. Activists are in fact the public company’s unlikely saviours.

Hyenas laughing...
Activists have been around since the 1980s, but the scale of their insurrection in America is unprecedented. Activists run funds with at least $100 billion of capital, and in 2014 attracted a fifth of all flows into hedge funds. Last year they launched 344 campaigns against public companies, large and small. In the past five years one company in two in the S&P 500 index of America’s most valuable listed firms has had a big activist fund on its share register, and one in seven has been on the receiving end of an activist attack.

Americans encounter firms that activists have targeted when they brush their teeth (Procter & Gamble), answer their phone (Apple), log in to their computer (Microsoft, Yahoo and eBay), dine out (Burger King and PepsiCo) and watch television (Netflix). In December an activist fund called Trian broke new ground by winning a board seat at Bank of New York Mellon, custodian for many of the world’s biggest banks.

A disgrace, say some; the cult of short-term shareholder value gone mad. Activists have a reputation for stripping cash and assets and loading firms with debt. Their rowdiness seems calculated to distract managers, good or bad. One prominent activist, Carl Icahn, likes to call chief executives “morons” and tease them on Twitter. Another, Bill Ackman of Pershing Square, has compared Herbalife, a firm he says is a fraud, to the Nazis. When Dan Loeb went for Sotheby’s, its then chairman branded him a “scumbag”. Some have used dubious tactics, including building positions by stealth with derivatives.

So much money is flowing the activists’ way that a few will no doubt go too far, harming a decently run firm or even breaking the law in the pursuit of an edge. Yet, despite their flaws and excesses, activists are a force for good.

...all the way to the bank
One reason is that plenty of companies suffer from rotten management. About a tenth of big American firms, and even more smaller ones, still employ tactics like “poison pills” and staggered boards that shelter incompetent managers.

Another is that today’s activists belie the scavenging stereotype of the 1980s. They often seek to improve firms’ boards rather than strip companies of assets. They work with other shareholders, frequently winning the support of big money-managers such as Capital Group and Fidelity. They are raising longer-term capital and so stretching their investment horizons.

ValueAct, based in San Francisco, locks in its investors for three to four years and has served on the boards of 37 firms, including Microsoft. Mr Ackman has raised a pile of “permanent capital”. The Economist has analysed the 50 largest activist positions in America since 2009. More often than not, profits, capital investment and R&D have risen.

Private-equity funds are another way of fixing misfiring firms. But activists have advantages over Wall Street’s buy-out barbarians. Instead of loading up on debt to finance the takeover of entire firms, they get the work done with a stake of, typically, just 5% or so. That means activists are good value because they use less debt, pay no takeover premium and extract far lower absolute fees.

Most of all, activists fill a governance void that afflicts today’s public companies. A rising chunk of the stockmarket sits in the hands of lazy investors. Index funds and exchange-traded funds mimic the market’s movements, and typically take little interest in how firms are run; conventional mutual funds and pension funds that oversee diversified portfolios dislike becoming deeply involved in firms’ management. In the face of Wall Street’s provocateurs, America’s lazy money is waking up.

Whether their ideas are barmy or brilliant, the activists make it harder for investors to stay on the sidelines. Mutual funds and pension funds are being forced to take a view, and hence become more active and forward-looking.

European and Asian shareholders say they do not need activists because they have more power than American investors over managers’ pay and appointments. They typically dismiss Mr Icahn and his friends as an American solution to an American problem. And, for cultural reasons, the few European activists tend to be more diplomatic and consultative than their brash cousins.

Yet wherever there are stockmarkets you will find underperforming companies, clubbable bosses and lazy capital. The public company was never meant to be a bureaucracy run by distant managers accountable to funds run by computers. The activist revolt will help give it a new lease of life.

Devaluation by China is the next great risk for a deflationary world

China is not alone in facing a dilemma as deflation spreads and beggar-thy-neighbour currency wars become the norm

By Ambrose Evans-Pritchard

9:44PM GMT 04 Feb 2015

A clerk counts Chinese currency notes at a bank branch in Huaibei in central China's Anhui province

 The 50-point cut in the RRR from 20pc to 19.5pc injects roughly $100bn into the Chinese financial system Photo: AP
China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely.
A year of tight money from the People's Bank and a $250bn crackdown on shadow banking have pushed the Chinese economy close to a debt-deflation crisis.
Wednesday's surprise cut in the Reserve Requirement Ratio (RRR) - the main policy tool - comes in the nick of time. Factory gate deflation has reached -3.3pc. The official gauge of manufacturing fell below the "boom-bust" line to 49.8 in January.
Haibin Zhu, from JP Morgan, says the 50-point cut in the RRR from 20pc to 19.5pc injects roughly $100bn into the system.
This will not, in itself, change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5pc in real terms over the past three years as a result of falling inflation. UBS said the debt-servicing burden for these firms has doubled from 7.5pc to 15pc of GDP.

Yet the cut marks an inflection point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100pc to 250pc of GDP in eight years. By comparison, Japan's credit growth in the cycle preceding its Lost Decade was 50pc of GDP.
The People's Bank may have to cut all the way to zero in the end - a $4 trillion reserve of emergency oxygen - but to do that is to play the last card.
Wednesday's trigger was an amber warning sign in the jobs market. The employment component of the manufacturing survey contracted for the 15th month. Premier Li Keqiang targets jobs - not growth - and the labour market is looking faintly ominous for the first time.
Unemployment is supposed to be 4.1pc, a make-believe figure. A joint study by the International Monetary Fund and the International Labour Federation said it is really 6.3pc, high enough to cause sleepless nights for a one-party regime that depends on ever-rising prosperity to replace the lost elan of revolutionary Maoism.
Whether or not you call it a hard-landing, China is struggling. Home prices fell 4.3pc in December. New floor space started has slumped 30pc on a three-month basis. This packs a macro-economic punch.

A study by Jun Nie and Guangye Cao for the US Federal Reserve said that since 1998 property investment in China has risen from 4pc to 15pc of GDP, the same level as in Spain at the peak of the "burbuja". The inventory overhang has risen to 18 months compared with 5.8 in the US.
The property slump is turning into a fiscal squeeze since land sales make up 25pc of local government money. Zhiwei Zhang, from Deutsche Bank, says land revenues crashed 21pc in the fourth quarter of last year. "The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown," he said.
The IMF says China's fiscal deficit is nearly 10pc of GDP once land sales are stripped out and all spending included, far higher than generally supposed. It warned two years ago that Beijing was running out of room and could ultimately face "a severe credit crunch".
The gears are shifting across the Chinese policy spectrum. Shanghai Securities News reported that 14 Chinese provinces are preparing a $2.4 trillion blitz on infrastructure to combat the downturn, a reversion to the same policies of reflexive stimulus that President Xi Jinping forswore in his Third Plenum reforms.
How much of this is new money remains to be seen but there is no doubt that Beijing is blinking. It may be right to do so - given the choice of poisons - yet such a course stores up even greater problems for the future. The China Development Research Council, Li Keqiang's brain-trust, has been shouting from the rooftops that the country must take its post-debt punishment "as soon possible".
China is not alone in facing this dilemma as deflation spreads and beggar-thy-neighbour currency wars become the norm. Fifteen central banks have eased monetary policy so far this year.
Denmark's National Bank has cut rates three times in two weeks to -0.5pc in an effort to defend its euro-peg, the latest casualty of the European Central Bank's €1.1 trillion quantitative easing. The Swiss central bank has been blown away.
Asia is already in a currency cauldron, eerily like the onset of the 1998 crisis. The Japanese yen has fallen by half against the Chinese yuan since Abenomics burst upon the Pacific Rim. Japanese exporters pocketed the windfall gains of devaluation at first to boost margins. Now they are cutting prices to gain export share, exporting deflation.
China's yuan is loosely pegged to a rocketing US dollar. Its trade-weighted exchange rate has jumped 10pc since July. This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn.

David Woo, from Bank of America, says Beijing may be forced to join the currency wars to defend itself, even though this variant of the "Prisoner's Dilemma" leaves everybody worse off.

"We view a meaningful yuan devaluation as a major tail-risk for the global economy," said.
If this were to happen, it would send a deflationary impulse worldwide. China spent $5 trillion on fixed investment last year, more than Europe and America combined, increasing its overcapacity in everything from shipping to steels, chemicals and solar panels, to even more unmanageable levels.
A yuan devaluation would dump this on everybody else. It would come at a moment when Europe is already in deflation at -0.6pc, and when Britain and the US are fast exhausting their inflation buffers as well.
Such a shock would be extremely hard to combat. Interest rates are already zero across the developed world. Five-year bond yields are negative in six European countries. The 10-year Bund has dropped to 0.31. These are no longer just 14th century lows. They are unprecedented.
My own guess is that we would have to tear up the script and start printing money to build roads, pay salaries and fund a vast New Deal. This form of helicopter money, or "fiscal dominance", may be dangerous, but not nearly as dangerous as the alternative.
China faces a Morton's Fork. Li Keqiang has made it his life's mission to stop his country drifting into the middle income trap. He says himself that the investment-led model of past 30 years is obsolete. The low-hanging fruit of catch-up growth has been picked.
For two years he has been trying to tame the state's industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.

February 3, 2015 6:59 pm

A deal to bring modernity to Greece

Martin Wolf

The EU is supposed to be a union of democracies, not an empire. It should negotiate in good faith

Ingram Pinn illustration©Ingram Pinn

Maximum austerity and minimum reform have been the outcome of the Greek crisis so far.

The fiscal and external adjustments have been painful. But the changes to a polity and economy riddled with clientelism and corruption have been modest. This is the worst of both worlds. The Greek people have suffered, but in vain. They are poorer than they thought they were. But a more productive Greece has failed to emerge. Now, after the election of the Syriza government, a forced Greek exit from the eurozone seems more likely than a productive new deal. But it is not too late. Everybody needs to take a deep breath.
The beginning of the new government has been predictably bumpy. Many of its domestic announcements indicate backsliding on reforms, notably over labour market reform and public-sector employment. Alexis Tsipras, the prime minister, and Yanis Varoufakis, the finance minister, have ruffled feathers in the way they have made their case for a new approach. Telling their partners that they would no longer deal with the “troika” — the group representing the European Commission, the European Central Bank and International Monetary Fund — caused offence. It is also puzzling that the finance minister thought it wise to announce ideas for debt restructuring in London, the capital of a nation of bystanders.

More significant, however, is whether Greece will run out of money soon. Most observers believe that Greece could find the €1.4bn it needs to pay the IMF next month even if the current programme were to lapse at the end of February. A more plausible danger is that Greek banks, vulnerable to runs by nervous depositors, would be deprived of access to funds from the European Central Bank. If that were to happen, the country would have to choose between constraining depositors’ access to their money and creating a new currency.

As Karl Whelan, Irish economist, notes, the ECB is not obliged to cut off the Greek banks. It has vast discretion over whether and how to offer support. The fundamental issue, he adds, is not whether Greek government securities are judged in default, since Greek banks do not rely heavily upon them.

Far more important are bonds the banks themselves issue, which are guaranteed by the Greek government. The ECB has stated it will no longer accept such bonds after the end of February, the date of expiry of the EU programme. If the ECB were to stick to this, it would put pressure on the Greek government to sign a new deal. But this government might well refuse. In that case the ECB might cut off the Greek banks.

Martin Wolf charts

This game of chicken could drive the eurozone into an unnecessary crisis and Greece into meltdown before serious consideration of the alternatives. The government deserves the time to present its ideas for what it calls a new “contract” with its partners. Its partners surely despise and fear what Mr Tsipras stands for. But the EU is supposed to be a union of democracies, not an empire. The eurozone should negotiate in good faith.

Moreover, the ideas presented on the debt are worth considering. Mr Varoufakis recognises that partner countries will not write down the face value of the debt owed to them, however absurd the pretence may be. So he proposes swaps, instead.

A growth-linked bond (more precisely, one linked to nominal gross domestic product) would replace loans from the eurozone, while a perpetual loan would replace the ECB’s holdings of Greek bonds.

One assumes the ECB would not accept the latter. But it might accept still longer-term bonds instead.

GDP-linked bonds are an excellent idea, because they offer risk-sharing. A currency union that lacks a fiscal transfer mechanism needs a risk-sharing financial system. GDP-linked bonds would be a good step in that direction.

Martin Wolf charts

Many governments would oppose anything that looks like a sellout to extremists. The Spanish government is strongly opposed to legitimising the campaign of its new opposition party, Podemos, against austerity. Nevertheless, Greece and Spain are very different. Spain is not on a programme and owes much of its debt to its own people. It can justify much of its policy mix in its own terms, without having to oppose a new agreement for Greece.
Two crucial issues remain. The first is the size of the primary fiscal surplus, now supposed to be 4.5 per cent of GDP. The government proposes 1.0 to 1.5 per cent, instead. Given the depressed state of the Greek economy, this makes sense. But it also means Greece would pay trivial amounts of interest in the near term.

The second issue is structural reform. The IMF notes that the past government failed to deliver on 13 of the 14 reforms to which it was supposedly committed. Yet the need for radical reform of the state and private sector no doubt exists.

One indication of the abiding economic inefficiency is the failure of exports to grow in real terms, despite the depression.

Indeed, Greece faces far more than a challenge to reform. It has to achieve law-governed modernity. It is on these issues that negotiations must focus.

Martin Wolf charts

So this must be the deal: deep and radical reform in return for an escape from debt-bondage.

This new deal does not need to be reached this month. The Greeks are right to ask for time.

But, in the end, they need to convince their partners they are serious about reforms.

What if it becomes obvious that they cannot or will not do so? The currency union is a partnership of states, not a federal union. Such a partnership can only work if it is a community of values. If Greece wants to be something quite different, that is its right. But it should leave. Yes, the damage would be considerable and the result undesirable. But an open sore would be worse.

So calm down and talk. Let us all then see whether the talk can become action.


Peru’s no-convictions politician

A failed labour reform exposes the limits of pragmatism

Feb 7th 2015

OLLANTA HUMALA is Latin America’s political weather vane. A former army officer, in 2006 he ran for Peru’s presidency (and lost) as a sympathiser of Hugo Chávez, his campaign financed in part by Venezuelan money. In 2011 he ran again, this time as a disciple of Brazil’s left-leaning but pragmatic former president, known as Lula, calling for “a great transformation”. To win a run-off election that year he moved further to the centre, promising to maintain the liberal economic policies that helped to give Peru the fastest growth rate of South America’s larger economies over the previous decade.

In office, that is what he has done, while recently drifting to a kind of mild populism of the centre-right—the default mode of Peruvian politics since the 1990s. His government has a schizophrenic quality. It has been marked by a superficial instability—he is on his sixth prime minister and sixth interior minister—and an undercurrent of intrigue.

The most recent scandal involves claims by opposition leaders and some of the president’s former supporters that they have been spied upon. The current interior minister, Daniel Urresti, is a retired army general who is being investigated on a charge of murdering a journalist during the war against the Shining Path terrorist group in the 1980s. Mr Urresti has helped to push up the president’s approval rating by behaving as a hyperactive police chief, forever seeking headlines even as crime worsens.

At the same time Mr Humala has appointed a core of capable technocrats to run socio-economic policies. His government is undertaking an overhaul of the country’s schools, and encouraging innovation and diversification of the economy. It is trying to free projects for new roads and metro lines from the red tape that binds them to the drawing board.

Such efforts are urgent and should go further. The end of the commodity boom has hit Peru hard. The economy grew by 2.4% last year, less than half the government’s forecast. Alonso Segura, the finance minister, insists growth will rebound to 4.8% in 2015. But there is no reason to believe the performance will be any better this year than last. The fall in the price of copper, Peru’s biggest export, will offset cheaper imports of oil products. Public investment will slow because newly elected regional governors and mayors are still figuring out how to do their jobs.

The finance ministry’s forecasts have lost credibility. It has misdiagnosed a permanent structural shock as a temporary lack of demand. It shovelled money at the economy last year, with tax cuts and extra bonuses for lower-paid public workers. This would have been better spent on attracting better teachers and administrators: a lack of proper finance is undermining the education reform and another aimed at professionalising the civil service. But Mr Humala has blocked this, because he fears criticism of wage rises for senior public servants, says one insider.

While Mr Humala accepts the need for structural reforms, his efforts have been timid. Two-thirds of Peruvians work in the informal sector, bereft of all labour protection. Fearing union opposition, the president vetoed the economic team’s plan to liberalise Peru’s extraordinarily rigid labour legislation.

Instead in December Congress approved a measure encouraging employers to hire 18-24-year-olds under a slightly more flexible regime. Modest though it was, this law prompted marches by thousands of students. On January 26th Congress decided the law was not worth the fuss and repealed it.

In a country that has lost faith in its political leaders, Mr Humala’s approval rating of around 30% compares favourably with that of his predecessors at the same stage in their terms. In 2011 his coalition, called Gana Peru, won 47 of the 130 seats in Congress. But his legislators were elected on his Lula-esque platform; 13 have deserted him, either because of his rightward shift or over palace intrigues. He risks losing control over the legislature in the final 18 months of his government.

Sadly for Peru, that means it is unlikely to get the reforms it needs to cope with the tougher economic world it now faces. In today’s Latin America, it is hardly alone in that. Whatever his failings in tackling corruption, Mexico’s Enrique Peña Nieto, with his ambitious reforms of energy and telecoms, stands out as an exception. “It is not by chance that reforms are so difficult,” observed Fernando Henrique Cardoso, who as Brazil’s president in the 1990s enacted many. Reforms require conviction, communication and the mobilisation of the potential winners, usually a more diffuse group than the losers. On these counts Mr Humala is letting Peruvians down.

lunes, febrero 09, 2015



Where Is Germany's Gold?

Almost half of Germany’s gold is stored in vaults under the streets of Manhattan. Or is it?

Courtesy: Federal Reserve Bank of New York
Gold at the Federal Reserve Bank of New York.

Peter Boehringer hates the word “conspiracy.” It implies something crazy, and if you spend even a little time with the 45-year-old German, it becomes clear he’s driven by a desire for order. On a recent morning in Munich, he’s dressed in a cobalt blue shirt that matches his blue tie and blue eyes.

His black hair is cropped close above his receded hairline. In his gray Volkswagen minivan, the cup holder contains two identical water bottles, each filled to the same level. At the end of a daylong interview, for which Boehringer has arranged an hour-by-hour itinerary, he sends a follow-up e-mail with a numbered summation of points he’s made. No. 2 says that the crusade he’s been waging for the last three years is simply about transparency. “Questions,” he writes, “by definition cannot be ‘conspiracy theories.’ ”

Boehringer is a gold bug, a member of the impassioned tribe of investors and academics who distrust central banks and paper money, unless the governments that print it will exchange the cash for gold or silver from their vaults. He has an asset management firm that invests his own money and that of clients in gold, silver, and mining stocks, and he’s a founder of the nonprofit German Precious Metal Society, which educates the public about “the craziness of unbacked monetary systems,” he says. In short, Boehringer is worried that the global economy is built on a fiction of currencies that aren’t backed by precious metals. Which is why he set out to make sure the gold that Germany and other nations say they have actually exists.

Almost half of Germany’s gold resides at 33 Liberty St., the headquarters of the Federal Reserve Bank of New York, 80 feet below street level in a vault that sits on Manhattan’s bedrock. In 2012, Boehringer started a campaign on his blog to bring it home. He argued the gold should be shipped to the German central bank in Frankfurt. The hoard, amassed during Germany’s postwar boom, had never been subject to a published bar-by-bar physical review by its owners.

That lack of accounting had become an insatiable itch for Boehringer. As the volunteer chairman of a private storage company for silver and gold investors based in Gerstetten, Germany, Boehringer personally counts the holdings each year by lugging metal valued at some €140 million ($161 million) from one end of the vault to the other, just to make sure it’s all there. His blog became a hub for precious-metal fans. As gold prices peaked in 2011, the Taxpayers Association of Europe asked him to draft a letter to the Deutsche Bundesbank seeking to know precisely where the central bank’s gold was. He eagerly agreed to help the group, which advocates for lower taxes and serves as an umbrella for 29 national associations across the continent. After receiving a response that wasn’t detailed enough to satisfy him, Boehringer pressed on, starting the “Repatriate Our Gold” campaign in February 2012. He conceded it had low odds of success. Gold bugs largely inhabit the fringes of finance, and some of their apocalyptic arguments for investing had begun to show cracks as gold prices slid.

Opponents including bankers and journalists branded Boehringer a conspiracy theorist for even suggesting something was amiss at the core of global finance. Then the seemingly impossible happened: He started to win.

Because it doesn’t react with air or water, gold always glitters, even in shipwrecks lost for centuries. It’s so dense—19.3 times heavier than water—that when you lift an ingot, the disconnect between what your eyes see and your hands feel produces an odd sensation, as if you’re on a planet with a stronger gravitational pull. A standard central bank gold bar is a bit smaller than two soda cans stuck together end-to-end but weighs about 27 pounds, the combined heft of four newborn babies.

Less than 175,000 metric tons (386 million pounds) of gold have been mined in all human history, according to the World Gold Council. Melt it all down—King Tutankhamun’s death mask, the bars in Fort Knox, your wedding ring—and it would form a cube 21 meters on each side, reaching just one eighth the height of the Washington Monument. A 1-kilogram gold bar is the size of a flip phone and could buy a BMW.

Gold also has a deeper appeal. When stocks and bonds are plummeting on paper, gold is reassuringly physical. Speaking in October at the Council on Foreign Relations, former Federal Reserve Chairman Alan Greenspan said gold is so universally treated like money itself, it’s as if it’s “inbred into human beings.” The fact that gold can be touched means, of course, that it can also disappear.

Boehringer cites an anecdote from almost a century ago to argue that Germany has failed to zealously protect its gold holdings. In the 1920s the president of the German central bank, Hjalmar Schacht, paid a visit to the New York Fed and its founding president, Benjamin Strong. In an episode recounted in his 1955 autobiography, Schacht wrote, “Strong was proud to be able to show us the vaults which were situated in the deepest cellar of the building and remarked: ‘Now, Herr Schacht, you shall see where the Reichsbank gold is kept.’ ”

The two bankers waited as New York Fed staff sought the German stash. “At length we were told:

‘Mr. Strong, we can’t find the Reichsbank gold.’ ” Schacht comforted the flabbergasted Fed banker: “Never mind; I believe you when you say the gold is there. Even if it weren’t you are good for its replacement.” The men left without the German seeing his bars, instead accepting their existence as a matter of trust.

Assuming the German gold actually was somewhere at 33 Liberty St. at the time, it’s probably now long gone. The period between the World Wars was plagued by runaway inflation in which Germans legendarily shopped with wheelbarrows of cash and burned bundles of reichsmarks for warmth.

(Among the inflation causes, Germany had stopped backing its currency with gold during World War I.) Adolf Hitler exploited the economic meltdown to seize power and then drained Germany’s gold holdings, including assets he stole from Jews, to pay for World War II.

After the war, global trade revolved around the U.S. dollar, which was backed by gold. Under the arrangement, any nation could cash in its greenbacks for ingots at any time. As West Germany’s economy took off, the nation ran a trade surplus during the 1950s and ’60s. German companies exchanged their dollars for deutsche marks, filling the new Deutsche Bundesbank with U.S. currency.

The central bank, in turn, switched the dollars for gold at the New York Fed, swelling its stores under Liberty Street. That ended in 1971 when President Richard Nixon suspended gold conversions, making the dollar a “fiat currency,” backed by nothing but the public’s confidence in the U.S. During the Cold War, it made sense to keep the gold in Manhattan rather than Frankfurt, 75 miles from the Iron Curtain, just in case the Soviets invaded. Yet even after the Berlin Wall fell in 1989, the gold remained in New York.

Or so the Germans have been told.

lunes, febrero 09, 2015



Negative Bond Yields And Gold

by: Pater Tenebrarum            

As the WSJ reports on government debt yields in Europe:
As much as €1.5 trillion ($1.7 trillion) of euro area debt maturing in more than a year now pays a negative yield, according to J.P. Morgan. That compares to none whatsoever a year ago. 
German government bonds offer negative yields on maturities up to six years, according to Tradeweb, along with those in Denmark. For five years, the Netherlands, Austria, Sweden and Finland are in the club. For four years, add France and Belgium. In Switzerland, bonds out to a whopping 13 years in length have negative yields.
Approximately €220 billion in bank reserves are subject to negative deposit rates as well (this is actually less than it once used to be, as banks have moved excess reserves from the deposit facility to the current account facility at the ECB, which at least yields zero instead of the 20 basis point penalty rate applied to the deposit facility).


In the meantime, the corporate bond market is also beginning to be infected by negative yield syndrome, while some covered bonds have traded at negative yields since September already, as Bloomberg reports:
Credit markets are being so distorted by the European Central Bank's record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle SA.
The Swiss chocolate maker's securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America Corp.'s London-based strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September. (emphasis added)
It should be noted that this is not only the ECB's doing. The SNB has lowered its three-month LIBOR target rate channel to a range from minus 0.25 to minus 1.25 percent (i.e., an average of minus 75 basis points), which may be of greater relevance to the market price of Nestle's debt.

Covered bonds are widely regarded as almost as safe as government bonds. This is due to the fact that issuers as a rule have to over-collateralize these bonds and look after the assets used as cover -- i.e., to replace any assets that become non-performing with performing assets.

Moreover, while assets in cover pools remain on the balance sheets of issuers, they are segregated in the event of an insolvency (regulations vary a bit from country to country, but this is the gist of them).

A sample of five-year government bond yields in Europe trading at negative yields to maturity:

Source: WSJ

Originary Interest vs. Bond Yields

As we have previously mentioned, the natural, or originary interest rate can never turn negative; this is so because time preference is an inviolable and universally valid category of human action. It is logically inconceivable for future goods not to be valued at a discount against present goods of the same type. Note that this has nothing to do with money -- the phenomenon of interest is at its root a non-monetary phenomenon. It simply concerns the valuation of future vs. present goods. As a reminder, here is a pertinent quote by Ludwig von Mises from Human Action:
Originary interest is not a price determined on the market by the interplay of the demand for and the supply of capital or capital goods. Its height does not depend on the extent of this demand and supply. It is rather the rate of originary interest that determines both the demand for and the supply of capital and capital goods. It determines how much of the available supply of goods is to be devoted to consumption in the immediate future and how much to provision for remoter periods of the future. 
People do not save and accumulate capital because there is interest. Interest is neither the impetus to saving nor the reward or the compensation granted for abstaining from immediate consumption. It is the ratio in the mutual valuation of present goods as against future goods. 
The loan market does not determine the rate of interest. It adjusts the rate of interest on loans to the rate of originary interest as manifested in the discount of future goods. Originary interest is a category of human action. It is operative in any valuation of external things and can never disappear. 
If one day the state of affairs were to return which was actual at the close of the first millennium of the Christian era when people believed that the ultimate end of all earthly things mas impending, man would stop providing for future secular wants. The factors of production would in their eyes become useless and worthless. The discount of future goods as against present goods would not vanish. It would, on the contrary, increase beyond all measure. 
On the other hand, the fading away of originary interest would mean that people do not care at all for want-satisfaction in nearer periods of the future. It would mean that they prefer to an apple available today, tomorrow, in one year or in ten years, two apples available in a thousand or ten thousand years. 
We cannot even think of a world in which originary interest would not exist as an inexorable element in every kind of action. Whether there is or is not division of labor and social cooperation and whether society is organized on the basis of private or of public control of the means of production, originary interest is always present. (emphasis added)
One example that shows why this must be so is the fact that the prices paid for productive land are finite. A piece of land producing an unchanging rent every year could not possibly have a finite price if there were no originary interest by which its future services are discounted; it would be impossible to value it. If originary interest were to disappear, land would only be bartered for other pieces of land, but would no longer be exchanged for anything else, including money.

How come then that numerous bonds are now trading at negative yields? There are several reasons for this. Central bank manipulation of interest rates is just one factor. We may assume that market participants are according a negative price premium (i.e., inflation premium) to bond yields at present, but that by itself can also not explain negative yields-to-maturity, as there is always the option of holding cash instead. In fact, superficially it seems a lot more sensible to hold cash rather than bonds with a negative yield, since one's purchasing power is certain to increase if there is indeed an economy-wide decline in prices.

Still, there must be reasons why people buy and hold bonds sporting negative yields. Some of these are technical, and some are connected with confidence issues and/or speculation.

Technically, there is for one thing the fact that banks don't have to reserve capital for assets they hold in the form of government bonds (which according to banking regulations, are considered "risk free"). Banks are also holding inventories of bonds for the purpose of using them as collateral in repo transactions. Since government bonds are considered "risk free," they are the type of collateral that is subject to the smallest haircuts in such transactions, which makes them desirable for this purpose. There are also market players such as insurance companies, that are practically forced by regulations to hold sizable portfolios of government bonds. These laws and regulations can be considered part and parcel of a "financial repression" scheme.

Then there are speculators who buy bonds at negative yields because they expect the trend to become even more pronounced. If e.g. a bond's yield-to-maturity falls from minus 10 to minus 30 basis points, they will make a capital gain. This is essentially the greater fool theory of bond buying, and it probably plays a not inconsiderable role in today's markets.

Germany's two-year government bond yield stands nearly at minus 20 basis points:

(click to enlarge)

However, a major motive driving the buying of bonds with negative yields is undoubtedly also a continuing lack of confidence in the banking system. Since it has not become common yet to charge holders of current accounts (as a rule, they still sport a small, but positive yield of 5 to 10 basis points), it would be more sensible to hold cash deposits instead of government bonds.

However, one would then be exposed to the counterparty risk associated with the bank.

The EU's new bank recovery and resolution directive mandates that before government support is extended to ailing banks, all other avenues must be exhausted first - and deposit holders are legally regarded as creditors of banks. This is actually a legal absurdity, but in a fractionally reserved system, banks no longer have merely a safekeeping function for funds entrusted to them that are ostensibly available on demand. Instead, they use them for the pyramiding of credit (and the consequent creation of additional deposit money from thin air).

These risks are especially pronounced for large depositors, as events in Cyprus have shown. Since holding cash currency is impracticable for large depositors (and would also involve costs), they rather buy government debt and accept negative yields in exchange for peace of mind. In principle there is of course nothing wrong with depositors being exposed to risk if they are voluntarily putting their funds into accounts with fractionally reserved banks. There is no reason why should taxpayers should bail them out. Anyway, the fact that governments are seen as safer debtors than banks is no doubt a major reason why some large investors prefer negative yielding government bonds (as well as covered bonds with their special safety features) over bank deposits.

Negative Yields and Gold

A friend recently asked us, "why not just buy gold"? Obviously, not every institutional investor can just buy gold, as many are prevented from doing so either due to government regulations or the stipulations of their investment mandate. Some however can, and individual investors definitely can do so. With government bond yields falling increasingly into negative territory, the opportunity cost of holding gold becomes negligible, as only storage and insurance costs remain to be considered.

The fact that investors are beginning to buy gold as an alternative asset that is not exposed to the banking system and not subject to any counterparty risk, is illustrated by the developing gold bull market in non-dollar currencies. Below is an updated chart of gold in euro and yen terms. Although a short term correction is now underway (as we recently pointed out, gold has become "overbought" in these currencies), the new trend can be clearly discerned:

Gold in terms of euro and yen:

(click to enlarge)

In Switzerland, there was also an uptrend in the CHF denominated gold price underway, which was interrupted by the SNB's decision to remove its currency peg. However, the trend has since then resumed. Also shown below is gold in terms of the Australian dollar. In terms of "commodity currencies" (meaning: the fiat currencies of countries that are large exporters of commodities) like the Australian and Canadian dollar, gold is rallying smartly as well, as the central banks of these countries have also embarked on rate cutting sprees. At least they still have minuscule rates that can be cut a bit, contrary to the ECB with its laughable 5 basis points main repo rate.

Gold in CHF and Australian dollars; the CHF gold rally was briefly interrupted by the de-pegging of the currency:

(click to enlarge)

Surely there are also other reasons why gold demand has increased, such as the uncertainty surrounding Greece after the election, the fact that confidence in central banks has been dented somewhat by the SNB's surprise move and the evident slowdown in global economic growth. It is impossible to tell which of these factors has played the biggest role in gold's recent rally, but we suspect that some $4 trillion in government debt globally now trades at negative yields is a quite significant factor.


The market distortions caused by central bank interventions and the lingering distrust of the banking system (especially in Europe) should be of concern to small investors as well. Regardless of near term price gyrations, gold provides excellent insurance for potential worst case scenarios. There is no guarantee whatsoever that government bonds will be forever regarded as "risk free" by market participants, on the contrary. The sovereign debt crisis in the euro area already showed that one cannot rely on that.

So is now a good time to buy gold? We would argue a good time to buy is whenever there seems to be little trouble on the horizon; once trouble becomes obvious to all, the price of insurance will no longer be cheap.

(Charts taken from BigCharts, WSJ, StockCharts.)

The $100 Trillion Global Debt Ponzi Scheme

by ZeroHedge

February 3, 2015 

by Phoenix Capital Research at ZeroHedge

If you are an investor, your big concern should not be about stocks… but what happens when the bond bubble goes bust.

For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. Today, a whopping 47% of American households receive some kind of Government benefit. This is not temporary… this is endemic.

All of this is spending is being financed by borrowed money… hence, the bond bubble, the biggest bubble in financial history: an incredible $100 trillion monster that is now growing by trillions of dollars every few months.

We do not write that point for effect. The US alone issued over $1 trillion in NEW debt in an eight week period towards the end of 2014.

The reasons it did this? Because it didn’t have the money to pay off the debt that is coming due from the past… so it simply issued NEW debt to raise the money to pay back the OLD debt.

Sounds a lot like a Ponzi scheme… but the US is not alone in this regard. Globally, the sovereign debt bubble is over $100 trillion in size. Just about every major nation on the planet is sporting a Debt to GDP ratio of 100%+ and that is just including “on the balance sheet” debts… not unfunded liabilities like Medicare or Social Security.

This is why the Fed and every other Central Bank on earth is terrified of interest rates rising; because anything even resembling the normalization of interest rates would mean entire countries going bust.

Remember when interest rates move, they tend to move quickly. Consider Italy. It was considered one of the pillars of the EU since it adopted the Euro in 1999. Because of this, the markets were happy to allow Italy to borrow at stable rates with the yield on the ten year Italy government bond well below 5% for most of the last decade.

Then, in the span of a few weeks, everything came unhinged and the yields on Italy government bonds spiked, rising over 7%: the dreaded level at which a country is considered to be insolvent and set for default. It was only through extraordinary lending mechanisms from the European Central bank (the LTRO 1 and LTRO 2 programs to the tune of hundreds of billions of Euros… for an economy that is €2 trillion in size) that Italy was saved from potential systemic collapse.

Again, Italy went from being a former pillar of Europe to insolvent in a matter of weeks… all because interest rates spiked a mere 2% higher than usual.

Italy is not alone here. Western nations in general are in a similar state. This is why QE has been such a popular monetary tool for the Central Banks (since 2008 they’ve spent $11 trillion buying assets, usually sovereign bonds). QE was never meant to create jobs or generate economic growth… it was a desperate ploy by Central Banks to put a floor under the bond market so rates wouldn’t rise.

It’s also why Central Banks have kept interest rates at zero or even negative: again, they cannot afford to have rates rise. In the US, every 1% increase in interest rates means between $150-$175 billion more in interest payments on our debt per year.

Forget stocks, forget your concerns about this or that valuation metric, the REAL issue is what happens when the Bond Bubble pops. When that happens it won’t be individual banks going bust, it will be ENTIRE NATIONS.

lunes, febrero 09, 2015



China’s G-20 Moment
Yu Yongding, Domenico Lombardi
FEB 4, 2015

China boat lantern sunset

BEIJING – The world caught a break in 2009. The G-20, an assembly of the world’s largest developed and major emerging economies – which had thus far failed to make a serious mark on the world stage – was meeting in Pittsburgh to formulate a response to the global financial crisis. US President Barack Obama, having gotten the message that the G-7 could no longer oversee the global economy on its own, led a summit that made the G-20 the primary body for coordinating global economic policy. It was a highpoint for American leadership.
Next year, the world’s other economic superpower will assume the presidency of the G-20 and host its annual summit. Though China’s leadership will, it is hoped, lack the drama of 2009, President Xi Jinping will undoubtedly make an impression of his own. If he did not miss the opportunity to advance the goal of an Asia-Pacific trade agreement while hosting last year’s Asia-Pacific Economic Cooperation summit, he certainly will not pass up the chance to ensure that the G-20 agenda serves China’s interests.
Of course, with Turkey’s term at the G-20’s helm having barely begun, Xi probably has not yet settled on specific priorities. But some potential areas of concern are already apparent.
Elements of the current G-20 agenda align well with China’s domestic economic concerns, especially with regard to infrastructure. Last year, G-20 members agreed to pursue a global infrastructure initiative aimed at facilitating investment and boosting financing for infrastructure projects and, crucially, for small and medium-size enterprises.
Given that SMEs will play a key role in China’s new growth strategy, and already account for some 85% of new jobs in the country, this initiative suits China well. With Turkey having zeroed in on SMEs as a key vehicle for fostering more inclusive growth, this year’s summit could already produce progress on this front.
But other infrastructure-related opportunities beckon. China has long sought to place Asia on par with North America and Western Europe in terms of connectivity – a project that the Asian Development Bank estimated in 2009 would cost $8 trillion by 2020. China, the only major Asian emerging economy that is currently meeting the ADB’s spending target, could use its G-20 presidency to persuade its neighbors to increase investment in this area.
The G-20 may also enable China to advance a key geopolitical objective: the reform of voting rights at the International Monetary Fund. Obama may be the leader who envisaged a premier role for the G-20; but the United States has displayed a distinct aversion to allowing emerging powers to exert the influence over multilateral institutions that their increased economic weight warrants and demands.
Indeed, the US Congress has consistently failed to ratify a package of IMF reforms, agreed in 2010, that would give countries like China greater say in decision-making – a failure that protects Western Europe, whose members benefit most from the status quo. If China uses its G-20 leadership to push vigorously for change, it would not only improve its own chances of gaining more authority in the IMF; it would also gain favor with other emerging economies, which have been similarly frustrated by US (and European) leaders’ treatment of the issue.
There is also scope for China to assume a leadership role in another domain long dominated by the US and Europe: the global financial system. China, where the US dollar’s predominant role is often criticized for having subjected global finance to unnecessary volatility, could use its G-20 presidency to demand a larger role for what is often considered the world’s only international currency: the IMF’s Special Drawing Rights.
In this effort, it would be in China’s interest to add the renminbi to the basket of currencies that determine the SDR’s value. To be sure, the IMF rejected this proposition in 2011, because the renminbi did not yet meet the criteria of a freely convertible currency.
But the IMF also hinted at a willingness to be flexible, conceding that, because the SDR is fundamentally a reserve asset, the currencies that underpin it need only to be available in “sufficiently liquid and deep markets.” And, over the last few years, China’s authorities have gradually loosened their grip on the capital account, allowing the renminbi to become the fifth most popular currency for settling global payments. With at least 60 central banks now including renminbi among their foreign reserves, next year could present an ideal opportunity for China to advance its long-term goal of reshaping the world monetary system.
At the same time, China might pursue a shift in the dynamic of international financial regulation. The G-7 economies – which, no surprise, have dictated international standards for the last 20 years – have rarely hesitated to name and shame emerging economies for their failure to comply with global norms.
Though China’s domestic regulatory regime remains subject to severe constraints, China’s leaders could use the G-20 summit to change the narrative, highlighting the failure of the US and Europe to complete their regulatory agendas. If China managed to compel them to do so, it would benefit considerably – and not just in terms of its international reputation. With an export-oriented economy and the world’s largest pile of foreign reserves, not to mention a conservative domestic financial system, China is exposed to international economic and financial volatility.
China may not be able to achieve all of its goals next year. But, if it plays its cards right, it could do much to increase its international influence, while enhancing global economic and financial stability. That should give China’s leaders much to consider in the coming months.

Hollande, Merkel go to Moscow to discuss Ukraine without consulting US – report

Published time: February 05, 2015 23:11                              

French President Francois Hollande and German Chancellor Angela Merkel (Reuters)
French President Francois Hollande and German Chancellor Angela Merkel (Reuters)

German Chancellor Angela Merkel and French President Francois Hollande did not consult Washington before deciding to visit Moscow to hold talks on the Ukrainian crisis, a source in the French government told AP.

The two leaders, who are part of the so-called ‘Normandy Four’ group along with Moscow and Kiev, decided on a trip on Wednesday night, an unnamed French government official said. Merkel and Hollande are due to arrive to the Russian capital on Friday, the next day after visiting Kiev.

Russian presidential spokesman Dmitry Peskov said that “the leaders of the three states will discuss what specifically the countries can do to contribute to speedy end of the civil war in the southeast of Ukraine, which has escalated in recent days and resulted in many casualties.”

After the Thursday meeting with the German and French leaders, Ukrainian President Poroshenko said that the talks indicated that a ceasefire was possible in eastern Ukraine.

Meanwhile, a senior French official toldlocal weekly Le Nouvel Observateur on Thursday that the decision to meet tet-a-tet with President Vladimir Putin was taken on Tuesday after the Russian leader called on both sides in the Ukrainian conflict to stop military actions and hostilities.

The French weekly also said that this “historic initiative” on the part of the two European leaders was preceded by “secret” talks between Paris, Berlin and Moscow.

As Hollande and Merkel are set to discuss a peaceful resolution to the conflict, the US Secretary of State John Kerry is in Ukraine to answer Kiev’s plea for weapons. Kerry told reporters that US President Barack Obama will make his decision on the possibility of sending lethal aid to Ukraine next week.

The White House however admitted on Thursday that military assistance from the US could increase bloodshed in the region.

Le Nouvel Observateur journalist Vincent Jauvert believes that Hollande and Merkel’s prompt decision to talk with Putin in Moscow comes as an attempt “to get ahead of the Americans who are trying to impose their solution to the problem on Westerners: a transfer of weapons to Ukraine.”
The journalist elaborates that the two leaders went to Kiev straight after Kerry as they “distrust the American administration” and want to “present their diplomatic solutions just before US Vice President Joe Biden” presents the US plan of sending lethal weapons to Kiev at the Munich security conference on Saturday.

Greece as a Pawn in Putin’s Chess Game vs. the West

By Martin Fluck

Feb 04, 2015
Last week the world woke up to the fact that Greece’s new government holds a geopolitical trump card: it can hold the EU ransom by threatening to break the fragile consensus on Russia.

The renewal of sanctions against Russia requires the unanimous support of EU members… which means Obama’s alliance against Russia needs Greek cooperation. What’s more, Greece has veto power over whether NATO can retaliate for an attack on any of its members. Article V, which states, “[A]n armed attack against one or more of them in Europe or North America shall be considered an attack against them all,” may only be invoked with unanimous agreement among NATO members.

Greece and Russia have close cultural and religious ties, and Russia is Greece’s largest trading partner. Russia’s ambassador to Athens didn’t waste any time congratulating Greece’s new prime minister, Alexis Tsipras, on his victory.

So it’s no surprise that Putin is using Greece as leverage. Russia has hinted that it will open its market to Greek food exports if Greece leaves the eurozone, and also that it would consider giving Greece financial aid. One can imagine other carrots being dangled, like an offer to hook up Greece to the Turkish Stream pipeline.

Syriza, which has close connections with Russia, admires Putin’s defiance of Western institutions. The new Greek foreign minister, Nikos Kotzias, has a relationship with Aleksandr Dugin, a Russian nationalist philosopher with close ties to Putin. As neo-eurasianists, they aim to pry a weak and divided Europe away from US influence. Syriza has openly campaigned for Greece to leave NATO, though they’ve toned down their hostility on that issue recently—presumbably to preserve it as a useful bargaining chip for the future.

Kotzias, who says he’ll work to prevent a rift between the EU and Russia, has already recognized the legitimacy of the Donetsk People’s Republic in eastern Ukraine and dismisses the Ukrainian government as a neo-Nazi junta. But he’s assured the world that he is not a “Russian puppet.” He simply wants to restore Greece’s dignity and stop the ongoing transformation of the EU “into an idiosyncratic empire, under the rule of Germany.”

European leaders were understandably alarmed when Tsipras suggested that Greece might veto further sanctions against Russia. Tsipras has been vocal in his opposition to sanctions, as have other members of the EU, including Austria, Italy, and Hungary. In the end, the EU decided against further economic sanctions but did extend existing sanctions against Russia, with the support of Greece.

The new Greek government appears to be cleverer than initially thought. It is playing both sides, leveraging its veto power to get what it wants in debt negotiations. Tsipras explicitly said that Greece has no intention of accepting Russian financial aid and that Greece’s only goal is to strike a deal with its EU partners.

Greece’s finance minister, Yanis Varoufakis, is a formidable negotiator. A world-class economist, financial blogger, and one-man media storm, he’s a leading expert on game theory. As James K. Galbraith, Varoufakis’ former colleague puts it, Varoufakis will be thinking a few steps ahead of his opponents. Varoufakis says the only thing that isn’t negotiable is keeping Syriza’s promise to render Greece’s debt sustainable, “even if the term haircut is replaced with euphemisms, like ‘debt swaps.’”

Greece’s relatively conciliatory approach appears to be paying off. President Obama is supporting Greece’s push for a debt restructuring, and France’s finance minister, Michael Sapin, concedes that Greece has a legitimate right to lighten its debt burden. Even the EU Commission president, Jean-Claude Juncker, appears to be prepared to scrap the troika.

At this point, it seems possible—and maybe even likely—that Germany won’t get its way in debt negotiations. Larger strategic matters are at stake. Russia’s influence in southeastern Europe is already growing, and it’s unlikely that NATO would accept a strategic defeat simply to preserve Germany’s small-town fiscal righteousness.

Either way, we could be nearing a historic turning point. The euro and the Ukraine crises are converging, and Putin is watching closely.


UPDATE: World top 10 gold producers – countries and miners

The last year has seen some changes in global gold production rankings, both by country and by company.

Lawrence Williams

3 February 2015 09:01

It is interesting to see how the major producers of gold are faring in the grand scheme of things – both nationally and by company, given the continuing lowish gold prices pertaining over the past two to three years. While one may sometimes argue with the methodology, and findings, of GFMS’ global gold supply/demand statistics the consultancy’s latest report on gold includes its estimates of the world’s top gold producing nations and companies which are not so controversial and there are some changes in position and outputs which are certainly worth noting.

We last produced a similar listing based on 2012/2013 figures from rival precious metals consultancy, Metals Focus, last May (see: World top 10 gold producers – countries and companies) and while some of the GFMS statistics may vary a little from those of Metals Focus they broadly follow the same pattern and the overall figures are comparable – perhaps not too surprising given that Metals Focus was started by ex GFMS analysts and marketers.

Let’s take the top 10 country-by-country producers first, showing changes in position based on GFMS 2013 figures and 2014 estimates:

Table 1. Top 10 World Gold Producing Countries 2013/2014 (tonnes) 
RankCountry2013 output2014e outputChange Y/Y
6South Africa177.0164.5-7%

Source: GFMS

Notably here, according to the GFMS estimates, China has continued to see increased gold output and remains comfortably the World No. 1. But the No.2 position is now occupied by Russia, which appears to have leapfrogged over Australia to attain this ranking with 9% output growth last year. Former World No. 1 for many years, South Africa, is nowadays only in sixth place – and is now in danger of being overtaken by Canada, which has seen particularly strong growth in the past couple of years while South African output continues to slip. Indeed Canada provided the strongest growth (15%) amongst the major producing nations.

Among the top producing companies, there have been some substantial gold output drops from the biggest miners, mainly due to divestments and closures – see table below.

Table 2.World Top 10 Gold Miners 2013/2014 (tonnes)
RankCompany2013 output2014e outputChange Y/Y
1Barrick Gold222.9194.4-13%
6Navoi (Uzbek)70.573.0+4%
8Gold Fields58.162.6+8%
9Polyus Gold51.350.8-1%
10Sibanye Gold44.550.1+13%
Source GFMS

As can be seen, Barrick has recorded the biggest fall, while Newmont is in danger of being surpassed by AngloGold Ashanti as world No. 2 if 2014’s percentage increase and decrease figures are replicated this year. Others which showed good production rises are Goldcorp, Gold Fields and the latter’s South African spinoff Sibanye Gold. Indeed if these two miners had remained combined they would together have been comfortably in the world No. 4 slot, well ahead of Goldcorp. The only change in ranking here is that GFMS reckons Uzbekistan’s state mining company, Navoi MMC, with a 4% increase in production, mostly from its massive Muruntau operation, has moved above Australia’s Newcrest, which appears to have recorded a small fall in output.

With GFMS now reckoning that the pent-up growth in global gold output may well have peaked last year with the various big, and small, new gold projects in the pipeline having mostly now reached full capacity, we could well see some further production downturns from some of the big miners this year, although their financial positions could be improving regardless given the recent concentration on cutting all-in costs – aided in many cases over the past year by the big fall in oil prices and the strength of the U.S. dollar.