Silver Takes The Leadership Baton- Next Stop Is Above $30 Per Ounce

Andrew Hecht


- Silver stops below $30, drops, and consolidates.

- The breakout to the upside was a significant event.

- The ratio is heading for the long-term average.

- Silver speculation should increase above $30.

- I believe that a new all-time high is on the horizon for silver- SILJ should outperform the metal on a percentage basis on the upside.

To say it has been a wild ride in the silver market in 2020 would be an understatement. The precious metal with a reputation and nickname as “gold’s sibling,” started the year at just under $18 per ounce. The risk-off conditions in March sent the price to the lowest level since 2009 when it hit bottom at $11.74.

After falling to an eleven-year low, silver came storming back, and four short months later, it rose above its critical technical resistance level at the July 2016 high of $21.095. Silver broke out to the upside and rose to its highest level since February 2013. The eleven-year low led to a seven-year high in 21 weeks. Aside from breaking through technical resistance, silver took the leadership role in the precious metals arena from gold. Silver tends to attract lots of speculative interest when the price starts trending higher or lower. Silver offers trend-followers, speculators, and investors lots of price action and has a history of enormous percentage moves.

The bullish price action in the silver market is likely to continue. A falling dollar and record levels of government and central bank stimulus and liquidity are rocket fuel for the metal. After trading in a consolidation range between $13.60 to $21.10 per ounce for six years from 2014 through 2020, silver broke to the downside before reversing and breaking to the upside over the past months.

The ETFMG Prime Junior Silver Miners ETF product (SILJ) has the potential to outperform the wild action in the silver market on the upside over the coming months and years.

Silver stops below $30, drops, and consolidates

The nearby COMEX silver futures contract rose from $11.74 in mid-March to a high of $29.915 during the first week of August or an incredible 154.8% in under five months.

Source: CQG

The weekly chart highlights the rise of the silver price and its correction to $23.58 on August 12. The price rebounded to just over the $28 level at the start of this week. Silver has been consolidating near the recent peak. Since early August, the total number of open long and short positions declined from 207,470 to 168,618 contracts.

Falling open interest as the price declines is not typically a technical validation of an emerging bearish trend in a futures market. Price momentum and relative strength indicators declined from overbought conditions in early August.

Both metrics were above neutral readings as of August 28. Weekly historical volatility fell from almost 100% in mid-August to below 38% at the end of last week as the weekly trading ranges narrowed as silver consolidates.

The breakout to the upside was a significant event

Gold broke above its long-term technical resistance level at the July 2016 high of $1377.50 in June 2019. It took silver one year and one month longer, as it broke through its July 2016 high at $21.095 in July 2020.

Source: CQG

The monthly chart illustrates silver’s decline to the lowest price since 2009, its rise to the highest level since 2013, and five months of a steady rally. The next significant technical resistance level on the monthly chart stands at the October 2012 high of $35.445.

Above there, $37.48, the February 2012 peak, $44.275, the high from August 2011, and $49.82, the 2011 apex stand as upside targets.

The ultimate goal is the 1980 all-time high at $50.36 per ounce. Silver’s break to the upside launched a bull market in the precious metal that has been playing catch up with gold.

The ratio is heading for the long-term average

The silver-gold ratio is a measure of the number of ounces of silver value in each ounce of gold value.

In March, when silver fell to an eleven-year low, the ratio rose to the modern-day high.

Source: CQG

The daily chart of December gold divided by December silver futures shows that the ratio rose to a high of just below 124:1 on March 18.

Source: CQG

The quarterly chart, that did not capture the peak in the relationship, shows that the previous record high was at 94.6:1 in 1990.

Over the past almost half-century, the average level of the ratio is just below the 70:1 level, considering the recent move to a new peak.

At the end of last week, the ratio was at the average level as silver’s rally caused it to catch up with the gold market.

Silver speculation should increase above $30

There is nothing like a bull market trend when it comes to attracting market participants to an asset. Speculators, trend-followers, and investors look for markets that offer significant percentage moves after a break to the up or the downside.

Another leg to the upside that takes the price of the continuous futures contract above $30 for the first time since early 2013 would confirm the bullish trend, causing increased interest in the silver market.

Silver and gold have a lot more than bullish price trends going for them these days. A declining dollar is bullish for the prices of precious metals. Unprecedented levels of central bank liquidity and government stimulus that is increasing deficits are highly inflationary.

Last week, Fed Chairman Jerome Powell told the world the US central bank is prepared to tolerate higher inflation levels. The current economic environment in the US and worldwide is highly supportive of rising precious metal prices.

A new all-time high is on the horizon for silver- SILJ should outperform the metal on a percentage basis on the upside

When the gold and silver markets are rallying, silver’s attraction for speculators causes far greater price volatility. As the variance in the ratio in 2020 highlights, silver tends to outperform gold on the upside and underperform on the downside on a percentage basis.

In both metals, mining shares tend to magnify the price movement in the gold and silver market.

Junior mining stocks can be even more volatile than the shares of established producers. The ETFMG Prime Junior Silver Miners ETF product (SILJ) has the potential to act as a leveraged instrument if the price of silver is heading higher and breaks above the $30 per ounce level.

The fund summary and top holdings of SILJ include:

Source: Yahoo Finance

SILJ holds the leading junior silver mining companies.

The ETF has $259.01 million in net assets, trades an average of over 1.7 million shares each day, and charges a 0.69% expense ratio. Silver rose from $11.74 in March to a high of $29.915 or 154.8%.

Source: Barchart

Over the same period, SILJ rose from $4.84 to $17.21 per share or 255.6% as the junior mining ETF provided a leveraged return compared to the volatile silver futures market.

The current environment creates an almost perfect bullish storm for gold and silver.

After the current consolidation period ends, we could see prices move substantially higher. A challenge of the 1980 high could be on the horizon over the coming months.

Interview with Anthony Fauci on COVID-19

"Helpless Means You Can't Do Anything. There's a Lot We Can Do."

In an interview with DER SPIEGEL, Dr. Anthony Fauci, Donald Trump's pandemic adviser, discusses the anger of his opponents, his relationship with the president, mistakes made in the effort to contain the spread of COVID-19 and his cautious optimism that a vaccine will be available soon.

Interview Conducted By Rafaela von Bredow und Veronika Hackenbroch

 Dr. Anthony Fauci: "I never even considered resigning."
Dr. Anthony Fauci: "I never even considered resigning." Foto: Mark Thiessen / National Geographic

DER SPIEGEL: Dr. Fauci, you once said of yourself that you had "a reputation of speaking the truth at all times and not sugarcoating things."

Can we hope to get a few samples of previously unspoken truths from you today?

Fauci: Of course! I will always give you truth. Just ask the question and I'll give you the truth.

At least to the extent, that I think it is, right. (laughs)

DER SPIEGEL: OK, we'll give it a try! You advised the Trump administration in 2017 to increase its pandemic preparedness. Did you see a pandemic like this coming, a scenario like this with worldwide lockdowns, overflowing hospitals and a rather violent social disruption?

Fauci: Well, the answer is, I predicted and anticipated an outbreak of a new infectious disease, because we've had so many of them. During my tenure as director of this institute, which is 36 years now, I've seen HIV, I've seen pandemic flu, I've seen Ebola, I've seen Zika. I always knew that we would have the inevitable perpetual challenge of outbreaks in the future.

DER SPIEGEL: What did your worst nightmare look like at that time?

Fauci: Already 30 years ago, I said my worst fear was the emergence of a brand-new infection, likely jumping from an animal host to a human, that was a) respiratory borne, b) transmitted extremely efficiently from human to human and c) had a high degree of morbidity and mortality, at least in some sets of the population.

And now all of a sudden, this perfect storm has given us a pandemic of historic proportions. I mean, it's the worst thing we've seen in 102 years since 1918.

DER SPIEGEL: As an AIDS researcher, you think that the coronavirus is worse than HIV?

Fauci: AIDS is entirely different. The reason the coronavirus pandemic is so unique is because it exploded upon the world. Because it appears that everyone is vulnerable. In seven or eight months, the coronavirus has immobilized the world. I mean, it has destroyed economies!

DER SPIEGEL: With 5.5 million cases and more than 170,000 deaths, the United States is the worst-affected country in the world. What, in your eyes, are the crucial reasons why things went so wrong in the U.S.?

Fauci: My country, it's a very large country. And it's very diverse.

That is one of our strengths -- but it turns out with an outbreak, it's one of our weaknesses.

We had different waves of infection, and cases never went back right to a low baseline like in Germany or Italy. Our baseline remained at about 20,000 cases a day.

We have made guidelines for carefully opening up the economy again. Some states listened to the guidelines, and they did reasonably well. But some states jumped over the checkpoints that we had set up, and in other states, the citizens just went ahead and did whatever they wanted to do. So what you saw was, although some parts of the country were doing very well, instead of going down, cases went up to 40,000, 50,000, 60,000 and even 70,000 a day.

DER SPIEGEL: Also, the Centers for Disease Control had problems introducing testing, so the virus was able to spread unnoticed at the beginning.

Fauci: Yes, we had a bad start with the testing, obviously. Another important reason that things are so bad now is that simple public health messages became a politically divisive thing.

DER SPIEGEL: Like wearing a face mask.

Fauci: Exactly. Some people said if you wear a mask, that's a political statement. And some said if you don't wear a mask, that's another political statement.

No, it's not! It's a public health principle.

DER SPIEGEL: We have this problem in Germany, too.

Fauci: I know. The problem is, when you politicize the public health response, you can't effectively fight the virus.

DER SPIEGEL: Don't you feel really helpless when you look at the current situation in the U.S.? Don't you get demoralized or depressed?

Fauci: Well, I never feel helpless. Helpless means you can't do anything. And there's a lot that we can do. It's up to us to actually do it. I don't get depressed.

I'm a scientist and a public health official. I don't have an emotional response to an outbreak.

I have a public health response to an outbreak and I never get demoralized. I'm a cautious optimist. I'm a realist.

DER SPIEGEL: Is that the reason that you continue working and haven't retired despite your age?

Fauci: (laughs) I never even considered resigning.

 Paramedics in Texas transporting a COVID-19 patient: "We had a bad start with testing," says Fauci.
Paramedics in Texas transporting a COVID-19 patient: "We had a bad start with testing," says Fauci. Foto: John Moore / Getty Images

DER SPIEGEL: Many see a vaccine as the only and perfect exit strategy out of this pandemic.

When will a coronavirus vaccine be available to the broader public?

How good will it be? And will it really be able to restore our lives to what they were before?

Fauci: You've asked three questions to which there is no definitive answer yet. Let me tell you where we stand.

There are a number of vaccines that are in advanced testing.

There are two in the United States, soon to be three.

If you look at the projection of how many months it takes to get an answer whether a vaccine is safe and effective, it should be by the end of this calendar year or the beginning of 2021 that we know, if we have a vaccine that works.

DER SPIEGEL: And when would this vaccine be available to a broader public?

Fauci: Since several companies already started producing their vaccine, around the beginning of 2021, tens of millions of doses should be available. By the time you get to the end of 2021, there should be hundreds of millions, maybe even a billion.

That's not enough for everybody in the world – but enough to get most people vaccinated that need it.

DER SPIEGEL: What will be crucial, however, is how effective such a vaccine will be.

Fauci: We don't know this before we have the results of the advanced testing. But my colleagues and I are cautiously optimistic – and I'm not saying confident, I'm saying cautiously optimistic – that we are actually on the right track. Early studies in several of the candidates indicate that these vaccines can induce an immune response in the human – that is equivalent to, if not even better than what you see in people who've recovered from COVID-19.

"It should be by the end of this calendar year or the beginning of 2021 that we know, if we have a vaccine that works."

DER SPIEGEL: You have said that a vaccine with 50 to 60 percent efficacy would be acceptable. And there's also a possibility that the vaccine will not be able to prevent infection, but only pneumonia. If this turned out to be the case, does it mean the pandemic will never really be over?

Fauci: I really don't believe this is going to happen. We are striving for 70-plus percent efficacy. That's not as good as a measles vaccine, which is 97 to 98 percent effective.

But if we get a coronavirus vaccine that is 70 percent effective and we combine it with some elements of good public health practices, then I think you could get enough umbrella of protection over the whole community, that we can get good control of this pandemic within a year or so.

I don't think the coronavirus threat is going to be with us forever in a way that it dramatically changes our lives for the next five years. I do not believe that that will be the case.

DER SPIEGEL: But more than one-third of the population of the U.S. doesn't want to be vaccinated.

Fauci: Well, that's another challenge. We have a whole program of community engagement and community outreach to try and to convince people of the benefit of getting vaccinated.

DER SPIEGEL: At the beginning of the outbreak in the U.S., you had daily meetings with President Donald Trump. Why, then, did he look so horribly ill-advised, downplaying the pandemic and even giving dangerous advice? Would you say that he's a hopeless case when it comes to understanding science? Or do you have yourself to blame for not making yourself clear enough?

Fauci: That gets the award for the loaded question of the year! You will get a trophy for this.

DER SPIEGEL: Will you give us the answer of the year?

Fauci: No, seriously, the president is a smart person. He understands. He has his own ideas about things. He expresses them in a different way. But he's a pretty smart guy. And I think I'm pretty clear.

I speak to the American public frequently. And here I am, speaking to the international public, certainly in Germany.

DER SPIEGEL: So, what went through your head when you heard that Trump had recommended injecting disinfectant?
Fauci: You know, that was taken a little bit out of context because he never recommended that.

If you look at the video clip, he said it more like: "Well, what about that? Would that be it?"

DER SPIEGEL: So you thought: Well, he didn't recommend it – never mind?

Fauci: I thought that that was a very interesting moment, that hopefully we've clarified since then. This is not something you should do. Not something you should even think about doing.

DER SPIEGEL: But people did consume disinfectant. And died as a result.

Fauci: I know. That's why we were out there the next day trying to make it very clear that that's not something you should be doing.

DER SPIEGEL: Donald Trump was pretty impressed by you at the beginning. He praised you as a "major television star for all the right reasons." Then, in April, he started to openly criticize you. He said that you made "a lot of mistakes" and you're an "alarmist." And he stopped talking to you. The last time you saw him was in early June, right?

Fauci: No, actually, I saw him last week.

DER SPIEGEL: Oh, really? And you talked?

Fauci: Yes.

DER SPIEGEL: About the campaign the White House launched against you to make you look bad in the public, to make you look incompetent?

Fauci: I think that was a big mistake that they made. You know, it's a complicated place, the White House. There's a lot of different people in the White House. I think that was really a bad thing. And I told them so. You know, just as I'm not afraid to tell the truth about science, I'm not afraid to tell the truth about other things.

"My colleagues and I are cautiously optimistic that we are actually on the right track."

DER SPIEGEL: Did you tell Donald Trump, too, that you were not amused by his rebukes?

Fauci: Actually, I made clear – not directly to him, but in the White House – that I thought that that was really unfortunate and uncalled for. And you don't say something in the White House that doesn't ultimately get to the president.

DER SPIEGEL: So, what did you talk about with Donald Trump last week?

Fauci: I briefed him about the vaccine we are developing at the National Institutes of Health; he wanted to know a little bit more about it. He asked me the same questions that you asked me.

DER SPIEGEL: Do you secretly hope for a President Joe Biden? Michelle Obama said at the Democratic Convention that Biden would "tell the truth and trust science."

Fauci: One of the reasons why I believe I have been able to effectively and successfully advise six presidents of the United States all the way back to Ronald Reagan is because I stay completely apolitical. I'm a scientist. I'm a physician. I'm a public health individual. I do not have an ideology. I certainly don't express it. And I never, ever, get involved in politics. Once you do that, you can diminish your credibility as a scientist and a public health official! So, I have been neutral throughout the six presidents that I have served.

"Early studies in several of the candidates indicate that these vaccines can induce an immune response in the human – that is equivalent to, if not even better than what you see in people who've recovered from COVID-19."

DER SPIEGEL: There is a conspiracy theory going around about you that claims that you created the coronavirus and that any vaccine will kill millions. So, while the pandemic has led to tremendous and outstanding research activities, it has also eroded trust in science. Is that damage irreversible?

Fauci: It's a serious damage. I hope it's not irreversible. You're absolutely correct: Along with the political divisiveness, we have some extreme thinking, including conspiracy theories, some of which are totally outlandish. There is such an intense polarization that when I give a public health message and I give recommendations of how we can actually open up the country again in a safe manner, there are some people who disagree so sharply that they start threatening me.

I mean, physically threatening me, my life, my children, my family, my wife. That is completely crazy. When you have a public health issue where we should all be pulling together for the common goal of ending this global scourge, that you have people that are so vehemently against the public health message that they actually resort to threats. That's almost inconceivable. But in reality, it's happening.

DER SPIEGEL: Do you have any idea what plague will sweep across the planet next? Ten years from now, we’ll meet again and see if you’ve been right.

Fauci: The one thing that is predictable about pandemics is that they will occur. The one thing that is completely unpredictable is what the heck it's going to be. And that really is the truth, I don't have the foggiest idea.

The one thing I hope is that it's not what we're going through right now. I told you why this was my worst nightmare.

So, if we do have another outbreak, and history tells us it will occur, I hope that it's relatively insignificant and it can be easily confined. But whatever it will be, it's not going to be in 10 years. Maybe we'll see each other soon, sooner than that.

DER SPIEGEL: Dr. Fauci, we thank you for this interview.

Angst in the Aegean

A row between Turkey and Greece over gas is raising tension in the eastern Mediterranean

A plethora of countries is entangled in a string of disputes in the área

As naval battles go, it was not a classic. The Kemal Reis, a Turkish frigate named after a 15th-century Ottoman admiral who tormented the Venetian fleet, was one of five escorts sent to protect the Oruc Reis, an exploration ship designed to hunt for undersea oil and gas.

The Limnos, an elderly Greek frigate charged with protecting Greece’s Exclusive Economic Zone (EEZ) from such predations, watched warily from a distance. On August 12th they collided after a clumsy manoeuvre.

Both governments tried to keep the incident under wraps, but Greek navy officials soon leaked details to local news websites. “We have fewer and older ships, but we protected Greece’s maritime rights,” boasted one veteran naval officer.

Greece’s defence minister is said to have congratulated the captain of the Limnos. “If this goes on, we will retaliate,” thundered Recep Tayyip Erdogan, Turkey’s president.

“We shall not leave either the dead or the living of our kin alone.”

After a call to Kyriakos Mitsotakis, the Greek prime minister, Emmanuel Macron, France’s president, said that he had decided to “temporarily reinforce” France’s military presence in the region with two fighter jets and a pair of warships in order to “make sure that international law is respected.”

Dust-ups between Greece and Turkey are nothing new. The two countries came to the brink of war in 1996 over disputed Aegean islets, and continue to spar over them. Greece complained that Turkish warplanes ventured into its airspace over 3,000 times in 2017.

They also disagree over the status of Cyprus, split into two after a Turkish invasion in 1974.

The current dispute, however, is part of a larger tapestry of growing tensions in the eastern Mediterranean over energy, security and ideology. Turkey finds itself pitted against a broad coalition of European and Middle Eastern rivals in battlegrounds stretching from Libya to Syria.

On the face of it, the latest skirmish is all about energy. Ten years ago Israel, the most energy-starved country in the Middle East, announced it had a huge hydrocarbon resource, after all.

Tucked beneath 1,645 metres of sea were some 450 billion cubic metres (bcm) of recoverable gas reserves, in a field presciently named Leviathan. Israeli officials dubbed it the best energy news in the country’s history.

The decade since has seen another boom. In 2015 Eni, an Italian oil-and-gas giant, discovered the huge Zohr field off Egypt’s coast. Big gasfields have been found near Cyprus, too, their names borrowed from Ovid or Homer: Glaucus (ExxonMobil and Qatar Petroleum), Aphrodite (Noble Energy, Royal Dutch Shell and Delek Drilling) and Calypso (Eni and Total).

Together Egypt, Israel and Cyprus have 2.3tcm of gas, reckons Rystad Energy, a Norwegian research firm, with the potential for a lot more. Optimists claim that such riches may not only enhance the local supply of natural gas, but foster new co-operation in a fractious region and, via an ambitious pipeline, bolster energy security in Europe. Some of these lofty aspirations have been realised. Others remain the stuff of myth.

Many countries in the region are successfully exploiting hydrocarbons without provoking their neighbours. Zohr and Leviathan have become important suppliers of gas to their domestic markets. Egypt has become a hub for foreign investment. Eni’s swift development of Zohr brought other big oil and gas companies to Egypt, lured by geology, favourable regulations and a large, growing domestic market for gas. It helps that Egypt is also home to two large liquefied natural gas (lng) facilities, which can accept gas by pipeline and turn it into lng suitable for shipping around the world.

Shared gas interests have also fostered unlikely collaboration. Leviathan’s gas serves not only Israel but Jordan and Egypt. Leviathan’s developers, America’s Noble Energy and Israel’s Delek Drilling, have taken minority stakes in the pipeline that serves Egypt. They plan to export 18.4mcm a day of Israeli gas to Egypt by mid-2022.

Yet ten years after Leviathan’s discovery, the economics of eastern Mediterranean energy are shakier. Oil and gas companies, under pressure from investors, were cutting capital spending even before covid-19 punctured energy demand.

The price of gas is almost half what it was in 2010. Chevron in July said it would buy Noble for a bargain $5bn. ExxonMobil, Total and Eni have delayed further drilling off Cyprus, as the firms slash spending and struggle to deploy crews in the pandemic.

Club Med

The scramble for resources and how best to exploit them is aggravating international tensions.

That is partly because of the awkward history and geography of the eastern Mediterranean.

Greece argues that each of its scattered islands, however small, is legally entitled to its own continental shelf with sole drilling rights.

Turkey, hemmed into the Aegean by a forbidding archipelagic wall of those islands, counters that the eastern ones rest on Turkey’s continental shelf and refuses to accept that they generate economic zones around them. It is one of only 15 countries, including Israel and Syria, that have refused to join the un Convention on the Law of the Sea, which largely supports Greece’s case.

Turkey, which has been increasingly at odds with its Western allies over a number of issues, from illiberalism at home to migration flows into Europe, is also the only country to recognise the breakaway republic in the northern third of Cyprus and therefore the legitimacy of its waters.

It insists that any exploitation of energy resources in the region must take into account Northern Cyprus. To back up these demands, it has sent exploration ships with naval escorts into Cypriot waters and those of Greek islands, most recently around Kastellorizo, close to Turkey’s mainland (see map).

“Let those who come to the region from far away, and their companies, see that nothing can be done in that region without us,” boasted Turkey’s foreign minister last year. In the past couple of years, Mr Erdogan’s government has embraced a revanchist doctrine known as the Blue Homeland, which seeks to give Turkey control over the waters of the eastern Aegean and the northern Mediterranean, disregarding every Greek island from Samothrace to Rhodes.

Turkey has discovered no new Mediterranean gas of its own (though as The Economist went to press, there were reports it may have done so in the Black Sea). But it too aspires to become an energy hub through the Trans-Anatolian pipeline (tanap), which can deliver up to 16bcm from Azerbaijan to Turkey and Europe each year.

Turkey plans to increase the pipeline’s capacity to 61bcm. “The problem is that Azerbaijan does not have enough to fill that,” says Michael Tanchum of the Austrian Institute for European and Security Policy. “Turkmenistan has among the world’s largest volumes of gas, but Russia and Iran keep preventing pipelines from there,” says Mr Tanchum. “So if you’re thinking where Turkey can get gas that Russia can’t interfere with, that’s Iraqi Kurdistan or Israel or the eastern Mediterranean.”

Others in the eastern Mediterranean have snubbed Turkey, however. In January Greece, Cyprus and Israel signed a deal to build a 1,900km undersea pipeline to carry 10bcm of natural gas a year (around a tenth of the EU’s needs) to Europe, bypassing mainland Turkey.

The viability of the plan is questionable. The pipeline would travel at extraordinary depth—3km below the surface in one stretch—as well as through areas of seabed prone to earthquakes. Industry analysts reckon its projected cost of $6bn-7bn is optimistic.

To help settle these questions, the region is getting organised—without Turkey. In January Cyprus, Greece, Israel, Italy, Jordan and Palestine established a bloc called the East Mediterranean Gas Forum. France has applied for membership, America for observer status. The forum has taken on an increasingly Turkosceptic tenor as many of its members lock horns with Turkey over a host of issues beyond energy.

“A decade ago the question was whether these gas discoveries would help to overcome political conflicts, or whether they would exacerbate political conflicts”, says Sir Michael Leigh, who served in the European Commission from 2006 to 2011. “It’s pretty clear that it’s more the latter than the former now. The gas issue has fed into other conflicts. And what we’re seeing is very largely a result of the standoff over Libya.”

The Libyan connection

For years, Libya has been riven by civil war between a un-recognised government in the west and the forces of Khalifa Haftar, a renegade general, in the east. Turkey supports the government, which works with Islamist militias, whereas France, Egypt, the United Arab Emirates (UAE) and Russia have aided General Haftar, who last year came close to seizing Tripoli, the capital.

Though it now claims to be taking a neutral stance, France, which is battling jihadists in Mali, views the general as a useful bulwark against extremist forces. Total, France’s largest energy company, has investments in Libyan oilfields controlled by him. French anti-tank missiles were found at one of the general’s bases last summer, though France denied sending them.

In January Turkey halted General Haftar’s offensive by sending arms, troops and thousands of Syrian mercenaries to beef up the government in Tripoli. That prompted a crisis in June, when a French frigate, operating as part of a nato mission, was threatened by a trio of Turkish naval vessels while inspecting a ship suspected of breaking the un arms embargo on Libya.

Mr Erdogan’s intervention in Libya starkly illustrated how energy and security in the region are entangled. His price for halting General Haftar was the Libyan government’s assent to a maritime deal bolstering Turkey’s claims. The accord mapped out Libyan and Turkish continental shelves and eezs spanning the Mediterranean.

They overlapped with those of Cyprus and Greece—ignoring the existence of Crete and Rhodes—and pointedly cut across the path of the proposed pipeline. The deal prompted howls of complaint in Greece. So on August 6th Greece and Egypt, which supports General Haftar and chafes at Turkey’s support for Islamist factions in the Middle East, signed their own maritime accord. That contributed to Mr Erdogan’s decision to send in the Oruc Reis and so to the latest flare-up.

Libya is only one of several Franco-Turkish flashpoints. Last year Mr Macron denounced a Turkish offensive in northern Syria which disrupted American, British and French support for Kurdish fighters battling Islamic State.

“This re-emergence of authoritarian powers, essentially Turkey and Russia, which are the two main players in our neighbourhood policy... creates a kind of turmoil,” he declared. France also responded to Turkish incursions into Cypriot waters by expanding its naval presence in Cyprus and conducting joint military exercises in the area with Greece, Cyprus and Italy (see diagram).

A growing problem

Turkey’s relations with other eastern Mediterranean countries have also soured. A decade ago Israel and Turkey were close military partners, but that ended after Israeli commandos attacked Turkish civilian ships trying to break a blockade of Gaza in 2010.

“Greece became very important in providing a substitute, especially in terms of training space,” says Oded Eran, a former Israeli diplomat at the Institute for National Security Studies in Tel Aviv. Yossi Cohen, Israel’s spy chief, is reported to have told his Saudi, Emirati and Egyptian counterparts last year that Turkey posed a greater threat than Iran.

He would have found a sympathetic audience, for Turkey is at loggerheads with both Egypt and the UAE. A kaleidoscope of grievances against Turkey has helped to meld a trio of European states (Greece, Cyprus and France), a pair of Arab ones (Egypt and the uae) and Israel into a loose but formidable geopolitical front.

“Turkey basically has had its back against the wall for the last four or five years,” says Nathalie Tocci of the Italian Institute of International Affairs, who advises Josep Borrell, the eu’s foreign-policy chief. “What Turkey managed to do in the last year is get back into the game through Libya,” she says.

When Greece and Turkey came close to war in 1996, America helped calm the crisis. It remains a big player in the region and has its own gripes about Turkey. After Mr Erdogan bought Russia’s s-400 air-defence system against nato objections, the Trump administration kicked Turkey out of the programme for buying f-35 warplanes.

In December America lifted an arms embargo on Cyprus, part of a batch of measures it said would boost energy security in Cyprus and Europe; that Cypriot interests align with ExxonMobil’s may have helped. Last month America said it would fund military training for the island for the first time and sent an aircraft-carrier to exercise with Greece off Crete, prompting the Oruc Reis to scurry back to harbour. This week a brand-new American helicopter carrier anchored in Souda Bay, a Greek base on Crete.

Yet American policy is erratic. Its approach to Libya has see-sawed. Donald Trump is unlikely to pay much attention to the intricacies of maritime boundaries as America’s presidential election looms. That makes the eu, which Cyprus joined in 2004, a vital actor. The club lacks America’s armadas. But it has other levers at its disposal. It has already sanctioned Turkey for “unauthorised drilling activities”. Mr Macron is keen to go further.

Dr Erdogan makes a house call in Libya

The problem is that the eu, which makes foreign-policy decisions by consensus, is itself divided.

Italy and Spain want to smooth things over with Turkey. Germany was irked by Greece’s decision to tweak Turkey’s nose by signing the maritime pact with Egypt just a day before talks between Greece and Turkey—mediated by Germany—were to take place.

Others are irritated by France, particularly its support for General Haftar in Libya. “There is little love for Turkey in Western capitals these days, but the French way of confronting Erdogan is not popular either,” writes Emile Hokayem of the International Institute for Strategic Studies in London.

On August 19th European leaders expressed “full solidarity” with Greece and Cyprus and agreed to discuss the issue further in September, promising that “all options will be on the table”. But Ms Tocci concludes that “ultimately Europeans are not going to do anything significant.”

That infuriates France, which believes someone should stand up to Turkey’s challenges to the eu’s maritime borders. “Defence is not a spectator sport,” comments François Heisbourg of the Foundation for Strategic Research, referring to German policy.

Neither Greece nor Turkey can afford these rising tensions in the Mediterranean. Both depend on their coastlines for billions of dollars from tourism. The few foreigners considering a trip to a Turkish or Greek resort later this year may be willing to risk covid-19, but not war. But neither country can back down easily.

Mr Mitsotakis, Greece’s centre-right prime minister, is held hostage by a nationalist faction in his New Democracy party with enough mps to topple his government. Mr Erdogan may be a divisive figure, but his Mediterranean policy wins bipartisan backing at home, notes Sinan Ülgen, a former Turkish diplomat who chairs edam, a think-tank in Istanbul. “This is viewed as an attack on Turkey’s national sovereignty.”

On August 16th Turkey’s foreign ministry vowed to press ahead with exploration: “No alliance of malice will manage to prevent this. Those who think otherwise have not taken their lessons from history.” On August 18th another Turkish vessel, the Yavuz, a drillship, headed for Cypriot waters to start four weeks of seismic surveys.

A third vessel, the Barbaros, has been in the area since late July. If Turkish ships were to enter Crete’s potentially oil-rich waters, which under the Turkey-Libya accord is assigned to Libya, then “all bets are off,” warns Mr Tanchum.

That is unlikely for the moment. But in the past, says Selim Kuneralp, a former Turkish ambassador to the EU, “there was the army and the president who acted as a brake. But now there is no brake and a guy [Mr Erdogan] who’s completely unpredictable.”

Financial Repression Revisited?

Although massive current spending in response to the COVID-19 pandemic seems justified, policymakers will have to address the mounting public debt once the crisis has passed. Policymakers will be strongly tempted to impose an interest-rate ceiling on financial institutions, but conditional tax increases would be preferable.

Anne O. Krueger

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WASHINGTON, DC – The US federal debt-to-GDP ratio rose sharply during the 2008-09 Great Recession and continued rising thereafter, going from 62% in 2007 to 90% in 2010.

By 2019, it had reached 106%, and the Congressional Budget Office was warning that the trust funds for Social Security and Medicare would be exhausted by 2028.

Many economists argued that a debt-to-GDP ratio of 100% was already worryingly high, and that the future tax increases needed to reduce it would be massive.

Then came COVID-19. Faced with lockdowns and collapsing economic activity, governments around the world approved vast additional expenditures even though revenues were expected to decline. After projecting an annual fiscal deficit of $1 trillion before the pandemic, the CBO has raised its estimate of the deficit for fiscal year 2020 (which ends in September) by an additional $2.2 trillion, followed by an additional $0.6 trillion in 2021.

According to the Committee for a Responsible Budget, this amounts to 17.9% of GDP in 2020, and to 9.9% in 2021. As things stand, the federal debt is expected to reach 108% of GDP by next year.

This means that in the space of just seven months, the US debt ratio has already exceeded the level accumulated during the two years of the Great Recession, and that doesn’t even account for additional spending bills that Congress has yet to pass. The consensus view is that these expenditures are justified, given the unprecedented, horrific circumstances of the pandemic.

Nonetheless, policymakers must recognize that measures to reduce the deficit-to-GDP ratio will be urgently needed after the virus has been brought under control.

To be sure, some economists have argued that in this low-inflation, low-interest-rate environment, one shouldn’t worry about the size of the federal debt, the implication being that deficits should expand even more to finance infrastructure and other spending while borrowing costs are so low. But there is no guarantee that today’s financial conditions will continue indefinitely.

On the contrary, if investors come to believe that the prospective increases in debt will require higher interest rates to induce people to hold it, they will not willingly purchase new debt (or even roll over existing debt) at the prevailing low rate.

In any advanced economy, the prospect that the government might not be able to roll over its debt to finance its expenditures is simply unacceptable. But while reducing current and prospective fiscal deficits (and even running a surplus) is the obvious solution to the problem, it also tends to be the most difficult to pull off politically.

This implies that there will be a strong temptation to reduce the debt through measures known as “financial repression.” Policymakers could try to cut the costs of debt service by capping the interest rates that financial institutions – including banks and pension and insurance funds – are allowed to pay.

An interest-rate ceiling enables governments to sell and roll over government bonds at lower interest rates than they otherwise could, because savers cannot obtain better returns elsewhere. Governments have even put such caps on the interest that lenders can charge, resulting in credit rationing across potential borrowers.

When used in the past, financial repression has worked, reducing the US debt-to-GDP ratio after World War II from 116% in 1945 to 66.2% in 1955 (and further thereafter). Moreover, Carmen M. Reinhart, now the World Bank’s Chief Economist, and Maria Belen Sbrancia of the International Monetary Fund have estimated that between 1946 and 1955, the US liquidated debt amounting to 5.7% of GDP per year through financial repression.

This gradual reduction came about because interest-rate ceilings were lower than the rate of inflation, resulting in a negative real return to creditors during this period. Reinhart and Sbrancia estimate that if real interest rates had been positive, US federal debt in 1955 would have stood at 141.4% of GDP. That 75-point difference reflects the amount by which government debt would have increased had the government not resorted to financial repression, all else being equal.

Still, analysts since then have concluded, more or less unanimously, that financial repression reduced GDP growth and was harmful to the economy. Financial repression diverts private savings from private investment toward government securities – usually accompanied by rising inflation because of excess demand at the controlled interest rate. For these reasons, it is almost always accompanied by relatively slower growth. Only in the 1980s were interest rates permitted to be determined by markets.

While a large fiscal deficit may be warranted because of the pandemic, politicians and the public should know that a dangerously high debt-to-GDP ratio will need to be addressed once the immediate crisis has passed. Otherwise, the nexus of high inflation and slow growth that accompanies financial repression could choke off the recovery.

One possibility would be for Congress to enact provisions for forthcoming tax increases, or to set a schedule of increases built around a carbon tax, a value-added tax, or a surcharge on income taxes. These could enter into force whenever unemployment has fallen below some pre-designated level, and they could be ratcheted up as the economy gained further ground.

Most economic observers recognize that “normal” growth cannot resume until the pandemic is brought under control. But even when that wonderful day arrives, economic sustainability will require addressing the high debt-to-GDP ratio.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University.

Will A Weak Dollar Bail Out Emerging Markets? Nope


Back in the simpler days of 2019, there was this (now completely forgotten) impending crisis in which emerging market countries’ dollar-denominated debt was going to blow up their – and by extension the rest of the world’s – economies.

The short version of the story is that China, Brazil and some other up-and-comers decided to lower their interest costs by borrowing US dollars at, say, 3%, rather than borrowing in their own bond markets at much higher rates. They’d save money in the short run and profit further in the long run when their economies grew and their currencies rose against the dollar, making it easier to pay off their loans. Based on these rosy assumptions, EM governments and corporations accumulated about $5.5 trillion of dollar-denominated debt.

It didn’t take long for the bet to sour. The dollar rose and emerging market economies slowed, and by last year the debt reckoning seemed close at hand.

Then the pandemic hit and the world forgot about emerging markets.

But their debt didn’t go away, even as their economies shrank under the pressure of lockdowns and lower developed-world consumer spending. And though the dollar has declined against some other currencies – which should in theory help emerging market dollar borrowers – it isn’t falling against a lot of EM currencies, which are declining even faster.

Emerging market currencies emerging markets dollar debt
Let’s take Brazil as an example of what this combination of falling income and rising debt looks like:

Brazil posts record budget deficit in June as coronavirus slams economy

(Reuters) – Brazil’s government posted a record budget deficit of 194.7 billion reais ($37.6 billion) in June, the Treasury said on Thursday, substantially more than economists had expected, as the coronavirus continued to depress tax revenues and fuel emergency spending.

The primary deficit excluding interest payments was more than the 160 billion reais deficit economists in a Reuters poll had predicted, and took the shortfall excluding interest payments in the first half of the year to 417.2 billion reais.

That compares with a deficit of 29.3 billion reais accumulated in the first half of last year, Treasury said.

Total net revenues in June for the central government, comprising the Treasury, central bank and social security system, were 65.1 billion reais, down 31% in real terms from the same month last year.

Expenditure totaled 259.9 billion reais, up 144% on the year.

The primary deficit accumulated in the 12 months to June was 483.9 billion reais, equivalent to 6.7% of gross domestic product, Treasury said.

The government’s current forecast for this calendar year is a primary deficit of 787.4 billion reais, close to 11.0% of GDP.

The result: Some if not most emerging market countries and their corporations are in a box from which they can’t escape without help from either a rebound in demand for raw materials (their main export) or direct funding from richer countries. And with the US and Europe just a bit preoccupied lately, help isn’t on the horizon.

So – as these things frequently go – the EM external debt problem is being allowed to fester until it can’t be ignored. That is, until the big money center banks realize that they’re on the hook for a lot of this debt and threaten their governments with Armageddon if they aren’t bailed out.

At which point the Fed and ECB will create another several trillion dollars and euros and toss it at this latest problem.