Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy

Submitted by Mark O’Byrne  –  GoldCore

– Persistent low rates leave central banks with no ammunition to fight next crisis
– BIS says short-sighted central banks and governments contributed to current weaknesses
– Lack of policy options have forced some central banks to stretch “boundaries of the unthinkable”
– Bust in developed economies the main risk facing global economy
– Greece prepares to default
– China markets routed overnight
– Gold will be last man standing when currencies collapse

Greeks line up to an ATM in a run on Greek banks

Greece embarked on capital controls as talks over the weekend between Tsipras’ leftist government and foreign lenders fell apart.

All banks and the Greek stock exchange are closed today. Greek citizens cued in long lines at ATMs or cash machines over the weekend and a run on the banks left most ATMs empty. There is a €60 limit on withdrawals from cash machines under strict capital controls. The ATMs will reopen tomorrow. Citizens are also lining up for petrol and food.

Central banks have run out of options to deal with the next global financial crisis the Bank of International Settlements (BIS) has warned in its annual report. Failure to make difficult policy decisions and raise rates throughout the “recovery” have left central banks with no stimulus options with which to juice the economy when the next downturn arrives.

The BIS, which is central bank of the central banks based in Basel, Switzerland, points to the short-sighted policies of governments and national central banks over the past few years who preferred to try keep their economies afloat using excessive debt rather than take unpopular steps to reform their economies.

Dangerously low interest rates for too long by Central Banks

The Telegraph puts it thus:

“The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies. These low interest rates have in turn fuelled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.” Continue reading

Greek Endgame

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Regime Change Option on the Table?

It has been clear from the beginning that Greece and its creditors were in a “Mexican standoff” situation. We already pointed this out shortly before Syriza won the election (see: Grexitology: A Mexican Standoff). 1. the “institutions” (formerly known as the “troika”) couldn’t possibly let Greece go, but could also not possibly give in and climb down from their demands and 2. Mr. Tsipras was in essentially the same situation; he couldn’t cross Syriza’s aptly named “red lines”, but defaulting and leaving the euro zone is likewise not palatable to him.

road closed

Moving too far to the left is unlikely to end well

Cartoon by Lisa Benson

The enfant terrible and his creditors.

Photo credit: Guido Bergmann / Reuters

In mid June, we speculated that given their perspective, the creditors may be considering an option that has already worked several times in the course of the euro area’s debt crisis: go for regime change.

Any concessions Tsipras happens to make are putting him on a collision course with Syriza’s left-wing hardliners, including his own wife. These people seriously believe that economic examples worth following are countries like Venezuela. In other words, they are hopeless ideologues supporting an economic model that has demonstrably and consistently failed for more than a century wherever it has been tried.

On the other hand, exiting from the euro means that Syriza would be in conflict with what the vast majority of Greek citizens wants, who understandably have no desire to readopt the drachma. Tsipras may be able to get the necessary votes for a compromise in parliament with the opposition’s help, but that would almost certainly lead to new elections, and very likely would split Syriza (which itself is a coalition of various leftist groups). We cannot imagine that a default and a subsequent euro exit wouldn’t provoke new elections as well.

As a result, the creditors may well be gambling on winning by confronting Greece with a “take it or leave it” offer, which they essentially appear to have done yesterday. If the offer isn’t accepted, the hope may be that a new government will subsequently come to power in Greece and prove easier to handle. In the meantime it has however emerged that the “differences between Greece and the EU have narrowed”, so maybe it won’t come to that.

As a side note: €7.2 billion in creditor funds are to be released if an agreement is struck, but Greece not only has a 1.544 bn. repayment to the IMF coming due on June 30, it also has altogether €6.934 bn. in repayments coming due in July. In short, by the end of July, more than the €7.2 bn. will be needed to make all these payments. The biggest chunks in July are €3 bn. in short term treasury bills, another €452 m. to the IMF, €2.096 bn. to the ECB and €1.361 to euro area national central banks. The bond repayments due to euro area central banks are the remnants that were exempted from the haircut imposed in the 2012 PSI (“private sector initiative”).

In recent weeks, deposit outflows from the Greek banking sector have accelerated markedly. We have updated our charts with the most recent available official data, which include the month of May, but not the panicked withdrawals of the past two weeks. One can probably deduct another €10 billion from private sector deposits to arrive at the current figure. This is pretty grim, as the banking system is undoubtedly running out of collateral (collateral presented for “ELA” is subject to very large haircuts). We are guessing that this may already have happened, and that the BoG is by now getting IOUs from the banks they issue themselves (this is how ELA worked in Ireland a few years ago).

Euro System Liabilities Continue reading

Europe’s Complicity in Evil

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Sovereignty or Imperialism?

On September 5, 2009 I addressed an international conference in Austria on the subject of Europe’s subordination to the US and, thus, the absence of any constructive criticism of US foreign and domestic policies. Karel van Wolferen, whose website is, kindly reminded me of my address to the conference when he he sent it to me with his supportive response. Both are available below. You can see from my address and from Karel’s response that the reckless direction of US foreign and domestic policy has been known for many years. Yet the recklessness continues

Europe’s Complicity in Evil
By Paul Craig Roberts

[An address by Hon. Paul Craig Roberts, Ph.D., Chevalier, Legion d’Honneur, to Mut zur Ethik Conference, “Sovereignty or Imperialism,” Feldkirch, Austria, September 5, 2009]

There is a widespread supposition that Obama, being black and a member of an oppressed race, will imbue US foreign policy with a higher morality than the world experienced from Bush and Clinton. This is a delusion.

Obama represents the same ideology of American “exceptionalism” as other re- cent presidents. This ideology designates the United States as The Virtuous Nation and supplies the basis for the belief that America has the right, indeed the responsibility, to impose its hegemony upon the world by bribery or by force. The claim of American exceptionalism produces a form of patriotism that blinds the US population to the immorality of America’s wars of aggression.

Nothing is any different under Obama. Obama has escalated war in Afghanistan; started a new war in Pakistan; tolerated or supported a military coup that overthrew the elected president of Honduras; is constructing 7 new US military bases in Colombia, South America; is going forward with various military projects designed to secure US global military hegemony, such as the Prompt Global Strike initiative that intends to provide the US with the capability to strike anywhere on earth within 60 minutes; is working to destabilize the government in Iran, with military attack still on the table as an option; supports America’s new military African Command; intends to encircle Russia with US bases in former constituent parts of the Soviet Union; has suborned NATO troops as mercenaries in US wars of aggression.

How should Europe react?

Europe should disassociate from the United States and go into active opposition to US foreign policy. Europeans should demand that their governments withdraw from NATO as it serves no European interest. The two aggressive militarist powers, the US and Israel, should be sanctioned by the UN and embargoed.

Instead, Europe is complicit in US and Israeli war crimes.

Because of the Cold War, Europe is accustomed to following US leadership. The financial convenience of the shelter provided by US military power negated independent European foreign policies. In effect, Western European countries became US puppet states.

How does Europe escape from a subservient relationship of many decades? Not easily. The US is accustomed to calling the shots and reacts harshly when it meets opposition. For example, French opposition to Bush’s invasion of Iraq brought about instant demonization of France by the US media and members of Congress. Continue reading

Anecdotes on Eurodollar ‘Money Supply’; Part 2

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

What I set about to demonstrate in Part 1 was the visible spectrum of the wholesale system. In other words, you can see balance sheets grow and distort, with money dealing along with it, but that doesn’t cover the full dimensions on how and why credit production, especially through securities, bloomed as it did. This is, in many ways, the same process as has occurred in banking since the first bank was established – fractional lending. The problem in the wholesale model is defining what, exactly, is being “fractioned.” In traditional banking, someone deposits actual money and the bank “produces” several competing claims upon that money. They do so because they believe it is profitable and estimate not all claims will be presented for satisfaction at once.

The problem in bank panics, thus, was how claiming (convertibility) events were clustered. The panic in 2008, beginning in August 2007, was essentially no different in terms of generic, systemic processes. What is difficult for many to comprehend is what was being claimed – it surely was not cash, currency or anything about real money. In essence, what banks sought was balance sheet risk factors that could provide “capital” relief.

In the modern, wholesale framework, the true “money supply” is far deeper than currency or even ledger “cash.” Because of the VaR-style framework for balance sheet construction, tied back to capital ratios and regulatory ideas about them, the ability to control risk management calculations amounts, in perfect kind, to a form of moneysupply; you might even go so far, as I would, as to recognize it as the form of money supply. If you can hedge at a definable price, you can define how much of a particular security or asset class in which to be able to invest. Once invested, that leverage is defined exclusively by the math!

If the “market” value of the hedges turn squirrely, that isn’t just a strict P/L problem for the income statement, but rather acts upon VaR, vega and all the rest. In other words, depending on a number of factors, without the ability to add additional hedges at desired prices and terms, leverage composition actually changes. In the case of 2008, because aggregate balance sheets were not attuned to taking on more risk, in the form of writing protection or the “needed” side of IR swaps, nobody could gain additional risk capacity to offset declining hedge effectiveness. The lack of derivative supply meant an exponentially greater decline in overall balance sheet leverage, and thus “money supply”contracted in the wholesale format exactly as it would have in a traditional bank panic.

This is what happened in miniature in 1998 with LTCM. Since, however, the FOMC and Alan Greenspan still thought purely in terms of banks rather than “banks”, they never did define it properly even though everything they needed to do so was right in front of them. They even discussed that very nature of the matter before them:

MR. FISHER. All this relates to the question of how this financing got to be so big and nobody realized it was happening.

CHAIRMAN GREENSPAN. What technically happens in that kind of model is that if we are resting on the last five years of experience during which the structure of the markets is essentially stable, that is, there were no severe contractions or even expansions, the covariances that we are going to pick up out of that five years are correct covariances for that population and that environment. What we were dealing with in the Russian situation, if we look at the data, was something that clearly was not a simple, steady state. In that environment, the coefficients in an econometric model either collapse to zero or to one. If we took the covariance matrix that would be implicit in that environment, it would give wholly different risk parameters than we would get in a system in which we are taking five years of special experience and saying the losses were never more than “x” on a daily basis. So what? That begs the question of what will happen in the future.

MS. RIVLIN. That is what stress testing is all about.


VICE CHAIRMAN MCDONOUGH. We have to be very careful because as horrendous as this experience was, if we assume that the normal market is that the Russians are going to default once a week, the cost of capital would go so high that nobody would ever invest in anything.

Continue reading


Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Harris&Ewing Woodward & Lothrop dept. store trucks, Washington DC 1912

While many voices will be seeking to define the precise terms of the referendum announced last night by Alexis Tsipras for July 5, I think perhaps the general gist is more important. It’ll be a vote between being governed by Tsipras, and Greeks in general, on the one hand, and being governed by Germany, the ECB and IMF on the other. “Who do you want to decide your future?”

And the Greek population will have to understand that voting to go with the latter, voting yes to the troika proposals, will mean there will be no getting out of the stranglehold of the institutions, there will be no more sovereignty, and there will be far more severe austerity, all for years to come. All that must be caught in the exact wording of the referendum question, but what lies underneath is what really counts.

In a similar vein, I don’t think it’s all that interesting to go through the precise text and numbers of the latest troika proposal, the one Tsipras labeled ‘blackmail’ and which led to the referendum announcement. This is not about those numbers. It never was.

It’s about two things: the battle for power in Europe, all of Europe, and the refusal by the troika members to admit to their past failures. I see the word ‘failures’ as fundamentally different from ‘mistakes’, because the latter indicates a lack of intent, and I am very hesitant to suggest there was no intent involved in the handling of the crisis over the past 5 years.

I would also suggest that unless one or more troika members admit to past failures, and honestly and openly work to correct them retroactively, there will never be a solution to the Greek issue that does not involve huge defaults and political fall-out. They should not want that, but their notion of the battle for power seems to have them too entrenched to get out.

Still, for the neutral observer, there is no way not to realize that the troika has to a large extent been responsible for creating the Greek problem. Which is a whole other problem all by itself, since the troika consists of three entirely different institutions, who often don’t agree. If just one of the three would admit to past failures, and look at and propose ways to correct these failures, the entire Greek issue could be resolved in no time.

I said a while ago that the IMF could be the one to break the chains, (How The IMF Can Save Greece And Itself), by insisting on ‘retroactive debt restructuring’, an applying the losses and write-offs for French, Dutch and German banks that should have been applied in 2010. But the IMF sits a lot closer to those banks than it does to the people of Greece.

The problem with that is that it makes the Fund’s position a political one, and it should stay away from politics at all costs. It ostensibly is part of the troika only because it has more experience in restructurings than the ECB and EU. But the so-called restructuring that has taken place in 2010 and 2012 could just as well have been done by the other two members. It’s what Varoufakis called the difference between a meat cleaver and surgery.

Still, the IMF did sign off on what happened, and that means a large risk to its credibility and the trust it can expect to encounter in subsequent cases. There are elections in Spain and Portugal later this year, and people there have duly noted how Greece has been handled even just so far. Continue reading

Bubble Trouble Strikes in China

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Scary Moment in Shanghai

In a brief update on stock markets around the world, the AP informs us:

“Chinese stocks plunged 7 percent Friday as fears spread that a yearlong bull rally there had gotten overheated. The market is still up more than 100 percent over the past year.”

Overheated is the understatement of the still fairly young century in this case. Millions of retail traders have opened new stock trading accounts in recent months, most of whom reportedly know between nothing and less than nothing about the stock market. Two thirds of the new traders entering the market apprently didn’t even finish high school (see chart further below). Margin debt has soared into the stratosphere along with the number of trading accounts and stock prices.

china-stock-market-rallyChinese grannies day-trading during lunch

Photo credit: Reuters

However, it appears as if the market may really be in trouble now:

SSECThe Shanghai Composite Index, daily – this is beginning to look serious – click to enlarge.

The chart pattern above actually looks like the beginning stages of a crash. The decisive level is probably the early May low. This may provide support in the short term, but if/when it breaks, a wave of panic selling is likely to develop very quickly.

investoredu2_colorcorrectedFrom Bloomberg: education level of China’s new breed of traders compared to the previously existing stock of households investing in stocks. Continue reading

Guest Column by Vladimir Putin — Introduction by PCR

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

Guest Column by Vladimir Putin

“Former arrogant colonial power and conqueror, then sovereign Gaullist Republic, France is now relegated to the status of American sub-colony whose independence and national interests are routinely violated and trampled [by France’s Washington master].” Sayed Hasan

Vladimir Putin on France and Europe: “NATO Member States have Renounced their Sovereignty

Vladimir Putin is the only leader worthy of the name in the Western World, with the exception of several in South America, who freeing their countries from Washington’s clutches are ceasing to be part of Washington’s world. Notice Putin’s easy ability to speak truthfully to any question and the total inability of any Western “leader” to do the same.

The obvious fact that Western “leaders” are corrupt non-entities explains the extraordinary demonization of Russia and its great president, a man of peace who, unlike every Western leader, respects law and human rights.

It is Washington and its totally corrupt vassal governments who have spent the 21st century attacking and destroying a number of countries and the lives and welfare of millions of people. It is the West that is the home of Sauron. As Chavez said at the UN, “yesterday at this very podium stood Satan himself [George W. Bush, the president of America] speaking as if he owned the world. You can still smell the sulfur.”

As the evil that governs in Washington prepares for a preemptive nuclear strike against Russia and China, the stench of sulfur intensifies.

Meanwhile Washington pretends that the source of evil is Putin, Russia, China, and Washington’s own creation–the Islamic State. And of course the democratically elected governments of Venezuela, Ecuador, Bolivia, Argentina, Brazil, and Chile.

Washington’s definition of evil is every country that does not subject itself to Washington’s will.

As it happened – Yanis Varoufakis’ intervention during the 27th June 2015 Eurogroup Meeting

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe’s history. Ministers turned down the Greek government’s request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions’ proposals – proposals crucial for Greece’s future in the Eurozone. The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: “How do you expect common people to understand such complex issues?”. Indeed, democracy did not have a good day in yesterday’s Eurogroup meeting! But nor did European institutions. After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the “next steps”.

Can democracy and a monetary union coexist? Or must one give way? This is the pivotal question that the Eurogroup has decided to answer by placing democracy in the too-hard basket. So far, one hopes.

Intervention by Yanis Varoufakis, 27th June 2015 Eurogroup Meeting


In our last meeting (25th June) the institutions tabled their final offer to the Greek authorities, in response to our proposal for a Staff Level Agreement (SLA) as tabled on 22nd June (and signed by Prime Minister Tsipras). After long, careful examination, our government decided that, unfortunately, the institutions’ proposal could not be accepted. In view of how close we have come to the 30th June deadline, the date when the current loan agreement expires, this impasse of grave concern to us all and its causes must be thoroughly examined.

We rejected the institutions’ 25th June proposals because of a variety of powerful reasons. The first reason is the combination of austerity and social injustice they would impose upon a population devastated already by… austerity and social injustice. Even our own SLA proposal (22nd June) is austerian, in a bid to placate the institutions and thus come closer to an agreement. Only our SLA attempted to shift the burden of this renewed austerian onslaught to those more able to afford it – e.g. by concentrating on increasing employer contributions to pension funds rather than on reducing the lowest of pensions. Nonetheless, even our SLA contains many parts that Greek society rejects.

So, having pushed us hard to accept substantial new austerity, in the form of absurdly large primary surpluses (3.5% of GDP over the medium term, albeit somewhat lower than the unfathomable number agreed to by previous Greek governments – i.e. 4.5%), we ended up having to make recessionary trade-offs between, on the one hand, higher taxes/charges in an economy where those who pay their dues pay through the nose and, on the other, reductions in pensions/benefits in a society already devastated by massive cuts in basic income support for the multiplying needy.

Let me say colleagues what we had already conveyed to the institutions on 22nd June, as we were tabling our own proposals: Even this SLA, the one we were proposing, would be extremely onerous to pass through Parliament, given the level of recessionary measures and austerity it entailed. Unfortunately, the institutions’ response was to insist on even more recessionary (aka parametric) measures (e.g. increasing VAT on hotels from 6% to 23%!) and, worse still, on shifting the burden massively from business to the weakest members of society (e.g. to reduce the lowest of pensions, to remove support for farmers, to postpone ad infinitum legislation that offers some protection to badly exploited workers).

The institutions new proposals, as expressed in their 25th June SLA/Prior Actions document, would make a politically problematic package – from the perspective of our Parliament – into a package that would extremely difficult to push through our Parliamentary caucus. But this is not all. It gets worse much worse than that once we take a look at the proposed financing package. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

A Perfect Storm Of Crises Blows Apart European Unity (Guardian)
The Losses For The EU Lenders Are Truly Eye-Watering (Muscatelli)
The Greek Butterfly Effect: Forcing The Issue of Math (Northman Trader)
Intervention in 27th June 2015 Eurogroup Meeting (Yanis Varoufakis)
Forget Greece, Portugal Is The Eurozone’s Next Crisis (MarketWatch)
Goldman’s Stunner: A Greek Default Is Precisely What The ECB Wants (Zero Hedge)
Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair (Bloomberg)
Here’s Why Any Greek Debt Deal Will Amount To Nothing (Satyajit Das)
Europe’s Moment of Truth (Paul Krugman)
Wikileaks: Plot Against Former Greek PM’s Life, ‘Silver Drachma’ Plan (GR)
Greece Referendum: Why Tsipras Made the Right Move (Fotaki)
IMF Heads Must Roll Over Shameful Greek Failings (Telegraph)
Austrians Launch Petition To Quit EU (RT)
The Government Must Run Deficits, Even In Good Times (Ari)
Pope Francis Recruits Naomi Klein In Climate Change Battle (Observer)