DEBKAfile Exclusive Analysis December 19, 2011, 3:52 PM (GMT+02:00)
The sudden death of Kim Jong II, of a heart attack aged 69, Monday, Dec. 19 – even though his youngest son Kim Jong-un was hailed as successor – confronts the world for the first time since the Cold War with a leaderless nuclear power about which it knows almost nothing. Though anointed as heir, his youngest son Kim Jong-un, believed to be 26, is more than likely to be challenged for his claim to power. At present, therefore, no one knows who controls North Korea's nuclear arsenal - any more than the identity of the country's next ruler after the dust settles.
Meanwhile there are pressing questions: Will Kim Jong II's successor follow through on his consent this week to suspend Pyongyang's enriched-uranium nuclear weapons program for 240,000 tonnes food aid from Washington? How will the 1.2 million strong standing army of the North respond to the first actions of South Korea, Japan and US forces in the Far East in placing their armies on alert?
There has been no sign of motion from this huge army apart from test-firing a short-range missile Monday morning from the east coast.
This is almost certainly the calm before the storm. A year ago, Kim Jong Il began grooming his son for the leadership, the third of their dynasty, by appointing him Vice Chairman of the Central Military Commission of the Workers Party of Korea and conferring on him the rank of four-star general.
Still, he is as shorter on military experience than he is in politics. After the dead leader's funeral on Dec. 28, the army, or parts therefore, will have to decide whether to continue supporting the Kim family's rule in Pyongyang after 60 years or replace it with a different kind of leadership.
The prospect of uncertainty and change there sends shudders down many political spines in Washington, Tokyo and Seoul, as well as in Beijing and Moscow. In recent months, world powers were deeply immersed in the war threats hanging over the Middle East, Syrian bloodshed and Iran's nuclear weapons momentum. Monday, they woke up to a completely unforeseen scenario, an unstable Far East state armed with a nuclear bomb which could take the region in any of five directions:
1. Elements of the North Korean army or its security services could go head to head for a power grab in Pyongyang, potentially sparking civil strife in this enigmatic nation of 24 million.
2. To keep any such violence from spilling across its borders, China may send troops into North Korea bringing similar action from Seoul, possibly with US backing.. China has a large North Korean expatriate minority which respects Pyongyang rather than Beijing and is therefore a source of unrest.
Of the US troops stationed for 58 years on the armistice lines between South and North, about 28,500 remain and could be involved in a conflict with the potential of exploding into another Korean War. The first war in the 1950s cost several armies more than a million lives.
3. The big difference between then and now is that today North Korea has nuclear arms and there is no knowing at what point someone in Pyongyang may decide to use them.
4. A recent Pentagon situation paper estimates that if the Korean Peninsula descended into domestic anarchy and civil strike, the United States would be called on to raise an army of intervention numbering 400,000 soldiers, 100,000 more than the size of US forces fighting in Iraq and Afghanistan and the peak of those conflicts.
5. North Korea maintains thriving nuclear, military and technological relations with Iran and Syria. Hundreds of technicians and engineers, including nuclear and missile experts, have worked for years on their nuclear and missile programs.
Western and Israel intelligence services have never been sure how deeply China is involved in North Korea's nuclear and military assistance to Iran and Syria. Is it just passive? or does Beijing use Pyongyang as a channel for pumping nuclear technology to Tehran and Damascus?
Some Western agencies have recently come to believe that China has a bigger stake in those Middle East countries than realized and much of the military technology transferred by North Korea to Iran is actually of Chinese origin.
A power struggle in Pyongyang, which could be drawn out for as long as a couple of years, could go in many unpredictable directions including stepped-up contribution to the Middle East nuclear race.
An epic lack of foresight, accuracy and rationale... https://www.tfmetalsreport.com/comment/170246#comment-170246
December 13, 2011
Two weeks ago, The Washington Post broadsided us with another Beltway bombshell: China's "Underground Great Wall" – a "vast network of tunnels" with a "sophisticated missile and nuclear arsenal" dug by "a secretive branch of the Chinese military."
The intrigue came from a 363-page study by top Pentagon strategist-turned-Georgetown University professor Phillip A. Karber and his students, based on classified Chinese military documents, satellite imagery and other information. Among the revelations, a Second Artillery Corps—which, in addition to digging the tunnels, has a website—directly linked to The Post's article.
To its credit, the story shows the three-year project creating an atmosphere menacing U.S. nuclear stockpile reductions. Still, the often-absurd saga of China and the United States will live on in dreary Capitol Hill hearings and buzz among Pentagon brass and tiresome foreign policy oracles. Moreover, despite U.S. economic indebtedness to China, Inc.—and common sense—petty, 1960s-era politicking and a military industrial complex fixated with a rising Middle Kingdom will continue to carry much of the day.
Is China challenging its neighbors over the Spratly Islands, the Paracels, the Scarborough Shoals, Reed Bank and Tungsha in a South China Sea home to 17.7 billion tons of oil and gas? According to the Indonesian Center of Democracy, Diplomacy and Defense, Beijing has deployed 27 battleships, an aircraft carrier and unknown submarines to the area amid competing claims with Brunei, Malaysia, the Philippines, Taiwan and Vietnam.
Beijing and the People's Liberation Army, for their part, have their own highly unpublicized views on Asian brinkmanship. Though hardly state secrets, they won't scream off the pages of The Post anytime soon.
Back in 2001, a curious incident off south China brought to light some quiet Cold War-style American espionage. The episode, long overshadowed by 9/11, took place when a U.S. spy plane collided with a Chinese aircraft near Hainan Island, leading to the crew's capture by local authorities.
After a diplomatic standoff, the pilots were freed in one of President George W. Bush's earliest humiliations. The following decade, we know, was marred by bigger embarrassments—namely botched wars in Iraq and Afghanistan—all impossibilities bereft a multitrillion-dollar fire sale of U.S. Treasury assets to China.
To this day, surveillance of China's air defense systems persists beneath the radar, 10 years after the worst terror attack in United States history claimed some 3,000 lives.
Lately, ASEAN members are relaxing with President Obama's announcement of a U.S. military base with 2,500 marines in Darwin, Australia. But Beijing sees red: In the vast arc of a U.S. militarized zone from the Korean peninsula to Marine bases in Japan—with more than 60,000 U.S. personnel between the two—to an activist 7th Fleet off Taiwan, it will now face extra encirclement thousands of miles due south. This must be a twist, given that China's joint naval maneuvers with the Australians in 2010 deliberately excluded American forces.
In the end, however, the Chinese Communist Party, with its 70 million adherents, remains its own worst enemy. The Party has a massive public relations problem, one that perpetuates the great Pacific stalemate every bit as much as Washington adventurism. Much state-owned media, notably, ceaselessly echoes eerie-sounding praise of "strategic cooperation" and "win-win" situations juxtaposed with bristling hostility, sowing bilateral confusion in the process.
President Obama's fabled 2009 Shanghai town-hall meeting crystallized this myopia. At the height of his first, most important visit to the mainland, Obama faced Orwellian questions by handpicked, hopelessly robotic students. Domestic media glossed over touchy responses, censors took down Internet transcripts, and only one local station carried the show live while international condemnation was fast and furious. It was hardly Beijing's finest hour.
All this is understandable, if maddening. Colored by millennial traditions tinged heavily by a brutal nationalism, an obsession with preserving face at all costs, and a historically justified leeriness of outsiders, the Chinese government feels itself caught between a rock and a hard place.
Order among 1.3 billion people is perceived as crucial, and sometimes urgent against a backdrop of ethnic tensions. Thus 60 offenses, including killing pandas, are capital crimes, among other gruesome human rights statistics. For another consideration, the unseemly term "renegade province" is all part of Beijing's oft-ignored internal domino theory: Once Taiwan goes, rather, so too do Tibet and Xinjiang, an "autonomous region" totaling one-sixth of China's land mass.
None of this, including China's big posturing or detentions of the tiny fishing boats of smaller countries, is excusable. China's balancing act, however, at least from within, weighs a broader—and, in ways, more serious—internal reality: patriotism of ordinary Chinese resentful of encroachment by foreigners.
And what if Alaska and Florida had separatist ambitions? Would China make public overtures to their political and religious leadership? Or what if the Chinese, under a 30-year-old internal mandate, sold billions in surface-to-air-missiles and MiG-20 fighter jets to an independent Hawaii, one with ties to an American civil war claiming at least 1 million lives that ended but 60 years ago?
Imagine a foreign, nuclear-armed naval destroyer hovering 300 miles off California's coast? And imagine Washington Post editorial indignity were Chinese signal intelligence planes probing national air defenses near the coast of Oregon.
These days, Sino-U.S. relations in Asia's sullied waters are equally beset by misunderstandings as genuine threats. On one side are Americans, brash and eager to manage crises and dominate a Pacific agenda they have largely ignored over the past 10 years. On the other are a proud, stubborn, heavy-handed Chinese set in their ways and petrified of betraying any weakness—to their own people, much less anyone else.
Nowhere to go: Fuel tankers parked in Karachi
By Shahan Mufti
Like a broker tracking the dips and spikes of a volatile but lucrative stock, Mohammad Shakir Afridi has kept a close eye on U.S. troop levels in Afghanistan since the first Americans landed in the country 10 years ago. As president of the Khyber Transport Assn., one of the largest associations of truck owners in Pakistan, Afridi’s biggest contract involves moving military equipment for American and coalition forces through Pakistan to military bases in Afghanistan. The slightest policy shift in Washington can carry major consequences for Afridi and his business.
Sitting on a rooftop in a leafy residential block in Peshawar, the largest city in northwest Pakistan, Afridi slaps the morning paper on the floor beside his mat. “Twenty-four of our boys in one go,” he spits out. A front page photograph shows a field full of coffins draped in Pakistani flags. The soldiers were killed on Nov. 26 when U.S. helicopters and jet fighters from Afghanistan fired on military outposts on the Pakistani side of the border. The relationship between Pakistan and the U.S., which has been rocky for years, hit a new low. While the U.S. military promised to investigate and the NATO chief regretted the “tragic, unintended” incident, the Pakistani Prime Minister said there would be “no more business as usual” with the U.S. Pakistan demanded the U.S. vacate an airbase it was using in the South and choked off all U.S. and coalition military supplies traveling through the country.
Afridi learned of the American attack before the Pakistan military or government had issued any statement...
Submitted by Tyler Durden on 12/19/2011 - 12:52
Scouring through the news screens, we nearly fell of the proverbial chair after reading the following Bloomberg headline paraphrasing a Nikkei report: "Japan May Buy Chinese Govt Bonds, Nikkei Says....Japan is seeking to diversify forex funds and strengthen economic cooperation with China by helping make yuan more international. Japan may purchase a total of $10b worth in stages." Naturally, there are two interpretations: the ugly one is that Japan, the 3rd largest holder of US debt after the Fed and China, is considering gradually abandoning the dollar or, as the term is better known in polite circles "diversifying."
Japan's public debt is expected to swell to a record $13.5 trillion as the government finances reconstruction efforts after the March earthquake and tsunami, reports said Saturday.
Japan's debt is already the industrialised world's biggest at around twice its GDP, after years of pump-priming measures by governments trying in vain to arrest a long economic decline.
The public debt is expected to reach 1,024 trillion yen ($13.5 trillion) by the end of this fiscal year to March, up 99.75 trillion yen from a year earlier, the Yomiuri daily reported citing, unnamed finance ministry sources.
The national debt will inflate as Tokyo plans to issue bonds worth 11.55 trillion yen to finance the reconstruction measures in the disaster-hit northeast, the Yomiuri and NHK public broadcaster said.
The government spending for the year to March is also expected to swell to a record 106.40 trillion as the series of extra budgets will exacerbate the nation's already tricky fiscal condition.
Russia on Monday praised Syria's decision to let in Arab monitors, saying this could help stabilize the violence-stricken country, after Damascus made clear it agreed to the deal on the advice of its big power ally. Earlier Monday Iran also gave its support for the measure.
"We believe that the document signed in Cairo gives an opportunity to ... provide safety for the Syrian people and stabilize the situation," the Russian Foreign ministry said in a statement, according to Interfax news agency.
Syria opposition wants Arabs to intervene militarily
Qatar sees Syria signing Arab peace deal
France rejects Russia's Syria resolution
Syria agreed on Monday to let Arab League observers into the country to monitor implementation of a deal it agreed last month to pull troops from protest-hit towns, free political prisoners and start talking to dissidents.
Damascus signed the deal on the counseling of Moscow, Syrian Foreign Minister Walid Moualem said.
An armed insurgency has emerged in the last two months in Syria, alongside a peaceful protest movement that began in March inspired by uprisings across the Arab world.
Syrian President Bashar Assad's forces, including a pro-Assad militia, have reportedly suffered scores of casualties in the last few weeks, especially in the northwestern province of Idlib near Turkey and in the central region of Homs.
Russia has had strong ties with Damascus since the Soviet era. Syria has been a major client for Russian arms sales and hosts a Russian naval maintenance installation on its Mediterranean coast, a rare outpost abroad for Moscow's military...
By Carlo Munoz
Published: December 19, 2011
Lockheed Martin Corp. (LMT) won a contract from Japan to supply F-35 Joint Strike Fighters, the aircraft’s first win in a competitive tender.
The U.S. contractor will build 42 of the planes for Japan, Defense Minister Yasuo Ichikawa told reporters in Tokyo today. He declined to comment on the cost of the contract. The F-35 was shortlisted against Boeing Co. (BA)’s F-18 Super Hornet and Eurofighter GmbH’s Typhoon.
The deal comes as the death of North Korean dictator Kim Jong Il spurs uncertainty about stability on the Korean peninsula, where 1.7 million troops from North Korea, South Korea and the U.S. are stationed. Japan, which has the world’s sixth-largest defense budget, has been upgrading air defenses asNorth Korea improves its ballistic missiles and nuclear weapons program, and as both Russia and China develop stealth fighters.
“From now on, we really have to think about distances and air force strength in Northeast Asia,” said Hideshi Takesada, a professor of international relations at Seoul’s Yonsei University. “This decision reflects the need for stealth and long-distance combat capabilities.”
CAIRO —Tahrir Square smells like piss. It is no surprise. After all, people had been living there in a tent camp for weeks. Yet the stench is also fitting for Egypt's current impasse. Egyptians -- soldiers, police, activists, soccer hooligans called "ultras," and others -- have abused this ostensibly hallowed ground at various moments since Hosni Mubarak's unexpected fall almost a year ago.
The proximate cause of Cairo's current spasm of violence was the military police's ill-advised effort to clear a relatively small number of protesters from in front of the cabinet building. The clashes, however, have revealed a deeper, more profound problem afflicting Egypt. The country has retreated from the moment of empowerment and national dignity that the uprising symbolized and is now grappling with a squalid politics and the normalization of violence.
What is perhaps most disturbing is that the weekend's battle, which left 10 dead and hundreds injured, didn't seem to have a point. The young toughs who descended on Qasr al-Aini Street after news spread of the Army's efforts to clear the area seemed less concerned with principle than combat. Having cut their teeth and paid for it with the loss of 45 lives in late November clasheswith the police and military, these kids seemed to be looking for payback. Qasr al-Aini Street bellowed with chants of "Death to the field marshal" -- a reference to Supreme Council of the Armed Forces (SCAF) head Gen. Mohamed Hussein Tantawi -- rather than the significantly more inspiring "Freedom! Freedom!" that echoed through the concrete canyon of Tahrir during the January uprising.
How did Egyptians get to this warped, demented, bizarro version of Tahrir Square? It is easy to blame the SCAF, as so many have, but the generals have also had a lot of help. Each of Egypt's primary political actors -- the military, revolutionary groups, Islamists, and liberals -- have contributed mightily to the country's current political impasse and economic collapse through a combination of incompetence, narcissism, and treachery. This has left a society on the edge, one in which minor traffic accidents become near riots, soldiers beat womenwith reckless abandon, and protesters burnthe building containing some of Egypt's historical and cultural treasures...
As we approach the one-year anniversary of the events that touched off the "Arab Spring," there is no lack of prudent handwringing. Writing in the Washington Post, my colleague Daniel Byman concludesthat with the exception of Tunisia, where democratization is moving apace, "the Arab Spring may not bring freedom to much, or even most, of the Arab world. Even as the United States prepares to work with the region's new democracies, it also must prepare for the chaos, stagnation and misrule that will mark the Arab Winter."
There is ample justification for such pessimism. Egypt's transition has been marred by the military's repeated violent repression of popular protests, by its periodic efforts to limit the authority of the new parliament, and by the growing fears among Egyptian liberals sparked by the electoral victories of their Islamist rivals. Further afield, Bahrain's Sunni rulers have crushed a popular movement led mostly by Shiite leaders, Yemen might be plunging into tribal civil war, and Syria seems to be descending into sectarian conflict between a mostly Alawite regime and its mostly Sunni opponents. As for Libya, friction within the National Transitional Council might herald a much wider power struggle -- especially among the 100 or so independent and well-armed militias. Watching these developments, we might ask whether the death knell of authoritarianism in the Arab world was sounded too readily, or at least prematurely?
Perhaps. When the momentous events that shook the Arab world in January 2011 first grabbed the world's attention, not a few observers eagerly proclaimed the "Arabexceptionalism." In the ensuing year, satellite television and the Internet allowed a world audience to experience -- as they say in the Olympics business -- the thrill of victory to the agony of defeat. Today, we must reckon with a process of authoritarian extraction that could last well into the next decade -- one that promises as many if not more disappointments than successes.
By way of analytical preparation for this long and difficult journey, I would suggest that we begin by jettisoning the term "Arab exceptionalism," as well as its conceptual relative -- democratic universalism. The assumption that the Arab world was stuck in the deep muck of an authoritarian past is as misleading as the assertion that it suddenly rose up to join teleology of global democratization. The notion that history sleeps or awakens is equally a historical. What we need instead is a pliable conceptualization of the concrete mechanisms of Arab autocracies, and how these mechanisms both sustained and undermined the region's despots.
In the present monetary system, wealth is commonly held as ambiguous claims against the economy. We call it stocks, bonds, money market funds, mutual funds, etc… People hold their wealth in this way for the promise it makes of more wealth forthcoming! Sound familiar?
Now, when I say that there will actually be much more wealth forthcoming for those with **unambiguous** ownership of physical gold today, some people feel compelled to argue that their ambiguous claims have a better history of "more wealth forthcoming." And this argument is not without merit.
It is true that stocks and bonds did very well in the '80s and '90s. In fact, my own father is still waiting for the Dow to get back to 14,000 to regain the wealth he thinks he lost. The Dow beat CPI inflation hands down throughout the '80s and '90s, and that's how you know you made a good investment, by beating inflation.
The Dow entered the 1980s at $824. So if your $824 investment in 1980 had perfectly tracked official inflation, you'd have had $1,722 in 2000 and $2,264 in 2011 (according to the BLS inflation calculator). But in the Dow, your investment became $11,722 by January, 2000, and $12,045 today. So even though it hasn't done much in the last decade, the Dow still beat inflation by a large margin over the last 30 years.
Bonds also had a huge 30-year run as the Fed lowered rates from 20% down to 0%. Remember, as interest rates are lowered, the price of bonds issued at the previous higher rates rises. So bond investors do very well in a falling interest rate environment.
Sometimes I write post-length comments that would be more useful as actual posts. Here's one…
Thank you for the ZH link. I suppose I need to be more specific when I refer to "the ZH/GATA CB thesis." First let me state that Zero Hedge and GATA both provide a great service and they both do fantastic work, ZH comments section notwithstanding. It is their underlying thesis about fiat currencies and central banks in general that I have a problem with. And this is not a problem with only ZH and GATA, it is a problem with the entire hard money camp.
Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."
One of the biggest struggles I observe in newish visitors to my blog is that they instinctively try to reconcile everything they learned from the hard money camp—ZH and GATA being two bright stars there—with what they read here. Their effort inevitably leads to contradictions that cannot be resolved. And because ZH, GATA and the rest of the hard money camp is so much more ubiquitous than my little blog, they win by default in minds that are unable to think for themselves.
Here are a couple of the irreconcilable concepts found on this blog that noobs must either reject or ignore in order to hang on to their ZH/GATA CB thesis.
1. Remember when Aristotle wrote this? "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."
Have you ever seen anyone in the hard money camp write anything like this? Or can you imagine them ever doing so? Yet this is one of the core fundamentals necessary to understanding Freegold.
2. And FOA wrote this: "Several years ago, many gold bugs and gold advocates missed the path as the trail turned." "Yes, the war now is between the Euro and the dollar! The Washington Agreement [a Central Bank agreement] placed gold 'on the road to high prices'." "The war between gold and the dollar has been over for a while now… Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."
December 19, 2011
By Robert Samuelson
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."
-- John Maynard Keynes, 1936
WASHINGTON -- The eclipse of Keynesian economics proceeds. When Keynes wrote "The General Theory of Employment, Interest and Money" in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns -- spend more and tax less -- presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won't work.
Countries then lose control over their economies. They default on maturing debts or must be rescued with loans from friendly countries, the International Monetary Fund (IMF), government central banks (the Federal Reserve, the European Central Bank) or someone. There are other reasons why Keynesian policies might fail or be weakened. But they pale by comparison with the potential veto now posed by bond markets. Ironically, the past overuse of deficits compromises their present utility to fight high unemployment...
Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to theInternational Monetary Fund as the European Central Bank widened its support for sagging bond markets.
Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will“define its contribution” in early 2012, euro finance ministers said in a statement after a conference call yesterday.
The IMF track is “obviously a small-scale solution,”former UBS AG Chairman Peter Kurer told Maryam Nemazee on Bloomberg Television’s “The Pulse” program. “What really would be needed in the ideal world would be euro bonds or a substitute which can bring large-scale liquidity and confidence into the markets.”
Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March. Still, the IMF infusion and jump in ECB bond purchases indicated that Europe is wielding more money instead of relying on...
Jamie Dimon, the highest-paid chief executive officer among the heads of the six biggest U.S. banks, turned a question at an investors’ conference in New York this month into an occasion to defend wealth.
“Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” theJPMorgan Chase & Co. (JPM) CEO told an audience member who asked about hostility toward bankers. “Sometimes there’s a bad apple, yet we denigrate the whole.”
Dimon, 55, whose 2010 compensation was $23 million, joined billionaires including hedge-fund manager John Paulson and Home Depot Inc. (HD) co-founder Bernard Marcus in using speeches, open letters and television appearances to defend themselves and the richest 1 percent of the population targeted by Occupy Wall Street demonstrators.
If successful businesspeople don’t go public to share their stories and talk about their troubles, “they deserve what they’re going to get,” said Marcus, 82, a founding member of Job Creators Alliance, a Dallas-based nonprofit that develops talking points and op-ed pieces aimed at “shaping the national agenda,” according to the group’s website. He said he isn’t worried that speaking out might make him a target of protesters.
“Who gives a crap about some imbecile?” Marcus said.“Are you kidding me?”
Four key risks to euro area financial stability
The first key risk, arguably the most important, concerns the potential for a further intensification of contagion and the negative feedback between the vulnerability of public finances, the financial sector and economic growth...
...the vulnerability to further contagion remains highest for those countries that are perceived to exhibit a combination of vulnerable fiscal positions, weak macro-financial conditions, and the potential for further significant losses in the banking sector.
Despite several national initiatives aimed at improving fiscal fundamentals, as well as the announcement or adoption of supranational initiatives to stem stress, contagion effects have spread widely across euro area sovereigns and banks...
...the possibility that more euro area sovereigns will, as a consequence, face difficulties in refinancing their debt remains among the most pressing risks to euro area financial stability.
By Andrew Trotman
12:34PM GMT 20 Dec 2011
12.34 BREAKING NEWS...
UK Deputy Prime Minister Nick Clegg says EU leaders will hold a summit on January 27.
12.33 Incoming Spanish Prime Minister Mariano Rajoy has said the country needs to cut its deficit by at least €16.5bn in 2012.
12.29 Here's something to make you smile.
What Investment has revealed that the UK has the happiest investors. In eight out of 10 countries, the majority of investors were unhappy with their investments. The findings are from a survey of more than 1,400 individuals by Schroders.
The only exceptions were the UK, where 55pc said they were happy with their choices, and Germany, where opinion was split at 50pc.
12.19 Update on the markets. FTSE 100 is down 0.3pc (and is the only major European index in negative territory). France's CAC is up 0.8pc, Germany's DAX is up 0.8pc, Spain's IBEX is up0.8pc and Italy's MIB is up0.9pc.
11.58 Greece is set for a deal with creditor banks on writing off half its debt by the beginning of January, a Greek government source has told AFP.
11.52 Investors have been buying Spanish bonds today thanks to the ECB promising to lend cut-rate money. The ECB will offer EU banks loans of up to three years at a rate of around 1pc, in an unprecedented move to fend off a credit crunch.
A treasurer at a Spanish bank said: "What has happened is that some banks hadn't realised quite how strong the ECB measures were. But there have been European [and Spanish banks] that were able to read the ECB's message and have operated through carry trade."
11.45 Sometimes you just can't take any more excitement - as Jose Manuel Barroso wishes the Brussels press corp a merry Christmas and an "exceptional" 2012, Wall Street Journal reporter Matina Stevis reacts via Twitter:
Barroso wishing us of Bxl press corp a happy new year, promises 2012 will be as exceptional as 2011. Noooooooooo
11.37 Nearly midday, so a quick recap of today's news:
Christine Lagarde has warned that the world economy is a 'very dangerous juncture'
This came after the Australian central bank voiced fears about the global economy
Spain has held a very successful short-term bond auction, while Greece's was less impressive
UK retail sales volumes have grown, and consumer confidence has edged up
Meanwhile, France believes the UK will boost IMF resources
11.32 Denmark can’t stretch beyond providing loans to the International Monetary Fund in the Nordic country’s effort to help solve the euro area’s debt crisis, Danish Minister for the Economy Margrethe Vestager said.
“Contributing through the IMF is how far Denmark should go because we have the euro opt-out,” Vestager, whose country has rejected euro membership in two referenda, said.
Euro nation leaders pledged yesterday to channel €150bn to the IMF as the European Central Bank widened its support for sagging bond markets
“Denmark is not doing anything special,” Vestager said. The IMF“is probably the safest spot where we could place the money in terms of making sure we get it back”.
11.20 BREAKING NEWS...
Fitch says the risk of downgrading EFSF bail-out fund has increased. The fund's AAA rating depends on France remaining AAA....
Dec. 20, 2011, 12:01 a.m. EST
By brett[dot]arends[at]wsj[dot]com (Brett Arends), MarketWatch
LONDON (MarketWatch) — If the Italians can’t persuade the bond markets to keep them in business, they have another card up their sleeve.
Few people realize it, but Italy holds the world’s fourth biggest stockpile of gold, at 2,452 tonnes. That’s even more than France, and more than twice as much as China.
Only the U.S., Germany and the International Monetary Fund hold more.
The question here is whether some of the troubled European countries — such as Italy and France — are going to have to start selling off the national gold pile to meet their bills.
Some wonder if they already have.
Italy’s gold has a street value of about $123 billion — easily enough to cover this year’s $80 billion budget shortfall. Portugal’s $19 billion in bullion more than covers its $13 billion deficit. France has $122 billion worth of bullion, enough to make a massive dent in its $150 billion deficit.
Meanwhile, look at the people who actually have a lot of money — namely, the Chinese. I continue to suspect that, sooner or later, China is going to move some of its massive $3 trillion-plus reserves into gold, the only currency that no other country controls. At the moment, the richest Western countries, including the United States, Germany, Italy, and the Netherlands, hold between 60% and 80% of their entire reserves in gold.
The figure for China: Less than 2%. No, that isn’t a misprint.
When that bullion changes hands, it may be the moment when power shifts from...
Dec. 19, 2011, 4:42 p.m. EST
WASHINGTON (MarketWatch) — British Prime Minister David Cameron caught some flak at home when he refused two weeks ago to sign up to the fiscal pact that 26 European nations either agreed or considered.
But Cameron’s decision then was more than defendable but wise.
He certainly hasn’t positioned himself as a Keynesian, but it does seem odd to hear his critics both within (Nick Clegg) and outside the cabinet (Ed Miliband) from the left of the British political spectrum argue in favor of severe, anti-cyclical austerity.
So while Cameron seemed willing to have signed that deal if French President Nicolas Sarkozy was willing to accept a carve-out from EU financial-sector regulations, the practical matter is that the country would have had a hard time meeting those budget standards. It was good policy, not to mention great politics.
It’s another matter entirely however not to shore up the European Union via International Monetary Fund contributions, as the U.K. refused to do Monday. First off, it’s the best way to lend to Europe, since IMF claims are first in line to be repaid. Second, it’s just good business for the U.K. to make sure the rest of Europe doesn’t drown — the euro zone is by far the U.K.’s biggest trade partner.
Thirty billion euros, what EU nations had asked the U.K. to lend via the IMF, basically represents 15% of the country’s exports to the euro zone each year.
Sure, the U.K. has promised to “define its contribution early in the new year.” But that’s not good enough at a time when Europe literally is struggling to keep its economies afloat.
The European crisis isn’t mostly or even moderately the fault of Britain. But while it’s fine and probably enjoyable to be smug and gloat at the likes of Sarkozy, the waters surrounding the U.K. won’t prevent a European fire from engulfing the nation’s already-limp economy as well.
While well-known to most, what may be lost on all those calling for the ECB to commence outright printing, is that as today's Bloodmberg chart of the day shows, the ECB's balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke, but at 30x leverage, has the same risk as Lehman did at its peak. However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB. From Bloomberg: "Without information on the quality of assets on the ECB’s balance sheet or how far it’s willing to allow leverage to increase, investors may doubt the bank’s ability to prop up the financial system, and demand higher yields to buy some countries’ bonds, he said. "Sovereign spreads could rise again if investors become uncomfortable with ECB leverage without a fully detailed rescue package,” said Tyce. “The ECB is providing liquidity and confidence to the banking system, yet all the while its own leverage and balance sheet size is hitting new highs. It seems likely that the market will begin to watch the rising leverage with interest and growing concern."
Technically the market should have been watching said leverage long ago, but then again, it is "the market" which lately tends to compete with the rating agencies in how far behind the curve it is. Because where the market may be surprised, is that as think tank Open Europe indicates, "Through its government bond buying and liquidity provision to banks, we estimate that the ECB’s exposure to weaker eurozone economies has now reached €705bn, up from €444bn in early summer – an increase of over 50% in only six months, raising fresh questions about its credibility, independence and possible losses it may face in the case of future sovereign defaults." Bottom line: the world's biggest hedge fund - ECB Capital LLC, Onshore Austerity Fund, is also the world's most insolvent. Which by implication means that when the ECB fails, and it will, it will be up to the Fed to bail it out.