BOE Raises Interest Rates In Surprise Unanimous Decision

As expected by the market, the Bank of England raised interest rates only for the second time since the financial crisis, to the highest level since 2009, saying recent data confirmed the bank’s view that the first quarter slowdown in UK growth was temporary.

Members of the BOE’s Monetary Policy Committee voted unanimously for a 25 basis point increase, bringing the BoE’s benchmark rate to 0.75%, the highest since the onset of the global crisis.

While the outcome was widely expected, with the market pricing in the quarter point rate rise fully in the run-up to the meeting well in advance, the surprise was that the decision was unanimous, which adds a hawkish tilt to this decision according to several Wall Street analysts.

The central bank was upbeat: “The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years.”

In the Inflation Report accompanying the decision, the BOE cut its forecast for global growth, though its predictions for Britain were broadly unchanged. While U.K. expansion is expected to be just 1.4% this year, it will average about 1.75% a year through 2020, slightly above the 1.5% potential.

The central bank also said that if the economy grows as expected, “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon,” and repeated its phrase that rate hikes will be limited and gradual.

Below are Some of the highlights from the full statement:

  1. Global demand grows at above-potential rates
  2. Net trade and business investment continue to support UK activity, while consumption growth remains modest
  3. Demand growth outstrips subdued potential supply growth, and a margin of excess demand emerges, pushing up domestic cost growth
  4. Domestic inflationary pressures continue to build over the forecast period, while external cost pressures ease
  5. r*: The BoE has for the first time published it’s r* (equilibrium Bank Rate) which would be the rate at which, if the economy started at a position with no output gap and inflation at target, would sustain output at potential and inflation at the target. The BoE notes that, when adding the BoE’s 2% inflation target to the 0-1% current real term r* rate this gives a nominal estimation for r* in the range of 2-3%.

Furthermore, for those wondering if today’s decision was a “one and done”, that does not seem to be the case: “The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

According to Bloomberg, today’s unanimous hike was a vindication of Governor Mark Carney’s view back in May, when the BOE held off tightening, that a slump in growth in the first quarter would prove temporary.

He’s not out of the woods just yet: while the hike was to be expected, increased uncertainty about Britain’s future relationship with the European Union and ongoing global trade tensions could mean that hiking now proves a risky move.

While GBP popped higher by 60 pips in a kneejerk reaction to the hawkish announcement, the reaction appears muted with investors now focused on Carney’s upcoming conference.

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S&P Futures, Global Stock Tumble As Trade War Fears Return; Yuan Plummets

It has been the case that every single day for months, the market’s mood is determined by whether trade tensions are better or worse (however subjectively this is determined). And judging by the bloodbath in the market snapshot below, today they are much worse.

For those who missed it, this is the key driver of overnight’s risk off: President Trump asked Lighthizer to consider 25% tariffs on USD 200bln of Chinese goods, while officials also commented that stronger actions are needed on China but added that President Trump is open to negotiating with the Chinese President. China Commerce Ministry said China will immediately retaliate to defend its dignity and people’s interests.

The resulting market hot takes were familiar: “fears of an escalating trade dispute between the United States and China” blasted numerous sellside notes and financial websites. And sure enough, following Trump’s threat to hike tariff rates from 10% to 25% on $200BN in Chinese imports – which incidentally was first reported on Tuesday – stocks slumped from Asia to Europe tumbled, with U.S. equity futures joining, and sliding to session lows, dragging the S&P back under 2,800. The dollar climbed and bonds were mixed with central bank policy high on the agenda.

Germany’s DAX index, which is seen by as trade war proxy, fell 1.1% about an hour after the open while the broader Europe STOXX 600 was down about 0.5%, dropping for a second day, tracking sharp declines in China and Hong Kong share indexes which were triggered by Trump telling the US trade representative to consider hiking tariffs on $200 billion worth of Chinese goods as early as next month. MSCI’s index of Asia-Pacific shares ex-Japan closed 1.6% down, dragged down by a 1.8 percent fall in Chinese H-shares and a 2% plunge in the Shanghai Composite whose 2-day selloff has taken it back under 2,800.

Then shortly before 6am EDT, Beijing responded that it was ready to retaliate, sending China’s onshore yuan tumbling to 6.8676 per dollar, the weakest level in more than a year.

There was more turbulence, when as reported earlier, 10Y JGB yields touched the highest since February 2017 before paring gains as the Bank of Japan made an unscheduled offer to buy 400 billion yen in bonds.

Following the “risk off” sentiment, and thanks to the BOJ intervention, US Treasuries climbed and were trading near session lows of 2.98% after falling on Wednesday when the Fed decided to leave rates unchanged while making it clear borrowing costs are heading higher.  In sympathy, Euro zone government bond yields edged down with borrowing costs in Germany and France pulling back from seven-week highs as demand for safe-haven debt grew.

The Bloomberg Dollar Spot Index extended its advance into a third day as heightened trade tensions and the Federal Reserve’s commitment Wednesday to gradual tightening helped buoy the U.S. currency. The yen pared an earlier gain, while the pound weakened even as BOE policy makers were forecast to raise rates for only the second time since the financial crisis. Turkey’s lira tumbled to a record low after the U.S. imposed sanctions on two ministers. Core euro-area bonds edged higher with Treasuries, while gilts slipped.

In commodities, oil steadied around a two-week low after a surprise gain in American crude inventories exacerbated supply concerns. Gold rose and copper extended a decline. Emerging-market currencies sold off, with South Africa’s rand dropping.

Market Snapshot

  • STOXX Europe 600 down 0.5% to 387.86
  • MXAP down 1.2% to 165.30
  • MXAPJ down 1.6% to 532.97
  • Nikkei down 1% to 22,512.53
  • Topix down 1% to 1,752.09
  • Hang Seng Index down 2.2% to 27,714.56
  • Shanghai Composite down 2% to 2,768.02
  • Sensex down 0.7% to 37,277.64
  • Australia S&P/ASX 200 down 0.6% to 6,240.86
  • Kospi down 1.6% to 2,270.20
  • German 10Y yield fell 0.2 bps to 0.476%
  • Euro down 0.3% to $1.1625
  • Brent Futures down 0.1% to $72.31/bbl
  • Italian 10Y yield rose 6.9 bps to 2.521%
  • Spanish 10Y yield fell 0.8 bps to 1.446%

Top overnight news

  • The Trump administration said it’s weighing whether to increase the proposed tariff on $200 billion of Chinese goods to 25 percent from 10 percent, stepping up pressure on Beijing to change its trade practices. China said it was ready to retaliate after latest U.S. tariff threat
  • Turkish markets are plunging deeper into the wild. Unprecedented sanctions imposed by the U.S., its NATO ally, have added to the cross-currents buffeting investors. They’ve already been despairing at policy makers’ failure to contain inflation and stem the slide in the lira under pressure from President Recep Tayyip Erdogan to bolster growth
  • The Bank of England is set to raise interest rates for only the second time since the financial crisis, even though Brexit threatens to prove a rough ride for the U.K. economy
  • The Bank of Japan is showing just what it means by being flexible with bond purchases. The central bank unexpectedly offered to buy 400 billion yen ($3.6 billion) of five- to 10-year bonds Thursday to stem a selloff that saw the 10-year yield touch an 18-month high of 0.145 percent
  • Federal Reserve officials left the benchmark interest rate unchanged while reiterating their plan to gradually lift borrowing costs to keep the economy expanding at a healthy pace
  • The aim of the latest steps taken by Japan’s central bank is to strengthen the sustainability of its current easing policy, taking into account its side-effects, Bank of Japan Deputy Governor Masayoshi Amamiya tells business leaders in Kyoto
  • The lira slumped to a record low as the U.S. imposed sanctions on two Turkish ministers over the continued detention of an American pastor
  • OPEC’s crude output increased last month as Saudi Arabia pumped near-record volumes to make good on a pledge to consumers that demand would be met

Asian equity markets were weaker across the board with sentiment weighed by increased global trade tensions after officials confirmed US President Trump instructed Trade Representative Lighthizer to consider a higher tariff of 25% on USD 200bln of goods from China which had earlier warned of retaliation. ASX 200 (-0.5%) and Nikkei 225 (-1.1%) were lower with the mining sector the worst performer in Australia amid losses in Rio Tinto following a miss on earnings, while a firmer currency, various corporate updates and weak US sales among automakers dampened Tokyo trade. Elsewhere, Hang Seng (-2.2%) and Shanghai Comp. (-2.0%) took the brunt of the increased US tariff threats as well as further inaction by the PBoC which refrained from conducting reverse repos for a 10th consecutive occasion. 10yr JGBs were choppy and initially continued on from yesterday’s slump at the open as the 10yr yield rose to its highest since February last year of 0.145%. However, yields then pulled back to provide much needed reprieve for JGBs which were also supported amid safe-haven flows. In addition, the latest securities flows data showed foreign investors upped their purchases of Japanese bonds by around 9-fold from the prior week, while Daiwa also suggested there should be good demand for 10yr JGBs at yields between 0.15%-0.20% at least until next BoJ policy meeting. Today’s 10yr year auction was another catalyst for price action with all metrics pointing to a weaker result which saw 10yr JGBs decline nearly 30 ticks, before bouncing back towards 150.00.

Top Asian News

  • Trump’s Tariff Threats Erase $220 Billion From Asia Stock Values
  • Citi Sees Sensex Doing Pretty Much Nothing From Now Until March
  • House of Fraser Seeks Lifeline After C.Banner Ends Buyout Talks
  • Metro Pacific Buys 12% of Air21; to Expand Warehouse Capacity

European equities trade firmly in the red (Eurostoxx 50 -1.3%) as sentiment is soured amid the rise in global trade tensions after officials confirmed US President Trump instructed Trade Representative Lighthizer to consider a higher tariff of 25% on USD 200bln of goods from China which had earlier warned of retaliation. China’s MOFCOM replied that China will fight back to defend its people’s interests and dignity. Germany’s DAX 30 is heavily underperforming, dragged down by heavyweight Siemens (-4.8%) following earnings, while Commerzbank (-4.5%), Deutsche Bank (-3.3%) and the German auto names also pressure the index. Material names continue to underperform, on the back of softer base metal prices. As such, we see UK miners resting at the bottom of the FTSE. Other notable post-earning movers include: LSE (+2.6%), Altice (-14.5%), Hugo Boss (-6.0%) and Inmarsat (-4.9%)

Top European News

  • BOE Rate Hike Seen Despite Brexit on Horizon: Decision Day Guide
  • U.K. Construction Growth Unexpectedly Jumps to Highest in a Year
  • ECB’s Rimsevics Says Can’t Name Substitute for Governing Council
  • Dialog Semi Stock Gives Up Gains as Apple Concerns Persist

In FX, The Greenback is broadly firmer in wake of the latest FOMC statement that saw growth, inflation and labour market assessments all upgraded to underpin September rate hike expectations and keep the Fed on track to deliver  another ¼ point tightening by year end. Heightened trade and other global tensions have also boosted the Buck as the DXY nudges back up to95.000 having hit lows very close to the big figure below just 2 days ago. EUR – The single currency has lost more traction vs the Usd on the downturn in risk sentiment, and retreated further from 1.1700 towards 1.1600 having breached Fib support near 1.1616 and a daily cloud base at 1.1648 on the way down. However, more layered expiry interest in decent size between 1.1600-10 and 1.1625-35 (both in 1.1 bn) could exert some directional influence ahead of and into the NY cut. EM -Broad losses vs the generally bid Usd, but the Lira’s almost inevitable further depreciation on latest US sanction proposals down through 5.0000 is eye-catching as the Try tumbles to fresh all time lows (circa 5.0900 at one stage).

In commodities, WTI and Brent slip lower with the complex pressured by USD strength following the latest tariff news. Energy news flow remains light, however, sources reported that Russia, the largest oil producer, is forecasting an output around 11.2mln bpd to the yearend. Of note: Russia’s July oil production stood at 11.2mln bpd (vs. June output of 10.93mln bpd). Meanwhile, the Shanghai International Energy Exchange are looking into the possibility of setting up a market maker scheme for crude oil futures after the exchange asked brokers to help boost trading volumes and liquidity. Spot gold is flat as USD strength outweighs safe-haven flows. Copper continues its decline amid demand concerns fuelled by the rise in trade tensions.

US Event Calendar

  • 7:30am: Challenger Job Cuts YoY, prior 19.6%
  • 8:30am: Initial Jobless Claims, est. 220,000, prior 217,000
  • 8:30am: Continuing Claims, est. 1.75m, prior 1.75m
  • 9:45am: Bloomberg Consumer Comfort, prior 59
  • 10am: Factory Orders, est. 0.7%, prior 0.4%; Factory Orders Ex Trans, prior 0.7%
  • 10am: Durable Goods Orders, prior 1.0%; Durables Ex Transportation, prior 0.4%
  • 10am: Cap Goods Orders Nondef Ex Air, prior 0.6%; 10am: Cap Goods Ship Nondef Ex Air, prior 1.0%

 

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Rollercoaster Session For Japanese Bonds Ends With Bizarre Central Bank Intervention

Traders expected another rollercoaster session for what has become the “fulcrum security” in the global bond market, Japanese Government Bonds, whose every move reverberates around the globe and has been responsible for much of the global steepening action in the past two weeks… and they were not disappointed.

It started off well enough: when yesterday’s dramatic selloff in JGBs failed to resume off the bat, there was a brief short squeeze, followed by a few hours of stability which kept the yield around 0.12%.

Then just before midnight EDT, Japanese JGB futures tumbled and yields jumped following a 10Y JGB auction which was badly received by the market, and which despite a bid/cover in line with recent auctions, saw poor pricing with a tail of 0.12, which is the longest in two years; the market reaction was to send the yield sharply higher back to session highs of 0.135% around the level when yesterday Japanese market regulators called for a margin call.

At this point questions started swirling: will the BOJ let 10Y JGB yields continue rising, letting them reach the 0.20% (the level Kuroda hinted at in his press conference) or maybe above, or would he launch another fixed-rate “unlimited buying” operation?

The answer turned out to be neither, because just after 1am EDT, the Bank of Japan surprised the market by offering to buy 400BN yen of 5-10 year bonds in a Rinban open market operation, i.e. the Japanese equivalent of POMO, that was outside its regular schedule, as the benchmark 10-year yield continued its advance. Immediately, the 10-year yield erased its advance and slumped back to unchanged.

Needless to say, the demand was more than enough, and the BOJ announced that the operation to purchase 400BN yen received bids worth 1.27t yen. The BOJ also told Bloomberg after the operation that its offer to buy 5-10 year bonds outside its regular schedule on Thursday “was meant to meet its policy objective of keeping the 10-year yield at around zero percent.”

Ok, fine, but why the flip-flop by the BOJ, and why did Kuroda pick to do an unscheduled “POMO” instead of calming the market with the far more forceful “fixed rate” operation?

According to Nomura, the central bank was faxed with two distinct issues: i) the BOJ wanted to wait until 10-year yields climbed to 0.2% before announcing a fixed-rate operation but ii) it needed to slow the pace of the increase so it held an unscheduled debt-purchase operation.

Had the BOJ held a fixed-rate operation at current yield levels, traditionally seen as a yield “red line” for the central bank, it would have risked narrowing the trading range again and undoing all the verbal guidance from the latest policy meeting, while waiting for the yield to reach 0.2% “may have been a bit reckless”, said Nomura’s Takenobu Nakashima.

In other words, Thursday’s move suggests the BOJ will avoid using fixed-rate operations until the yield reaches 0.2%, and until it reaches that level it may continue to use this auction-style buying.

Others agreed, and Daisuke Uno, chief strategist at Sumitomo Mitsui said that the Bank of Japan’s unusual bond buying is aimed at removing the fixed idea about operations.

“What the BOJ sees as side-effects of its policy include a decline in market function,” he says by phone. “Today’s operation is probably meant to be like a rehabilitation to help the market regain its function given it has been in doldrums.”

“The BOJ signals to the market that it still keeps the yield curve under its control but its grip has loosened a little bit” he added.

The last part was spot on, because while the BOJ managed to preserve control, it now has the market guessing not only as to the magnitude of the yield move it will allow, but the form of intervention it will launch: what happens if the BOJ reveals there are far more bids for its rinban than clear? Would it set off an avalanche of selling? Alternatively, what happens when the BOJ has to do a constant fixed-rate operation at 0.20% should panic selling emerge as Kuroda’s control “loosens” a little more?

For now, the good news is that the Japanese bond market remained under control -a bond market which now determines the bond yields from France to the US. But what about next time, and the time after that?

And finally, if this is the kind of drama that a simply move from 0.1% to 0.2% entails, what will happen if the BOJ truly normalizes and lets yields move freely?

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US Sides With Russia… Against Ukraine, In WTO Case

Authored by Frank Sellers via TheDuran.com,

What actions can countries take in the name of national security, even if it violates their WTO commitments?

Typically, Washington is against anything that benefits Moscow, and is for anything which bolsters the position of US puppet regime Ukraine. But, at ongoing cases before the World Trade Organization, that narrative isn’t applicable.

This is so because if Washington slams Moscow for its actions relative to Kiev, it would provide a case against Trump’s metals tariffs. However, by standing with Russia on this issue, Washington thinks that it can save its own trade actions, namely Trump’s metals tariffs.

Politico reports

The Trump administration is siding with Russia in a potential landmark case over an issue that threatens to tear the World Trade Organization apart: What actions can countries take in the name of national security, even if it violates their WTO commitments?

The panel’s decision, expected later this year, could be consequential for a number of cases brought against the U.S. over President Donald Trump’s use of steel and aluminum tariffs.

However, the case involving Russia stems from a different type of action — namely, transit restrictions that Moscow imposed on Ukraine in January 2016 that cut off key markets in Central Asia and the Caucuses, which Ukrainian exporters can only reach by Russian roads. The move came amid continuing conflict between the two nations over Russia’s annexation of Crimea in March 2014 and a war in eastern Ukraine that’s now in its fifth year.

Although the U.S. backs Ukraine in the larger territorial conflict, both the U.S. and Russia argue the WTO has no right to weigh in on the case Ukraine brought against the transit restrictions.

That’s because Moscow says it imposed its restrictions as a national security measure under Article 21 of the General Agreement on Tariffs and Trade, which allows members to take actions that violate their WTO commitments for purposes of national security.

The U.S. government argues that “the dispute involving essential security is political in nature and, therefore, beyond the proper authority and competency of the WTO to assess.”

It’s the same argument the Trump administration is using to justify its steel and aluminum tariffs. Both Washington and Moscow insist Article 21 claims are “non-justiciable” — meaning WTO panels can’t rule on any dispute invoking the national security exemption.

In the other words, they argue “as soon as anybody says the word ‘Article 21’ out loud, the panel has to stop and go home,” Jennifer Hillman, a former WTO Appellate Body judge, said in a recent speech.
The Office of the U.S. Trade Representative declined to comment, but directed to POLITICO to documents on its website explaining its position in the Russia-Ukraine dispute.

“A dispute involving essential security is political in nature and, therefore, beyond the proper authority and competency of the WTO to assess,” the U.S. government said during an oral presentation on the case earlier this year. “The panel should fulfill its function by noting the invocation of Article 21(b)(iii) in its report to the [WTO Dispute Settlement Body] and make no other findings.”

Some other WTO members, such as Canada, believe countries should at least be required to say why they’re invoking Article 21. However, Russia and the U.S. counter that the provision is “self-judging” — that is, once a country decides an action is in its national security interests, it doesn’t have to explain the decision to other members.

Trump’s steel and aluminum tariffs come closest to a safeguard action, but that would require the U.S. to compensate other WTO members for lost trade, something Trump didn’t want to do.

“The text of Article 21 contains no requirement for a member to detail reasons or events to invoke the security exception. The text instead provides only that a member ‘considers’ the action necessary for the protection of its essential security interests in time of war or other emergency in international relations,” the U.S. said in another legal brief in the case.

However, Hillman contends the provision isn’t as broad as the Trump administration argues, since the text indicates it can only be used in situations involving nuclear weapon materials; trade in implements of war or goods to supply a military establishment; or in the time of war or some “other emergency in international relations.”

In Russia’s case, the country has been reluctant to admit any military role in Ukraine, so identifying the reason for its national security exception could be awkward for Moscow, she said.

Trump imposed duties on steel and aluminum in March following a pair of investigations that found imports of the two metals threatened to impair national security by weakening the U.S. economy. A rarely used U.S. law known as Section 232 of the 1962 Trade Expansion Act allows the president to restrict imports in the case of a national security threat, but most commanders in chief have been loathe to use the authority.

Countries responded to Trump’s trade restrictions both by retaliating against U.S. exports and by challenging the move at the WTO, accusing the U.S. of imposing an illegal trade barrier.

Under WTO rules, countries that want to impose additional duties on imports can do so through a temporary “safeguard” action; through countervailing and anti-dumping duty proceedings; or through negotiations with other WTO members. Trump’s steel and aluminum tariffs come closest to a safeguard action, but that would require the U.S. to compensate other WTO members for lost trade, something Trump didn’t want to do.

While the EU, China, Canada, Mexico and others believe the tariffs are illegal, the U.S. makes the same charge against countries that have retaliated.

“Instead of working with us to address a common problem [of global steel and aluminum excess capacity], some of our trading partners have elected to respond with retaliatory tariffs designed to punish American workers, farmers and companies,” U.S. Trade Representative Robert Lighthizer said in statement announcing WTO cases against five trading partners. “These tariffs appear to breach each WTO member’s commitments under the WTO agreement.”

Lighthizer repeated that sentiment Thursday during a Senate Appropriations subcommittee hearing, where he was challenged to explain how steel and aluminum exports from a longtime ally like Canada pose a threat to national security.

“Nobody’s declaring war on Canada, or saying they’re an unfriendly neighbor. They’re obviously not,” Lighthizer replied. “They’re a great ally and certainly one of America’s closest friends and closest trading partners. But if you decide that you need to protect an industry, you can’t be in a position where the protection is of no value because everything comes in … from Canada.”

That doesn’t mean the countries themselves are a national security threat, just their exports, he explained, adding that once the U.S. has decided to restrict imports, it has to ensure there’s “no hole in the net” that defeats the purpose of the original action. Still, many close allies are offended by the Trump administration’s use of the national security argument to keep out their products.

“This goes against all logic and against all history. We simply cannot accept this,” European Commission President Jean-Claude Juncker said Wednesday, just hours after he and Trump agreed to launch negotiations to reduce trade barriers across the Atlantic. Those talks could lead to removal of the steel and aluminum tariffs and Europe’s retaliatory duties on $3.3 billion of American exports.

But still looming is another probe into whether auto and auto part imports, including from Europe, pose a risk to U.S. national security.

Although Trump agreed to hold off on imposing new tariffs on the EU as long as negotiations are making progress, he’s directed Commerce Secretary Wilbur Ross to continue the Section 232 auto investigation to keep the option of additional restrictions on the table.

In the meantime, the cases that China, the EU and others have brought against the U.S. steel and aluminum tariffs are proceeding at the WTO, as well as the more recent cases brought by the U.S. against the retaliatory tariffs.

A narrow ruling that restricts the right of WTO members to use the exception could reinforce Trump’s perception.

If WTO judges get over the first hurdle and decide they can rule in cases invoking Article 21, there’s a fear they could either decide the case too narrowly or too broadly, a senior European official said last week.

A narrow ruling that restricts the right of WTO members to use the exception could reinforce Trump’s perception that the rules-based global trading is unfairly tilted against the U.S. and encourage him to disregard its decisions.

A broad ruling, meanwhile, could open the door for countries to use the national security exception every time they want to unilaterally raise duties or take some other action in contravention of their WTO obligations.

The second possibility presents a particularly interesting situation, where countries could potentially invoke the “self-judging” Article 21 exception to justify their retaliatory duties on the U.S.

Trade restrictions are bad, and Moscow is bad no matter what. But when it suits American interests, however, the situation can be radically different, as in this case.

Here, at these WTO proceedings, trade restrictions on the basis of national security are awesome and Russia is perfectly okay using them, because it happens to work out in Washington’s benefit to say so.

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Venezuela’s Maduro Admits Socialist Model Has Failed

Venezuela’s President Nicolas Maduro admitted that his socialist economic model has “failed” amid food and medicine shortages as well as a failing infrastructure highlighted by Tuesday’s power failure to 80% of Caracas. 

Compounding matters is the IMF’s Weimar-topping hyperinflation forecast of 1,000,000% by year end, and a GDP set to plummet 18% this year, as the government continues to simply print money to in hopes of filling the void of what was once the country’s economy.

“The production models we’ve tried so far have failed and the responsibility is ours, mine and yours,” Maduro told his ruling PSUV party congress. “Enough with the whining… we need to produce with or without (outside) aggression, with or without blockades, we need to make Venezuela an economic power.

“No more whining, I want solutions comrades!”

No word on whether he took a bite of an empanada during his speech while his country starves on the “Maduro diet” – a phrase coined after Venezuela’s notorious food shortages gave rise to mass starvation across the country. Not even the donkeys are safe. 

Meanwhile: 

Venezuela’s socialist government has nationalized a wide swath of industries across the country over the past several years, such as steel and cement plants, food processing, distribution and more. In order to try and control inflation, the country has fixed prices on various goods while imposing tight regulations surrounding foreign exchange. 

I estimate it will take about two years to reach a high level of stability and see the first symptoms of new and economic prosperity, without for one second affecting social security and protection,” added the president.

Maduro plans to increase oil production to “six million barrels a day by 2025 or before,” amid a crash in output from a high of 3.2 million barrels a day in 2008 to just 1.5 million this year, a 30-year low. Venezuela’s crude oil sales comprise approximately 96% of the country’s revenue. 

The economic crisis has hit so hard that the public transport system has almost ground to a halt, with the government and local councils offering free rides in unsafe and uncomfortable pick-up trucks — branded “kennels” by users — after many bus service providers couldn’t afford to keep their vehicles on the road.

Maduro, who blames Venezuela’s woes on an “economic war” waged by the United States, called on PSUV supporters to help kick-start production and resist US “aggression.” –France24

Washington, meanwhile, has imposed financial sanctions against Maduro’s government, along with state-owned oil company PDVSA.  

Meanwhile, Venezuela’s industrial sector is operating at just 30% capacity, as illustrated by the farming sector, which now provides just a quarter of national consumption, after providing 75% just a few years ago according to the National Farmers Federation. 

This should all make for some interesting debate questions during the next US elections, as Democratic Socialists have become the “new face” of the left. Just don’t ask any questions about economics or logistics…

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Greece’s ‘Greatest’ Depression

Authored by Frances Coppola via Forbes.com,

The IMF has just released its latest review of the Greek economy. “Following a deep and protracted contraction,” it says in its press release, “growth has finally returned to Greece.” The green light has been given for Greece’s exit from its bailout program in August 2018.

For many, this is welcome news. Greece has turned a corner. The dark days are behind it, and the future will be bright. But is this really the end of Greece’s troubles – or will there be more pain to come?

The magnitude of Greece’s collapse over the last decade is extraordinary. Right at the start of the IMF’s review is this chart, which compares the fall in Greek output over the last 10 years with other major historical contractions, including the U.S.’s Great Depression:

Greek contraction compared with other major peacetime contractions

The Greek people have just lived through a Depression as deep as the Great Depression and considerably longer. It is now the greatest recorded peacetime Depression.

Fortunately, the Greatest Depression may now have run its course. The Greek economy grew by 1.4% in 2017, and the IMF projects that GDP growth will rise to 2% in 2018 and 2.4% in 2019.

Of course, IMF growth forecasts for Greece need to be treated with considerable caution. As the Greek economy sank ever deeper into depression, the IMF continued to predict that growth would rebound “any day now.” The satirical blog ZeroHedge lampooned the IMF’s dire forecasting record as “hockey stick comedy.” But Greece did emerge from its long-running depression in 2017, and indications so far are that growth will be maintained this year.

In part, Greece’s recovery is due to generally strong Eurozone growth: a rising tide floats all boats, as they say. But the IMF says it is also because of Greece’s own painful reform efforts:

The large macroeconomic stabilization effort, structural reforms, and a better external environment contributed to an increase in real GDP….

I suppose the IMF would have to say that, really: after all, if the structural reforms it insists upon don’t result in stronger growth, what on earth is their point?

The legacy of the Greatest Depression, even with the doubtful benefit of those structural reforms, is a terribly weak and deeply damaged economy. Adult unemployment, which peaked at over 25% at the height of the Greatest Depression, is still over 20%, while youth unemployment is twice as high. In a footnote to its review, the IMF comments that structural unemployment (the average excess of people over jobs across the business cycle) was 15% in 2016 and is expected to fall only gradually “over the next two decades.” Many of Greece’s young people will be middle-aged by the time there is any work for them. Some may never work at all. An entire generation thrown on the scrap heap.

Despite all the pain the Greeks have endured to fix their country’s finances, Greece’s fiscal situation remains extremely precarious. The IMF staff predictions show absolutely no room for fiscal expansion, even though it is desperately needed, not least to relieve extremely high poverty levels. One in four people in Greece is living below the poverty line.

Greece’s government is critically hampered by ridiculously tight fiscal targets not of its own making. The Eurozone creditors have agreed a package of debt relief that depends on the Greek government maintaining high primary fiscal surpluses virtually indefinitely. This is from the Eurogroup’s statement of June 22, 2018:

In this context the Eurogroup welcomes the commitment of Greece to maintain a primary surplus of 3.5% of GDP until 2022 and, thereafter to continue to ensure that its fiscal commitments are in line with the EU fiscal framework. Analysis of the European Commission suggests that this will imply a primary surplus of 2.2% of GDP on average in the period from 2023 to 2060.

As primary surpluses are reported as a percentage of GDP, achieving them depends not just on maintaining fiscal prudence, but on robust GDP growth. If growth falters, then the primary surplus targets will be missed, and the Greek government will have to inflict further tax rises and spending cuts on its population to comply with debt conditions, further reinforcing a downward economic trend. This is crazily pro-cyclical. When the next recession comes, as it inevitably will – after all, Greece is expected to maintain these primary surpluses for over 40 years – Greece will head down the Depression road again.

The IMF doesn’t believe that the primary surpluses envisaged by the Eurogroup are remotely achievable. It says that the largest primary surplus that could realistically be sustained for such a long time is 1.5%. If it is right, then Greece’s fiscal finances could quickly take a significant turn for the worse.

There’s a further risk too. Greece is currently paying very low interest rates on its debt. But when the bonds held by its Eurozone creditors mature, it will have to refinance them on the financial markets – if it can. It’s as yet unclear how much market access Greece will have by, say, 2030. But one thing is certain. Market financing will be at much higher interest rates, making Greece’s ability to service its debt more challenging.

“Greece will need to simultaneously achieve high GDP growth and run large primary fiscal surpluses for many years to keep public debt on a downward trajectory,” says Peter Dohlman, IMF mission chief for Greece. Since the staff review insists that large primary fiscal surpluses are a drag on growth, it is not difficult to deduce that the IMF thinks Greece will eventually need more debt relief.

This will not go down well with the Eurozone. But I fear the IMF is right. That battered old can has been kicked down the road once more. Greece has only had a reprieve, not a pardon.

In a few years’ time, when Greece once again faces debt default and Euro exit, what will the price of debt relief be? Well, unless there is a change of heart among Eurozone governments by then, the price will be yet more harsh spending cuts and tax rises, and perhaps another Depression. Greece does indeed have more pain to come.

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Terror Charges Dropped Against British Ex-Soldier Who Fought In Syria

As the war in Syria is showing signs that it could be winding down, more “foreign fighters” from Europe and the West are returning to their home countries, most especially jihadists who are in some instances (though notably not all) being charged and tried upon their return for violating anti-terror laws.

But the more interesting “hard” cases are currently playing out in UK courtrooms as more and more “volunteers” for the Syrian Kurdish YPG (or Kurdish “People’s Protection Units”) are also returning home.

And though in the instance of the secular Kurdish armed movement which currently holds up to 20% of Syrian territory in the north and east of the country American, British and French troops are actually directly supporting the YPG (which is the core component of the US-backed SDF), still — British men and women previously embedded with the group face arrest and trial upon their return on terrorism related charges, as demonstrated this week in the case of a British ex-soldier.  

James Matthews, from east London, was charged with receiving training in Iraq and Syria on or before February 2016 “for purposes connected to the commission of preparation of terrorism.” He was set to face trial in November. The 43-year-old is the first person to face prosecution for terrorism in the UK for volunteering with a group already helped by the British and American governments.

As Al-Masdar News reports, James Matthews pleaded not guilty to terror-related charges at a London court and has had the charges against him dropped, The Guardian revealed of the proceedings on Tuesday.

Prosecutor Tom Little QC told the Old Bailey that the Crown Court was dropping the charges against Mr. Matthews as they believed there wasn’t a realistic chance of getting a conviction due to a lack of evidence.

The defendant, from East London, volunteered with Kurdish forces to battle ISIS terrorists in Syria, and was surprised to be accused of “attending terrorist training camps in the war-torn state” upon his return to the UK.

Speaking on his behalf, his lawyer insisted that they always said the allegations against Mr. Matthews were “extraordinary and totally unjustified,” but described his client as happy the charges had been dropped.

When the charges were first announced it sparked anger from different segments of the UK, with pro-Kurdish activists accusing the government of letting returning ISIS and other jihadist terrorists off the hook while seeking to prosecute YPG volunteers. NATO ally Turkey considers the YPG a terrorist group and likely lobbied the UK to pursue arrests of returning volunteers.

James Matthews isn’t the only Briton to have smuggled himself to Syria to engage in the conflict, with dozens of others also doing so, and at least seven being killed there.

The Foreign Office continues to urge British nationals to avoid Syria and hasn’t provided specific details about the number of Brits embedded in Kurdish forces there, saying “As all UK consular services are suspended in Syria, it is extremely difficult to confirm the whereabouts and status of British nationals in the country.”

The Kurdish-led Syrian Democratic Forces (SDF) have been significantly propped up by foreign fighters over the course of the conflict, primarily fighting ISIS, but some also elected to battle Turkey-backed forces which attacked Afrin earlier this year.

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NATO: Time To Re-Examine An Alliance

Authored by Conn Hallinan via Dispatches From The Edge blog,

The outcome of the July11-12 NATO meeting in Brussels got lost amid the media’s obsession with President Donald Trump’s bombast, but the “Summit Declaration” makes for sober reading. The media reported that the 28-page document “upgraded military readiness,” and was “harshly critical of Russia,” but there was not much detail beyond that.

But details matter, because that is where the Devil hides.

One such detail is NATO’s “Readiness Initiative” that will beef up naval, air and ground forces in “the eastern portion of the Alliance.” NATO is moving to base troops in Latvia, Estonia Lithuania, the Czech Republic and Poland. Since Georgia and Ukraine have been invited to join the Alliance, some of those forces could end up deployed on Moscow’s western and southern borders.

And that should give us pause.

A recent European Leadership’s Network’s (ELN) study titled “Envisioning a Russia-NATO Conflict” concludes, “The current Russia-NATO deterrence relationship is unstable and dangerously so.” The ELN is an independent think tank of military, diplomatic and political leaders that fosters “collaborative” solutions to defense and security issues.

High on the study’s list of dangers is “inadvertent conflict,” which ELN concludes “may be the most likely scenario for a breakout” of hostilities. “The close proximity of Russian and NATO forces” is a major concern, argues the study, “but also the fact that Russia and NATO have been adapting their military postures towards early reaction, thus making rapid escalation more likely to happen.”

With armed forces nose-to-nose, “a passage from crisis to conflict might be sparked by the actions of regional commanders or military commanders at local levels or come as a consequence of an unexpected incident or accident.” According to the European Leadership Council, there have been more than 60 such incidents in the last year.

The NATO document is, indeed, hard on Russia, which it blasts for the “illegal and illegitimate annexation of Crimea,” its “provocative military activities, including near NATO borders,” and its “significant investments in the modernization of its strategic [nuclear] forces.”

Unpacking all that requires a little history, not the media’s strong suit.

The story goes back more than three decades to the fall of the Berlin Wall and eventual re-unification of Germany. At the time, the Soviet Union had some 380,000 troops in what was then the German Democratic Republic. Those forces were there as part of the treaty ending World War II, and the Soviets were concerned that removing them could end up threatening the USSR’s borders. The Russians have been invaded—at terrible cost—three times in a little more than a century.

So West German Chancellor Helmet Kohl, U.S. Secretary of State James Baker, and Soviet Premier Mikhail Gorbachev cut a deal. The Soviets agreed to withdraw troops from Eastern Europe as long as NATO did not fill the vacuum, or recruit members of the Soviet-dominated Warsaw Pact. Baker promised Gorbachev that NATO would not move “one inch east.”

The agreement was never written down, but it was followed in practice. NATO stayed west of the Oder and Neisse rivers, and Soviet troops returned to Russia. The Warsaw Pact was dissolved in 1991.

But President Bill Clinton blew that all up in 1999 when the U.S. and NATO intervened in the civil war between Serbs and Albanians over the Serbian province of Kosovo. Behind the new American doctrine of “responsibility to protect,” NATO opened a massive 11-week bombing campaign against Serbia.

From Moscow’s point of view the war was unnecessary. The Serbs were willing to withdraw their troops and restore Kosovo’s autonomous status. But NATO demanded a large occupation force that would be immune from Serbian law, something the nationalist-minded Serbs would never agree to. It was virtually the same provocative language the Austrian-Hungarian Empire had presented to the Serbs in 1914, language that set off World War I.

In the end, NATO lopped off part of Serbia to create Kosovo and re-drew the post World War II map of Europe, exactly what the Alliance charges that Russia has done with its seizure of the Crimea.

But NATO did not stop there. In 1999 the Alliance recruited former Warsaw Pact members Hungary, Poland and the Czech Republic, adding Bulgaria and Romania four years later. By the end of 2004, Moscow was confronted with NATO in Latvia, Lithuania and Estonia to the north, Poland to the west, and Bulgaria and Turkey to the south. Since then, the Alliance has added Slovakia, Slovenia, Albania, Croatia, and Montenegro. It has invited Georgia, Ukraine, Macedonia and Bosnia and Herzegovina to apply as well.

When the NATO document chastises Russia for “provocative” military activities near the NATO border, it is referring to maneuvers within its own border or one of its few allies, Belarus.

As author and foreign policy analyst Anatol Lieven points out, “Even a child” can look at a 1988 map of Europe and see “which side has advanced in which direction.”

NATO also accuses Russia of “continuing a military buildup in Crimea,” without a hint that those actions might be in response to what the Alliance document calls its “substantial increase in NATO’s presence and maritime activity in the Black Sea.” Russia’s largest naval port on the Black Sea is Sevastopol in the Crimea.

One does not expect even-handedness in such a document, but there are disconnects in this one that are worrisome.

Yes, the Russians are modernizing their nuclear forces, but the Obama administration was first out of that gate in 2009 with its $1.5 trillion program to upgrade the U.S.’s nuclear weapons systems. Both programs are a bad idea.

Some of the document’s language about Russia is aimed at loosening purse strings at home. NATO members agreed to cough up more money, but that decision preceded Trump’s Brussels tantrum on spending.

There is some wishful thinking on Afghanistan—“Our Resolute Support Mission is achieving success”—when in fact things have seldom been worse. There are vague references to the Middle East and North Africa, nothing specific, but a reminder that NATO is no longer confining its mission to what it was supposedly set up to do: Keep the Americans in, the Russians out, and the Germans down.

The Americans are still in – one should take Trump’s threat of withdrawal with a boulder size piece of salt – there is no serious evidence the Russians ever planned to come in, and the Germans have been up since they joined NATO in 1955. Indeed, it was the addition of Germany that sparked the formation of the Warsaw Pact.

While Moscow is depicted as an aggressive adversary, NATO surrounds Russia on three sides, has deployed anti-missile systems in Poland, Romania, Spain, Turkey, and the Black Sea, and has a 12 to 1 advantage in military spending. With opposing forces now toe-to-toe, it would not take much to set off a chain reaction that could end in a nuclear exchange.

Yet instead of inviting a dialogue, the document boasts that the Alliance has “suspended all practical civilian and military cooperation between NATO and Russia.”

The solution seems obvious.

First, a return to the 1998 military deployment. While it is unlikely that former members of the Warsaw Pact would drop their NATO membership, a withdrawal of non-national troops from NATO members that border Russia would cool things off. Second, the removal of anti-missile systems that should never have been deployed in the first place. In turn, Russia could remove the middle range Iskander missiles NATO is complaining about and agree to talks aimed at reducing nuclear stockpiles.

But long range, it is finally time to re-think alliances. NATO was a child of the Cold War, when the West believed that the Soviets were a threat. But Russia today is not the Soviet Union, and there is no way Moscow would be stupid enough to attack a superior military force. It is time NATO went the way of the Warsaw Pact and recognize that the old ways of thinking are not only outdated but also dangerous.

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Meet China’s “Secret” Space Control Listening Base In Argentina Now Alarming US Officials

A recent New York Times piece has sounded the alarm over what Washington perceives as China’s “expanding reach into Latin America,” related to a space mission control center located in the heart of the Patagonia region of Argentina.   

It begins with an eerily beautiful description of an imposing structure, guarded by Chinese military personnel, unexpectedly rising out of Patagonian desert:

The giant antenna rises from the desert floor like an apparition, a gleaming metal tower jutting 16 stories above an endless wind-whipped stretch of Patagonia. The 450-ton device, with its hulking dish embracing the open skies, is the centerpiece of a $50 million satellite and space mission control station built by the Chinese military. The station began operating in March, playing a pivotal role in China’s audacious expedition to the far side of the moon — an endeavor that Argentine officials say they are elated to support.

Via The New York Times

The underlying perspective of the New York Times report over what is otherwise ostensibly a peaceful Argentine-Chinese space communications partnership is presented bluntly in the third stanza“The isolated base is one of the most striking symbols of Beijing’s long push to transform Latin America and shape its future for generations to come — often in ways that directly undermine the United States’ political, economic and strategic power in the region.”

For Washington strategists the Chinese military-constructed “deep space research” communications base, defined visually by the massive antenna that juts out of the otherwise small facility in an isolated country area of Neuquen province, represents China’s growing ability to sow deep economic inroads and expanding political influence in Latin America via secretive negotiations. 

The NYT notes “concerns” over Chinese tech infrastructure being established as part of an extension to China’s global Belt and Road initiative:

But the way the base was negotiated — in secret, at a time when Argentina desperately needed investment — and concerns that it could enhance China’s intelligence-gathering capabilities in the Western Hemisphere have set off a debate in Argentina about the risks and benefits of being pulled into China’s orbit.

Base construction moved forward after a 50-year contract for was negotiated between the government of Argentina’s former President Christina Fernandez de Kirchner (2007-2015) and the administration of Chinese President Xi Jinping, and approved by Argentinian parliament in February 2015. It finally went online in March of 2018.

A 2017 handout picture provided by local authorities shows the Chinese space station in Neuquen, Argentina. Reports say Chinese military personnel provide security around the base. Via Agencia EFE

The NYT charts China’s significant economic inroads into both Argentina and Latin America in general, starting with the fact that China eclipsed the United States as South America and the Caribbean’s top trading partner starting in 2015, topping $244 billion last yearover twice that of a decade earlier

This, the Times says, is what allowed China to make deep trade, infrastructure, and military inroads into Latin America at a time when both the Obama and Trump administrations focused their attention elsewhere in the globe, for example, on China’s expanding trade corridor in central Asia.

And more specifically, the secret negotiations for the space control station with Argentina’s president occurred at a time when the country and its neighbors were desperate to secure external loans and in some cases urgent bail outs:

Perhaps more significantly, China has issued tens of billions of dollars in commodities-backed loans across the Americas, giving it claim over a large share of the region’s oil — including nearly 90 percent of Ecuador’s reserves — for years.

China has also made itself indispensable by rescuing embattled governments and vital state-controlled companies in countries like Venezuela and Brazil, willing to make big bets to secure its place in the region.

Here in Argentina, a nation that had been shut out of international credit markets for defaulting on about $100 billion in bonds, China became a godsend for then-President Cristina Fernández de Kirchner.

At the very moment China “was extending a helping hand” it then “began the secret negotiations that led to the satellite and space control station here in Patagonia”. 

The NYT goes on the cite a number of Washington defense officials and analysts who present an alarmist scenario of what’s described as China’s discreet and “far-reaching plans” to hitch “the fate of several countries in the region to its own” in order to feed its “voracious appetite for the region’s oil, iron, soybeans and copper” — all the while surreptitiously laying down security and intelligence infrastructure

An arms control official under the Obama administration, Frank A. Rose, told the Times, “They are deploying these capabilities to blunt American military advantages, which are in many ways derived from space,” which he identifies as sophisticated jamming techniques that could “disrupt and destroy satellites” — though without citing specific examples of such aggressive acts happening. 

And further, the Times describes the potential ulterior capabilities and uses of the 450-ton Chinese antenna and space communications station

Antennas and other equipment that support space missions, like the kind China now has here in Patagonia, can increase China’s intelligence-gathering capabilities, experts say.

“A giant antenna is like a giant vacuum cleaner,” said Dean Cheng, a former congressional investigator who studies China’s national security policy. “What you are sucking up is signals, data, all sorts of things.”

Lt. Col. Christopher Logan, a Pentagon spokesman, said American military officials were assessing the implications of the Chinese monitoring station. Chinese officials declined requests for interviews about the base and their space program.

Though certainly worrisome that Americans’ telecommunications data could be swept up by such a Chinese space listening post, it could simply be that China first and foremost seeks trade as well as tech partners throughout the world to allay the massive costs that come which such endeavors as space exploration (like most any other advanced industrial power today).

But then again as we’ve reported with increased frequency over the past year, China’s rapid military and advanced telecommunications and weapons modernization —  undergirded by a burgeoning defense budget (it recently unveiled its largest in three years) – has been nothing short of remarkable, and is set to challenge the West on several fronts.

Perhaps, in what would be a nightmare scenario for Western officials who’ve been caught off guard, China has indeed already staked out a new massive intelligence-collecting outpost south of America’s border under the guise of space exploration. 

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