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August 31, 2012

The hidden world of private security contractors in USA

The hidden world of of the Security and Surveillance Industrial complex has attracted the attention of big media in US.

The most complete and updated source of information on this is the Washington Post special investigation website Top Secret America where maps , interactive features and and updated articles explore the hidden business of Security in America.

The top-secret world the government created in response to the terrorist attacks of Sept. 11, 2001, has become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.

The investigation's other findings include:
* Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States.
* An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, D.C., hold top-secret security clearances.
* In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons or 22 U.S. Capitol buildings - about 17 million square feet of space.
* Many security and intelligence agencies do the same work, creating redundancy and waste. For example, 51 federal organizations and military commands, operating in 15 U.S. cities, track the flow of money to and from terrorist networks.
* Analysts who make sense of documents and conversations obtained by foreign and domestic spying share their judgment by publishing 50,000 intelligence reports each year - a volume so large that many are routinely ignored.
The Department of Defence is the authority in charge to oversee those companies but it has declared recently that is overwhelmed by the amount of private companies to control and is unable to keep an eye on all their activities.
According to Democracy Now over 1/3 of USA surveillance and enforcement operations are conducted by private contractors, the surveillance grid established by the National Security Agency intercepts every 24 hours over 1.7 billion personal communications in US only.
E-mails, phone calls, SMS, internet postings all are recorded and disseminated to a wide range of private and public agencies for analysis.
Data is not provided only to big names as Raytheon, Booz Allen Hamilton, L-3 Communications, Csc, Northrop Grumman, General Dynamics, Blackwater, Saic, but also to a myriad of small and medium businesses which represents 70% of the industry, most of them employ less than 100 employee and are in charge of background checks, fiscal checks, phone and internet wiretapping and data analysis.
It is not only the National Security Agency or police and other governmental agencies contracting their services, more and more private companies such as corporation, banks are contracting their services for employee checks and other intelligence purposes.
Ho safe we are that public data is not being used for private interests? We are unable to say it at this stage given the lack of supervision and tracking of the information.

Daily Photo: Rabat Streets

Iceland did it right!

Should Europe have followed Iceland in letting go bust their banks to avoid a sovereign crisis and impoverish the population to cover banks' bad debt?

Nobel prize winning economist Joe Stiglitz notes:
What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system.
Nobel prize winning economist Paul Krugman writes:
What [Iceland's recovery] demonstrated was the … case for letting creditors of private banks gone wild eat the losses.
Krugman also says:
A funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

Bloomberg reports:
Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.

Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.

Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy.

The IMF notes:
[The] decision not to make taxpayers liable for bank losses was right, economists say.
In other words, as IMF put it:
Key to Iceland’s recovery was [a] program [which] sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses.
Icenews points out:
Experts continue to praise Iceland’s recovery success after the country’s bank bailouts of 2008.

Unlike the US and several countries in the eurozone, Iceland allowed its banking system to fail in the global economic downturn and put the burden on the industry’s creditors rather than taxpayers.

The rebound continues to wow officials, including International Monetary Fund chief Christine Lagarde, who recently referred to the Icelandic recovery as “impressive”. And experts continue to reiterate that European officials should look to Iceland for lessons regarding austerity measures and similar issues.
Barry Ritholtz noted last year:
Rather than bailout the banks — Iceland could not have done so even if they wanted to — they guaranteed deposits (the way our FDIC does), and let the normal capitalistic process of failure run its course.

They are now much much better for it than the countries like the US and Ireland who did not.
Bloomberg pointed out February 2011:
Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

“Iceland did the right thing … creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 46 billion euros ($64 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.

Countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.

“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees.

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”
And Iceland’s prosecution of white collar fraud played a big part in its recovery:
The U.S. and Europe have thwarted white collar fraud investigations ... let alone prosecutions. On the other hand, Iceland has prosecuted the fraudster bank heads and their former prime minister, and their economy is recovering nicely because trust is being restored in the financial system.

Spanish Bank run accellarating

From The Guardian:

Deposit flight from Spanish banks hits 15-year high as bailout rumours grow

Spanish banks lost €1 out of every €20 deposited with them in July, making it the worst month for deposit flight in 15 years as rumours grew that the country is edging closer to a full bailout.

News that banks were losing deposits came as Spain's statistics institute revealed the current recession is worse than thought, with the economy shrinking at an annual rate of 1.3% in the second quarter.

"The downturn in the Spanish economy is deeper than previously thought and accelerating," warned Robert O'Daly of the Economist Intelligence Unit.

A collapse in internal consumption in a country squeezed by government austerity and massive unemployment is largely to blame for the recession, as this fell at an annual rate of 3.9% in the second quarter.

Unemployment is already at 25% but the speed at which jobs are being destroyed quickened to an average rate of 800,000 jobs a year in the second quarter, according to the statistics institute.

Poverty in Europe on the rise

From Bloomberg:

Paulo Oliveira and his wife sold their wedding rings to pay the rent after he lost his job as a builder last month. They were the couple’s last pieces of jewelry.
“We have no more gold to save us from being kicked out this month,” the 46-year-old said as he stood in the area of downtown Lisbon popular with cash-for-gold stores. “Everyone I know is struggling, even the gold stores are empty because nobody has any more gold left to sell.”
“Business has gone from great to terrible in a matter of months,” Luis Almeida, whose family has owned a gold store near Lisbon’s Rossio Square for more than 40 years, said in an interview. “The sad truth is that most of my clients have already sold all of their gold rings.”
Portugal’s gold exports increased by more than five times to 519.4 million euros last year from 102.1 million euros in 2009, according to data published on the Lisbon-based National Statistics Institute’s website.

From The Globe and Mail:

Times are now so tough that Valerio Novelli, a ticket inspector on Rome’s buses, is planning to sell his old gold teeth.
“I can’t get to the end of the month without running up debts,” said Mr. Novelli, 56.
In a country suffering from economic crisis, buying gold off desperate people has become one of the few boom industries.
People are barely surviving based on the gold passed down from generation to generation.
The pawnbrokers, by contrast, can hardly keep up with business. They normally have the gold quickly melted down and sent abroad, making it one of Italy’s fastest growing exports. Official gold sales to Switzerland leaped 65 per cent last year to 120 tonnes, up from 73 tonnes in 2010 and 64 tonnes in 2009.

Read The Globe and Mail article here.

That’s not just gold being exported, that is wealth being exported!

August 26, 2012

Daily Photo: Rabat

Isaac threaten "monster" oil price jump

Brent crude jumped to $115 a barrel last week and petrol costs across much of Europe are now at record levels.
Diesel is above the political pain threshold of $4 a gallon in the US, hence reports circulating last week that the International Energy Agency (IEA) is preparing to release strategic reserves.
Barclays Capital expects a “monster” effect this quarter as the crude market tightens by 2.4m barrels a day (bpd), with little extra supply in sight.
Goldman Sachs said the industry is chronically incapable of meeting global needs. “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand,” said its oil guru David Greely.
This is a remarkable state of affairs given the world economy is close to a double-dip slump right now, the latest relapse in our contained global depression.
A further risk to oil production has materialized with Tropical Storm Isaac which now looks set to threaten New Orleans and the Gulf. Weather trackers are predicting an increase in intensity given its size and the storm's predicted paths are set to cross straight through the middle of the Gulf's oil production in a replay of the terrible August of Katrina. All major rig operators are evacuating which leaves output notably down already.
24% of oil and 8,2% of natural gas output has been shut down for tropical storm Isaac and markets will be monitoring the situation closely tomorrow.
During Katrina prices rose by 75c and given tight reserves at this moment the situation could get even worst.
Isaac's predicted path (via NOAA)

[Image of 5-day forecast and coastal areas under a warning or a watch]

goes straight through the oilfields... (source: Forbes)

August 22, 2012

Daily Photo: Tarxien's Fat Lady

Daily Photo: Vittoriosa Marina

Velocity of Money

Velocity of money is the  frequency with which a unit of money is spent on new goods and services.   It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales.  In a healthy economy, the same dollar is collected as payment and subsequently spent many times over.  In a depression, the velocity of money goes catatonic.  
Velocity of money is calculated by simply dividing GDP by a given money supply.  The following is the velocity of money since Great Depression, sometimes a picture is worth more than thousand words and the picture is quite clear here.
The situation here is worst than the Great Depression and World War II and deteriorating fast.


Real Income Growth in the Eurozone

The following chart tell us the story of real income growth in the EU between 2000 and 2010 before the Euro crisis exploded and before austerity. It will open a lot of political debates

From UBS:
If we look across the larger and longer established Euro membership we can see these two patterns being replicated according to country type. Each country shows the cumulative real disposable household income growth for each of its income deciles. The lowest income decile is to the left of each country’s selection, and the highest to the right.

Austria looks to be alarmingly weak – what this actually represents is very little change in nominal disposable income growth, coupled with inflation. Germany, Ireland, most of Italy and the French middle class all experience a decline in their standards of living. In most of these countries, the highest income groups do relatively well.

What stand out are Greece, Portugal and Spain. These economies have benefited from increased standards of living under the Euro (at least, until 2010), as nominal incomes have overcome inflation pressures. There has also been a concentration on improving the lot of the lower income groups in these societies.
This chart unfortunately plays into the hands of the more nationally minded politicians of the Euro core. The argument can be made (and increasingly is being made) that periphery economies must simply accept the declines in living standards that their non-periphery counterparts have had to accept. Lower living standards in the sense of real disposable income implies either  lower wages, or yet more fiscal austerity, or both.

USA Presidential Campaign Infograph

Another great infograph on the USA Presidential Campaign!

Full size HERE

Italy's Debt Growth going ballistic!

The fact Italy as reached 1.97 trillion Euro debt is by itself scary but what strikes most in the following chart is the pace of growth that has accelerated tremendously.  
Pre-Euro (1999), Italy's debt was growing at a rate of just less than 2 Billion Euro per month.
After the Euro (2001 until the crisis in 2008), Italy's pace of debt growth almost doubled to 3.8 Billion Euro per month.
Since 2008, Italy's debt load has grown at a stunning pace of 6.4 Billion Euro per month.
In the last nine-months though the pace of debt-load growth surged to 9.5 billion Euro per month.

Buckle Up!

Italy's General Government Debt Load...

Europe's 10 most dangerous politicians

Der Spiegel has published an article about Europe's 10 Most Dangerous Politicians although some of those names are certainly interesting choices up to you to decide if more worthy names deserve to be in this list. Let me know what you think!

Top 10 List

  1. Markus Söder, Bavarian Finance Minister: The politician from the Christian Social Union, the conservative sister party to Chancellor Angela Merkel's Christian Democratic Union, is known for his tub-thumping rhetoric and has stepped up a gear in the euro crisis with vitriolic comments about Greece. "An example must be made of Athens, that this euro zone can show teeth," he told the Bild am Sonntag tabloid newspaper this week.
  2. Alexis Tsipras, the leader of Greece's leftist Syriza party: In his latest proposal, Tsipras argues the Greek government should refuse to talk to the so-called troika comprised of the European Commission, the European Central Bank and the International Monetary Fund. He wants to "criminalize" the privatization of public enterprises. He has been labelled the "most dangerous man in Europe" since he became leader of the radical left and has been pressuring successive governments to abandon austerity measures that underpin Greece's continued access to international aid.
  3. Silvio Berlusconi, entrepreneur and former Italian prime minister: His Popolo della Libertà (People of Freedom) party supports current Prime Minister Mario Monti but is secretly preparing for Italian elections next year. Berlusconi wants to win a fifth term as prime minister with the help of populist anti-euro rhetoric. He recently said the Italian central bank should simply print more euros to avoid instructions from Brussels. He has also threatened to reintroduce the lira.
  4. Marine Le Pen, leader of the far-right Front National in France: The populist politician campaigned in this year's presidential election by warning about the supposed might of the EU. "Frau Merkel and her friends, Van Rompuy and the European Commission are in the final stages of creating a European Soviet Union," she thundered. "We are about to lose our status as a free nation."
  5. Timo Soini, leader of the True Finns party and a member of the European Parliament: Since the election, Finland has demanded that Greece provide collateral in return for Finnish aid. Soini wants that aid to stop. "Not a penny more," he says. "We've paid enough."
  6. Alexander Dobrindt, general secretary of the conservative Bavarian Christian Social Union (CSU): "It's the end of the line for Greece," Dobrindt said recently. Previously, he had demanded that the Greek government should no longer pay its civil servants and pensioners in euros but in drachmas.
  7. Nigel Farage, leader of the UK Independence Party (UKIP) and a member of the European Parliament: Farage is the man who can cause an uproar in the otherwise dull European Parliament, where he called the Lisbon Treaty "the most spectacular, bureaucratic coup d'etat that the world had ever seen." He has described European Council President Herman Van Rompuy as having the "charisma of a damp rag."
  8. Heinz-Christian Strache, head of the Austrian Freedom Party (FPÖ): Strache claims that the permanent euro bailout fund, the European Stability Mechanism (ESM), will destroy "not only our state, but also our democracy and constitution." He says the ESM is tantamount to an ´Ermächtigungsgesetz, an allusion to the 1933 German law that allowed Hitler to rise to power.
  9. Geert Wilders, head of the Dutch Freedom Party (PVV): Wilders wants to see the return of the Dutch guilder and described the ESM as "a dictate from Brussels."
  10. Viktor Orbán, Hungarian prime minister: Orbán's statement that he would bow to Brussels' power but not to its arguments created considerable irritation.

China Investments in Africa

Since 2010, when China pledged over $100 billion to develop commercial projects in Africa, the continent is rapidly being harvested by China for resources. Map below show China's interests in Africa since 2010.

August 7, 2012

The Great European Divide

If the recent quarrel between Italy and Germany is a clear signal that  political divisions are growing in the dysfunctional Euro family, the graphs below from Goldman Sachs clearly illustrate how the economic divide is already there and widening by the day.
I have highlighted some parts of the report which sound an alarm bell for the month to come.

Goldman Sachs: Focus: Europe’s ‘red line’: Segmentation of the Euro interbank market is significant
Bottom line: A ‘red line’ has descended across Europe, running along the Pyrenees and the Alps. Banks south of this line have difficulty accessing Euro interbank markets, whereas banks north of that line remain better integrated and retain market access. As Mr. Draghi emphasised at last week’s ECB press conference, this segmentation is interfering with monetary policy transmission and thus affecting macroeconomic outcomes. Monitoring the intensity and geographical location of the ‘red line’ will remain crucial going forward, not least to assess the effectiveness of the policy measures announced by the ECB last week.
“… financial fragmentation hinders the effective working of monetary policy”. Mr. Draghi’s comments at last week’s ECB press conference have placed the segmentation of Euro financial markets at centre stage. In this daily, we explore the nature of that fragmentation, focusing on the Euro interbank markets.
From hot to cold: The periphery is being frozen out. Charts 1 and 2 show the row country’s bank claims on the column country’s banks, in 2008 Q1 and 2012 Q1 respectively. The numbers capture these claims expressed as a percentage of the column country’s (quarterly) GDP in 2008 Q1. Of course, representing the data in this form is not a neutral choice. But the basic insights revealed are not sensitive to our choice of scaling variable.
The charts are presented in the form of heat maps: ‘hot’ colours (red) reflect a high degree of financial interaction, whereas ‘cold’ colours (blue) point to financial isolation.

In 2008 Q1 before the failure of Lehman, integration of Euro interbank markets was high: i.e. Chart 1 is predominantly red. With the notable exception of Greece, banks in all Euro area countries have significant claims on all other Euro area countries. Ireland, Spain and Italy are all well-embedded into the Euro interbank markets.

In 2012 Q1 as the European sovereign crisis has intensified, integration has broken down: i.e. Chart 2 is predominantly blue. In particular, the three programme countries (Greece, Portugal and Ireland) have become isolated. Spain (and to a lesser extent Italy) are also drifting towards greater isolation, whereas among Germany, France and the Netherlands integration remains significant, albeit still diminishing.

A ‘red line’ has emerged in Euro interbank markets – and is shifting northwards. To draw on the credit rationing literature in economics, banks in the periphery have been “red-lined”, i.e. simply on account of their residency, they are being excluded from the Euro interbank markets.
This red line has long isolated the program countries. And it is now moving northwards: Italy and (especially) Spain are vulnerable. A ‘red line’ running along the Pyrenees and Alps cleaves the big-4 countries at the heart of the Euro area in two. Given the deep recessions being suffered in Spain and Italy, the implications for borrowers and the real economy – as well as for the ability of monetary policy to ease tight financing conditions – are self-evident.

Source: Goldman Sachs

Daily Photo: Knight's House

August 5, 2012

Best of TED - Joshua Foer: Feats of memory anyone can do

There are people who can quickly memorize lists of thousands of numbers, the order of all the cards in a deck (or ten!), and much more. Science writer Joshua Foer describes the technique -- called the memory palace -- and shows off its most remarkable feature: anyone can learn how to use it.

Best of TED - Rory Sutherland: Perspective is everything

The circumstances of our lives may matter less than how we see them, says Rory Sutherland. At TEDxAthens, he makes a compelling case for how reframing is the key to happiness.

Best of TED - Tali Sharot: The optimism bias

Are we born to be optimistic, rather than realistic? Tali Sharot shares new research that suggests our brains are wired to look on the bright side -- and how that can be both dangerous and beneficial.

Daily Photo: Collacchio

August 4, 2012

Best of TED - Reuben Margolin: Sculpting waves in wood and time

Reuben Margolin is a kinetic sculptor, crafting beautiful pieces that move in the pattern of raindrops falling and waves combining. Take nine minutes and be mesmerized by his meditative art -- inspired in equal parts by math and nature.

Best of TED - Jonathan Foley: The other inconvenient truth

A skyrocketing demand for food means that agriculture has become the largest driver of climate change, biodiversity loss and environmental destruction.

Best of TED - Avi Rubin: All your devices can be hacked

Avi Rubin explains how hackers are compromising cars, smartphones and medical devices, and warns us about the dangers of an increasingly hack-able world.

Beer Production Report

One of the fastest growing businesses in the world is Beer! In 2011, it rose by another 60 million hectoliters to 1.9 billion hectoliters, and was 38.3% higher than in 2000, according to the annual beer and hops report by Barth-Haas Group.

Although in this case as well growth is being fuelled by emerging economies. In most developed countries, production dropped.
In the US, it edged down 1.6% last year and 5.7% since 1990—despite a significant increase in the population.
In Germany, it stabilized recently, but had plunged 20.5% since 1990.
Production in the UK had skidded 27.5% during that time, though it ticked up last year.
In Japan, production is down 14.7% since 1990, and down 3.6% from 2010, the seventh straight year of declines.
But the rest of Asia is on a binge mission. Well, except India, the only major country that hasn’t yet discovered a taste for beer.
The driver in worldwide beer production growth was China, up 9.3% in 2011, and up an astonishing 600% since 1990. Of the 60 million hectoliters in growth worldwide last year, 42 million where brewed in China.
Vietnam made huge strides; in percentage terms a 2,680% melt-up since 1990.
Beer production also grew in Africa and Latin America.
Russia is a special case: in the Soviet Union in 1990, beer production was zero.
By 1996, Russian beers and Heineken were available, but hard to find in smaller towns or on trains, though vodka (served in water glasses or by the bottle) was everywhere. Since then, Russia has shot up to third place in beer production, knocking off Germany and other countries.

Today, the Czech Republic and Austria are the top two beer-drinking nations in the world with 143 and 108 liters per capita respectively.

 In 2011, 51.8% of the world’s beer was produced by six mega-brewing groups.

In June, ABInBev announced that it would acquire 7th ranked Grupo Modelo, giving the company a 21.5% share of the worldwide market. Without further acquisitions, the top six will brew 54.7% of all beer in 2012.
Germany still has about 1,250 breweries, four times as many as the rest of the EU combined. They range from brewpubs to mega breweries. About half of them are in Bavaria. And there are almost 5,000 brands.

September will be Crunch Time for Europe

"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

As eurocrats take their mandatory vacations for a job well done, Europe will enter hibernation mode, until September which according to Reuters "is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency."

Reuters explains why September will also be known as the popcorn month:
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy - or what do if one or both were to topple.

Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.

Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.
In Reuters' own words, the life raft is about to go pop:
The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.

But Greece is, once again, just the beginning.
Sept. 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone's permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.
All this, and much more, is finally coming to a head, as the time for can kicking is running out.
A full timeline of the incoming events, courtesy of Deutsche Bank is listed below:

  • 13 August: Italy auction. Bills
  • 14 August: Italy auction. Bonds
  • 14 August: Euro area Q2 GDP flash estimate, from Eurostat.
  • Mid-August: French Constitutional Court/Fiscal Compact. In Mid-August the French Constitutional Court is due to rule whether  the Fiscal Compact, which euro area countries are due to endorse by the start of 2013, needs to be ratified into the French Constitution. If so, a joint vote by the French Assembly would be required. Signals are that this would happen in September if required. See accompanying article on France in this issue of Focus Europe.
  • 16 August: Spain auction. Bonds
  • 20 August: Greek bond redemption. Greece is due to repay EUR3.1bn of GGBs. Following the PSI, these would be GGBs owned  by the ECB and EIB. While agreement on how to reconfigure the second loan programme is unlikely before September, it is unlikely the EU will hold-out from paying funds to Greece to repay the ECB/EIB. In a consolidated sense, the official sector’s exposure to Greece remains the same, but the creditor changes (to the EFSF). Alternatively, Greece could issue T-bills and the  Greek banks could absorb them with the assistance of ELA from the Greek central bank.
  • 21 August: Spain auction. Bills
  • 28 August: Spain auction. Bills
  • 28 August: Italy auction. Bonds
  • 29 August: Italy auction. Bills
  • 30 August: Italy auction. Bonds
  • End-August: DBRS rating on Spain/Ireland. By the end of August, the DBRS ratings agency is due to have concluded its review  of Spanish and Irish sovereign ratings.
  • September: Moody’s due to conclude review of Spanish sovereign rating. Logically Moody's should wait until there is clarity on  direct recap before making a decision on Spain’s rating. Since governments have not made progress fleshing out a direct recapitalisation facility — indeed, have created some ambiguity as to whether it will be non-recourse — there is a distinct risk that Moody's, in another move to be “ahead of the curve”, decides to downgrade Spain within the next 3 months. Moody’s currently rates Spain Baa3, the lowest investment grade rating.
  • September: Detailed bottom-up Spanish bank stress tests due for publication.
  • 6 September: Spain auction. Bonds
  • 6 September: ECB Governing Council meeting. If we are right about the outcome of the 2 August ECB meeting (dominated by “quantity” measures), we suspect that revisions to staff forecasts for growth and inflation are likely to be a basis for a 25bp rate  cut.
  • 11 September: Greece auction. Bills
  • 12 September: German Constitutional Court ESM ruling. The German Constitutional Court is to rule on the complaints lodged  against the ESM and fiscal compact. The chances of the ESM being vetoed are low. However, the Court might again strengthen the German Parliament’s prerogatives as regards future European integration (see Focus Germany, 20 July). Germany is the last approval needed for the ESM to come into effect. Then the first instalment of the capital has to be paid by the ESM members  within 15 days of the ESM treaty entering into force. There are three other countries where Constitutional Court queries are outstanding — France, Austria and Ireland. France’s Constitutional Court will be deciding by mid-August. Neither Austria (which  may take another 3-6 months) nor Ireland are large enough to hold back the ESM — the ESM will come into force when countries representing 90% of the subscribed capital have approved it. Both Germany and France have an effective veto power in that case.
  • 12 September: Dutch Election. In April, the VVD/CDA minority government failed when Geert Wilders' PVV party withdrew its  support amid negotiations for the 2013 austerity budget. A crisis was averted when three smaller parties came forward to give support to a budget, but an early election was unavoidable. Domestic austerity and European crisis issues will likely play  important roles in the election. Compared to the configuration of parliament at the October 2010 election, the latest opinion polls (Maurice de Hond) show PM Rutte's VVD liberal party vying with the Socialist Party for the dominant party position. Both would  gain 31 seats in the 150 seat parliament on the latest polls. This is an unchanged position for VVD, but a doubling of SP seats. SP are gaining at the expense of all other parties except VVD and neo-liberal D66. This may reflect a backlash against the  austerity for 2013 which has broad party political support. SP have also taken a stance against euro rescue initiatives, voting against the ESM alongside the PVV and extracting a pledge from Dutch FinMin De Jager that parliament will vote on any future  direct bank recapitalisation disbursements. Given the typical distribution of the vote among several parties, the questions are  what coalition emerges from this election, how long it takes to form a government and what policies will it support? Markets in particular will be watching the ramifications for domestic fiscal policy (the 2013 Budget is a week after the election) and euro  rescue initiatives.
  • 12 September: Italy auction. Bills
  • 13-14 September: G20 Finance Ministers and Central Bankers meeting. In Mexico.
  • 13 September: Italy auction. Bonds
  • 14 September: ECOFIN meeting. This is very likely the finance ministers meeting when adjustments to Greece's second loan programme will be considered. The remaining EUR23bn recapitalisation of the Greek banks is due to complete by the end of September, assuming a positive review of the loan programme. This is also when finance ministers should have their first discussion on the proposals for a common bank supervisory regime under the ECB. Any delays, with knock-on delays for a direct bank recapitalisation mechanism, will disappoint the market. Options for a reconsideration of Ireland’s legacy bank bailout policies may also be discussed (decision not due until October ECOFIN meeting).
  • 15 September: Eurogroup meeting. Coinciding
  • 18 September: Greece auction. Bills
  • 18 September: Spain auction. Bills
  • 20 September: Spain auction. Bonds
  • 25 September: Spain auction. Bills
  • 25 September: Italy auction. Bonds
  • 26 September: Italy auction. Bills
  • 27 September: Italy auction. Bonds

Eurozone Game Theory Analysis: Italy expected to exit first

Game Theory is a useful tool for analysing Europe's crisis. Bank of America dedicated a full report to a game theory scenario on the Euro Breakup, analysing the costs and benefits of a voluntary exit from the Euro-area for the core and periphery countries. The results are shocking.

Italy and Ireland (not Greece) are expected to exit first (with Italy having a decent chance of an orderly exit) and while Germany is the most likely to achieve an orderly exit, it has the lowest incentive to exit the euro-zone - since growth, borrowing costs, and a weakening balance sheet would cause more pain.

Ultimately, they play the game out and find out that while Germany could 'bribe' Italy to stay, they will not accept and Italy will optimally exit first - suggesting a very dark future ahead for the Eurozone.

The cost of insuring against EUR tail risk, which was already in retreat even before the EU Summit, has fallen further since, is at 2 year lows.

One of the most provocative observations of modern game theory is that the most likely outcome is not always the optimal one. Put differently, the dominant strategy for game players is not always to cooperate, even when everyone is better off if they do.

The most famous illustration of this is the Prisoner’s Dilemma. In this game, two men are arrested. The police offer both men a similar deal. If one testifies against the other, and the other stays silent, the betrayer goes free while the one who remains silent gets a one-year sentence. If both remain silent, they will each get a one-month sentence. If both decide to testify against the other, each will get a three-month sentence. Even though both will be better off if they stay silent, the “Nash equilibrium” is that both men will testify against each other. This is because from the perspective of each prisoner, regardless of what the other person does, he can be better off by betraying.

The prisoner’s dilemma problem can help us better understand the dynamics of the eurozone crisis.
 Below (Table 1), we present a highly abstract, stylized form of the game that Germany and Greece have been playing for the last two years. Greece is given two options: austerity or no austerity. Germany also has two options: Eurobonds or no Eurobonds. For each of the four possible outcomes a certain payoff is assigned for each country that is meant to be illustrative, but captures the essence of the different political/economic considerations of the two countries.

As the payoffs in Table 1 imply, both countries would fare better if they choose to cooperate (Greece agreeing to austerity while Germany agreeing to Eurobonds) than if they do not cooperate (no austerity and no Eurobonds). However, Greece would be even better off if it chooses no austerity but Germany agrees to Eurobonds. Similarly, the best outcome for Germany is that it opts for no Eurobonds but Greece chooses austerity. We assume that neither country knows what the other country is going to do before it has to decide on a course of action.

It is easy to see that the Nash equilibrium is no austerity and no Eurobonds (uncooperative equilibrium). This is because from the point of view of Greece, regardless of what Germany chooses, it will be better off if it opts for no austerity. Similarly, from the point of view of Germany, regardless of what Greece does, it will be better off if it chooses no Eurobonds. As with the Prisoner’s Dilemma, no austerity and no Eurobonds can be shown to be the Nash equilibrium even if we were to allow for the game to be played repeatedly.

The fact that the dominant strategy for both countries is not to cooperate is why now more than two years into the crisis Greece is not closer to implementing a credible reform program and Germany is not any closer to agreeing to Eurobonds.

The obstacle is that neither side is able to make a credible pre-commitment to doing the “right thing,” to the extent that there is no enforcement mechanism to ensure that each country lives up to its promises.

The lack of an enforcement mechanism is why the Germans are demanding that fiscal union will have to precede Eurobonds. Fiscal union, by taking fiscal policy out of the hands of the national governments, solves the pre-commitment problem. However, very few eurozone countries are willing to entertain the notion of giving up their independent fiscal policy, especially given that, as members of the monetary union, they do not have recourse to an independent monetary policy.

If the eurozone is no closer to a fiscal union and Eurobonds, we need to consider other potential outcomes of the crisis. Much has been said about involuntary exit from the eurozone , but what about the chances of a voluntary exit, meaning a country (or multiple countries) opting to call it quits on its (their) own accord?

Voluntary Exit?

A decision to stay or exit should be dictated by a cost and benefit analysis. What are some of the considerations that should go into such an analysis? There are four key questions that will have to be answered before any such decision can be made:
What are the chances for an orderly exit?
What is the impact on growth following an exit?
What is the impact on borrowing costs following an exit?
What is the impact on the country’s balance sheet following an exit?

Two very interesting results emerge:
Even though much of the market focus on exit risk has been on Greece, Italy and Ireland have the highest relative incentive to voluntarily exit the euro, by our analysis. In the case of Italy, it faces a relatively higher chance of achieving an orderly exit and it stands to benefit significantly from competitive gains, growth gains and even balance sheet gains. No wonder former Prime Minister Berlusconi has been recently quoted as saying that leaving the euro is not a “blasphemy.” Among the peripheral countries, Spain appears to have the lowest relative incentive to leave.

While Germany is the country most likely to achieve an orderly exit from the Euro, it also has the lowest incentive of any country to leave. It would suffer from lower growth, possibly higher borrowing costs, and negative balance sheet effect. Austria, Finland and Belgium don’t have strong incentive to leave, either.

Can Germany “bribe” Italy to stay?

Incentive to leave the euro varies from country to country. Among the major economies, Italy stands the most to gain from exiting, whereas Germany has the most to lose from exiting. Germany would also lose from the exit of other countries. (Say Italy leaves the euro but Germany stays. German holdings of Italian liabilities would fall in value, German exports to Italy would suffer and German companies would now face more competitive Italian manufacturing firms.) Does this mean that Germany would be willing to pay a price for Italy (as it has for Greece, Ireland, and Portugal) to stay in the euro? The answer is Yes but would Italy accept it.

What is the Nash equilibrium of this game?

Italy is clearly better off exiting than staying (after Germany has already paid the “bribe”), as the payoff for Italy in outcome 4 is inferior to the payoff in outcome 3. If we can see this, so can Germany in period 2. Whether it pays or not, Italy will exit in the following period. Therefore, Germany is better off by not paying. Now in period 1, Italy can make the informed calculation that Germany will not pay. This means that Italy has an incentive to exit in period 1. The bottom line is that the only stable equilibrium of this game is that Italy exits the euro and, more importantly, it exits already in period 1.

This game and the analysis in the previous section would suggest that we should not expect what has already happened between Germany and Greece during the eurozone crisis to play out the same way for Italy if the crisis spreads. Italy has more incentives than Greece to voluntarily exit the eurozone, in our view, while it will be more expensive for Germany to keep Italy in the eurozone. This means that Italy could be even more reluctant than Greece to accept tough conditionalities for staying.

Only a weak Euro can save the Eurozone

Despite the depreciation of the euro in the last three years, it is still nearly 10% stronger than where it was in 2000. Against the USD, it is still 45% stronger than its low in November 2000.

A much weaker Euro would significantly reduce the incentive of any country to exit. For example, a 20% depreciation of the EUR against the USD would reduce by nearly half the loss of competitiveness of Italy to the US since the inception of the Euro.

Catalonia unable to pay salaries

If Rajoy is opening to a full scale bailout of the Spain the situation is also rapidly deteriorating at regional level, Catalonia on the wealthiest regions of Spain is facing an effective shutdown if bailot money will not be provided soon by the central Spanish government.

El Pais reports Catalonia Will Not Pay Hospitals or Private Centers and 100,000 workers are affected.

Google Translation Below:

This month, the Government of Catalona cannot tackle  payments owed to hospitals, schools, residences, social organizations, and children in care centers and workshops. These are the services provided by entities, public and private, funded by the Government.
The move affects up to 7,500 associations and some 100,000 workers, according to the third sector.

The news that the Government could not meet its commitments this month was confirmed on Monday after several days of negotiations with the affected entities. Sources from the Departments of Health and Welfare explained ten days ago it "could not meet the payments this month." Welfare, however, has ensured that other non-contributory pensions paid or the minimum income.

The Catalan Association of Relief calculated that 63% of companies cannot meet the payroll this month.
This is not the first time that the Government is obliged to defer payment. It happened last September when it could only address 65% of the amount and the rest was paid by the end of the year.

Daily Photo: Vittoriosa Marina

Habitable Extra Solar Planets

Image: Artist’s conception of five potentially habitable exoplanets, with Earth and Mars to scale. Credit: The Habitable Exoplanets Catalog, PHL @ UPR Arecibo.