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Athens has to pay €2 billion in debt payments this Friday to ECB, IMF and Goldman Sachs

Athens will have to pony up more than €2 billion in debt payments this Friday to the ECB, the IMF, and (get this) Goldman Sachs, for an interest payment on a derivative and it’s not entirely clear where the money will come from.

Alex Christoforou

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Post originally appeared on Zerohedge.

Greece’s day of reckoning may be fast approaching. Athens will have to pony up more than €2 billion in debt payments this Friday to the ECB, the IMF, and (get this) Goldman Sachs, for an interest payment on a derivative and it’s not entirely clear where the money will come from. On Wednesday, the government will vote on a “plan” to boost liquidity which includes tapping public funds and diverting bank bailout money. Here’s Bloomberg:

Greece will begin debating measures to boost liquidity as the cash-starved country braces for more than 2 billion euros ($2.12 billion) in debt payments Friday…

The government’s revenue-boosting plan includes eliminating fines on those who submit overdue taxes by March 27 to encourage payment, helping cover salaries and pensions due at the end of the month. The bill also requires pension funds and public entities to invest reserves held at the Bank of Greece in government securities and repurchase agreements, and transfers 556 million euros from the country’s bank recapitalization fund to the state. A vote on the measures is scheduled for Wednesday…

The Goldman Sachs derivative, now held by the National Bank of Greece, masked the country’s growing debt when it was agreed in 2001, helping it meet European Union rules for entering the euro area. The interest payment adds to the country’s funding woes as the government misses budget targets and the ECB refuses to allow Greek banks to keep the country afloat with additional short-term debt.

Despite government claims that it can meet its obligations, outside observers aren’t so sure. German FinMin Wolfgang Schaeuble for instance, can’t find anyone who can explain it:

“None of my colleagues, or anyone in the international institutions, can tell me how this is supposed to work.”

Meanwhile, one senior fellow at the Brookings Institution suggests Athens is winging it entirely at this point:

“The impression given is that there’s no plan A or plan B. There’s nothing.”

With the situation deteriorating rapidly, the sell side is back to drawing up Grexit plans. For their part, Morgan Stanley sees a 60% chance of either a euro exit or what the bank is calling a “staycation,” which basically means that the situation is so convoluted that no one can figure it out leading to the imposition of capital controls and a painful prolonging of the inevitable. Here’s more from MS:

Grexit – what’s the probability?

We recap the three alternative scenarios worth exploring:

1. Euro stay (40% probability): This scenario would be the result of political compromise. Basically, of the ‘impossible trinity’ that Syriza wants (stay in the euro; be in power; and undo the bailout programme), what gives is that the Greek government doesn’t undo the bailout programme. We assume that it recommits to implementing a slightly less demanding package of measures in agreement with the official lenders, and prospects of somewhat less austerity, extra maturity extensions and interest rate reductions on the EU loans, as well as ECB QE, help find a compromise (see here). This is still our base case but, compared to our previous assessment of 55%, we think that the chances of this outcome have diminished, given the inherent difficulties in finding a middle-ground solution, mostly given Greece’s political constraints domestically, and Europe has little appetite for further slippages.

2. Euro exit (25% probability): This would happen if the lack of a Greece-Troika compromise led to bitter negotiations, then a worsening in market reaction, negotiations ultimately failing and Greek banks being cut off from ECB funding. It could also happen if the EU perceived low contagion risk and/or viewed the political precedent of a Greek euro exit as not that bad – in which case Greece would be ‘let go’. The chances of this outcome playing out have not increased, in our view; yet they haven’t diminished either. While this is not our base case, we believe that the probability of a misstep remains substantial – given an unstable economic, bank deposit and sovereign funding situation – and may well lead to an exit. 

3. Euro staycation (35% probability): This is an intermediate scenario where no

compromise is reached over a 3-6-month horizon. We presume capital controls would be introduced to limit money outflows, and Greece, like Cyprus, would effectively no longer be a full member of the eurozone, even though formally it would stay within the currency union. Full euro membership would eventually be restored once/if all capital controls were lifted. This scenario, after some time, could evolve into either of the other two. Should this happen, we’d see a 60% probability that an exit might follow, taking a 12-18 month view, and a 40% probability that capital controls get lifted. Further damage to the economy, banking system and confidence may well lead to this outcome, especially if accompanied by policy mistakes.

Endgame probabilities: Even though it’s beyond the scope of this note, the ‘fully computed’ probabilities – i.e., taking into account that staycation, in the end, either becomes exit or stay in the medium term – suggest that the chances of the euro stay scenario are just slightly more than even. As such, the outlook really is binary, with considerable downside risks – should capital controls be introduced. Besides economic developments, deposit flows and sovereign funding, what’s worth monitoring is the negotiations on the measures that Greece is supposed to implement by the end of April, and whether a more durable solution can be found before the expiration of the four-month extension at the end of June.

 

GrexitMS1_0

…and here’s a bit on systemic risk…

But wouldn’t Grexit make the euro a riskier proposition? Yes, we think that Grexit could conceivably affect market participants’ reaction function – perhaps for a long time. It’s probably fair to say that, if it’s just one of the smaller countries leaving, the overall impact of a euro exit scenario may well be more manageable for the rest of the region and the contagion effects rather limited if the policy response is strong enough.Yet even that would likely change the dynamics of EMU and negate the concept of irrevocability. So Grexit has the potential to leave the impression that the eurozone is no longer a monetary union, but more akin to a collection of fixed exchange rates. From a logical standpoint, if one country leaves, market participants may think that, in a subsequent crisis, others could follow, which may make bond markets in the EU periphery respond much more negatively to a future shock.

…followed by projections for the euro…

Exit (25% probability) => EURUSD to decline to 0.82

A Greek exit is still the most bearish scenario for EUR, in our view. A country leaving the eurozone, even one of the smaller countries in the periphery, will have a major negative impact on EUR. We believe that this may change the dynamics of EUR, implying that the eurozone is no longer a monetary union, but rather a collection of fixed exchange rates. Under the scenario of a Greek exit, we now project EURUSD at 0.82, especially if a Greek exit starts to increase the probability of other countries leaving.

Staycation (35% probability) => EURUSD to decline to 0.90 However, where we believe the risks have increased the most is for our staycation scenario. The potential for a staycation, where Greece stays in the euro but only with the assistance of additional measures, has increased with a probability of 35%, in our view, up from the 20% we assumed previously. This implies that the probability of the EUR decline exceeding our 1.05 base case projection (euro stay scenario) has also increased significantly. One of most significant measures, as far as EUR is concerned, could be the introduction of capital controls for Greece. While not as severe as an exit from the euro, it would once again call into question the eurozone as a monetary union. This, we believe, would expose EUR to increased downward pressure. Under our staycation scenario, we would now expect EURUSD to achieve 0.90 by year-end.

…and ending in a rather dire outlook for the Greek banking sector…

We’ve been here before: As the chart below shows, at the peak in 2012, one-third of Greek balance sheets were funded by the ECB, mostly via ELA. This coincided with the height of deposit outflows at 20%Y in June 2012 – when a Greek euro exit was most anticipated – and had remained c.30% below its peak before this latest round of outflows.

Eurosystem funds withdrawal in event of a euro exit leaves €82bn loans unfunded: Should deposit outflows further accelerate against fears of potential euro exit, at which point the ECB would stop funding Greek banks, the system would be faced with a large and arguably unmanageable funding gap. We estimate that a 20% decline in deposits – the highest percentage we have seen in a single year (2012) – would result in a funding gap equal to about €82bn, > 40% of GDP.

 

GrexitMS2_0

The bottom line here is that the supposedly “indissoluble” monetary union is looking more dissoluble by the day and if there’s anything the ECB does not need a week into PSPP it’s for sovereign spreads to blow out as the market begins to price in redenomination risk.

References:

http://www.zerohedge.com/news/2015-03-17/greece-faces-cash-crunch-friday-without-plan-or-plan-b-what-happens-next

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US-China trade war heats up as surplus hits record $34 Billion (Video)

The Duran – News in Review – Episode 136.

Alex Christoforou

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According to a report by the AFP, China’s trade surplus with the United States ballooned to a record $34.1 billion in September, despite a raft of US tariffs, official data showed Friday, adding fuel to the fire of a worsening trade war.

Relations between the world’s two largest economies have soured sharply this year, with US President Donald Trump vowing on Thursday to inflict economic pain on China if it does not blink.
The two countries imposed new tariffs on a massive amount of each other’s goods mid-September, with the US targeting $200 billion in Chinese imports and Beijing firing back at $60 billion worth of US goods.

“China-US trade friction has caused trouble and pounded our foreign trade development,” customs spokesman Li Kuiwen told reporters Friday.

But China’s trade surplus with the US grew 10 percent in September from a record $31 billion in August, according to China’s customs administration. It was a 22 percent jump from the same month last year.

China’s exports to the US rose to $46.7 billion while imports slumped to $12.6 billion.

China’s overall trade — what it buys and sells with all countries including the US — logged a $31.7 billion surplus, as exports rose faster than imports.

Exports jumped 14.5 percent for September on-year, beating forecasts from analysts polled by Bloomberg News, while imports rose 14.3 percent on-year.

While the data showed China’s trade remained strong for the month, analysts forecast the trade war will start to hurt in coming months.

China’s export jump for the month suggests exporters were shipping goods early to beat the latest tariffs, said ANZ’s China economist Betty Wang, citing the bounce in electrical machinery exports, much of which faced the looming duties.

“We will watch for downside risks to China’s exports” in the fourth quarter, Wang said.

Analysts say a sharp depreciation of the yuan has also helped China weather the tariffs by making its exports cheaper.

“The big picture is the Chinese exports have so far held up well in the face of escalating trade tensions and cooling global growth, most likely thanks to the competitiveness boost provided by a weaker renminbi (yuan),” said Julian Evans-Pritchard, China economist at Capital Economics.

“With global growth likely to cool further in the coming quarters and US tariffs set to become more punishing, the recent resilience of exports is unlikely to be sustained,” he said.

According to Bloomberg US President Donald Trump’s new U.S.-Mexico-Canada Agreement isn’t that different from the North American Free Trade Agreement that it replaced. But hidden in the bowels of the new trade deal is a clause, Article 32.10, that could have a far-reaching impact. The new agreement requires member states to get approval from the other members if they initiate trade negotiations with a so-called non-market economy. In practice, “non-market” almost certainly means China. If, for example, Canada begins trade talks with China, it has to show the full text of the proposed agreement to the U.S. and Mexico — and if either the U.S. or Mexico doesn’t like what it sees, it can unilaterally kick Canada out of the USMCA.

Although it seems unlikely that the clause would be invoked, it will almost certainly exert a chilling effect on Canada and Mexico’s trade relations with China. Forced to choose between a gargantuan economy across the Pacific and another one next door, both of the U.S.’s neighbors are almost certain to pick the latter.

This is just another part of Trump’s general trade waragainst China. It’s a good sign that Trump realizes that unilateral U.S. efforts alone won’t be enough to force China to make concessions on issues like currency valuation, intellectual-property protection and industrial subsidies. China’s export markets are much too diverse:

If Trump cuts the U.S. off from trade with China, the likeliest outcome is that China simply steps up its exports to other markets. That would bind the rest of the world more closely to China and weaken the global influence of the U.S. China’s economy would take a small but temporary hit, while the U.S. would see its position as the economic center of the world slip into memory.

Instead, to take on China, Trump needs a gang. And that gang has to be much bigger than just North America. But most countries in Europe and East Asia probably can’t be bullied into choosing between the U.S. and China. — their ties to the U.S. are not as strong as those of Mexico and Canada. Countries such as South Korea, Germany, India and Japan will need carrots as well as sticks if they’re going to join a U.S.-led united trade front against China.

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss the escalating trade war between the United States and China, and the record trade surplus that positions China with a bit more leverage than Trump anticipated.

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Via Zerohedge Trump Threatens China With More Tariffs, Does Not Seek Economic “Depression”

US equity futures dipped in the red after President Trump threatened to impose a third round of tariffs on China and warned that Chinese meddling in U.S. politics was a “bigger problem” than Russian involvement in the 2016 election.

During the same interview with CBS’s “60 Minutes”, in which Trump threatened to impose sanctions against Saudi Arabia if the Saudis are found to have killed WaPo reported Khashoggi, and which sent Saudi stock plunging, Trump said he “might,” impose a new round of tariffs on China, adding that while he has “great chemistry” with Chinese President Xi Jinping, and noting that Xi “wants to negotiate”, he doesn’t “know that that’s necessarily going to continue.” Asked if American products have become more expensive due to tariffs on China, Trump said that “so far, that hasn’t turned out to be the case.”

“They can retaliate, but they can’t, they don’t have enough ammunition to retaliate,” Trump says, “We do $100 billion with them. They do $531 billion with us.”

Trump was also asked if he wants to push China’s economy into a depression to which the US president said “no” before comparing the country’s stock-market losses since the tariffs first launched to those in 1929, the start of the Great Depression in the U.S.

“I want them to negotiate a fair deal with us. I want them to open their markets like our markets are open,” Trump said in the interview that aired Sunday. So far, the U.S. has imposed three rounds of tariffs on Chinese imports totaling $250 billion, prompting China to retaliate against U.S. products. The president previously has threatened to hit virtually all Chinese imports with duties.

Asked about his relationship with Vladimir Putin and the Kremlin’s alleged efforts to influence the 2016 presidential election, Trump quickly turned back to China. “They meddled,” he said of Russia, “but I think China meddled too.”

“I think China meddled also. And I think, frankly, China … is a bigger problem,” Trump said, as interviewer Lesley Stahl interrupted him for “diverting” from a discussion of Russia.

Shortly before an audacious speech by Mike Pence last weekend, in which the US vice president effectively declared a new cold war on Beijing (see “Russell Napier: Mike Pence Announces Cold War II”), Trump made similar accusations during a speech at the United Nations last month, which his aides substantiated by pointing to long-term Chinese influence campaigns and an advertising section in the Des Moines Register warning farmers about the potential effects of Trump’s tariffs.

Meanwhile, in a rare U.S. television appearance, China’s ambassador to the U.S. said Beijing has no choice but to respond to what he described as a trade war started by the U.S.

“We never wanted a trade war, but if somebody started a trade war against us, we have to respond and defend our own interests,” said China’s Ambassador Cui Tiankai.

Cui also dismissed as “groundless” the abovementioned suggestion by Vice President Mike Pence that China has orchestrated an effort to meddle in U.S. domestic affairs. Pence escalated the rhetoric in a speech Oct. 4, saying Beijing has created a “a whole-of-government approach” to sway American public opinion, including spies, tariffs, coercive measures and a propaganda campaign.

Pence’s comments were some of the most critical about China by a high-ranking U.S. official in recent memory. Secretary of State Michael Pompeo got a lecture when he visited Beijing days later, about U.S. actions that were termed “completely out of line.” The tough words followed months of increases tit-for-tat tariffs imposed by Washington and Beijing that have ballooned to cover hundreds of billions of dollars in bilateral trade.

During a recent interview with National Public Radio, Cui said the U.S. has “not sufficiently” dealt in good faith with the Chinese on trade matters, saying “the U.S. position keeps changing all the time so we don’t know exactly what the U.S. would want as priorities.”

Meanwhile, White House economic director Larry Kudlow said on “Fox News Sunday” that President Donald Trump and Chinese President Xi Jinping will “probably meet” at the G-20 summit in Buenos Aires in late November. “There’s plans and discussions and agendas” being discussed, he said. So far, talks with China on trade have been “unsatisfactory,” Kudlow said. “We’ve made our asks” on allegations of intellectual property theft and forced technology transfers, he added. “We have to have reciprocity.”

Addressing the upcoming meeting, Cui said he was present at two previous meetings of Xi and Trump, and that top-level communication “played a key role, an irreplaceable role, in guiding the relationship forward.” Despite current tensions the two have a “good working relationship,” he said.

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BREAKING: Explosion in Crimea, Russia kills many, injuring dozens, terrorism suspected

According to preliminary information, the incident was caused by a gas explosion at a college facility in Kerch, Crimea.

The Duran

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“We are clarifying the information at the moment. Preliminary figures are 50 injured and 10 dead. Eight ambulance crews are working at the site and air medical services are involved,” the press-service for the Crimean Ministry of Health stated.

Medics announced that at least 50 people were injured in the explosion in Kerch and 25 have already been taken to local hospital with moderate wounds, according to Sputnik.

Local news outlets reported that earlier in the day, students at the college heard a blast and windows of the building were shattered.

Putin Orders that Assistance Be Provided to Victims of Blast in Kerch – Kremlin Spokesman

“The president has instructed the Ministry of Health and the rescue services to take emergency measures to assist victims of this explosion, if necessary, to ensure the urgent transportation of seriously wounded patients to leading medical institutions of Russia, whether in Moscow or other cities,” Kremlin spokesman Dmitriy Peskov said.

The president also expressed his condolences to all those affected by the tragic incident.

Manhunt Underway in Kerch as FSB Specialists Investigate Site of Explosion – National Anti-Terrorist Committee

The site of the blast that rocked a city college in Kerch is being examined by FSB bomb disposal experts and law enforcement agencies are searching for clues that might lead to the arrest of the perpetrators, the National Anti Terrorism Committee said in a statement.

“Acting on orders from the head of the NAC’s local headquarters, FSB, Interior Ministry, Russian Guards and Emergency Ministry units have arrived at the site. The territory around the college has been cordoned off and the people inside the building evacuated… Mine-disposal experts are working at the site and law enforcement specialists are investigating,” the statement said.

Terrorist Act Considered as Possible Cause of Blast in Kerch – Kremlin Spokesman

“The tragic news that comes from Kerch. Explosion. The president was informed … The data on those killed and the number of injured is constantly updated,” Peskov told reporters.

“[The version of a terrorist attack] is being considered,” he said.

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10 percent of American F-22 fighter jets damaged by Hurricane Michael

Part of the reason the F-22’s were left in the path of the storm is that they were broken and too expensive to fix or fly.

Seraphim Hanisch

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Note to the wise: When a hurricane comes, move your planes out of the way. Especially your really expensive F-22 fighter planes. After all, those babies are $339 mil apiece. Got the message?

Apparently the US Air Force didn’t get this message. Or, did they find themselves unable to follow the message?

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The Washington Times reported Tuesday that between 17 and 20 of these top-of-the-line fighter jets were damaged, some beyond the point of repair, when Hurricane Michael slammed ashore on Mexico Beach, Florida, not far from the Tyndall Air Force Base in the same state. The Times reports that more than a dozen of the F-22 Raptor stealth fighter jets were damaged after being left in the path of the extremely fierce storm:

President Trump’s tour Monday of devastation wrought by Hurricane Michael took him close to Florida’s Tyndall Air Force Base, where more than a dozen F-22 Raptor stealth fighter jets were damaged after being left in the path of the powerful storm.

The pricey fighter jets — some possibly damaged beyond repair — were caught in the widespread destruction that took at least 18 lives, flattened homes, downed trees and buckled roads from Florida to Virginia.

The decision to leave roughly $7.5 billion in aircraft in the path of a hurricane raised eyebrows, including among defense analysts who say the Pentagon’s entire high-tech strategy continues to make its fighter jets vulnerable to weather and other mishaps when they are grounded for repairs.

“This becomes sort of a self-defeating cycle where we have $400 million aircraft that can’t fly precisely because they are $400 million aircraft,” said Dan Grazier, a defense fellow at Project on Government Oversight. “If we were buying simpler aircraft then it would be a whole lot easier for the base commander to get these aircraft up and in working order, at least more of them.”

This is quite a statement. The F-22 is held to be the tip of the American air defense sword. A superb airplane (when it works), it can do things no other plane in the world can do. It boasts a radar profile the size of a marble, making it virtually undetectable by enemy radars. It is highly maneuverable with thrust-vectoring built into its engines.

However, to see a report like this is simply stunning. After all, one would expect that the best military equipment ought to be the most reliable as well. 

It appears that Hurricane Michael figuratively and physically blew the lid off any efforts to conceal a problem with these planes, and indeed with the hyper-technological basis for the US air fighting forcesThe Times continues:

Reports on the number of aircraft damaged ranged from 17 to 22 or about 10 percent of the Air Force’s F-22 fleet of 187.

The Air Force stopped buying F-22s, considered the world’s most advanced fighter jets, in 2012. The aircraft is being replaced by the F-35, another high-tech but slightly less-expensive aircraft.

Later in the tour, at an emergency command center in Georgia, Mr. Trump said the damage to the F-22s couldn’t be avoided because the aircraft were grounded and the storm moved quickly.

“We’re going to have a full report. There was some damage, not nearly as bad as we first heard,” he said when asked about the F-22s, which cost about $339 million each.

“I’m always concerned about cost. I don’t like it,” Mr. Trump said.

Still, the president remains a fan of the high-tech fighter jet.

“The F-22 is one of my all-time favorites. It is the most beautiful fighter jet in the world. One of the best,” he said.

The Air Force managed to fly 33 of the F-22s to safety, but maintenance and repair issues kept 22 of the notoriously finicky aircraft on the ground when the powerful storm hit the base.

About 49 percent of the F-22s are out of action at any given time, according to an Air Force report this year.

This is a stunning statistic. This means that of the 187 planes in existence, 90 of them are not working. At their cost, that means that over thirty billion dollars worth of military equipment is sitting around, broken, just in airplanes alone.

As a point of comparison, the entire Russian military budget for 2017 was $61 billion, with that budget producing hypersonic missiles, superb fighter aircraft and tanks. Russian fighter planes are known for being able to take harsh landing and take-off conditions that would cripple the most modern American flying machines.

It would seem that Hurricane Michael exposed a serious problem with the state of readiness of American armed forces. Thankfully that problem did not arise in combat, but it is no less serious.

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