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posted on 16 July 2015

Epoch of Belief, Epoch of Incredulity (26): Last Among Unequals

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Christine Lagarde has been positioning the IMF (and herself) at the centre of the two current flashpoints on the European continent, in addition to the potential global flashpoint in relation to the Fed’s Taper Tantrum.

As debt talks loom with Ukraine, the IMF has pledged its support for this breakaway former Soviet Republic[i]. In the Eurozone, the IMF is now at risk of not being repaid by the Greeks[ii]. By some strange quirk of fate, President Putin and Prime Minister Tsipras have now manifestly connected the two conflicts[iii]. By an even stranger quirk of fate, an anonymous source has just claimed the $47 million reward for fingering the fingers on the trigger that shot down flight MH17 over Ukraine[iv]. Whilst the recipient of the $47 million remains unknown, the EU has extended sanctions against Russia to 2016[v], which suggests that the informer informed of Russian fingers on the trigger. Lagarde herself called on Janet Yellen not to start raising interest rates until 2016[vi]. It’s all coming together nicely for the IMF… or perhaps not!

Further IMF positioning was recently observed in its latest publication entitled “Causes and Consequences of Income Inequality: A Global Perspective”[vii].

The IMF is drawing the line under QE; and grading it as a fail in terms of income inequality. Central banks created greater income inequality with QE; and the IMF is now leading the policy debate on how income equality can be attained. Clearly the current central banker fascination, with the creation of inflation, runs the risk of exacerbating the impacts of the acute income inequality they have attenuated since the Credit Crunch.

Janet Yellen will be sadly missed at Jackson Hole this year. Her absence signals that the Fed’s exit from QE is currently on data dependent auto-pilot. The Fed is therefore not currently engaged in the great income inequality debate. Previously, Yellen had been a late convert to the dark art of Helicopter Money creation; through the redistribution of wealth via the Tax Code facilitated by large helpings of an accommodative money supply. It would seem that the IMF is now filling the global void until the Fed reconnects.

The European reaction to IMF positioning has been interesting to observe. Jean-Claude Juncker is on record for his comments about a sinister Anglo Saxon plot to destroy the European Project[viii]. It has therefore been no surprise to see Juncker use the current crisis as an opportunity for further European integration. His latest call was for European fiscal integration by 2025[ix]. Juncker hopes to play upon European fears, both of Russia and a stream of migrants from North Africa, to overcome the current prevalent wave of nationalism. Good luck with that JC!

Epoch of Belief, Epoch of Incredulity (24) The Magnificent G-Seven bubbled the little charade being played out by Alexis Tsipras and Jean Claude-Juncker. The two have played their antagonistic parts a little too well to be credible. It was concluded that Tsipras was framing himself as the defender of Greek Socialism, in order to do a last minute deal that would then be viewed as a victory for him. Having first appeared to trigger the Grexit, Tsipras then subtly moved his position towards that of conciliation rather than capitulation.

The objective of both actors was to engineer a political solution at the EU level, which would then oblige the finance ministers to come up with an economic solution that followed suit. As Juncker knows, such a move combined with his plans for a common Treasury by 2025, would effectively create both fiscal and political union by fiat. The irony of a hostile Socialist Greek prime minister in league with an unelected bureaucracy in Brussels, diverting decisions and funding from national parliaments, would be the ultimate signal that European political and fiscal union was a reality. If the EU leaders could be made to fall for this strategy, then the money to save Greece and pay all creditors would then have to be found.

Clearly a unified European Treasury system would allow the EU to dip into the collective revenues of all members to bailout nations falling by the wayside going forward. In addition, a collective Treasury could then cancel debts owed by weaker member nations without triggering defaults and hence the demise of the Euro. Over the weekend running into last week, the seeds of an exclusively European solution were sown. Greek Minister of State Nikos Pappas signalled that the Greeks would like to follow a line of negotiation that once again drives a wedge between the EU and the IMF, when he opined that Europe does not need the IMF[x]. The EU then reciprocated with alacrity, when ministers signalled that concessions could be made to Greece, if Tsipras could move across Syriza’s red lines and compromise on the issues of EU concern[xi]. Tsipras is therefore now being redefined as a “EUseful Idiot” rather than a generic “Useful Idiot” who may be aligned with America and/or Russia depending on who pays the most for his allegiance. Seeing some wiggle room, the Greeks then re-presented some new vague economic reform proposals; which were warmly received by their EU brothers and sisters[xii] at first. The markets bought it for a four percent plus squeeze, thus confirming the crisis was allegedly over with price action.

The IMF however did not join in the euphoria which greeted the developments last Monday. The proto-European deal would reduce Anglo Saxon influence on the continent, in addition to short-changing the Anglo Saxon beneficial shareholding in the IMF; so it was always going to be viewed with suspicion by this institution. Still pretending to act tough and to protect the Anglo Saxons, the EU then gave Tsipras 48 hours to reach a deal with his creditors[xiii]. Allegedly a new debt restructuring programme is to be offered to Greece, once it has met its current obligations in order to avoid a default[xiv]. What then remained for Tsipras, was the task of getting his coalition members to buy into the sketchy deal he had outlined with the Eurogroup[xv].

At this point in the great drama, the IMF had still not opined on the terms of the Europhoric deal. The silence of the IMF was becoming deafening for some; especially as US Defence Secretary Carter was doing the rounds of European capitals to bolster the case for more American support of NATO. America was therefore just about to shell out on new military expenditure in Europe, just as it was about to get defaulted on by Greece via the IMF. In all the Europhoria, nobody in the Eurozone had explained how the latest Greek deal was supposed to pay the IMF’s looming payment deadline. How the Eurogroup was to finance the payment to the IMF was shrouded in mystery[xvi]; to such a degree that it was even suggested that the ECB would facilitate the payment by lifting the curb on the amount of T-Bills that the Greeks could issue.

Germany remains steadfast against raising this T-Bill borrowing limit in addition to bailing out Greece any further.

The Europhoria seemed misplaced therefore, in light of the fact that all concerned had neglected to say how Greece would avoid default by paying the IMF on time. It was therefore time to test whether the political solution fully discounted in the markets would actually pass through the respective parliaments of Greece and Germany[xvii].

It was notable that the circumspect German lawmakers were more in favour of the IMF as the arbiter of the negotiations than the EU. The Germans made it clear that there is no deal, without the IMF[xviii]; thus moving the status quo back to the Anglo Saxon influence that Greece and Juncker would like to remove. The first hurdle was for Tsipras to convince his coalition partners (and his wife!) that he had made a good deal. For this to occur, the Troika would have to cut Greek debts, or agree to unfreeze some emergency funding. Such a move by the Troika was therefore conditional upon the exact proposals and wording from the Greeks. If as usual the Greeks had made some vague promises, that they could subsequently re-interpret in order to fool their creditors; all bets would be off. Having already called the Greeks liars[xix], Juncker was therefore sticking what remains of his reputation on the line by embracing their latest “lies”.

He would be well advised to mind his eye. Epoch of Belief, Epoch of Incredulity (25) 1215 and All That explained how the Anglo Saxon global agenda was driven by the principles of corporate and political governance best practice. The EU, as a body devoid of all notions of best practice in democratic terms, flies directly in the face of this Anglo Saxon agenda.

Juncker’s attempt to expel the Anglo Saxon influence from the continent is going to ultimately end in tears. If he has any skeletons in his own private cupboard, he would do well to bury them very deep in the ground. Since he is from an interesting tax haven called Luxembourg and the Anglo Saxons are currently cracking down on fiscal crime and tax evasion, the skeletons must be rattling away by now. Luxembourg’s rise to notoriety as a tax dodging centre is strangely coincident with his time there as Prime Minister[xx]. It would be ironic (but not surprising) if the proceeds of various Greek bailouts and other incidents of tax evasion in that country, were found to have been laundered through Luxembourg accounts. When the FBI started firing warning shots at FIFA, various other institutions on the European continent should have paid attention, not least the EU itself.

Francois Hollande is clearly worried about these US inspired developments, since he has ordered an investigation into claims that the NSA has been spying on himself and previous Prime Ministers[xxi]. President Obama could only avoid perjuring himself and making the situation worse by opining that America no longer spies, rather than never spied, on France[xxii]. Obama’s comments only serve to give even greater credibility to the documents leaked by Wikileaks.

Hollande therefore seems to be a subscriber to Juncker’s Anglo Saxon plot hypothesis. Hollande’s fears are precipitated by the threat from Marine Le Pen; and the “Frexit” that she demands should precede the formal unwinding of the Eurozone by Germany and France. Le Pen is currently ahead of Hollande in the opinion polls; and each new wave of immigrants pushes her further and further beyond him. Just as the EU tries to use the wave of migrants as a force for greater European integration, so there is an equal and opposite force of disintegration created by the same tide. The implications for the Brexit and David Cameron’s new attempt at renegotiating thus took on a more ominous tone, as the combination of striking French customs officials and unmotivated police gave migrants in Calais the green light to stow away on vehicles bound for Britain.

As the week progressed the Europhoria deteriorated as the details of the sketchy Greek compromise turned out to be without any meaningful substance, other than to give Tsipras the appearance of having done a great deal at the expense of his creditors. It also became evident that Juncker and Tsipras’s hopes for a political deal, that would overrule the financial deal of the EU finance ministers, were in vain.

When the first Greek offer[xxiii] was therefore declined by the finance ministers a new one was hastily put forward[xxiv]; thus wasting precious time and making the likelihood of default much greater. Tsipras unfortunately reacted negatively to the response and demands from the EU finance ministers and the IMF[xxv], after they had declined the first Greek offer. This may have been one emotional outburst too many however; signalling that he had once again led Juncker down a path that leads to nowhere other than default.

It is now clear that there will not be any exclusively European deal that does not involve the IMF. Juncker’s hopes for an exclusive European deal have been thwarted by higher global priorities. One priority is that the Europeans want to share the loss of any Greek default and/or debt haircut with the IMF.

One larger priority is the new fact that NATO is now re-evaluating its whole nuclear arsenal and strategy, after Russia announced that it would increase its own inventory by 40[xxvi]. Since Tsipras decided to play the Russian card, he has now been viewed as a dangerously unstable figure at the epicentre of international security. He is not a rational actor therefore he must now be removed from the table. Having broken the good cop bad cop double act with Juncker, Tsipras has effectively destroyed the utility of the partnership. Juncker’s position is now also less tenable, after his attempt to take the Anglo Saxons out of the equation and hence put the basis of the NATO alliance at risk.

The ECB’s role has also been limited to narrowly supporting the Greek banks, rather than the Greek government per se; which further pushes the country closer to default[xxvii]. Given the bigger picture, the Anglo Saxon involvement in Europe took priority over the smaller matter of Greece’s debts. David Cameron is still trying to position Britain as America’s gatekeeper and proxy in Europe. There were signs that Europe wishes to accommodate this arrangement, when Jonathan Faull was placed in charge of the renegotiations by the European Commission[xxviii]. Faull has opined on the demise of British influence in Europe, therefore by appointing him in this pivotal role the Europeans signalled that they wish to preserve the Trans-Atlantic status quo.

Given the high stakes, Britain dispatched its highest ranking and most respected diplomat and her Greek husband to the continent[xxix]; to make the case for Britain staying in a Eurozone that also contains Greece. As the weekend loomed again, Schaeuble reported that negotiations with Greece were moving backwards[xxx] and Merkel issued a final ultimatum[xxxi], even though Hollande clung to hopes of a dealixxxii]. The IMF key, the player in the negotiations, reported that it still expects to get paid its next scheduled payment in full on June 30th[xxxiii]. Greece has run out of wiggle room.

With all the attention focused on Europe, the fact that steadfast Governor Kuroda was actually getting tacit recognition of having delivered on growth and inflation was ignored[xxxiv]. Speculators preferred to think that, since the Grexit has been avoided, the Fed can now go ahead and start tightening. A run of poor US data may then find them reappraising the Yen.

Sadly for Kuroda, the Japanese data is deteriorating the fastest[xxxv], giving those who believe in further easing and a further Yen slide more conviction. He has thus started to manipulate the data, in order to provide the strength in the Yen from which to embark on another round of easing. In its latest attempt to move the goalposts, the BOJ suggested to redefine the way CPI is calculated, so that it appears to be higher[xxxvi]. Kuroda is now betting on American data disappointing the FX traders enough to give the Yen some strength running into Q3. He’s played a pretty good hand thus far, so why bet against him at this point?





































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