Financial Times ( FT ) :- Swift shows impact of Iran dispute on international business

Link

The Europe-US-Iran issue is existential for Swift as a global network

These could include asset freezes and US travel bans for the individuals, and restrictions on banks’ ability to do business in the US.

Swift’s very survival as a worldwide system for facilitating cross-border payments depends on it resisting such attempts to “weaponise” it for political ends, said Nicolas Véron, senior fellow at the Peterson Institute for International Economics.

“The Europe-US-Iran issue is existential for Swift as a global network,” he said of the action against the company, which is owned by about 2,400 banks and other financial institutions.

Born in the 1970s out of leading banks’ desire to replace clunky Telex messages with a more reliable and faster payment system, Swift is now part of the world’s financial plumbing. Its 11,000-strong network of users expects the pipes to stretch as far and wide as possible.

The company runs a gigantic secure messaging service for the world’s financial institutions, transmitting payment requests across its electronic platform and keeping a record of such communications on servers in Europe and the US. It handles over 6bn messages a year.

Its role and dominance make Swift a very unusual company: a technology business that is systemically important for global commerce but that does not directly handle payments and whose turnover is a tiny fraction of that of a large bank. Its 25-member board of directors resembles a United Nations of executives specialised in the more prosaic side of banking: experts in payments processing, trade finance and interbank relations.

The Iran deal fallout is part of a post-millennium pattern of Swift becoming caught up in political fights. In 2006, EU lawmakers were outraged by revelations of a secret “Terrorist Finance Tracking Programme” that allowed investigators to tap Swift data held on a server in the US.

The company was also at the centre of international tensions in 2012, when it was ordered by the EU — following a US initiative — to disconnect from Iranian banks that were the subject of sanctions. These measures were later suspended in 2016 after the nuclear deal came into effect.

But Swift has fought back publicly against the idea that access to its services should be used to punish or reward governments.

The rows showed how it has become a sensitive asset: a gateway to the global finance system that comes under Belgian and European oversight but which has become of great interest to US authorities.

Swift’s global role is highlighted by its purpose-built headquarters, set amid manicured lawns and a miniature forest where deer and pheasants roam.

The neoclassical building houses just under 1,000 employees from about 50 countries and is the base for Swift’s central management. This is where internal cyber security and physical security experts duel: “red” teams probe for weaknesses in the system against “blue” opponents whose job is to defend its integrity.

The data centres themselves are in the Netherlands and the US state of Virginia, with a back-up in Switzerland. There are also emergency recovery sites whose location Swift does not disclose.

The National Bank of Belgium noted in a report last year that Swift’s activities have “been recognised as a significant factor in the safety and efficiency of payment and securities settlement systems” across the world.

About 90 per cent of Swift’s complex is out of bounds to visitors for security reasons, with some areas secured by code-operated doors. Even one of the architects from the Barcelona-based firm that designed the complex once had trouble getting in for a visit. Swift wants to keep both its customer data and intellectual property from prying eyes, with developers working on areas such as machine learning and data management.

While the company describes itself as a “neutral utility with a global systemic character,” insiders say its offices bear more resemblance to those of a tech firm, with an open-plan layout, a hot desk environment, little visible paperwork and few desk phones.

Swift has kept a low profile so far on the Iran sanctions, but a spokesperson told the FT that it would “naturally be consulting with and seeking clarification from both EU and US authorities”., adding: “Our mission remains to be a global and neutral service provider to the financial industry.”

The question is whether Swift can achieve both goals at the same time. A financial information network can either be “global with political neutrality, or not politically neutral and fragmented”, said Mr Véron. Politicisation and global reach “are mutually incompatible”.

Who is holding T-Bills

Backdrop

Let us use “Mihir Sharma’s Isolating Saudi Arabia Will Be Harder Than It Looks” poem as our backdrop.

  1. At the same time, however, it’s risky to keep cutting bits out of the global financial system and expecting it to survive. Russian sanctions strained it. Iranian sanctions might break the SWIFT system unless Europe and America can agree on a path forward. Any attempt to isolate Saudi Arabia could be the last straw. Already there are mutters in the Gulf about “alternate” ways to ensure the flow of finance, especially if the Magnitsky Act is invoked.
  2. Integrating global finance has been a real achievement of the past century. The question now is whether the world is willing to take the risk of balkanizing it.

T-Bills Holding

Graphs

Statistica Portal

Government Finances – Who’s Holding U.S. Government Debt

Link

whoIsHoldingUSGovernmentDebt_20181103_0913AM

 

Who is selling?

  1. Russia
    • 2018-March Thru May
      • Between March and May, Russia’s holdings of US Treasury bonds plummeted by $81 billion, representing 84% of its total US debt holdings.
  2. Turkey
    • 2018-1st Half
      • Turkish Central Bank sells off half of US government bonds in 6 months ( Link )
        • Turkey’s holdings of U.S. bonds, bills and notes have fallen 45.24 percent in the first half of this year, dropping to $28.8 billion in June with a selloff worth $23.8 billion, according to a U.S. Treasury Department report released Wednesday.
        • The U.S. Treasury has a floor of $30 billion to be classified as a major holder.
        • At the end of December 2017, Turkey was reported to hold U.S. Treasury bonds worth $52.6 billion.
  3. Japan
    • Schiff Gold
      • Who Is Buying US Treasuries ( Link )
        • The Japanese rank as the second-largest holder of US Treasuries, but they’ve been systematically selling. Over the past six months, the Japanese have shed $63 billion in US debt. Since July 2016, they have reduced Treasury holdings by $123 billion.

 

Graphs

Russia

US Treasury Holdings By Russia

US-treasury-holdings-Russia-2018-04

 

Who is buying

  1. Ireland
    • It’s no surprise that economic juggernauts China and Japan keep swapping places at the top of the list of biggest U.S. creditors. What might strike observers as odd, however, is that tiny Ireland has been lurking at No. 3 for more than a year.
    • The country holds more than $310 billion in U.S. government paper, according to the Treasury International Capital, or TIC, report released on Monday.
    • But Ireland’s ranking is puzzling given that economic heavyweights with deeper financial markets, including the United Kingdom and Germany, keep less Treasurys on their books than an arguably peripheral member of the eurozone. Ireland does not have Japan’s massive pension fund and life insurance companies that need to buy long-dated government debt to match their lengthy liabilities. Nor does it have China’s exporters, whose rapid growth has enabled the country to accumulate its hoard of foreign-exchange reserves.
    • Investors and analysts suspect Ireland appears as one of the U.S.’s largest creditors on paper because Google parent Alphabet and other American corporations like to hold their overseas profits in highly liquid Treasurys. These cash-rich firms want to avoid the 35% repatriation tax, but they don’t want to let the foreign-earned cash sit idly by.
    • “There might be some correlation because U.S. corporations with European subsidiaries tend to hold most of their offshore corporate cash in Ireland and Luxembourg. Those are the two main places where they have their offshore cash,” said Lance Pan, director of investment research at Capital Advisors Group, which manages money for American firms.
    • As a country that offers a combination of low corporate taxes and an English-speaking workforce, it’s little surprise Ireland is now the country of choice for many U.S. companies looking for a launching pad for European operations. It currently hosts the European headquarters of Google, Facebook, Apple, and Microsoft
    • The four firms including Amazon which has located its main office in Luxembourg, hold more than $200 billion worth of government paper, according to their corporate filings.
    • Microsoft and Apple alone added more than $80 billion of U.S. government paper in the past five years, doubling the previous amount. At the same time, Ireland’s holdings have grown at a similar pace, rising $200 billion since 2012.
    • Most of the sovereign paper in the country is placed in so-called custodial accounts. But the Treasury Department does not differentiate the composition and identity of the actual owners, and simply categorizes by nationality—in other words, central banks are lumped with private money managers.
  2. American institutional and individual investors
    • Who Is Buying US Treasuries
      • According to Wolf Street, “Mostly American institutional and individual investors, directly and indirectly, through bond funds, pension funds, and other ways.”
      • The question is how much of the load can these investors absorb? And how high will interest rates have to climb in order to keep them buying? Keep in mind, rising interest rates don’t just impact bond yields. On the flip-side, debtors are paying more to service their debts. That means leveraged companies and consumers with massive credit card balances. That’s not good news in a world drowning in debt.

 

US Federal Reserve

  1. Schiff Gold
    • Who Is Buying US Treasuries ( Link )
      • The Federal Reserve is another big player in the US Treasury market. The central bank holds about $2.39 trillion on federal debt, much of it purchased over the last decade through its QE programs.
      • But the Fed isn’t buying right now either. Its Treasury holdings fell by $70 billion from the beginning of its QE unwind last fall through April.

World Drowning In Debt

  1. Zero Hedge
    • Tyler Dunden
      • IMF Sounds The Alarm On Global Debt, Warns “United States Stands Out” ( Link )
        • What we again find odd is how quiet everyone was for the past ten years when central banks, by keeping interest rates at record low levels, enabled the world’s biggest debt issuance spree, for both public and private debt, and now that debt is at a level that even Goldman recently said is no longer sustainable, suddenly everyone – from central banks, to bank CEOs, to NGOs – is screaming from the rooftops how dangerous debt really is …
        • Reading the IMF report between the lines, it is nothing more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical – if completely expected – is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it’s all Trump’s fault.
        • Somehow we doubt this advance damage control will work after the next, and likely final, crash.
        • “We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” Gaspar said; what he really meant was “Trump, stop what you are doing before you lead to a debt funding crisis, that finally bursts the global debt bubble. “
        • There is another threat: rising rates. The IMF said that the interest burden has doubled in the past ten years to close to 20% of taxes, an escalating cost which “reflects in part the increasing reliance on nonconcessional debt, as countries have gained access to international financial markets and expanded domestic debt issuance to nonresidents.”
        • Echoing its warning from April 2017, The IMF again noted it is was concerned that private sector debts make the global economy more vulnerable to a new financial crisis started by “an abrupt deleveraging process” where borrowers all tighten their belts simultaneously, sending the economy into a nosedive.
        • “In the event of a financial crisis, a weak fiscal position increases the depth and duration of the ensuing recession, as the ability to conduct countercyclical fiscal policy is significantly curtailed.”
        • So what should policymakers – having gotten used to flooding the world in debt – do? Why the opposite, of course: as the FT summarizes, with the global economy growing strongly, the IMF recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.
        • Translation: no tax cuts, no increases to deficit spending, i.e. another dig at everything that Trump is doing.
        • In fact, the IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP. It also explains why the IMF forecasts the US is the only nation whose debt load will rise in the next 5 years.

          “In the United States fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilising higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment.”

 

Iran

New Payment System

  • Al Jazeera
    • EU and Iran agree on new payment system to skirt US sanctions
      • In a major snub to the United States, the European Union has decided to set up a new mechanism to enable legal trade with Iran without encountering US sanctions.
      • The EU will create new payment channels to preserve oil and other business deals with IranFederica Mogherini, the bloc’s foreign policy chief said late on Monday, in a bid to evade US punitive measures.
      • Mogherini’s announcement came after a meeting with foreign ministers from Britain, France, Germany, Russia, China, and Iran on the sidelines of the United Nations General Assembly in New York.
      • “In practical terms this will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world,” she told reporters after the closed-door meeting.
      • The EU, along with Russia and China, said in a joint statement that the so-called “Special Purpose Vehicle” will “assist and reassure economic operators pursuing legitimate business with Iran”.
      • The statement added that the six countries signatory to the 2015 nuclear agreement “reconfirmed their commitment to its full and effective implementation in good faith and in a constructive atmosphere”.

SWIFT

  1. Wkipedia
    • As mentioned above SWIFT had disconnected all Iranian banks from its international network as a sanction against Iran. However, as of 2016 Iranian banks which are no longer on international sanctions lists, were reconnected to SWIFT. Even though in theory this enables movement of money from and to these Iranian banks, foreign banks remain wary of doing business with the country. Due to primary sanctions, transactions of U.S. banks with Iran, or transactions in U.S. dollars with Iran, remain prohibited.
    • Similarly, in August 2014 the UK planned to press the EU to block Russian use of SWIFT as a sanction due to Russian military intervention in Ukraine.However, SWIFT refused to do so. In their official statement they said, “SWIFT regrets the pressure, as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides its customers around the world”.  SPFS, a Russia-based SWIFT equivalent, was created by the Central Bank of Russia as a backup measure.
    • In September 2018 the European Union foreign policy head, Federica Mogherini, proposed the development of a new “special purpose financial vehicle” intended to bypass the U.S. controlled Society for Worldwide Interbank Financial Telecommunication payments system – commonly known as SWIFT. The seven founding members of this new system are to be Iran, the European Commission, Germany, France, the U.K., Russia and China – but not the United States.
    • The United States, having withdrawn from the JCPOA – better known as “the Iran Nuclear Deal” – has decreed severe sanctions against any nation trading with Iran. The new payments system is designed to remove certain banking transactions with Iran from the purview of U.S. authorities, and as such, to escape U.S. sanctions against nations trading with Iran. The goal is to encourage Iran to continue to adhere to the terms of the JCPOA, which forbids the testing, development and manufacture of nuclear weapons.
    • In time, it could be used more generally to evade other U.S. sanctions, such as those against the German-Russian pipeline project known as Nordstream 2.
    • SWIFT has also rejected calls to boycott Israeli banks from its network.

Quotes

  1. David Kotok, chairman of Cumberland Advisors
    • money.cnn.com [ Link ]
      • The bigger risk is that China or another country weans itself off US debt by slowing its purchases and waiting for existing Treasuries to mature.
      • “Gradualism could have a long-term impact on the United States. But that would be a patient policy that would not reveal itself easily,” said David Kotok, chairman of Cumberland Advisors.

 

Technical Summary

As it relates to Treasury Bills:

  1. Sold Off
    • Russia and Turkey have sold off
  2. Holding at Current Levels
    • Japan & China
  3. Buying
    • US Multi-Nationals ( Amazon, Microsoft, Google, Facebook ) are accumulating as part of off-shore business income
    • Resistant to bring on-shore due to exposure to Tax

International Money Transfer

  1. SWIFT
    • Pressured to exert itself as embargoes are launched against countries
    • It appears that Western Europe, Russia, and China might not go along

Closing

In closing, “How do you deal toughly with your banker?” – Hilary Clinton

NY Times – LANDON THOMAS Jr. – Greek Crisis, the Book. Or Actually Several of Them

Background

Back in early August 2016, I read an article in the New York Times Business section.

It spoke about the many books that are out that renders a voice to the various participants in the Greek bailouts.

Yesterday, I ran into a lady who was on her away to visit Greece.  And, somehow coincidentally I came across the same cluster of newspapers today.

And, so it must be time to share the article.

 

Greek Crisis, the Book. Or Actually Several of Them

Link
In May last year, James K. Galbraith, a left-leaning American economist, sent an email to Greece’s finance minister, Yanis Varoufakis, in which he argued that an exit from the eurozone would benefit Greece.

Mr. Galbraith, who was advising Mr. Varoufakis at the time, made the case that a new currency would wash away the country’s debts, solve Greece’s competitiveness problem and ultimately create what he called a “good society.” Though the step was opposed by most Greeks, he had drawn up a contingency plan for Greece under Mr. Varoufakis’s direction, in the event the country was forced to leave the currency zone by its creditors.

In the end, there was not a so-called Grexit. One year ago this month, after the polarizing finance minister left his post, Greece agreed to its third bailout with Europe, accepting yet another round of brutal austerity measures as the price for a new round of loans.

Mr. Galbraith’s vision of a sun-kissed utopia of powerful unions, small businesses and cultural exchanges was published in June in his book of essays, speeches and assorted memorandums (“Welcome to the Poisoned Chalice”; Yale University Press) describing the five months he spent as an unofficial member of Mr. Varoufakis’s inner policy circle.

A starry-eyed embrace of all that Mr. Varoufakis said and did, the book also highlights the extent to which unorthodox, if not unrealistic, economic thinking reached the highest levels of the Greek government as it battled with its creditors last summer.

As the anniversary of Greece’s bailout deal approaches, there have been several memoirs, essays, a blistering critique of the International Monetary Fund’s policies in Europe and even a book of poetry that, from various perspectives, examine Greece’s torturous struggle to avoid bankruptcy.

The history of Greece in the eurozone is by no means complete, and the latest financial rescue package is still being worked out. But the accounts do offer up a number of piquant revelations on that nation’s crisis, including outright policy mistakes, dubious conduct, personal agendas and tragedies.

And as the negotiations between Greece and its creditors slowly press on, these works serve as a reminder that an agreement allowing Greece to pay off its debts without strangling its economy is unlikely to be reached any time soon.

“There is a fog-of-war atmosphere here that inhibits good policy making,” said Paul Blustein, a former Washington Post reporter and the author of “Laid Low: Inside the Crisis that Overwhelmed Europe and the I.M.F.,” which will be out in October. “But there are no villains — just people fighting their corner and kicking the can down the road.”

Besides Mr. Galbraith’s work, Mr. Varoufakis and George Papaconstantinou, the finance minister during the saga’s early days, have come out with books. Nick Papandreou, the brother of former prime minister George Papandreou, has written a searing personal essay about the Greek press attacking his family. And a collection of poems, “Austerity Measures,” examines the crisis.

Without question though, the most comprehensive examination has been a series of papers put out as a report by the International Monetary Fund’s internal watchdog — the Independent Evaluation Office.

The report reveals how I.M.F. staff members operated outside official channels, kept sensitive papers in personal files, withheld crucial documents from the watchdog agency and did not keep the fund’s board fully informed during the crisis.

The secrecy was such, I.M.F. board members said, that at times they learned more of what was going on in Greece from media reports than their own staff.

The I.M.F. has a mandate to serve as an objective lender of last resort to troubled economies. The report by the watchdog agency, which also examines the crises in Ireland and Portugal, highlights just how difficult it was for the fund to fulfill its mission in developed Europe as opposed to the emerging world where it usually operates.

I.M.F. economists did not foresee the crisis in Europe — from bank blowups in Spain and Ireland to sovereign bankruptcy in Greece — because of “groupthink and intellectual capture,” the report said.

The I.M.F., after all, has always been run by a European, and many of its top executives, hailing from Italy, Spain, France and Portugal, had complete trust in the sanctity and strength of the euro.

It was not until mid-2010, the watchdog points out, when the Greek crisis was in full swing, that I.M.F. economists first accepted that excessive borrowing by smaller countries using the euro — Greece and Ireland — could have a destabilizing effect on the currency zone.

Time and again, the review highlights this unwillingness of the fund to challenge European officials as a persistent flaw in its policies, leading to its highly controversial decision to lend money to Greece in 2010, even though economists at the fund believed that the near-bankrupt country had little chance of paying the money back.

In blunt language, Susan Schadler, a former top official at the I.M.F., writes that the I.M.F. was too easily swayed by European officials who argued that not lending to Greece, or requiring it to restructure its debt, would create a systemic panic in the markets.

In a response to the watchdog agency’s report, Christine Lagarde, the managing director of I.M.F., called the fund’s involvement in Europe a qualified success. She said Greece’s problems were unique and that the bottom line was that the country had remained in the euro.

But Ms. Schadler has a different view, seeing the decision and the secretive way it was handled as damaging to the fund’s reputation.

“By not following an open, transparent process, the fund created the perception that a decision made in Europe had been imposed on it,” she wrote in her paper.

A self-published memoir by George Papaconstantinou, the Greek finance minister at the time, looks at why the I.M.F. had to lend to Greece in the first place in 2010.

Mr. Papaconstantinou bills his chronicle (“Game Over: The Inside Story of the Greek Crisis”) as a political thriller, and for those interested in who was saying what to whom as Greece fell apart, his account is a valuable one.

One tends to forget just how absurd Greek finances were when he took over.

One example: The Greek Finance Ministry spent 35,000 euros a month on buying newspapers alone.

And there are some juicy vignettes, such as a warning from Jean-Claude Trichet, then the head of the European Central Bank, that a restructuring of Greek debt would have the same effect on global markets as allowing Lehman Brothers to fail.

Mr. Papaconstantinou also relates how he came to be seen as a scapegoat for Greece’s ills. He was personally blamed for the austerity measures and brought to trial on what turned out to be spurious charges relating to how he handled sensitive files about Greek taxpayers.

Mr. Papandreou’s essay, “Taming the Dogs of War,” which he presented in April at a conference on media pressures from business and government, covers some similar ground.

He recounts how the newspapers in Greece, which are controlled by powerful businessmen, attacked him as well as his brother, the former prime minister, accusing him of hoarding money overseas and driving him to the brink of suicide.

Mr. Varoufakis also has a book out, which asks: “And The Weak Suffer What They Must?”

For the many who are waiting for his promised tell-all about his experiences battling with European and I.M.F. officials over Greece’s debt, this is not that book.

Fans of Mr. Varoufakis will lap up his fiery criticisms of European and American economic policy making, but other readers will prefer to wait until next summer when his blow-by-blow account is scheduled to be published.

Videos

Yanis Varoufakis

  1. Universal Basic Income Will Be Required Because of Automation Yanis Varoufakis
    Link
    Link

 

Dr. James K. Galbraith

  1. Smart Talk: Welcome to the Poisoned Chalice
    What led to a true Greek tragedy? Rigid, even unethical mandates, according to Dr. James K. Galbraith, author of Welcome to the Poisoned Chalice, The Destruction of Greece and the Future of Europe. In this new episode of Smart Talk, Andrew Mazzone, President of the Henry George School of Social Science, talks to Dr. Galbraith about what went wrong in Greece, and why it went wrong — and what lessons the Greek tragedy holds for us.
    Link

 

Quotes

Yanis Varoufakis

  1. Basic Income
    • Basic Income is a necessity
      • It is a necessity
      • Civilized Capitalism
    • Stabilize Capitalism
    • Twenty Century
      • New Deal in US
      • Social Democratic in Europe
      • New deal is finished and can not be revived
      • Redistribution of wage within the economy
    • What is the new deal?
      • Redistribution of wages within the working class
        • National Insurance in Britain
        • Unemployment Insurance in the US
      • Health Provision
      • Pension
      • Minimal wages
      • Trade Unions
      • Taxation
  2. It is now dead
    • Reasons?
      • Financialization
        • Process of financialization
        • Created wedge between capital and labor
        • New Labor, New Capital
        • Socialization
          • 1991 Died with Soviet Union
        • Capitalization
        • 2008 died
        • High Deflation
          • Negative interest rates territory
        • 1929
          • Gold standard died
        • Working class can not insure itself
        • Young can not get jobs
        • Wage has stagnated that it is impossible for
      • Toxic Political Climate
        • EU
          • Brexit
        • Washington
          • White House & Congress
        • Political Governance
        • Ungovernable
      • Rise of the machines – Artificial Intelligence
        • What will go away …
          • Repetitive & Routine work
          • Algorithm work
        • What machines pass the tuning effect
        • Overwhelm creation effect
          • More job distraction than job creation
        • Manufacturing work was replaced by low wage repetitive work
          • In the last 30 years
    • Implications
      • Reinforce inflationary pressure that keeps Central Bankers awaking at night
      • Accelerate downsizing of Aggregate demand
      • Significant displacement between Savings & Investment
      • Even lower the current savings rate which is already very and too low
  3. Likely Remedies
    • Basic Income
      • The struggle we are going to have is in an ethical one
      • A struggle of the Heart to carry hearts and minds
      • Opposition from all sides
        • From the Haves and the Have Nots
        • From the left, the social democrats, from leftist
        • Sense of dignity to get something for nothing
      • To give money to the un-deserved
    • Current narrative of Capitalism
      • Private production of wealth is later appropriated by State for social services
    • In practice, narrative of Capitalism
      • But, this is what often occurs in the real world
      • If one takes time to break apart any new machine, one quickly sees parts that came to be through Government grants
      • Our wealth production is more communal