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Economic Growth That Generates Poverty

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A very interesting concept whereby countries that generate surpluses end up causing poverty to its own people. Ireland being a great example of this. The Troika demand that goods and services generated, are exported all the while wage reduction and austerity are forced on the people.

The extreme form of what Adam Smith called a “folly” occurs when surpluses finance poverty and economic instability. Two infamous twentieth century examples were the German reparation payments after World War One, and the Latin American debt crisis in the 1980s and into the 1990s. In both cases, external powers pressured governments to generate trade surpluses in order make payments to foreign governments (in the case of Germany in the 1920s), or to foreign banks (the Latin American countries in the 1980s). The former led to Hitler and the latter to a generation of impoverishment.

In effect, these externally-imposed, government-generated surpluses take goods and services from residents and transfer them to foreign governments, banks and corporations. This type of trade surplus falls into the category of what Jagdish Bhagwati, the famous Indian economist (now at Columbia University), termed “immiserizing growth”, economic growth that generates poverty not improvement for a population. To put it simply, the country exports and the population grows poorer.

Armed with the ideas of “mercantilism” and “immiserizing growth”, we can have a look at the “Star Pupil”. The chart below shows why the Triad of the EC, IMF and German government (and the German opposition, it would appear) make Ireland the teacher’s pet. While the famous PIGS (Portugal, Italy, Greece and Spain) languish in stagnation or plunge into decline, Irish GDP has increased, by 1.4 percent in 2011 and one percent in 2012. Not great, but looks good compared to decline. More important ideologically, the Triad assures us that this growth shows that “austerity works”. It shows the PIGS the shining path to recovery.

Here is the logic of the Troika

In case we missed it, the path to recovery runs along the following road. Austerity forces down wages, lowering production costs. Lower costs result in export competitiveness, and the growth of exports rejuvenates the economy as a whole. The rejuvenated growth reduces the fiscal deficit by raising tax revenue that can be used to pay foreign creditors. If the residents in the PIGS would show the discipline of the Irish, the euro crisis would soon end.

Who benefits from Ireland’s surplus?

The exposé of this ideological story would not be complete without pointing to the recipients of the Irish export surplus, the major banks in Europe that hold the debt of the Emerald Isle.

Even if by some miracle a mega-importer appeared on the world horizon (think China), the Irish path would still represent a road to misery. The chart below shows three economic trends since 2001. Unemployment rose continuously after 2007 in the land of the star pupil, with economic growth brining no reversal (measured in percentage of the labor force on the left). This rising unemployment rate went along with increasing exports per capita, from less than six thousand dollars per head in 2007 to over eleven thousand in 2011-2012 (measured on the right hand vertical axis).

While exports per head increased, domestic national income per person, total national income minus the trade surplus, declined, from $35,000 in 2007 to 25,000 in 2012, a drop of one-third. Domestic income per head declined in both the years of positive GDP growth. This appalling redistribution from the Irish to the European 1%, aka a trade surplus, was not the result of austerity reducing labor costs. For over twenty years Ireland ran a continuous annual trade surplus with no austerity to “lower costs” Under austerity imports contracted in Ireland because of falling incomes of the 99%.

Ireland, the Star Pupil of Immiserizing Growth, 2001-2012

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This is Bhagwati’s “immiserizing growth” in real time, unrequited transfer abroad of almost a third of national income. The star pupil fails the test of a decent society, to protect the welfare of its people. And if the cause does not jump off the page, have a look at the final diagram. The vertical axis measures Ireland’s export surplus per capita, and the horizontal one measures domestic income per capita (GDP minus the export surplus). From 2001 through 2004, more exports per person went along with more domestic income per person. Then came the bad news, more exports, less left over for the Irish population to consume and invest.

Ireland may be the star pupil, but for the sake of the 99% its government needs to find different teachers and perhaps drop out of school.

Ireland, Star Student of Export-led Impoverishment, 2011-2012 (thousands of dollars)

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Source: social-europe

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Cyprus Bailout MoneyTo Benefit Russia

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Cyprus is on the verge of a bailout from the EU but according to Testosteronepit it is Russian “black” money that will benefit. Either way, Cyprus needs €17 billion for its bankrupt banks following in the path of other Eurozone countries whereby the banks destroyed the nation and governments under orders, signed its citizens up to repaying the banks debts.

German Bailout Chancellor Angela Merkel, who is trying to avoid any tumult ahead of the elections later this year, has a new headache. Cyprus, the fifth of 17 Eurozone countries to ask for a bailout, might default and exit the Eurozone under her watch. Using taxpayer money or the ECB’s freshly printed trillions to bail out the corrupt Greek elite or stockholders, bondholders, and counterparties of decomposing banks, or even privileged speculators, is one thing, but bailing out Russian “black money” is, politically at least, quite another.

Cyprus is in horrid shape. Particularly its banks. Their €152 billion in “assets” are 8.5 times the country’s GDP of €17.8 billion. “Assets” in quotation marks because some have dissipated and because €23 billion in loans, or 27% of the banks’ entire credit portfolio, are nonperforming. That’s 127% of GDP! And then there are the Russian-owned “black-money” accounts.

A “secret” report by the German version of the CIA, the Bundesnachrichtendienst (BND) was leaked last November, revealing that any bailout of Cyprus would benefit rich Russians and their €26 billion in “black money” that they deposited in the now collapsing banks. The report accuses Cyprus of creating ideal conditions for large-scale money laundering, including handing out Cypriot passports to Russian oligarchs, giving them the option to settle in the EU. Much of this laundered money then reverses direction, turning minuscule Cyprus into Russia’s largest foreign investor [read…  The Bailout of Russian “Black Money” in Cyprus].

Now Cyprus needs a bailout of over €17 billion but Merkel faces an enormous task back home in convincing a sceptical public in bailing out Russian interests.

Now Cyprus needs €17.5 billion—just about 100% of its GDP—of which €12 billion would go directly to the murky and putrid banks. The package should be wrapped up and signed on February 10 at the meeting of the European finance ministers.

“I cannot imagine that the German taxpayer will save Cypriot banks whose business model is to abet tax fraud,” grumbled Sigmar Gabriel, chairman of the opposition SPD that has been a supporter of euro bailouts; and Merkel, hobbled by opposition within her own coalition, had relied on them to get prior bailouts passed. “If Mrs. Merkel wants to have the approval of the SPD, she must have very good reasons,” he said. “But I don’t see any….”

The Greens are resisting the Cyprus bailout for the same reasons. And 20 members of Merkel’s own coalition are categorically opposed to it. For the first time, Merkel has no majority to get a bailout package passed. The opposition smells an election advantage.

Before the German finance minister can vote in the Euro Group of finance ministers for disbursement of bailout funds, he must seek parliamentary approval. The German Constitutional Court said so, inconveniently. But without his yes-vote, which weighs 29%, the qualified majority of 73.9% cannot be reached. The bailout disbursement crashes. That’s what Cyprus is contemplating.

Fearing defeat, sources within the government now made it known that they wouldn’t even present a bailout package unless Cyprus agreed to “radical reforms,” including massive privatizations of the bloated state sector—precisely what communist President Dimitris Christofias has ruled out.

The Russian “black money” is so unpalatable that even the bailout-happy President of the EU Parliament, Martin Schulz, got cold feet. Before a bailout package could be put together, he said, “it must be disclosed where the money in Cyprus is coming from.”

Markus Ferber, head of Merkel’s coalition partner CSU, demanded a guarantee that “we help the citizens of Cyprus and not the Russian oligarchs.” In addition, he wants Cyprus to reform its naturalization law. If Cyprus wants to get bailed out, he mused, it must make sure “that not everyone who has a lot of money can get a Cypriot passport.

Source: Testosteronepit

Troika Want More Made Homeless In Ireland

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“Throw them out on the streets” cries the IMF. The Troika in its latest Memorandum of Understanding with Ireland is pushing for more house repossessions. The only reason it hasn’t happened so far is because the banks aren’t able to cover the losses and the State would have to go back to the taxpayer to further capitalize the banks. The fragile housing markets also would not be able to survive the shock of an avalanche of houses hitting the market coupled with the inevitable property tax.

Of course the politicians have framed it so far, that they are protecting the people’s interest. The country can ill afford this move currently, as the Troika well knows, but is pushing for this because of a repeal of the 1964 Act (used for repossessions) with a new Act in 2009 meant due to a drafting oversight, it applied only to loans taken out after December 1, 2009. The timing is lousy just as the Economic and Social Research Institute (ESRI) announces that Ireland has the highest proportion of households without a working adult out of 31 European countries and more than double that of the euro zone average.

The EU-IMF Troika wants the Government to remove a legal impediment constraining banks from repossessing properties tied to bad loans.

In the latest revision of Ireland’s bailout terms, published today, the Troika says the Irish authorities must introduce legislation remedying a flaw in legislation governing property repossessions.

Last year, Ms Justice Elizabeth Dunne found a failure to save aspects of old legislation when the Land and Conveyancing Law Reform Act 2009 was introduced meant the only registered properties that lenders could repossess for failure to pay mortgages were those for which they had demanded full repayment before December 1st, 2009.

According to the Central Bank’s latest figures, there were 167,000 mortgage accounts with €35 billion of debt in arrears at the end of June 2012.

At the same time, some 265 orders for possession were granted by the courts in the first six months of the year, down by almost 32 per cent on the same time last year, when 390 orders were granted.

The Central Bank’s head of banking supervision Fiona Muldoon recently criticised the banks for their slow progress in tackling mortgage arrears cases. saying the scale of the problem showed that “wait and see” had become the strategy of choice for lenders.

The latest update to the Troika’s memorandum of understanding with the Government states the authorities must move to remedy the flawed repossession legislation once adequate protections for debtors and their principal private residence were enacted via the proposed personal insolvency legislation.

The document also obliges the Irish authorities to publish banks’ reported data on loan modifications, including defaults of modified loans, “to permit analysis of the effectiveness of alternative resolution approaches”.

The bailout programme review also called on the authorities to halt overruns in health spending and to keep overall health expenditure below €13.6 billion next year.

Source: IrishTimes

Time For Ireland To Default

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David McWilliams writes of Greece’s latest debt deal and how the smart option for Ireland now is to default. Of course when the country is run by school teachers and ex unionists there is no chance, as their only focus is securing funds to pay public sector wages as well as their own.

McWilliams has consistently argued against Irelands odious bank debt which lets face it is just being paid back for bondholders who gambled badly. Now is the time to push for a debt deal. Unfortunately the Presstitutes refuse to debate openly the merits of reneging on payments to bankers. Equally discussion of pulling out of the euro has been muted least it catch on.

ireland toxicbankGreece has defaulted again, and the financial markets have shrugged their shoulders. The euro remained unchanged versus the dollar. The Greek stock market even rallied. What does this tell us? It tells us that, as this column has argued again and again, the markets have no memory. Because it improves the overall position of a country, a debt restructuring will be welcomed since it adheres to the golden rule: a broken balance sheet is made better by less debt not more debt.

The media is reporting this as a “deal” in Greece. It is not, it is yet another default from a country where the economy is destroyed and needs to be nursed back to health rather than punished.

The big news for Greece and for us is that the troika has accepted that the country must be healthy in order to pay debt. This logic applies to Ireland too. Before we focus on the implications of the latest Greek default for us, let’s look at the broader picture. And before you think that I am advocating we follow the Greek route, I am not, I am simply pointing out the reality of the global economy and the realpolitik at the centre of Europe.

Effectively, the troika and the Europa group of Greece’s creditors have “agreed” (rather they have had their hands forced) to restructure their bailout loans. Interest rates will be lowered and even deferred to give Greece breathing room.

The crux of the agreement is that Greece’s debt-to-GDP ratio should reach 175pc in 2016 and 124pc in 2020. So 120pc has become the new sustainability.

It has also calculated that this is how capitalism works. In a crisis, the debtor and the creditor suffer, they both lose out and that’s how the system works. It is called co-responsibility.

The eurozone’s economy is in tatters, carrying too much debt, unable to grow. Italian consumer confidence has fallen to a record low this month. It is now at the lowest level since the series began in 1996. The only countries that seem to be keeping their necks above water in Europe are Bulgaria, Romania and Poland. This is hardly a reassuring picture, is it?

As the great deleveraging continues and unpayable debts can’t be paid, it would be surprising if Athens is the only government to choose to face down its creditors.

This all brings us here to Ireland as we continue to squeeze the economy dry, foisting austerity upon austerity and the local economy falters. Next week will be more of the same. We have been at this for five years now and there is no sign of recovery. It is increasingly clear that the Irish domestic economy will not recover as long as the crushing debt burden on the country’s young workers is not lifted.

And as we all buy and sell to each other in the local economy, your spending is actually my income and my spe- nding is your income. And if we all stop spending at the same time and the Government exacerbates this by slashing spending simultaneously, who is spending? And if no one is spending, who is earning? And if no one is earning, who can possibly be saving without earning?

So you see that what sounds good for the individual, such as “I am saving”, is only good for me if others continue to spend; if we all save at the same time, there is no income.

Now as these macro-economic targets that the Government and the troika set themselves are always debt expressed as a percentage of income, if our income is falling because no one is spending, then debt expressed as a percentage of income will be rising, not falling.

Now is the time to push for a debt deal, instead of the excuses pushed by the government for nearly two years as to why they haven’t.

This is why there has to be a debt deal for these hundreds of thousands of mortgages underwater. We already have 128,000 mortgages in arrears. This figure is rising consistently. There are 400,000 tracker mortgages which will only get more expensive as interest rates eventually rise over the course of the mortgage. These people will face default when this moment arrives and our banks will be bust again.

Now is the opportunity, when the EU is doing deals all over the place, to propose a big bank solution for Ireland’s mortgage debt. Such a deal would aid the Irish recovery, the EU would have the victory it so craves and ordinary Irish people would have the debt relief they so desperately need.

This would allow the economy to breathe again and it could be made the centrepiece of Ireland’s EU Presidency in the next six months. The EU President sets the EU agenda for the period when it has this role. Let’s not miss this chance.

Otherwise Ireland will become known as the country that never misses an opportunity to miss an opportunity. The Greek deal is an opportunity; let’s not throw it away.

Source: David McWilliams

Greece Once Again Threatens The Euro

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During the week the Greek finance minister was caught out lying about a troika bailout outcome but now Greece needs to face up to labour reforms over the weekend or else…

Tim Geithner’s carefully scripted plan to avoid European “reality” until the US election is unraveling. While previously Greece was not supposed to be an issue until after November 6, the recent escalation with the Greek FinMin openly lying about a Troika interim bailout outcome (which may or may not happen, but only following yet another MoU which would see Greece fully transitioning to a German vassal state in exchange for what is now seen as a €30 billion shortfall over the next 4 years, and which would send Syriza soaring in the polls in the process ensuring that a Grexit is merely a matter of time) has forced a retaliation. According to the Greek press, the Troika now demands that Greece resolve its objections to labor reforms (which as reported earlier have forced the ruling coalition to split) by Sunday night, or else… The implication, it appears, is that absent a compromise, the next Troika tranche of €31.5 billion is not coming, and Greece is out.

……

From Kathimerini:

The government is facing a Sunday deadline for a full agreement on the package of measures that will see it cash in the next bailout tranche of 31.5 billion euros. The three-day extension it got in order to get maximum backing within the three-party coalition will be necessary as minor partner Democratic Left insists on an improvement in the terms concerning labor reforms that it staunchly opposes.” Will Greece come through in the clutch? And if not, just what happens with the EURUSD on Sunday night as Greece calls the Troika’s bluff? Deja vu shades of early summer, and plunging European risk come to mind…

It will not be an easy agreement to reach and any fallout will be assessed on Monday by the Euro Working Group.

The Euro Working Group (EWG) of eurozone finance ministry officials will convene again on Monday to discuss whatever conclusions Athens has come to and prepare the blueprint that the Eurogroup of euro area finance ministers may discuss on Wednesday through a video conference that sources from Brussels say is likely to take place in order to discuss Greece.

The prime minister appears determined to have the measures passed immediately through Parliament, either in one or in two draft laws, ordering on Thursday the preparation of the bills required.

At the same time there are also disagreements within PASOK, the other minor coalition partner, as a number of deputies are threatening to vote against a Finance Ministry measure regarding privatizations.

Source: ZeroHedge

Greece Is Printing Its Own Euros And Everyone Turns A Blind Eye

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Nobody is brave enough to finally pull the plug on Greece and force it to exit the euro so the game continues. The Troika are due to release their report in September but in the meantime on 20 August a €3.2 billion bond is due to be paid. The ECB has stopped accepting Greek collateral. So where does Greece get its funding from? And here lies the fragility of the monetary system because Greek is printing its own money and everyone is turning  a blind eye.

A lot of politicians in Germany, but also in other countries, issue zingers about a Greek exit from the Eurozone and the end of their patience. Yet those with decision-making power play for time. They want someone else to do the job. Suddenly Greece is out of money again. It would default on everything, from bonds held by central banks to internal obligations. On August 20. The day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And somebody would get blamed.

So who the heck had turned off the dang spigot? At first, it was the Troika—the austerity and bailout gang from the ECB, the EU, and the IMF. It was supposed to send Greece €31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, rehire laid-off workers….

The Troika got cold feet. Instead of sending the payment, it promised to send its inspectors. It would drag its feet and write reports. It would take till September—knowing that Greece wouldn’t make it past August 20. Then it let the firebrand politicians stew in their own juices.

 

In late July, the inspectors returned to Athens yet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. A big faceless document on which people of different nationalities labored for months; a lot of politicians can hide behind it. Even Merkel. And the Bundestag, which gets to have a say each time the EFSF disburses bailout funds.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Its against the governing treaties but when has that stopped the elites in the EU who can break the rules whenever it suits them. As Eddie Van Halen once said, “To hell with the rules. If it sounds right, then it is.”

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks. And on Tuesday, Greece “sold” the first batch, €812.5 million of 6-month T-bills with a yield of 4.68%. Hallelujah.

“We don’t have any time to lose,” said Eurogroup President Jean-Claude Juncker. The euro must be saved “by all available means.” And clearly, his strategy is being implemented by hook or crook. Then he gave a stunning interview. At first, he was just jabbering about Greece, whose exit wouldn’t happen “before the end of autumn.” But suddenly the floodgates opened, and deeply chilling existential pessimism not only about the euro but about the future of the continent poured out. Read….. Top Honcho Jean-Claude Juncker: “Europeans are dwarfs”

Source: Testosteronepit.com

Trokia Start Asset Strip Of Ireland

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Ah well, it was only a matter of time, but today was officially announced by Minister for hardshipReform, Brendan Howlin that Ireland would begin the process of selling off the crown jewels. They hope to raise in the region of €3 billion. When you put that in context,  Ireland currently owes €120 billion, so its it won’t make the slightest dent in the banker’s bill that Ireland has been handed. And saving the best for last, they would not be sold off cheaply but would start to be sold next year. As if things are going to get better 😉 The following were announced by the minister:

THE GOVERNMENT is planning to sell off parts of the ESB and Bord Gais in a bid to raise €3bn – €1bn of which will be put towards job creation.

Stake in National Electricity and Gas companies

However, the strategically important networks of both companies, which carry gas and electricity, will be remain in State control.
In the case of Bord Gais, the company’s energy business, excluding its gas transmission and distribution systems and two gas interconnectors, are for sale.
Some of ESBs non-strategic power generation capacity has also been put on the block but the Government has held back on selling a minority stake in the firm.

National Forestry

Other sales include some forests owned by Coillte but not the land on which they are planted.

Stake in National Airline

In addition, the remaining state-controlled stake in Aer Lingus will be sold when conditions are favourable and the stock market price is acceptable to the Government.

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