Tuesday, February 14, 2017

Tuesday, February 14, Morning Global Market Roundup: Trump Rally Gives Way To Caution As Yellen Testimony Looms

By Dhara Ranasinghe
February 14, 2017

Stocks flatlined and the dollar dipped on Tuesday as caution set in before testimony from Federal Reserve chief Janet Yellen that may offer clues to the timing of the next U.S. interest rate rise.

Adding to pressure on the dollar was the resignation of President Donald Trump's national security adviser Michael Flynn, who quit over revelations he had discussed U.S. sanctions against Moscow with the Russian ambassador to the United States before Trump took office, and misled Vice President Mike Pence about the conversations.

The prospect of Trump-led economic stimulus in the United States has underpinned the dollar and stocks in recent days, powering U.S. equity markets to record highs on Monday and helping Asian shares to eke out 19-month peaks on Tuesday.

But the buoyant mood in global markets was tempered somewhat as attention turned to semi-annual testimony by Yellen on Tuesday and Wednesday that could highlight the likelihood of two or more U.S. interest rate hikes this year.

Dallas Fed President Robert Kaplan on Monday argued the Fed should move soon to avoid falling behind the curve, especially as fiscal policy could drive faster growth and inflation.

"If Yellen wants March to be a live meeting as other Fed officials have suggested it is, she will have to adopt a more hawkish tone beyond the usual reference to data dependency," said ING senior rates strategist Martin van Vliet.

"Currently we calculate a market implied probability of around 17 percent for a March rate hike."

The STOXX 600 , Europe's leading index of top 600 shares, dipped 0.2 percent to 369.43 points, pulling back from more than one-year highs hit on Monday.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.2 percent, trying for its fifth straight session of gains.

Japanese shares ran into trouble after Toshiba Corp (6502.T) delayed an anxiously awaited earnings release. Toshiba said it would take a 712.5 billion yen ($6.28 billion) writedown on its U.S. nuclear business, wiping out its shareholder equity and dragging the company to a full-year loss.

There was also some eye-catching data from China, where producer price inflation picked up more than expected in January to near six-year highs, while consumer price inflation neared a three-year high.

U.S. stock market futures pointed to a slightly weaker open on Wall Street ESc1. U.S. stock indexes hit historic peaks on Monday, with the benchmark S&P 500's market value topping $20 trillion as investors bet tax cuts promised by Trump would boost the economy.

Dollar On Back Foot

The dollar fell after Flynn's resignation and as investors looked ahead to Yellen's testimony.

The dollar index .DXY dipped 0.2 percent against a basket of currencies to 100.74 but was still near its strongest since Jan. 20, while the euro was 0.3 percent firmer after three sessions of losses to stand at $1.0626 EUR=.

Against the yen, the dollar weakened 0.2 percent on the day to stand at 113.46 yen JPY=, off Monday's high of 114.17 but well above a 10-week low of 111.59 yen touched a week ago.

In commodity markets, metals were on a tear thanks to supply disruptions and strong Chinese demand.

Copper CMCU3 hit its highest since May 2015 after shipments from the world's two biggest copper mines were disrupted. [MET/l]

Iron ore climbed to its since August 2014 amid reports China plans to cut steel capacity by at least half in 28 cities across five regions during the winter heating season.

Oil recouped some ground on OPEC-led efforts to cut output, though rising production elsewhere kept prices to a narrow range that has contained them so far this year.

U.S. West Texas crude CLc1 added 22 cents to $53.15 a barrel, having shed 1.7 percent overnight. Brent futures LCOc1 rose 33 cents to $55.90 a barrel.

Article Link To Reuters:

Why Donald Trump Let Michael Flynn Go

Inside Donald Trump's national security adviser's final days in the White House.

By Josh DawseyAlex Isenstadt and Tara Palmeri
February 14, 2017

Michael Flynn, President Donald Trump's national security adviser, carried on this past weekend as planned, despite reports that he had inappropriate conversations with Russia's foreign minister before Trump took office. Flynn trekked to Mar-a-Lago, hopped on phone calls with foreign leaders, huddled with senior Trump officials and was in on the presidential daily briefing.

At the same time, Flynn's political future was crashing down around him: Trump's aides and top allies urged the president to get rid of Flynn, after it became clear he discussed sanctions with Russian officials and lied about it to Vice President Mike Pence and other administration officials.

By Monday night, the president had made his first big staff shake-up, causing chaos in a nascent presidency and raising further questions about the president's ability to handle national security matters in the first month of his tenure.

Though questions about Flynn's conversations -- and whether he fully communicated the details of those discussions with administration officials -- overshadowed Trump's weekend meeting with Japanese Prime Minister Shinzō Abe, perhaps most damaging to the Trump administration was a report from The Washington Post that Trump officials were informed by the Justice Department of the issues at least several weeks before and had chosen not to act.

Trump's decision on what to do with Flynn was not easy, according to several people who spoke with him about it. The president values loyalty perhaps more than anything, and Flynn had been one of his most staunch surrogates on the campaign trail. The president saw Flynn as a fellow outsider who had a good sense of the national security challenges. "Trump liked the way he talked to him," one adviser said. "He thought Flynn knew what he was doing."

But Trump became increasingly convinced that the question of Flynn's contact with Russia wasn't going away. His top aides and advisers distrusted Flynn, according to senior White House officials and others who spoke with Trump, and Trump was concerned that the intelligence and national security community would always oppose Flynn, sources said.

"I inadvertently briefed the Vice President Elect and others with incomplete information regarding my phone calls with the Russian Ambassador," Flynn said in a resignation letter. "I have sincerely apologized to the President and the Vice President, and they have accepted my apology."

Pence was unhappy with Flynn for not telling him the truth and told the president about his displeasure, a White House official said, but said he would accept whatever decision the president made.

Kellyanne Conway, counselor to the president, who is close with Bannon, was aware of the uncertainty about Flynn's future and the concerns in Trump's orbit but tried to telegraph on TV that the adviser wasn't in trouble hoping the storm could pass, one person familiar with her thinking said.

"General Flynn does enjoy the full confidence of the president," Conway said.

Her appearance created waves in Trump's orbit, and Sean Spicer, Trump's press secretary, who has expressed displeasure about Conway to associates, immediately put out a statement that seemed to contradict her.

"The president is evaluating the situation," Spicer said soon after Conway's remarks.

One person who frequently speaks to Trump said the president was reluctant to ditch Flynn because he doesn't "like to fire people who are loyal." Even Monday evening, Trump was still pondering the decision, the person said.

"He has this reputation of being a 'you're fired' kind of guy, but he really didn't want to have that conversation," the person said.

Heading the agency in Flynn's absence will be Keith Kellogg, Flynn's chief of staff, but he is not guaranteed the job permanently, senior officials said.

Officials are searching for a permanent head and meeting with officials, including Gen. David Petraeus. Also, in the hunt to replace Flynn, according to a senior administration official, is Vice Admiral Robert Harward, who is the frontrunner, a senior White House official said.

A number of White House and national security officials are involved in the search, including CIA Director Mike Pompeo, Defense Secretary James Mattis, Department of Homeland Security John Kelly, chief of staff Reince Priebus, chief strategist Stephen Bannon and son-in-law Jared Kushner, a senior official said.

Retired Army Gen. Barry McCaffrey, who has known Kellogg for decades, said early Tuesday that he is a "good man" who was among the earliest Trump loyalists.

But he doubted he will be a permanent replacement for Flynn.

"He won't be the selection," McCaffrey predicted, saying Flynn's permanent replacement has to be "someone with the chops needed to deal with Bannon and Miller, references to two of the president's top political advisers, Steve Bannon and Stephen Miller.

Flynn's decision to resign came after it became clear to him that he had lost the president's trust, officials said. Flynn was increasingly isolated from Trump's inner circle, and became convinced that he had little support by Monday afternoon after making a number of calls to Trump confidants and aides, according to a White House official.

Flynn was also rattled by a number of news media reports that said he was on the outs, according to a high ranking official. He "knew things weren't heading in the right direction for him and that Trump might be changing his position."

Flynn, long a controversial figure in the national security establishment, was widely disliked by many of Trump's aides who were more aligned with the establishment wing of the party, according to several aides.

Though he was particularly close to Bannon, the president's top strategist and a philosophical and strategic adviser with a vast sway on the presidency, Bannon by the weekend had told Flynn to "do the right thing" and resign, according to a senior White House official.

Trump spent the weekend in difficult conversations about Flynn and talked with a number of top aides on Monday, many of whom told the president to get rid of Flynn, according to several people who spoke with him.

Yet Flynn spent the weekend at Mar-a-Lago and was on the front row Monday when Canadian Prime Minister Justin Trudeau came to the White House.

Two people close to Trump said that many in Trump's world had turned on Flynn and used the latest story to try and drive him out. Others in Trump's immediate circle wondered "why Trump kept defending him."

Flynn seemed to take the departure in stride. The last four words of his resignation letter posted Monday night were Trump's presidential slogan: "Make America Great Again."

Article Link To Politico:

Early Tax Reform Will End Obama's War On Business

By Larry Kudlow
The National Review
February 14, 2017

On the very day President Donald Trump’s incentive-based tax and regulatory policies are put in place, Barack Obama’s war on business will have officially come to an end. No longer will American companies be punished by uncompetitive rates of taxation and unnecessary rules and regulations.

Business tax rates are coming down from roughly 40 percent to 15 or 20 percent, which is not only a boon for business, but a godsend for the middle class. Slashing business tax rates for both large and small businesses will generate significant new investment, jobs, and growth, all of which will lead to higher wages.

And when people and businesses get to keep more of what they earn, more of what they invest, and more of what they risk, they are incentivized to keep doing more of these activities.

In essence, that’s the Trump economic plan. The president is saying: “We will reward success, not punish it.” He’s also saying: “The war against business is over.”

And that means growth, growth, growth.

You want to lower the budget deficit? You want to lower the debt-to-GDP ratio? Then grow the economy. Not by 1 or 2 percent, which is the lackluster growth rate that solidified during the Obama years. But by 3 or 4 percent.

That level of consistent economic growth will solve a lot of problems. Every 1 percentage point in GDP above the baseline, which is 2 percent today, cuts deficits by more than $3 trillion over ten years.

A U.S. manufacturing boom or more companies staying and making things at home -- those are great things. But I don’t want the U.S. to be an export-led economy. I want us to once again be a market-driven economy. And if we reinvigorate market incentives with tax and regulatory reform, we will once again be king of the hill for economic growth.

Anemic growth is what the rest of the world does. And I don’t want us to be the rest of the world. I don’t want us to be semi-socialists. I don’t want the United States to have a value-added tax (VAT). I want us to be free-market capitalists, and I want all the growth that comes with that.

And just imagine an incentive-driven, free-market-capitalist economy where tax dollars collected are put to good use, not squandered. I’m not opposed to government-spending restraint at all. I would like to get rid of the Department of Labor. The Department of Commerce can go, too. I would like to cut all the waste, fraud, and abuse in Washington that’s possible.

Incentive-based tax policy plus “drain the swamp” is an excellent model for the future of America.

But one of the keys to President Trump’s economic success will be strong and clear guidance, and I’m not completely sure the president is receiving such solid advice right now. Someone needs to explain to the president the actual consequences of his fiscal plans. Cause-and-effect scenarios need to be mapped out, at least so there are no surprises down the road.

For instance, Trump is talking about lower trade gaps and a weaker dollar. Well, if his lower tax and regulatory policies go through and work as I believe they will, the reverse will occur. The dollar will strengthen and trade gaps will widen. Somebody needs to sit with the president and say, “Think about this. Here are some charts that show what happened in the past when across-the-board tax cuts and regulatory reforms were put in place.”

History shows that growth-driven trade deficits are merely the flip-side of massive capital inflows from around the world. That’s a good thing, not a bad one. Additionally, a strong and stable King Dollar will generate investment confidence at home and abroad and will also hold down inflation. Another good thing.

The first few weeks of the Trump administration have not been short of controversy. But they’ve also been filled with promise. The president is proving right out of the gate that he’s both a man of his word and someone who gets things done.

But let me put my vote in for the primacy of tax and regulatory reform -- in particular a reduction of the corporate tax rate from 40 percent to 15 or 20 percent. This is the backbone of President Trump’s growth policies. As such, business tax reform should come early, not late.

It would be best that it come in the first reconciliation bill this spring. Otherwise, if it comes late this year or next year, the 2017 economy and stock markets will disappoint as people postpone activity until they are certain of the lower tax rates and the rules that will accompany them.

The end of Obama’s war on business cannot come fast enough. Neither can renewed economic growth. Early tax reform is the key.

Article Link To The National Review:

Delays, Confusion As Toshiba Reports $6 Billion Nuclear Hit And Slides To Loss

By Makiko Yamazaki
February 14, 2017

After a day of delays and confusion, Japan's Toshiba Corp said on Tuesday it expected to book a $6.3 billion hit to its U.S. nuclear unit, a writedown that wipes out its shareholder equity and will drag the group to a full-year loss.

Hours earlier on Tuesday, the battered conglomerate rattled investors by failing to release its earnings on schedule, saying initially it was 'not ready' and then announcing later it needed more time to probe its Westinghouse nuclear business after internal reports uncovered potential problems.

The figures eventually released were numbers that have yet to be approved by its auditor and Toshiba cautioned investors that a major revision was possible. Fully audited numbers are now not due till March 14 after the firm was granted a reprieve for its formal filing by Japanese regulators.

Toshiba also said in a statement it could push harder to raise capital, including selling a majority stake in its memory chip arm. Previously, it had sought to sell just under 20 percent of its prize business.

"Finally now people are starting to recognize that internal control problems, the accounting issues and governance issues are very real and no longer abstract," said Zuhair Khan, an analyst at Jefferies in Tokyo.

"They impact the viability of the company."

Shares in the group slid 8 percent, putting the company's market value at 973 billion yen ($8.6 billion), less than half its value in mid-December. Just under a decade ago, the firm was worth almost 5 trillion yen.

It also announced the first top-level departure since the nuclear problems were uncovered in December: chairman Shigenori Shiga, a former Westinghouse boss brought in to the top role last year after a $1.3 billion accounting scandal in 2015 shook up Toshiba's upper ranks.

Toshiba said it expected to book a 499.9 billion yen ($4.4 billion) net loss for the nine months to December, and a 390 billion yen net loss for the full year.

It also ended 2016 with negative shareholder equity due to the 712.5 billion yen nuclear writedown - a charge that was first flagged in December last year.

Toshiba said it would withdraw from nuclear plant construction overseas. Reuters reported this month that Toshiba was seeking at least a partial exit from ventures in Britain and India, a blow to both countries' nuclear plans.

Westinghouse Woes

In an earlier, separate statement, Toshiba outlined concerns at its Westinghouse business, the U.S. nuclear unit bought from the UK government a decade ago.

Internal reports, Toshiba said, suggested controls at Westinghouse had been "insufficient" and it needed to look into whether senior managers at Westinghouse exerted "inappropriate pressure" during discussions over a U.S. deal to buy the company at the heart of its cost overruns, it said.

"We judged that it would take about a month for external lawyers ... to conduct these further probes and for the independent auditors to review the results," Toshiba said.

A source briefed on the matter said Toshiba had not been able to immediately secure the approval of its auditor, PricewaterhouseCoopers Aarata. The source asked not to be identified because he is not allowed to talk the media.

PricewaterhouseCoopers Aarata declined to comment, citing client confidentiality. Toshiba declined to comment on the audit process.

Article Link To Reuters:

World's Biggest Debt Market Faces Huge Test From Trump

By Tracy Alloway
The Bloomberg View
February 14, 2017

President Donald Trump is a man obsessed by imports, and untroubled by exports.

Since he first hit the campaign trail, Trump has been squarely focused on boosting domestic production by limiting cheap imports from places like China and Mexico and replacing them with homegrown offerings. Much more rarely has he talked about selling those homegrown offerings -- be they Ford Explorers or Boeing 747s -- to the rest of the world.

It’s a curious state of affairs, like encouraging people to cook by banning restaurants. Disconcertingly, Trump’s brand of import substitution is now playing out in the world’s biggest debt market.

Debt is, without a doubt, the U.S.’s biggest export. The U.S. Treasury market is not just worth trillions ($13.9 trillion, to be exact), but also represents the “risk-free” rate against which other financial assets are judged, if not fully pegged. To overstate its importance is difficult: It is huge, big-league -- one of the few markets to which Trump’s brand of hyperbole might actually apply.

And yet U.S. Treasuries have been finding far fewer foreign buyers in recent months -- a trend that has so far been offset by higher domestic demand. U.S. investors have been buying longer-term government debt at a record pace since June, while recent data shows Japanese buyers, the biggest owners of U.S. Treasuries, have reduced their holdings for two consecutive months.

Demand for U.S. Treasuries has moved “from global to local,” Bank of America Merrill Lynch rates strategists Carol Zhang and Shyam Rajan wrote in a note to clients last week, calling the shift “the biggest macro theme” playing out in markets.

That might be music to the ears of market mercantilists, but it comes at a cost.

Adversaries of import substitution have long argued that the strategy boosts short-term growth at the expense of longer-term health. It flies in the face of comparative advantage -- a central tenet of classical economic theory -- and precludes economies from enjoying all of the benefits that come with specialization, including lower prices.

A similar dynamic applies to the transformation of the U.S. Treasury market. While a pickup in domestic demand can initially help offset selling by foreign investors -- such as the People’s Bank of China attempting to stabilize the yuan or Saudi Arabia reducing reserves to deal with lower oil prices -- it may well leave the market more fragile over the longer term.

U.S. pension funds, banks and insurance companies can opt to “Buy American” with Treasuries, but there are limits and there are risks. Those risks became painfully clear during the eurozone debt crisis, when troubled European Union members used central bank liquidity facilities to buy their own debt after foreign buyers went on strike. The move helped them weather the worst of the crisis, but it also became a pressure point as investors fretted over a “feedback loop” of codependency and negative sentiment between banks and bonds.

That feedback loop idea has most recently been revived by Paul Schmelzing, a doctoral candidate at Harvard and a visiting researcher at the Bank of England, who has warned that a sharp sell-off in bonds could be worsened as investors are forced to offload their holdings as they lose value.

Certainly, American investors are buying U.S. Treasuries at a tricky time; rumors of the death of the 30-year bull run in bonds have been much exaggerated, but they are gaining steam. The fact that investors have been buying longer-maturity bonds exposes them to significant duration risk, meaning they’re more exposed to changes in interest rates at a time when the Federal Reserve is expected to raise.

Perhaps more relevant to Trump’s ambitions are the self-apparent limits that a domestically funded budget will put on his growth plans. The president wants to boost fiscal stimulus while cutting taxes -- a plan that will only work as long as the U.S. is able to issue and sell its debt. Few think that foreigners will stop purchasing U.S. debt altogether, but the loss of a significant pool of players will by definition place a cap on the market.


Article Link To The Bloomberg View:

U.S. Insurers Sense Opportunity In Unwanted Pension Plans

By Suzanne Barlyn
February 14, 2017

U.S. insurers are buying corporate pension plans at a record clip as rising interest rates and all-time high stock-market values give companies the perfect excuse to offload them.

Calculating they can make more money from selling companies an annuity to cover the cost of the pension plans and then invest the proceeds in bonds and other securities, insurers are competing to persuade corporate America to sell them their pension risk.

These deals, known as pension risk transfers, have been around for at least 90 years, but they can be limited by a Catch 22: in good times, corporate leaders feel less of a need to rid their companies of pension burdens, and in bad times it is more expensive to do so.

"There's a huge opportunity for the insurance industry," said Ellen Kleinstuber, who advises pension-plan sponsors as an actuary for CBIZ Inc (CBZ.N).

Last week, Prudential Financial Inc (PRU.N), the biggest player in pension transfers, said it had finalized $2.2 billion in pension deals during the fourth quarter, including a $1.8 billion deal with United Technologies Corp (UTX.N).

Other large insurers, including Transamerica Life Insurance Co and Principal Financial Group Inc (PFG.N) are also competing for hefty pension deals as smaller insurers jockey for a slice of the market.

With so much competition, many pension consultants expect 2017 to be a strong year for pension deals. Pension transfers totaling $8.1 billion were finalized in the first nine months of 2016, according to the Life Insurance and Market Research Association (LIMRA), an industry trade group. The number of deals hit 225, the highest in more than 25 years.

"It's really unstoppable now," said Scott McDermott, a managing director at Goldman Sachs Asset Management (GS.N) who advises companies on pension issues.


Pension transfers have been kicking around the insurance industry since the Cleveland Public Library unloaded its pension to Prudential in 1928.

Prudential is still making payments to two of those employees, ages 100 and 103, a spokesman said.

The biggest driver of the trend in recent years is the growing number of companies that are deciding to end their plans, McDermott said.

As retirees live longer and the legal and financial cost of maintaining pensions rise, corporations are keen to jettison them.

The problem for companies looking to offload is that the pension plans must be fully-funded before they can sell them. GM, for example, had to inject more than $2.8 billion into its pension before closing a 2012 transfer to Prudential. It also paid Prudential a $2.1 billion fee for taking on the assets.

GM's current U.S. pension plan that is still held by the company is underfunded by $7.2 billion.

Surging stock markets and rising interest rates are making it easier for companies to replenish their pension plans but there are still gaps. The average corporate pension fund was 82 percent underfunded as of Jan. 31, according to Mercer Investment Consulting.

Article Link To Reuters:

U.S. Mulls Fresh Tactic To Prod China On Yuan

White House seeks to avoid confrontation with Beijing: paper; Wall Street Journal cites people formulating the policy.

By David Tweed
February 14, 2017

President Donald Trump’s administration is considering a new tactic to discourage China from undervaluing its currency that falls short of a direct confrontation, the Wall Street Journal reported, citing people with knowledge of the policy.

Under the plan, the commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China, the newspaper reported. American companies could then bring anti-subsidy actions to the U.S. Commerce Department against China or other countries, it said.

The discussions are part of a strategy being pursued by the White House’s new National Trade Council to balance the goals of challenging China on certain policies while keeping broader relations on an even keel, the paper said. The Trump administration would avoid, at least for now, making claims about whether China is manipulating its currency, it said.

If the proposal is enacted it would suggest Trump is taking a softer approach after campaign threats to label China a currency manipulator and impose punitive tariffs. It also opens the door for action against other countries Trump and his team have singled out for currency manipulation, including allies Japan and Germany -- a move that may prompt them to join China in countering the policy.
Federal Reserve

Former president Barack Obama’s administration decided against naming currency practices as a subsidy out of concern that doing so would violate World Trade Organization rules and spur similar measures against U.S. exports, the report said. Other countries could argue that Federal Reserve policies that weaken the dollar qualify as subsidies, it added.

During a briefing with Japanese Prime Minister Shinzo Abe in Washington on Feb. 10, Trump vowed that the currencies of the U.S., China and Japan would soon be on a “level playing field.” He didn’t explain what he meant by the phrase. Abe has said it is wrong to say that Japan is devaluing the yen.

German Chancellor Angela Merkel last month rejected a charge from Peter Navarro, who heads the National Trade Council, that Germany’s trade surplus is a sign of an undervalued currency. The euro’s exchange rate was the responsibility of the European Central Bank and the German government had long upheld the bank’s independence, Merkel said.

The report on China currency policy comes after Trump rang President Xi Jinping last week and agreed to respect the One-China policy on Taiwan. The policy has been the basis of U.S.-China ties since the 1970s.

Tensions with China rose after Trump tweeted about his protocol-breaking December phone conversation with Taiwanese President Tsai Ing-wen and subsequently questioned the One-China policy in interviews.

Article Link To Bloomberg:

Rolls-Royce Tumbles To Record $5.8 Billion Loss

By Paul Sandle
February 14, 2017

Rolls-Royce (RR.L) suffered a record headline loss of 4.6 billion pounds ($5.8 billion) on Tuesday as a fine to settle bribery charges and the collapse in the pound from Brexit capped a difficult few years for the British aero engine maker.

Already reshaping its business after a series of profit warnings, Rolls said it needed to cut more costs after its underlying profit halved to 813 million pounds last year -- a result that was better than analysts' expectations.

Chief Executive Warren East, brought in to restructure the group in 2015, said the business portfolio was "broadly correct", but he needed to review 20 percent of its operations, and would decide on further actions in the coming months.

Rolls-Royce, which makes engines for wide-body civil jets, and defense and marine customers, said it expected "modest performance improvements" this year and would aim to keep its free cash flow at a similar level to 2016.

"While we have made good progress in our cost cutting and efficiency programs, more needs to be done to ensure we drive sustainable margin improvements within the business," East said.

Last year, the group halved its dividend to shore up its finances, the first cut in the payout for 24 years.

It kept the dividend at the same level this time, a move it said would allow it to maintain a degree of flexibility in its balance sheet.

Big Charge

The drop in the pound against the dollar resulted in a 4.4 billion pound non-cash charge on its hedging book, which increased to $38 billion. Most aircraft deals are priced in dollars, forcing Rolls-Royce to hedge future income.

The headline loss also included the 671 million pounds it agreed to pay to settle bribery investigations in Britain, the United States and Brazil last month. The sum is payable over five years, but Rolls-Royce has taken the full charge now.

Shares in the company, which have risen 50 percent from the five-year-lows hit in early February 2016, reversed early gains to trade down 2.6 percent at 721 pence at 0855 GMT (3:55 a.m. ET)

Analyst Andy Chambers at Edison Investment Research said that ignoring the headline loss, the underlying performance of Rolls-Royce was ahead of both its own and market expectations.

On the dividend decision, he said "this might be considered a little conservative following the pain shareholders have suffered in the last few years".

Rolls said it was well under way with its transformation program, achieving 60 million pounds in savings in 2016, and was on track for its 2017 targets too.

In its troubled marine division, which has been hit by weak demand from shipping and energy customers, it took a 200 million pound goodwill impairment to reflect a more cautious outlook.

The group has also been hit by a slowdown in high-margin aircraft engine servicing, in part caused by reduced use of older aircraft, and lower sales of its Trent 700 engine that powers the Airbus A330, which is being superseded by the A330neo.

Article Link To Reuters:

OPEC’s Top Producer Is Turning To Wind And Solar Power

Solar and wind plants will cut need to use oil in power plants; Expanding natural gas production to support new industry.

By Anthony Dipaola
February 14, 2017

The nation most identified with its massive oil reserves is turning to wind and solar to generate power at home and help extend the life of its crucial crude franchise.

Starting this year, Saudi Arabia plans to develop almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants in its vast northwestern desert. The effort could replace the equivalent of 80,000 barrels of oil a day now burned for power. Add in natural gas projects set to start later this decade, and the Saudis could quadruple that number, according to Wood MacKenzie Ltd. That could supplant all the crude burned in the kingdom during its winter months.

The effort goes hand-in-hand with a drive by the royal family to broaden the economy following two years of budget deficits tied to low oil prices. More industry, though, means more energy, with the amount of power used at peak times growing by 10 percent in the last year alone.

“Renewable energy is not a luxury anymore,” said Mario Maratheftis, chief economist at Standard Chartered Plc., in an interview. "If domestic use continues like this, eventually the Saudis won’t have spare oil to export.’’

In all, Saudi Arabia is seeking $30 billion to $50 billion worth of investment in renewables, Energy Minister Khalid Al-Falih said this month. The ministry will set up a division to handle the tenders until the country establishes a new independent buyer for all power supplies.

“The terms on renewable contracts will be motivating so that the cost of generating power from these renewable sources will be the lowest in the world,” Al-Falih said at a news conference in Riyadh. The kingdom will award its first tenders to build 700 megawatts of solar and wind energy in September, Al-Falih said.

Energy Pricing

The government has already raised domestic energy prices to slow demand growth and called for greater efficiency, according to the Riyadh-based King Abdullah Petroleum Studies and Research Center. Failing to tap more sources, including renewable energy, natural gas or even nuclear reactors could erode the oil exports still vital to the economy, the center wrote in an October report.

Improving the country’s energy efficiency by just 4 percent a year could save the equivalent of 1 million barrels a day of crude by 2030, according to the report.

The cornerstone of an economic transformation plan championed by Deputy Crown Prince Mohammed bin Salman, a son of the king, is the sale of as much as 5 percent of Saudi Arabian Oil Co. With the company worth about $2 trillion, according to estimates from the prince, the share sale would be the worlds’ largest initial public offering.

The kingdom, OPEC’s biggest member, is the linchpin of the group’s effort to prop up crude prices by cutting output to reduce a global supply glut. Saudi Arabia said it cut production by 717,600 barrels a day last month, its biggest cut in more than eight years, to 9.748 million a day, according to a monthly report from the Organization of Petroleum Exporting Countries.

Aramco Plants

Saudi Aramco, as the state energy producer is known, already earns most of the Persian Gulf kingdom’s income by pumping 1 in every 10 barrels sold every day. It’s also driving the country’s first steps toward a renewable energy industry.

At its sprawling campus of office buildings, control rooms and suburban-style residential compounds in Dhahran in the country’s east, Saudi Aramco runs the country’s biggest solar plant, a 10 megawatt facility mounted on a parking lot roof. In January, it started the kingdom’s first commercial wind turbine to power a facility in the northwest. The solar panels atop the parking facility cut the need for the equivalent of about 30,000 barrels of oil and the wind turbines will eliminate demand for about 19,000 barrels, according to Aramco.

As the kingdom strives to build industries and spread jobs, other state companies are expanding projects. The Saudi Arabian Mining Co. operates a phosphate plant and is building a new industrial city in the northwest. Power for sections of the vast area where those projects are located will partly come from renewables and new gas projects.

“Small projects are very important in helping diversify the country’s energy sources,” Stewart Williams, Wood Mackenzie’s vice president for Middle East research said in a telephone interview. “These are steps toward building up the country’s energy base.”

Without alternative power sources, including gas and renewables, the kingdom would be forced to increase its crude burn. That can reach as high as 900,000 barrels a day during the kingdom’s summer months, according to data from the Joint Organisations Data Initiative.

Saudi Arabia has already taken steps to substitute natural gas for oil in power plants, a change that’s had “immense” impact on the crude burn, OPEC said in its Monthly Oil Market Report released in January. The use of crude for domestic power has fallen by nearly a third since the Wasit gas plant began operations in March 2016, according to the OPEC report.

300,000 Barrels

Saudi Aramco will bring online the similar-sized Fadhili gas project in the country’s east by the end of the decade. That gas project and the renewable projects planned for completion by 2023 could save about 300,000 barrels of oil from being burnt for power, according to estimates based on IEA and OPEC data.

Alternative energies are “a key factor in the economic transformation,’’ Fabio Scacciavillani, chief economist of the Oman Investment Fund, said in an interview. “This region has a great competitive advantage in low-cost energy production and that will continue with renewables. That will create a big advantage particularly in energy intensive industries.’’

Article Link To Bloomberg:

Geeks Venture Into Goldman Sachs' World Of Big Deals And Egos

By Olivia Oran
February 14, 2017

Technology whizzes who helped Goldman Sachs (GS.N) eliminate hundreds of trading jobs over the past few years are venturing into the bank's flagship M&A business, making some junior bankers uneasy.

A team of 75 programmers, internally referred to as "strats," has been developing technology to make Goldman's elite dealmakers more productive. That team within investment banking has doubled in size since 2014, when long time tech banker George Lee was appointed chief information officer for the investment banking division.

Programmers are now supporting those handling equity underwriting, leveraged buyouts and deals within the financial services and real estate sectors. They are also analyzing client data to offer better advice on deal targets and types of actions that might please a particular company’s investor base.

Conventional wisdom holds that investment banking does not yield itself to automation the way trading does, because it relies so much on personal relationships forged over years of business lunches, rounds of golf and boardroom presentations.

Goldman executives say technology aims to reduce the grunt-work junior bankers now perform, so they can spend more time helping top dealmakers rake in more money.

But some who joined Goldman in recent years expecting to advance from supporting cast to lead roles on big deals are wondering whether technology will be their friend or foe.

One employee who asked not to be named told Reuters investment bank staff are looking at how trading got automated, and wondering if the same fate awaits them.

There is more water-cooler chatter among young employees about using their Goldman experience to build a career outside banking, he said. Automation is not the only concern, but it does come up, he added.

"Banking used to be an area where the top undergrads and MBAs wanted jobs, but now so much of those roles are automatable," said Tom Davenport, a professor of information technology and management at Babson College.

MIT And Wharton

One concern is that technology may make some staff redundant. Another is that the strats themselves – more likely to hold engineering PhDs from the Massachusetts Institute of Technology than MBAs from Wharton – could get ahead of bankers on a career path.

Worries have been exacerbated by weak business and broader job cuts across the industry.

At Goldman, revenue fell 9 percent last year to its lowest since 2011, and its return on equity remains below the 10 percent investors generally expect. Investment banking had a rough year, hurt by a near-empty calendar for initial public offerings, and a broad slowdown in M&A activity.

The top 10 Wall Street firms have cut the number of client-facing investment bankers they employ by 15 percent since 2010, according to research firm Coalition.

Advances in technology could thin the ranks of low-level staff at Goldman as much as 10 percent in the next few years, people familiar with the matter said. Kognetics, a software company that uses artificial intelligence to assist investment bankers, says about a quarter of their routine can be automated.

Goldman's strats recently launched "Sellside," an application that allows junior bankers to quickly compile deal information, such as when bids from different buyers arrive. They have also made it possible for senior bankers to check deals remotely while traveling, instead of calling analysts for updates.

As certain tasks get automated, it could become harder for junior bankers to learn the basics of their job and advance to more senior positions, said Jeanne Branthover, managing partner at executive search firm DHR International.

"The pipeline of talent will dwindle," she said.

But Goldman executives involved in the technology push say their goal is to makes junior staff more efficient and call concerns about job losses overblown. Expanding strats' roles is necessary to stay competitive, they say.

Goldman's deputy finance chief, Marty Chavez, has been telling people worried about their jobs to learn skills that cannot be replicated by a computer. At a Harvard event last month, Chavez said some investment banking tasks were "begging to be automated," according to an MIT Technology Review report.

Chavez, a computer scientist who made his name leading teams of strats, is now considered a contender to eventually succeed Chief Executive Lloyd Blankfein.

Blankfein himself likes to say Goldman is more of a technology firm than a financial one, even though dealmakers and traders have led the bank for its entire 148-year history.

Executives also note that programmers have been helping investment banking for over a decade, the cooperation has just intensified lately. They also point out that Goldman has thousands of investment bankers around the globe, compared with just 75 programmers inside the division.

"No CEO is going to just use a computer to decide what company they're going to merge with," said one. "The nature of an M&A transaction is much more intimate than that."

Article Link To Reuters:

Fed Has Limited View On Trump Economic Policies As Yellen Heads To Congress

By Jason Lange 
February 14, 2017

Federal Reserve Chair Janet Yellen goes to Congress on Tuesday for the first time since Republicans took control of the White House and both houses of the legislature with less clarity on the direction of U.S. economic policy than at any time of her three-year tenure.

The details of President Donald Trump's economic policies remain largely unknown. He has announced a rollback of financial regulation with few details and there is no clarity on the size, scope and timing of the tax cuts he has promised.

Possible new taxes on imports and increased infrastructure spending could boost inflation and send the dollar soaring, uncertainties that make it unusually difficult for the Fed to chart a course for interest rate policy.

"There is quite significant uncertainty about what's actually going to happen, I don't think anyone quite knows," Fed Vice Chair Stanley Fischer said on Saturday.

Even at the best of times, the Fed's ability to see shifts in the economy is limited. In 2012 it said that interest rates would start to rise in 2014 but policymakers waited until December 2015 for their first rate hike. A forecast of four interest rate rises in 2016 turned out to be one.

Yellen is due to give semi-annual testimony before the Senate Banking Committee on Tuesday at 10 a.m. EST. She will address the House Financial Services Committee on Wednesday.

The American economy is now, by many estimates, around what the Fed considers to be "full employment," inflation has ticked up to 1.6 percent and the economy grew 1.6 percent last year.

Based on the Fed's economic projections for this year, it could raise interest rates three times in 25 basis-point steps.

Little was changed in the central bank's Feb. 1 policy statement, a reflection of how little insight Fed officials have into Trump's policies.

"There are just a lot of ways this could go wrong, like spinning off toward a trade war," said Jon Faust, a Johns Hopkins University economics professor and former special adviser to the Fed's Board of Governors.

Some Trump advisers, including National Trade Council Director Peter Navarro, have criticized the trade policies of China and Germany, fueling concerns Washington might disrupt global commerce. At the same time, the new president's Treasury Secretary, Steve Mnuchin, has stressed Washington will continue to participate in global economic forums.

Call For Fed Rules

On Tuesday, Yellen will likely face renewed pressure from lawmakers to set rate policy with a publicly disclosed mathematical formula. The head of the financial services committee in the House of Representatives has said he will resubmit a proposal to make the Fed adopt a policy rule.

Yellen has publicly opposed the proposal, saying it would damage the Fed's ability to respond to crises, but it could win traction in the central bank as Trump has a raft of appointments to make.

Trump can name members to the central bank's Washington-based Board of Governors. There are currently two empty seats on the seven-member body, and Fed Governor Daniel Tarullo said on Friday he would resign around early April.

The president may also appoint a new chair as Yellen's 4-year term as chair comes up in January 2018, while Fischer's term as vice chairman ends in June of that year.

Article Link To Reuters:

Credit Suisse To Cut 5,500 Jobs In 2017 After $2.4 Billion Full-Year Loss

By Joshua Franklin 
February 14, 2017

Credit Suisse (CSGN.S) posted a 2.44 billion Swiss franc ($2.43 billion) net loss for 2016, its second straight year in the red, keeping pressure on Chief Executive Tidjane Thiam to deliver on his turnaround plan for Switzerland's second-biggest bank.

The average estimate in a Reuters poll of seven analysts was for a net loss of 2.013 billion francs in the quarter.

Zurich-based Credit Suisse also said it will cut its headcount by a net 5,500 jobs in 2017 after 7,250 layoffs in 2016, as it works toward its 2018 cost-cutting target. The bank did not specify where the extra cuts would be.

"We believe we are well positioned to continue to make progress with our restructuring program in 2017 and 2018," Thiam said in a statement.

For the fourth quarter, Credit Suisse posted a 2.35 billion franc net loss, largely on the back of a roughly $2 billion charge to settle U.S. claims the bank misled investors in the sale of residential mortgage-backed securities..

The average estimate in the Reuters poll was for a quarterly net loss of 2.01 billion francs.

Nevertheless, Credit Suisse proposed an unchanged dividend of 0.70 francs per share, in line with market expectations.

Just over 18 months into his time as CEO, Thiam has refocused Credit Suisse more toward wealth management and less on investment banking.

In wealth management, Credit Suisse said it suffered net outflows in the fourth quarter due to clients pulling cash to participate in tax amnesty programs and a decision to no longer bank certain external asset managers.

The bank said all its wealth management divisions had seen positive inflows year to date.

At the end of the fourth quarter, Credit Suisse's common equity Tier 1 capital ratio, an important measure of balance sheet strength, was 11.6 percent, down from 12 percent in the third quarter.

Credit Suisse also reaffirmed plans to sell 20-30 percent of its Swiss business in an initial public offering, brushing off talk from some analysts and investors that the bank could reconsider the stake sale. It said a flotation depended on market conditions and board approval.

Article Link To Reuters:

Oil Stable On OPEC-Led Cuts, But Market Remains Range-Bound

February 14, 2017

Oil prices were stable on Tuesday, supported by an OPEC-led effort to cut output while rising production elsewhere kept crude futures within the narrow range that has contained them so far this year.

Brent crude futures LCOc1 were trading at $55.63 per barrel, up 4 cents from their last close.

U.S. West Texas Intermediate (WTI) crude CLc1 was up 4 cents at $52.97 per barrel.

This followed a 2 percent decline in the previous session. Both oil benchmarks have remained within a $5 per barrel trading range since the beginning of the year.

"The usually fairly volatile oil price has barely budged for two months, the reason being conflicting dynamics in the market," said Dutch bank ABN Amro.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, have agreed to cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017 in a bid to rein in a global fuel supply overhang.

But undermining these efforts has been rising production in the United States, where increased drilling activity especially by shale oil producers has lifted overall output to 8.98 million bpd, up 6.5 percent since mid-2016 and to its highest level since April last year. [C-OUT-T-EIA]

"Oil just appears to be caught in a range at the moment and mainly focused on those supply considerations," said Ric Spooner, chief market analyst, CMC Markets in Sydney.

Despite an OPEC compliance rate of around 90 percent with the announced cuts, scepticism remains over the end result, preventing the cut from having a bigger impact on prices, traders said.

"OPEC producers want the market to believe they will stick to the agreed production freeze (cut). But lessons from the past have made the market deeply suspicious," ABN said.

Traders said that even at an OPEC compliance of 90 percent, and a much lower rate for non-OPEC members, producers would have to accelerate their cuts in the coming months in order to achieve the average daily reduction target agreed for the first half of the year.

ABN said it had reduced its average Brent oil price forecast for the first half of 2017 "from $55 per barrel to $50 per barrel, while allowing for a possible temporary dip toward $45 per barrel".

With oil fundamentals like OPEC cuts and U.S. drilling dominating the markets, financial price drivers such as Brent's relation with the dollar have been upended, at least for now.

Oil and the U.S. dollar .DXY typically move inversely as a strong dollar weighs on oil prices as it makes fuel purchases by countries using other currencies more expensive, potentially crimping demand.

"The OPEC production cuts and the U.S. rig count are beginning to outweigh the valuation impact of currencies (on oil)," said Spooner.

Article Link To Reuters:

The Kremlin Is Starting To Worry About Trump

Vladimir Putin's entourage cheered the outcome of the U.S. election – until they saw exactly what they were dealing with.

By Ivan Krastev and Stephen Holmes
Foreign Policy
February 14, 2017

In 2016, a senior Russian official explained to a group of visiting foreigners why the government had decided not to celebrate the upcoming 100th anniversary of the Bolshevik Revolution. Yes, it was a turning point in Russian history, he argued, and, yes, President Vladimir Putin sees today’s Russia as a successor to both the tsars and the Bolsheviks. But celebrating a revolution would send the wrong message to society. The Kremlin today is staunchly opposed to “regime change,” the visitors were told, and thus skittish about eulogizing 1917. It plans to use the centenary, instead, to draw attention to the catastrophic consequences of resorting to revolution to solve social and political problems.

The last thing the Russian government expected was that 2017 would bring it face to face not with a revolution of the past but with a revolution of the present — the radical regime change taking place in the United States as a result of the electoral victory of Donald Trump. It is Trump’s electoral revolution that has captured the imagination, and fanned the fears, of Russian elites today.

The search for a key to Trump’s mind-boggling and miscellaneous gusher of policy directives has tended to focus on his disturbingly erratic, vindictive, simplistic, narcissistic, insecure, and occasionally delusional personality, due exception being made for those conspiracy theorists who treat him as a kind of Manchurian candidate or sock puppet of the Kremlin. What most observers have been late to recognize is the extent to which, behind his mask as a showman, Trump views himself as a revolutionary insurgent with a mission to dismantle America’s “old regime.”

Trump’s tactics certainly belong to the classic revolutionary playbook. His shock-and-awe style of executive action is designed to rattle Congress, catch his opponents unprepared, and incite his base to wage war on the establishment. The extreme polarization he deliberately foments allows him to fend off an opportunistic alliance of the Republican elite with the Democratic Party in defense of the constitutional system, ensuring that protests will be largely impotent. In the words of White House strategist-in-chief Stephen Bannon, Trump is positioning himself as the global leader of an anti-global movement that is anti-elite, anti-establishment, anti-liberal, and nationalistic. “What we are witnessing now,” Bannon told the Washington Post, “is the birth of a new political order, and the more frantic a handful of media elites become, the more powerful that new political order becomes itself.”

Russian policymakers, obsessed as they are with the fear of “color revolutions,” may understand better than Americans and Europeans the radical nature of the political change that has descended on Washington. Indeed, when it comes to the ongoing Trump revolution, Russian policymakers are in much the same position as the German General Staff one century ago. In 1917, the German government concluded that the best hope for a German victory in World War I was for a revolution to erupt in Russia. It thus allowed some of the leaders of the Bolshevik party, Lenin among them, to pass through Germany and make their way back to Russia. The hope was that a revolution in Russia would pull the country out of the war — and the plan worked. But by the beginning of 1918, the German government started to fear that the virus of revolution that it had surreptitiously help spread to Russia might circle back calamitously to Germany itself.

Our conversations with Russian policymakers and experts indicate they are starting to have similar fears and doubts today.

There is no way of knowing if Russian interference contributed decisively to Trump’s upset victory. But it’s fair to say that the Kremlin viewed the outcome as a divine gift. Since at least 2011-2012, when Russia witnessed widespread popular protests, and particularly after the Ukrainian Maidan uprising — events that elicited heartfelt praise and encouragement from then-Secretary of State Hillary Clinton — Russia’s leadership had been convinced that her election would spell disaster for Russia and that it might even lead to war. So Russians did what they could to prevent Clinton from getting into the White House. But while they welcomed her defeat, they were wholly unprepared for the ensuing regime change in Washington.

Now that Trump is in power, political elites in Moscow have stopped cheering. They recognize that Russia’s position has become abruptly and agonizingly complex.

It’s true that Trump’s accession opens up the possibility of “normalizing” Russia’s relations with the West, beginning with a reduction or even elimination of sanctions. It also validates many of Russia’s ideological criticisms of the liberal order and may perhaps foreshadow policy reversals that Moscow has long hoped for: from Washington’s disengagement from the Ukraine crisis to its dissolution of the Cold War Western alliance. Russians also celebrate Trump’s unfiltered stream-of-consciousness diatribes as signaling a welcome end to America’s hypocrisy and condescension.

But Trump’s revolution is also ushering in a period of turmoil and uncertainty, including the likelihood of self-defeating trade wars. Still traumatized by the disintegration of the Soviet Union, Russia’s present leadership has no appetite for global instability.

With Trump in the White House, moreover, Putin has lost his monopoly over geopolitical unpredictability. The Kremlin’s ability to shock the world by taking the initiative and trashing ordinary international rules and customs has allowed Russia to play an oversized international role and to punch above its weight. Putin now has to share the capacity to keep the world off balance with a new American president vastly more powerful than himself. More world leaders are watching anxiously to discover what Trump will do next than are worrying about what Putin will do next. Meanwhile, using anti-Americanism as an ideological crutch has become much more dubious now that the American electorate has chosen as their president a man publicly derided as “Putin’s puppet.”

What the Kremlin fears most today is that Trump may be ousted or even killed. His ouster, Kremlin insiders argue, is bound to unleash a virulent and bipartisan anti-Russian campaign in Washington. Oddly, therefore, Putin has become a hostage to Trump’s survival and success. This has seriously restricted Russia’s geopolitical options. The Kremlin is perfectly aware that Democrats want to use Russia to discredit and possibly impeach Trump while Republican elites want to use Russia to deflate and discipline Trump. The Russian government fears not only Trump’s downfall, of course, but also the possibility that he could opportunistically switch to a tough anti-Moscow line in order to make peace with hawkish Republican leaders in Congress.

It is emblematic that, in their first telephone call, Putin refused to press Trump on lifting the sanctions or on America’s discontinuing support for Kiev. Moscow has also chosen to ignore some harsh anti-Russian statements issued by certain members of the new administration. The renewed fighting in eastern Ukraine might seem like a counterexample, but the Kremlin swears that the Petro Poroshenko government in Kiev is the guilty party, aiming at getting the attention of anti-Russian U.S. Congress members and thereby providing a potent argument against Trump’s appeasement of Putin. In any case, Russia has been trying to find ways to accommodate the U.S. president, including, for example, echoing the White House’s denials that Ambassador Sergei Kislyak discussed sanctions with Michael Flynn before Trump’s inauguration as well as announcing plans to reconsider Trump’s demand to set up safe zones inside Syria—a proposal that was initially rejected by the Russians.

Trump’s presidency has also complicated Moscow’s relations with China and Iran. Moscow is interested in normalization with the West but not at the cost of joining a Washington-led anti-China coalition, which Trump seems insistent on creating. Moreover, Putin’s Russia hosts up to 20 million Muslims and therefore cannot indulge in the radical anti-Islam rhetoric adopted by Trump.

What is especially dangerous from the Kremlin’s perspective is that certain nationalistic circles in Russia are falling in love with Trump’s insurrectionary approach. In January, for the first time since Putin returned to the Kremlin in 2012, Putin was not the most frequently cited name in the Russian media; Trump was. And although most of Trump’s Russian admirers, such as Alexander Dugin, are loyal to Putin personally, they also dream of purging the globalist elites who occupy the rooms adjoining their president’s.

Anyone who spends any time in Moscow will quickly discover that ordinary Russians, in contrast with a majority of Europeans, feel surprisingly positive about Trump. One reason is that they are exhausted at Russia’s confrontation with the West. Another is that they share Trump’s cynical, borderline apocalyptic view of international politics. Like Trump, they never believed in win-win politics in the first place.

Most interesting of all, they readily compare Trump to an early Boris Yeltsin — impulsive, charismatic, trusting only his family, and ready to bomb the parliament if that works to cement his hold on power. The problem for the Kremlin is that Yeltsin was a revolutionary leader and Putin has decided to make 2017 a year for deploring, not celebrating, revolutions.

Article Link To Foreign Policy:

Can The EU Stop Yet Another Greek Debt Crisis?

Greek and EU leaders have to balance political reality and economic necessity.

The National Interest
February 14, 2017

At a European Union finance ministers’ meeting scheduled for February 20, Greece needs its creditors to release a €10.3 billion tranche from its 2015 bailout agreement. This is necessary for the country of eleven million people to make its debt repayments and avoid default. Doing so is proving to be more difficult than initially thought, raising the threat of yet another Greek debt crisis. The timing could not be worse: volatile elections are being held in the Netherlands in March, France in April and May, and Germany in September. At some point during this period, tough negotiations with the British over their departure from the EU are set to start. Once again, Greece could be an important linchpin for the future of the EU, the region’s economy and global markets.

The Greek economy has contracted by 26 percent since 2009, and unemployment remains stubbornly above 20 percent. A massive buildup of debt in the late 1990s and through much of the next decade, a bloated and inefficient bureaucracy (with the public sector accounting for about 40 percent of GDP), a government cover-up of actual fiscal deficits, society-wide tax evasion and many years of yield-hungry foreign buyers of Greek public-sector debt all contributed to the financial doom that hit the country on Europe’s southern flank in 2009.

Despite three bailouts and years of tough austerity, Greece still owes a lot of debt, much of it to the rest of EU countries. According to the Organization for Economic Cooperation and Development, the country’s gross debt-to-GDP-ratio stands at 185.7 percent of GDP, with only Japan having a worse ratio (over 240 percent of GDP). At the same time, Greece’s economy continues to struggle. After anemic 0.4 percent real GDP growth in 2014, the economy slipped back into recession in 2015 (the year of the third bailout) and was flat in 2016.

The OECD is projecting a 1.3 percent expansion in 2017, which is dependent on improved lending conditions, meaningful movement on privatization, implementation of competitiveness reforms, better tax collection and a continued easing of regulations. Favorable external conditions are also important, including what happens with Brexit, the risk of another wave of migrants (who use Greece as a major transit point), the risk from weaker global trade, and growth in the EU and China that would affect exports.

Looming over the economy is the debt issue. To repay the country’s debt, the government must maintain a primary surplus. The Greek government, under EU pressure, legislated fiscal measures to reach the primary surplus target of 1.75 percent of GDP for 2017 and 3.5 percent for 2018. This approach has become contentious between the EU and the IMF. The latter institution has been opposed to such targets, as they “would generate a degree of austerity that could prevent the nascent recovery from taking hold.”

The IMF believes Greece’s austerity push has hurt investment in badly needed and growth-inducing infrastructure, and compromised the delivery of basic public services such as transportation and health care. Moreover, Greece has failed to address two problems, “an income tax regime that exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent of GDP) and an extremely generous pension system that costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2 ¼ percent of GDP).”

Both of these are sensitive politically in Greece, and the Syriza-led government has a wafer-thin majority in parliament, leaving the possibility that snap elections are not entirely out of the question. Greek prime minister Alexis Tsipras is keenly aware that further cuts in pensions will be difficult to sell to a public exhausted by a lengthy period of austerity.

This has left the IMF regarding Greece’s economic program, backed by the EU, as lacking credibility. Indeed, the IMF stated: “It is not the IMF that is demanding more austerity, either now or as a means to lower the need for debt relief over the medium-term. Or to be more direct, if Greece agrees with its European partners on ambitious fiscal targets, don’t criticize the IMF for being the ones insisting on austerity when we ask to see the measures to make such targets credible.” Along these lines, the IMF has also favored some form of further debt relief.

The situation was not helped by the comments of German finance minister Wolfgang Schäuble, who ruled out debt reduction for Greece. In a television interview in early February, he stated, “For that, Greece would have to leave the monetary union.” Schäuble has consistently pushed austerity for Greece.

In response to the German finance minister and the IMF, Greece’s minister for Europe, George Katrougalos, held out that Schäuble now represents a minority position within the EU as well as in Germany. Katrougalos also criticized the IMF, noting, “If we had just to deal with the Europeans we would have already completed this review in December. All the delay is due to the ambivalence of the IMF to participate or not participate.”

The February 20 EU finance ministers’ meeting is the last such meeting before the political season begins in earnest. Considering the rise of national-populist forces in the Netherlands (where the PVV of Geert Wilders is likely to win the most seats in parliament), France (where Marine Le Pen is heading opinion polls for the presidency and expected to be one of the two second-round contestants), and Germany, a new Greek crisis, with the risk of a default, is likely to be averted. This is the case even if the current approach is flawed, and will see Greece return yet again as a troubled debtor.

One element of Europe’s political game is that much of the EU establishment has grudgingly come to terms that the Greek bailouts contributed to anti-EU sentiment among European voters. The EU’s response to the Greek sovereign-debt crisis (and the others that followed in Ireland, Cyprus, Portugal, Slovenia and Spain) was slow and painful, with Brussels being accused of repeatedly kicking the can of fiscal responsibility down the road. There was also criticism that the Greek bailouts were undertaken not to help that country, but to bail out northern European banks that were heavily exposed.

In Greece alone, the eurozone’s rescue funds, the European Financial Stability Facility and the European Stability Mechanism, have already disbursed €174 billion to Greece, and more is needed. According to Klaus Regling, head of the ESM, “We would not have lent this amount if we did not think we would get our money back.”

Whether or not the EU gets its money back from Greece ultimately is not the issue. The issue is that another Greek debt crisis is averted—in the short term, with the hope that the economy can continue to turn around. This is likely, as the IMF will remain as part of the process, at least for now. Yet the IMF is probably correct in its assessment of Greece’s problems needing more targeted reform on taxes and pensions, as well as debt relief of some type. But the IMF does not face frustrated and angry voters, who may opt for non-establishment alternatives, some of whom favor what German finance minister Schäuble has marked as the cost of Greece’s debt relief: leaving the eurozone. It would seem that the threat of being forced out of the eurozone has lost some of its sting, especially after Brexit.

Article Link To The National Interest: