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The Italian people must understand that their country is at war

The Italian people must understand that their country is at war

The conflict between the European Union and Italy is a full-blown financial war. Euro countries cannot print their own money and for that reason they cannot have an endless deficit. Countries within the eurozone have to live within their means or else, without the intervention of the ECB, they will go bankrupt. Nobody knows the consequences of an Italian default and debt restructuring, but it can lead to the end of the euro.

To make the euro sustainable, the European financial elites want the Italians to reduce their spending and turn a budget deficit into a budget surplus. However, due to the country’s shrinking population the Italian budget deficit — as we have argued many times – can only increase. The European commission rejects the Italian budget because Rome wants to increase its debt far beyond the limit allowed by the ECB. “This is the first Italian budget that the EU doesn’t like,” wrote Deputy Prime Minister Luigi Di Maio on Facebook. “No surprise: This is the first Italian budget written in Rome and not in Brussels!”1)Matteo Salvini added: “This (the rejection of the Italian budget plan by the EU) doesn’t change anything.”. “They’re not attacking a government but a people. These are things that will anger Italians even more,” he said.2)

The country has entered a demographic winter3)and sustainable economic growth is simply impossible, at least for the foreseeable future. As is the case with the whole of Europe, the continent needs a plan to support an ageing and declining population. As if not aware of it, the Brussels-Frankfurt establishment only wants Italy to stick to their austerity program, i.e. decrease public spending and do away with the current Italian administration, which refuses to comply.

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Venezuela, PDVSA CDS Triggered: ISDA Says Credit Event Has Occured

Venezuela, PDVSA CDS Triggered: ISDA Says Credit Event Has Occured

In a long overdue, and not exactly surprising decision, moments ago the ISDA Determination Committee decided, after punting for three days in a row, that a Failure to Pay Credit Event has occured with respect to both the Bolivarian Republic of Venezuela as well as Petroleos de Venezuela, S.A.

Specifically, in today’s determination, in response to the question whether a “Failure to Pay Credit Event occurred with respect to Petroleos de Venezuela, S.A.?” ISDA said that the Determinations Committee voted 15 to 0 that a failure to pay credit event had occurred with respect to PDVSA.

ISDA said the DC also voted 15 to 0 that date of credit event was Nov. 13 and that the potential failure to pay occurred on Oct. 12. ISDA also announced that the DC agreed to reconvene Nov. 20 to continue talks regarding the CDS auction, now that the Credit Default Swaps have been triggered.

Over the past week, all three rating agencies, with Fitch Ratings most recently, declared PDVSA in default, citing the state oil company’s repeated payment delays. The oil company failed to pay yet another $80 million in interest that was due in mid-October on bonds maturing in 2027, and whose buffer period expired over the weekend. Venezuela was declared in default by S&P Global ratings for a similar issue. According to Bloomberg, Fitch said that it expects PDVSA’s creditors to recover as little as 31 percent on their investment.

The panel will now meet next week to discuss whether to hold an auction to set the rate at which the CDS will pay out. When credit swaps are triggered, buyers of the contracts have their losses covered by the counterparties that sold them the insurance-like derivatives.

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Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

As Venezuela teeters right on the brink of complete financial collapse, Bloomberg reports that Russia has agreed to restructure roughly $3.2 billion in outstanding obligations.  While details of the restructuring agreement are scarce, both sides reported that the deal spreads payments out over 10 years with minimal cash service required over the next six years.

Russia signed an agreement to restructure $3.15 billion of debt owed by Venezuela, throwing a lifeline to a crisis-wracked ally that’s struggling to repay creditors.

The deal spreads the loan payments out over a decade, with “minimal” payments over the first six years, the Russian Finance Ministry said in a statement. The pact doesn’t cover obligations of state oil company Petroleos de Venezuela SA to its Russian counterpart Rosneft PJSC, however.

“The terms are flexible and very favorable for our country,” Wilmar Castro Soteldo, Venezuela’s economic vice president, told reporters in Moscow after the signing. “We will be able to return to the level of commercial relations with Russia that we had before,” he added, noting that a deal to buy Russian wheat will be signed next week.

This is the second time Russia has agreed to reschedule Venezuela’s debt payments after agreeing to an extension last year. Still, Caracas failed to make payments amid an economic crisis triggered by low prices for oil. Rosneft has also provided several billion dollars in advance payments for Venezuelan crude supplies.

The rescheduling pact is a “demonstration of the desire to maintain ties with the current Venezuelan leadership,” Viktor Kheifets, an expert in Venezuela at St. Petersburg State University, said by phone. “Russia isn’t happy with everything that the government there is doing but Venezuela is an ally where Russia has economic interests and Moscow is firmly against a forcible change of regime there.”

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Venezuela Headed For “Messiest Debt-Restructuring In History” Thanks To US Sanctions

Venezuela Headed For “Messiest Debt-Restructuring In History” Thanks To US Sanctions

After being effectively shut out from global financial markets – a situation that was made more precarious by US sanctions prohibiting purchases of Venezuelan debt (unless you’re buying them off Goldman Sachs, should the bank’s asset-management arm desire to liquidate its $3 billion “hunger bond” position) – Venezuela is drawing ever-nearer to what the Financial Times describes as potentially the “messiest debt restructuring in history.”

So far, Venezuela has managed to forestall a default by stripping assets from its state-owned oil company, Petroleos de Venezuela, commonly referred to as PVDSA, and shaking down local institutions of spare dollars – not to mention the explicit financial support of China and Russia. Recently, Rosneft, the largest Russian oil company, helped support its troubled ally, which enjoys the largest crude reserves in the world, by offering billions of dollars in advance payments for future crude supplies. Thanks to a deal brokered by deceased former President Hugo Chavez, Venezuela has for years been Rosneft’s largest foreign supplier of crude. Last year, the oil giant accepted a 49.9% stake in PVDSA’s US-based subsidiary, Citgo, as collateral for a $1.5 billion loan.

Venezuelan President Nicolas Maduro

However, thanks to the US sanctions, which prohibit purchases of newly issued debt and existing bonds that have so far not been sold outside of Caracas, the country will once again need to innovate or risk sliding into bankruptcy. Making matters all the more urgent, the country recently suffered a loss in US courts after a judge ruled that Canadian miner Crystallex can seize Venezuelan money held in a custody account at Bank of New York Mellon to cover a $1.4 billion judgment awarded by a World Bank tribunal.

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Sudden Death? Junk-Rated Companies Headed for Biggest “Refinancing Cliff” Ever: Moody’s

Sudden Death? Junk-Rated Companies Headed for Biggest “Refinancing Cliff” Ever: Moody’s

At the worst possible time.

Most of the defaults, debt restructurings, and bankruptcies so far this year and last year were triggered when over-indebted cash-flow negative companies could not make interest payments on their debts.

During the crazy days of the peak of the credit bubble two years ago, they would have been able to borrow even more money at 8% or 9% and go on as if nothing happened. But those days are gone. Now the riskiest companies face interest costs of 20% or higher – if they’re able to get new money at all. Hence, the wave of debt restructurings and bankruptcies.

But that’s small fry. Now comes the wave of companies whose debts mature. They will have to borrow new money not only to fund their interest payments, cash-flow-negative operations, and capital expenditures, but also to pay off maturing debt.

That “refinancing cliff” is going to be the biggest, steepest ever, after the greatest credit bubble in US history when companies took on record amounts of debt, and it comes at the worst possible time, warned Moody’s in its annual report.

In its report a year ago, Moody’s had already warned that the refinancing cliff for junk-rated US companies over the next five years – at the time, from 2015 through 2019 – would hit $791 billion. Of that, $349 billion would mature in 2019, the largest amount ever to mature in a single year.

But Moody’s pointed out that “near term risk remains low as only $18 billion, or 2% of total speculative-grade issuance comes due in 2015.” And that’s how it played out last year.

Since then, the refinancing cliff has gotten a lot bigger, according to Moody’s new annual report. The amount in junk-rated debt to be refinanced over the next five years, from 2016 through 2020, has surged nearly 20% to a record of $947 billion.

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A Year of Sovereign Defaults?

A Year of Sovereign Defaults?

MIAMI – When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).

If history is a guide, such conversations may be happening a lot in 2016.

Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.

The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.

Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.

And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises.

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Obama Unveils Roadmap To ‘Bailout’ Puerto Rico: “New” Bankruptcy Rules & Federal Fiscal Oversight

Obama Unveils Roadmap To ‘Bailout’ Puerto Rico: “New” Bankruptcy Rules & Federal Fiscal Oversight

America is not Greece, but judging from the Obama administration’s just-unveiled plans to bailout Puerto Rico’s disastrous debt situation, the American territory may have to sacrifice a little more sovereignty to get some relief. Obama is pressing for Congress to give Puerto Rico (PR) sweeping powers to reduce its $73 billion debt burden through a form of bankruptcy protection not now available to American territoriesand will also ask lawmakers to establish an independent body to monitor the island’s fiscal affairs (a la Troika). While the proposals likely face an uphill battle in Congress, as NYTimes reports, both Democrats and Republicans are under pressure to respond because Puerto Ricans are flooding the US, particularly in central Florida, and are becoming an increasingly important voting block in the 2016 presidential race.

Puerto Rico is teetering under debt amassed from years of borrowing as the economy failed to grow and residents left for the U.S. mainland. Governor Alejandro Garcia Padilla is seeking to persuade investors to accept less than they’re owed, saying tax increases and spending cuts alone won’t be sufficient to eliminate the government’s budget shortfalls.

Creditors say that the island’s government has been seeking to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reports, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 milllion of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.

It appears to have worked… (as Bloomberg details)

President Barack Obama is pressing for Congress to give Puerto Rico sweeping powers to reduce its $73 billion debt burden through bankruptcy, escalating administration involvement as the Caribbean island’s access to cash dries up.

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Greece: It’s Time For Your Default And Debt Restructuring

Greece: It’s Time For Your Default And Debt Restructuring

For some reason, people think a sovereign default, and a subsequent debt restructuring such as Greece’s government faces, is something that is conceivable – the proverbial asteroid hitting the earth – but which has never actually happened.

Sometimes, raw data says more than words. According to a dataset from the National Bureau of Economic Research, there have been at least 153 sovereign debt restructurings since 1980.

Ideally, Greece’s government will be able to reduce the overall debt load, now around 192%, to something manageable, perhaps around 50% of GDP. This process is rife with danger, alas, and I suggest consulting with Russia (which had a default and debt restructuring in 1998-2000 that reduced the net present value of the outstanding debt by about 50%) to avoid some of the potentially bad outcomes, such as widespread asset stripping by foreign entities (which is already going on), or the loss of domestic sovereignity and the installation of some unelected EU-controlled autocrat, as arguably happened in Italy under Mario Monti. It also happened in Greece, under unelected technocrat prime minister Lucas Papademos, who was previously the governor of the Bank of Greece, and then afterwards became the Vice President of the European Central Bank. Papademos argued against a eurozone deal to write off half of Greece’s debts. He wanted a far smaller “haircut,” because a 50% writeoff would hurt banks.

Since Papademos’ stay of execution for the bankers, there have been a long series of “bailouts” by various official entities beginning May 2010, funded by directly or indirectly by taxpayers outside of Greece, notably Germany and France. None of this has helped Greece’s situation in any way. The Greek government’s debt/GDP was 130% at the end of 2010. A 50% writeoff would have reduced this to about 65%. The eurozone’s official government debt-to-GDP ratio limit is 60%.

 

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It’s Greece vs Wall Street

It’s Greece vs Wall Street

On the one hand, I’ve written so much about Greece lately I fear I’m reaching overkill. On the other hand, there’s so much going on with Greece, and so fast, that I wouldn’t know here to begin. Moreover, I’m thinking and trying to figure what is what and what is actually happening so much it’s hard to stay focused for more than a short while before something else happens again and it all starts all over. And I’m thinking it must feel that way for the Syriza guys as well.

One thing I do increasingly ponder is that it gets ever harder to see the eurozone survive. In its present shape and form, that is. Damned if you do, doomed if you don’t, is an expression I’ve used before. It’s like this big experiment that a bunch of power hungry Europeans really get off on, that now all of a sudden is confronted with the democracy they all only thought existed in books of history anymore.

But if you take your blind hunger far enough to kill people, or ‘only’ condemn them to lives of misery, they will eventually try to speak up, even if not nearly soon enough. It’s like a law of physics, or like Icarus in, yes, Greek mythology: try to reach too high, and you’ll find you can’t.

What is Brussels supposed to do now? Throw Athens off a cliff? Not respect the voice of the Greek people? That doesn’t really rhyme with the ideals of the union, does it? If they want to keep the euro going, they’re going to have to give in to a probably substantial part of what Syriza is looking for. Or Greece will leave the eurozone, and bust it wide open, exposing its failures, its lack of coherence, and especially its lack of democratic and moral values.

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Olduvai IV: Courage
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Olduvai II: Exodus
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