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Cyber Attacks Force EU to Close Emission Trading System

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, Natural science, Quantitative Finance, Technology, Trading software, Uncategorized, Views, commentaries and opinions on 22.01.11 at 03:15

A series of cyber-attacks on national registries, where carbon permits are stored, have forced the EU to close its emissions trading system (ETS) for at least a week. The European Commission posted the announcement on its website on Wednesday after Czech Republic-based firm Blackstone Global Ventures said about €6.8 million of carbon allowances appeared to have disappeared. Thefts on electronic registries in Austria, Greece, Poland and Estonia have also been reported over the last days.

“They will over time undermine the credibility of carbon trading as a policy measure.”

Kjersti Ulset


After discovering unauthorized trading on its account on Wednesday, Blackstone contacted the Czech registry OTE AS, which promptly closed all operations and began an investigation. The Paris-based BlueNext SA, operator of the world’s biggest spot exchange for permits, followed suit, as did registries in Poland and Estonia, before the EU finally imposed a region-wide shutdown.

It’s not the first time cyber criminal have been trading stolen permits at the international ETS market, but never has the activity been so comprehensive that the regulators have been forced to close the whole market.

“Incidents over the last weeks have underlined the urgent need for enhanced security measures,” the EU commission says in its announcement of the closure.

The bloc’s ETS system will be down, at least until 26 January.

Full statement

Q&A’s

A Criminals Market

According to The Guardian, European Authorities estimate that up to 90% of the whole market volume is plain fraudulent activities.

Belgian prosecutors highlighted the massive losses faced by EU governments from VAT fraud today after they charged three Britons and a Dutchman with money-laundering following an investigation into a multimillion-pound scam involving carbon emissions permits.

The three Britons, who were arrested last month in Belgium, were accused of failing to pay VAT worth €3m (£2.7m) on a series of carbon credit transactions.

European authorities believe the EU has lost at least €5bn to carbon-trading VAT fraud in the last 18 months.

Last month, the European police agency Europol reported that the European Union’s Emissions Trading Scheme had been victim of fraudulent trading activities over the past 18 months, worth €5 billion for several national tax revenues.

Europol, the EU’s law-­enforcement operation, fears the fraud will be used in other areas, especially gas and electricity trading markets, after criminals found VAT fraud was one of the most lucrative financial frauds.

The Most Lucrative Financial Fraud

Wednesday’s announcement and similar cyber-attacks have also damaged the EU initiative, together with reports of tax fraud and the recycling of used credits, the EUobserver.com reports.

“They will over time undermine the credibility of carbon trading as a policy measure,” says Kjersti Ulset, manager at Point Carbon, a company that reports on Europe’s emission trading, carried out in a network of registries across the union.

Despite its pioneering position, Europe’s ETS system has attracted criticism over its six years of operation, with some businesses saying it threatens the bloc’s competitiveness, while NGOs argue emission thresholds have been set too high.

By placing a price on carbon, Europe’s trading system is designed to lower company emissions and therefore protect the environment from global warming. Corporations received emission permits for free under the first phase (2005-2007) of the scheme. Some, however, are forced to pay for a portion of their permits.

The European emission trading system is the world’s largest, as the US plans for a similar cap-and-trade scheme was blocked by the US Senate last year.

Carbon permits are, however, traded as ordinary securities at the Chicago Carbon Exchange.

Brussels wants to see energy companies buy all their permits with their own money from 2013 and onwards, with other heavy industries gradually phased in by 2020.

China experts suggest pilot ETS projects could appear in Beijing’s next five-year plan, set to be approved in March.

Here at The Swapper we have been skeptical to the ETS all along.

It’s an artificial market, created on basis of nice thoughts, without a real supply/demand situation and is regulated in a way the is more similar to a pharmacy than a financial market.

But what is really worrisome, is the sharp increase in this kind of activity.

Just wait till you see the Chicago Board Option Exchange gets hacked!

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Yippee! Another European Stress Test Festival!

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, Quantitative Finance, Technology, Views, commentaries and opinions on 20.01.11 at 04:46

EU finance ministers have Wednesday agreed on the broad outlines of another stress tests on major European financial institutions. I’m not really sure what happens during an European Stress Test, but it seems to make a lot of people happy. Perhaps it’s some kind of big party – like a festival, or something.  Anyway – I’m sure it will be fun.

“The euro zone debt crisis could last another ten years.”

Gyorgy Matolcsy


And this years stress test will be even better than last year, when they somehow forgot to invite the Irish, the prominent people of Brussels promise. But, like last year, the organizers are not sure if they will tell us all about it, or not.

Please forgive the sarcasm, but if the new European Banking Authority is going to be taken just a little bit serious, the stress test has to be conducted with total transparency.

Nothing less will ever be able to restore the lost confidence in this maneuvers.

“We are going to draw the lessons by making the next tests more rigorous and even more credible,” says internal market commissioner, Michel Barnier, at the end of a two-day meeting between Europe’s economy chiefs in Brussels.

The new stress tests will this time also take into account underlying capital, liquidity and exposure to sovereign debt.

In July last year, the financial strength of 91 institutions was tested against potential crisis situations. Only seven failed the examination.

The methodology this time, which will imagine even more severe crisis situation, notably in property markets, has yet to be agreed upon, but will be undertaken by the new European Banking Authority, with ministers expecting the tests to be completed by the end of May.

The level of disclosure once the results are concluded however remains a point of division amongst ministers.

The new test comes as Portugal, currently in the euro zone’s sovereign-debt emergency room, sees increased pressure on its bond yields, with rates climbing on 10-year bonds to 6.951 percent, shy of the seven-percent level thought to be the tipping point for the country to request a bail-out.

Meanwhile on Tuesday, the Hungarian EU presidency enjoyed renewed opprobrium from other member states when the country’s finance minister made the gaffe of publicly saying the euro zone debt crisis could last another ten years, the EUobserver.com reports.

Mr. Gyorgy Matolcsy made the comments during the public, televised portion of the meeting of EU finance ministers.

There is a likelihood “that the euro is endangered for another decade,” he says.

Well, that’s just what I pointed out in my commentary on New Years Eve.

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Fitch: Euro Governments Borrowing To Drop by 9% in 2011

In Financial Markets, Health and Environment, International Econnomic Politics, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 19.01.11 at 13:36

Fitch Ratings says in a statement that gross government borrowing for the EU15 countries will fall by 9.2% this year, to EUR 1.866 billion versus EUR 2.050 billion in 2010. Fitch expects that the run-off of government-guaranteed bank debt will start to eliminate a source of competition for sovereign debt, potentially easing sovereign financing conditions.

“Fitch expects net borrowing by central governments across Europe to fall sharply in 2011 as governments implement budget cuts.”

Douglas Renwick


In 2010 European governments had the largest borrowing requirement for decades. In a new report, Fitch notes that 2011 euro area gross borrowing is down 13% year-on-year to EUR 1.607 billion, or 16.5% of GDP.

In absolute terms, it is largest in France (EUR 386 bn), Italy (EUR 381 bn) and Germany (EUR 292 bn).

As a share of GDP, it is largest in Greece (25%), Italy (23%), Portugal (23%) Belgium (21%), France (18%) and Ireland (17%).

Overall, gross borrowing has fallen y-o-y for most European governments.

Denmark, Greece, and Portugal are the exceptions.

“Fitch expects net borrowing by central governments across Europe to fall sharply in 2011 as governments implement budget cuts,” Douglas Renwick, Director of Fitch’s Sovereign team, says in a statement.

“The dramatic rise in short-term debt issuance by EU15 countries seen in 2009 has also started to unwind, with short-term debt falling 11.2% year-on-year as of December 2010. As a result, medium and long-term debt maturities are up 13% year-on-year in 2011, partly reflecting higher public debt stocks,” Robert Shearman adds.  Shearman is co-author of the report and member of Fitch’s Sovereign team.

Although the marginal cost of funding increased for ‘peripheral’ euro area governments (Greece, Ireland, Italy, Portugal and Spain), yields declined for the EU15 as a whole, on an annual average y-o-y basis, to 3.5% in 2010 from 3.7% in 2009.

The report notes that by maintaining the average duration of their debt, peripheral countries are slowing the feed-through of higher yields to their effective rate of interest.

Fitch expects that the run-off of government-guaranteed bank debt (EUR 242 billion in 2011) will start to eliminate a source of competition for sovereign debt, potentially easing sovereign financing conditions.

(Note: Fitch defines gross borrowing as net borrowing plus redemptions on medium and long-term debt plus the stock of short-term debt at the end of the previous year, which will need to be rolled over at least once during the current year).

Here’s a copy of the report, entitled “European Government Borrowing: Steps in the Right Direction”

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Internet Nuke Bomb Ready To Blow (Update)

In Financial Engeneering, Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Law & Regulations, Learning, National Economic Politics, Quantitative Finance, Technology, Trading software, Uncategorized, Views, commentaries and opinions on 16.01.11 at 20:29

The Swapper have been warning about this since last summer when the mysterious Stuxnet worm was discovered at several critical energy and water supply facilities around the world. However, research by Symantec have later reveled that 60% of the infections are found inside Iranian borders. The threat from cyber space has risen to the top of the list over potential global risks in 2011, alongside pandemic diseases and terrorism. The internet, once seen as the solution to all of mans problems, have instead become one of the most severe threats to all of us.

“The primary involvement of states in cyber security, as both protagonists and principal targets, fundamentally changes the nature of the risk.”

Eurasia Group


By the end of 2010 McAfee Security counted 60.000 new pieces of malicious software being released on the internet every day, the hacker attacks on Java platforms (used in practically every security system, including online banks and the Pentagon) rose by 1.200% last year, and for the first time ever the value of theft of digital assets exceeded the theft of physical assets. And for Stuxnet; that’s only the beginning.

More than 100 foreign intelligence organizations are trying to break into US networks, Deputy Defense Secretary William Lynn wrote in the September/October issue of the journal Foreign Affairs. Some already have the capacity to disrupt U.S. information infrastructure, he says.

The US government’s main code-making and code-cracking agency now works on the assumption that foes may have pierced even the most sensitive national security computer networks under its guard, Reuters reports.

“There’s no such thing as ‘secure’ any more,” Debora Plunkett of the National Security Agency said last month, amid US anger and embarrassment over disclosure of sensitive diplomatic cables by the web site WikiLeaks.

“The most sophisticated adversaries are going to go unnoticed on our networks,” she said.

Plunkett heads the NSA’s Information Assurance Directorate, which is responsible for protecting national security information and networks from the foxhole to the White House.

“We have to build our systems on the assumption that adversaries will get in,” she told a cyber security forum sponsored by the Atlantic and Government Executive media organizations.

The United States can’t put its trust “in different components of the system that might have already been violated,” Plunkett added in a rare public airing of NSA’s view on the issue.

“We have to, again, assume that all the components of our system are not safe, and make sure we’re adjusting accordingly.”

The NSA must constantly fine tune its approach, she said, adding that there was no such thing as a “static state of security.”


And the US is not the only nation struggling to keep its sensitive data safe.

According to Iain Lobban, head of GCHQ, the UK’s core infrastructure is under constant attack. He says thousands of targeted emails are hitting the systems every month, planting worms that cause “significant disruptions.”

Mr. Lobban’s claims are supported in a national security report, naming cyber attacks as a top threat to the UK, alongside pandemic diseases and terrorism, according to the PC Pro Magazine.

A Global Threat

“Cyberspace is contested every day, every hour, every minute and every second,” the British security expert says.

The international risk analysis company Eurasia Group put cyber security at number 3 amongst the top 10 risks of 2011.

“For the past decade, increasingly technologically capable hackers and organized crime organizations have elevated cyber security as a business risk, but not as a political risk. The centralization of data networks, both in energy distribution (the move to the smart grid) and information technology more broadly (the shift to cloud computing) are now metastasizing the cyber risk, and governments are becoming more directly and actively involved in playing both offense and defense in cyberspace. The primary involvement of states in cyber security, as both protagonists and principal targets, fundamentally changes the nature of the risk. The new roles of governments and their antagonists bring geopolitics and cyber security together in three different ways,” Eurasia writes.

(Link to full report below).

Java Systems Under Heavy Fire

One of the main components in practically every security system today is the Java platform, produced by Oracle.

So it’s no wonder that attacks on the Java system increased by more than thousand percent in 2010.

“The number of attacks against flaws in Java has jumped by 1.000% – even outstripping attacks against vulnerabilities in Adobe PDF’s,” Microsoft says.

The attacks against Java code – not the Java script – rose from 500.000 at the beginning of last year to about 6 million in the last quarter of 2010.

Even if Oracle have manged to patch the vulnerabilities in Java, the have the same problem as Adobe – people forget to update their software.

And on top of that; Java is a piece of software that’s used in almost everything, it runs in the background, making more visible components work, PC Pro Magazine points out.

“How do you know if you have Java installed, or if it is running?” researcher at Microsoft Malware Protection, Holly Stewart rightfully asks.

(If you want to know more about Java, click the link below.)

1 in 3 Companies Exposed To Data Theft

According to the latest issue of Kroll Annual Global Fraud Report, suggest that the theft of digital assets has overtaken that of physical stock for the first time ever in 2010.

A Survey, conducted in cooperation with the Economist Intelligence Unit, indicates that the numbers of companies reporting theft of information has risen sharply – from 18% to 27,3% – in 2010.

“There’s a growing awareness among thieves of the intrinsic value of intellectual property,” Kroll vice president, Robert Brenner explains.

The survey also suggest that 88% of the  participating companies had been victim of some kind of fraud over the past year, nearly half of them are now fearful of expanding globally because of the cyber threat.

The experts emphasize that the numbers probably not are 100% accurate.

However, the message is pretty clear.

(Download the report below)

The Most Scary Thing

I guess most of you have heard about the Stuxnet worm/virus/malware in the news by now, and are familiar with the speculations that the extremely sophisticated malware might be some kind of cyber weapon, developed by government related scientists somewhere.

I sounds like a plot in James Bond movie – but the truth might be even more vicious.

Davey Winder

According to experts is not unlikely to be a prototype of the first ever cyber-weapon-of-mass-destruction.

Davey Winder, award-winning journalist, business consultant and security expert, explains:

“So what do we know about Stuxnet and the SCADA (Supervisory Control and Data Acquisition) systems?  Well, we know that Stuxnet is designed to be disseminated via USB sticks, and that it was developed to exploit specific zero-day vulnerabilities in the Windows operating system. To expand on that a little, Stuxnet actually exploits no fewer than four zero-day Windows vulnerabilities, a statement that alone should set the hair on the back of any security analyst’s neck prickling. Zero-day vulnerabilities are extremely valuable to the shady world of both hackers – where a zero-day is a kudos-generating device – and to criminals where zero-day equals pay-day. It’s relatively rare to see a single exploit being used in a piece of malware, and totally unheard of to see four expended in such a way.”

“Ask yourself, why would anyone waste three highly valuable zero-day exploits in a single piece of code when one would most likely do the job? Security experts recognize that this isn’t the modus operandi of the average hacker, nor the average criminal,” Winder writes in a recent article.

Personally, I believe that Stuxnet 2.0 is already out there – it just hasn’t been discovered yet.

The Internet Nuke Bomb

According to trend analyst, Gerald Celente, CEO and founder of Trends Research Institute, will cyber wars cause stir and come to fore in 2011.

And. as Eurasia, he is concerned about the government’s involvement.

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Here are some of the other highlights in Mr. Celente’s predictions for the year to come:

  • Every citizen in 2011 will realize that we are in the “greatest depression”
  • In 2011, the game’s gonna run out
  • Digital money, not worth the paper it’s not printed on
  • The youth of the world has mountains of debt to climb, and no way to get to the top
  • The greatest fear that governments have is freedom of speech
  • Your growth industries are the gangs
  • Crackdown on crime will lead to crackdown on liberties
  • Drones flying over your city looking in windows
  • The more government loses control, the harder they crack down

You may not take all of Gerald Celente’s forecasts equally serious, but many of the situations he describes is. in fact, common human behavior, observed in times of crisis since the collapse of the Roman empire thousands of years ago and up to our time.

At the latest count by McAfee Security Lab, about 60.000 pieces of malicious software is released on the internet every day.

And here’s how the last six months of 2010 looked like from the security software producer Kaspersky‘s point of view:

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Perhaps it’s time to upgrade?

 

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Looks Like A Classical Pump&Dump Setup

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology, Views, commentaries and opinions on 14.01.11 at 22:04

The global stocks markets are reaching for new highs, sending the benchmarks to the highest level since August 2008. Once again it’s the financials that’s leading the race after Wells Fargo raised its rating for large banks on prospects for higher dividends, JPMorgan Chase says it will use some of its reserves to boost earnings and Morgan Stanley says banks and insurance companies will be winners in the stock market this year. Well, it sounds like the same old song and dance routine to me, just like we’ve seen it over and over again for the last two years – a classical pump & dump scheme.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

Philip Dow


Personally, I don’t think there’s many investors who actually believe a word of what the bankers and their stock pushers are saying. But that’s not the point. The point is, however, that the big financials are setting up another stock market rally so they can cash in a couple of billion dollar more before the new regulations takes effect and prohibit them from trading with their own money, shutting down their most lucrative area of business.

This may very well be the biggest opportunity investors will get in 2011. The financial shares have, more or less, controlled the stock market over the last two years – pushing the average prices up, then pulling them down again.

But this is no game for amateurs. You never know when the big players turn around, stop buying and dump the load right in your face. The so-called “swing trade,” where the goal is to figure out exactly when the market turns, is one of the most difficult investment strategies there is. It can also be the most rewarding.

But remember; there is nothing – I emphasize; nothing – that indicates that the problems are over for financial firms. On the contrary; several signs points to more trouble ahead.

The greatest factor of uncertain right now is the European debt crisis. Even if it’s the national governments that is about to go bankrupt, it is the financial industry who’ll get the punch when countries starts to default.

Something the credit market investors have figured out a long time ago.

(Read also: Smart Money Is Not Stupid (Or Is It?))

The second bomb about to detonate is the dodgy foreclosure case.

At the moment, the banks are allowed to accrue interest on non-performing mortgages  until the actual foreclosure takes place, which on average takes about 16 months.

This “phantom interest” is not actually collected, but still it’s booked as income until the actual act of foreclosure.

As a resullt, many bank financial statements actually look much better than they actually are.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, and hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed, according to Forbes.

“Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans,” says Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

However, the central banks, and the governments will be pumping money into the financial markets as long as they can in order to keep the financial system running. And they might be able to do that for a year or two more (maybe even longer).

“The markets can stay irrational longer than you can stay solvent.”

(John Maynard Keynes)

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Anyway – who gives a shit?

The KBW Bank Index, which tracks 24 US financial companies, was up 13% in the four weeks through Jan. 5, three times the gains of the Standard & Poor’s 500.

And there’s also a third landmine in store for US banks.

According to Forbes, investors are now betting that the GOP-controlled Congress will water down the financial-services overhaul, and the great Wall Street reform will be just a joke, as many have feared.

On paper, the Dodd-Frank financial-services overhaul bill looks like a bank-stock killer.

It restricts how banks can trade for their own accounts, it raises capital requirements and it tightens supervision. By some estimates it will cut big bank profits by $22 billion annually—what the industry makes in a decent quarter.

Yet, bank stocks is rallying like it’s 2009.

Investors are banking that House Republicans will modify the new law, says Terry Haines, a senior analyst Potomac Research Group: “Back in July 2010, when Dodd-Frank became law, investors expected the quick imposition of rules with an immediate impact on the financial sector. But a lot of the key components of Dodd-Frank have not yet been implemented. And now there is a more favorable and moderate political environment as well.”

Note that any statement of just how much of the Dodd-Frank law will be changed by House Republicans is only speculation.

Investors may be overestimating the GOP‘s nimbleness.  The regulatory agencies could, in fact, begin to implement rules before the House Financial Services Committee holds any hearings on the matter, and the republicans may be distracted by efforts to reform the congressionally chartered mortgage giants Fannie Mae and Freddie Mac.

And some of the new regulations will simply not go away by themselves.

Banks will have to adhere to higher capital of some kind – the same goes for liquidity requirements – and the banks’ cost of deposit insurance and regulatory compliance are sure to increase significantly, regardless of what the GOP may accomplish.

“Every page of the law has something that impacts the bottom line,” banking lawyer Thomas Vartanian points out.

(The law is 848 pages long!)

Terry Haines points out that  the  regulators charged with writing regulations under the act will be scrutinized by the House Appropriations Committee as well as the Financial Services Committee.

“The Appropriations committee could limit the funding of controversial regulatory initiatives under Dodd-Frank, or even defund them entirely,” Haines says .

Perhaps. But the republicans could also easily be “Stewartized” into submission (mocked by the Daily Show’s John Stewart). And the general public is still quite upset over the fact that the hot-shots responsible for wrecking the economy still have their jobs and their bonuses, while about 8.5 million American workers lost theirs.

Something is going to hit the banking industry – whatever it will be…

“The people who took a political gamble on the sector in December most likely are traders who will take their money and run at the first sign of wavering by the House GOP,” Forbes writes.

If that’s the truth – the sector is set up for a classic pump and dump scheme.

Bank and life insurer stocks should see the biggest gains in 2011, according to a team of Morgan Stanley analysts. The team says its call is based on low valuations in the sectors, as well as increasing clarity about regulation that has weighed on the shares. An improving economy and the company’s increased capital deployment should drive return on equity.

Property and casualty insurers should also get a boost late in the underwriting cycle.

Morgan Stanley says its favorite names are Bank of America, Comerica and TD, for large cap, mid cap, and Canadian  banks, respectively.

In insurance, Prudential is the team’s pick for life insurers, with Axis Capital as a standout in P&C.

“Bank dividends and M&A activity signal the economy is transitioning from recovery to expansion,” says Philip Dow, director of equity strategy at RBC Wealth Management in a market comment at Bloomberg.com.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

That’s right! Pump, baby. Pump!

 

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EU To Increase Bailout Fund, Brussels Demands More Austerity

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 13.01.11 at 02:13

EU economics and monetary affairs commissioner Olli Rehn calls for a substantial increase of the European bailout fund ahead of the meeting between European finance ministers next week. Mr. Rehn also issue a stark warning about all the deficit-slashing austerity measures that European states have so far imposed – it is not enough.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change.”

Olli Rehn


Well, there is one thing the EU leaders absolutely not is lacking, and that is ambitions.  The economics and monetary  commissioner is asking for Europe to embrace structural reforms to bring an end to the debt crisis – by the end of this year.

“We need to review all options for the size and scope of our financial backstops – not only for the current ones but also for the permanent European stability mechanism too,” EU economics and monetary affairs commissioner Olli Rehn writes in an article in the Financial Times Wednesday.

“There is insufficient ambition and a lack of urgency in implementation. That needs to change,” he writes.

The commissioner, who calls for Europe to embrace structural reforms to bring an end to the debt crisis this year, wants to see changes to tax and benefit systems, reform of labor markets and pension provision, a loosening of business regulation and more investment in innovation.

“This calls for a comprehensive response by the whole EU and for bold fiscal and structural measures in all member states.”

He issued the call ahead of the unveiling of the European Commission‘s first annual growth survey, essentially a template with spending recommendations for EU member states, published as part of an effort to bring European-level coherence to national budgetary plans.

The EU member states are already considering an increase in the effective lending capacity of European Financial Stability Facility (EFSF).

While the EFSF kitty amounts to €440 billion, as more countries become borrowers from rather than guarantors of the fund, the actual capacity of the fund currently sits at roughly €250 billion.

Some governments favor a hike in the effective lending capacity to the full €440 billion, while others are looking to a doubling of the fund.

Member states are considering expanding the role of the EFSF to permit the common purchase of government bonds, an exercise which is currently the competence of the European Central Bank.

According to EU sources, any decision on the matter hinges on the result of government bond auctions this week, particularly Portugal’s trip to the market, EUobserver.com reports.

Mr Rehn told reporters Wednesday that “rigorous” cuts and “structural reforms” were necessary for Europe to emerge from its ongoing debt crisis and return to growth.

“Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscous circle of high unemployment, high debt and low growth,” he said.

Adding the following warning: “Without intensified fiscal consolidation across member states, we are at mercy of market forces.”

(Now, that’s also an interesting perspective!)

The commission says that “bold” and “resolute policies” are needed to turn around weak projected growth of around 1.5 percent for the EU over the next ten years and 1.25 percent for the euro zone.

Brussels wants to see further cuts to budgets in 2012 on welfare reform – including more conditionality attached to benefits, and a raising of the “premature” retirement ages.

Labor markets should also be made more flexible and “strict and sustained wage moderation” should be maintained.

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2011 Key European Issue: Politicians And Politics

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Quantitative Finance, Technology, Views, commentaries and opinions on 11.01.11 at 02:11

According to The Economist Intelligence Unit (EIU) will European politicians and lawmakers come under heavy pressure in 2011, as the politics become more confrontational and creditor countries’ willingness to sustain financial support is fading away. New austerity measures will be implemented and trigger a new wave of social unrest. It’s looking more and more like a worst case scenario, but at least the responsibility for the whole mess is about to be put in the right place.

“It cannot be ruled out that Europe will witness its first sovereign defaults since 1948.”

Economist Intelligence Unit


If a sovereign default should happen, it would put huge strains on banks’ balance sheets, potentially triggering further bank recapitalization in core euro states, EIU argues. “The EU economy has revived somewhat following an unprecedented contraction in 2008-09, but the recovery will remain faltering and uneven, with some countries recovering pre-crisis output levels quickly and others suffering long and painful adjustments,” the analyst concludes.

This is the key remarks by the EIU-analysts in their 2011 report:

* Euro crisis.

The sovereign debt crisis will continue to cast a shadow over the euro zone, and doubts about the single currency’s long-term survival will not easily be assuaged. Policymakers are slowly coming to terms with the fact that the survival of the euro area cannot simply be taken for granted and will depend on careful management of current stresses in the bond markets and weak banking systems, as well as reforms to fiscal governance and more determined efforts to tackle structural problems. Our core forecast is that the euro zone will avoid collapse in 2011, but there are likely to be more than a few uncomfortable moments. We expect that Portugal will be forced to access the EU/IMF financial stability fund, while Spain will need to roll over about 21% of its public debt in 2011, in addition to financing a budget deficit of over 7% of GDP. Financial-market jitters could resurface for many reasons, but a particular concern would be if investors became fundamentally convinced that the EU/IMF fund, nominally worth $750bn (US$990bn), was inadequate to bail out those countries needing assistance. Spain probably won’t need to request a bail-out, but the size of its economy means that any doubts on this front would present a particular risk to euro zone stability. The European Central Bank (ECB), meanwhile, by purchasing government bonds, has stepped into politically controversial territory and is likely to find it increasingly difficult to step back.

* Austerity.

The need to reduce large budget deficits will remain an obvious challenge for many members of the euro zone, and also for the UK. In 2011 austerity will become more visible in European countries as cuts in public services and pay bite. Economic conditions will also be rendered more difficult by the fact that the drivers of the global recovery in 2010 will have largely faded. A key question will be whether the supposed “cure” for fiscal ills will do the “patients” more harm than good by undermining economic growth so much that fiscal ratios worsen or, at least, fail to improve as much as policymakers had hoped. Moreover, if fiscal tightening starts to jeopardize the recovery, it may tempt governments to defer necessary austerity measures. The UK will prove a good test-case in this regard. The coalition government’s dramatic five-year fiscal consolidation programme comprises a mix of tax rises and the deepest sustained period of real-term public spending restraint since the 1940s. We remain of the view that policymakers are over-estimating the ability of a structurally weak private sector to drive economic activity as austerity bites, which could see the government facing the dilemma of either choking off the recovery or risking a rapid shift in investor sentiment by backing away from its fiscal targets.


* Social unrest.

Deep spending cuts and tax rises could have serious detrimental impacts on social and political stability. Sacrifices have been and will continue to be demanded of all those receiving salaries, pensions or other benefits from the state, while unemployment among public-sector workers is likely to increase. Greece in particular has been facing ongoing strikes against government austerity measures, by both public- and private-sector workers. We expect widespread industrial unrest to continue, but do not expect unrest to undermine the government’s efforts to rein in its budget deficit significantly. Political stability in Ireland will be significantly tested. So far, Irish citizens have accepted two years of austerity budgets with little protest. But the prospect of deeper cuts in the years ahead as demanded by the EU/IMF as a condition of Ireland’s $85bn rescue is likely to inspire social unrest. Dangers of social strife in other EU countries exist, but are lower than in the case of Greece and Ireland. Portugal has already undergone a long period of austerity and weak growth. Spain is only at the beginning of a period of public-sector tightening, but is over two years into a recession caused by a collapse in its property market (as well as the international financial turmoil) and has seen unemployment rise to over 20%, double that of most other countries, without so far experiencing anything worse than disciplined and peaceful protests. In France, recent trade union strikes to protest against an overhaul of the state-pension system served as a reminder of the potential for protests to cause significant economic disruption and trigger outbreaks of rioting. The government is likely to delay any further controversial reforms ahead of the 2012 elections. Trade unions in the UK are also expected to stage strikes as the scope of the government’s public-sector cuts become clearer. Comparatively tight legal restrictions on the ability to strike in the UK (in contrast to many other EU countries) will help the coalition to some extent, but we think that the scale of social unrest will prove to be considerably greater and more widespread than is currently assumed.


* Political relations.

The most important bilateral relationship in the EU is between Germany and France, both because their reconciliation laid the foundation of EU integration, and because they are the two largest euro area economies. As the political dynamics of the ongoing sovereign debt crisis demonstrate, Germany’s role in Europe is now more central than it has ever been. We expect Germany to maintain its commitment to the euro, but it’s increasingly assertive promotion of its national interest and reluctance to discuss the issue of macroeconomic imbalances within the euro area could trigger wider tensions. Relations between Chancellor Merkel and President Sarkozy have long been difficult and as discussions over how to hold the euro area together continue, frequent shows of unity are likely to be undermined by fundamental disagreements on crucial matters. There is a risk that relations could deteriorate. In general, French attitudes to the EU have become more sceptical in recent years, as the increase in the EU’s membership has reduced France’s influence. Mr Sarkozy may be able to point to the reform of financial regulations as evidence that the EU is developing in line with France’s aims, but the sovereign debt crisis has also increased the likelihood of a clash with the EU over the poor state of the French public finances.

* State aid.

Given how dependent many financial institutions are on national government and ECB assistance, the removal of the panoply of support measures (including liability guarantees, infusions of capital, government purchases of impaired assets and cheap central bank funding) might precipitate the failure of institutions and a further bout of financial panic. As a result, the phasing-out of support will be gradual. At the same time, efforts will continue to reconstruct internally those financial institutions that are being buttressed by government support. Having waved through all rescue packages at the height of the panic, the European Commission is now reasserting itself. It has already imposed large-scale downsizing on some banks, and more are being scrutinised. From the start of 2011, all financial institutions receiving state aid will be obliged to submit restructuring plans to the Commission (whereas previously this requirement was restricted to banks receiving support above 2% of their risk-weighed assets). The Commission’s active intervention is justified on the grounds that institutions that require state aid cannot be allowed an advantage over those that have survived unaided.

* Financial reform.

The implementation of a revised regulatory architecture for financial institutions will be high on the agenda, at national, EU and international levels. At the level of the EU, in September 2010 member states and the Parliament approved a major reform of the EU’s financial supervisory framework that will enable the creation in January 2011 of a European Systemic Risk Board (ESRB), responsible for macroeconomic supervision, and three new bodies to oversee the supervision of banks, insurers and securities markets throughout the EU. European supervisory authorities (ESAs) will be charged with developing and helping to enforce a common rule book and reinforcing day-to-day supervision by national authorities. There is still considerable scope for any recommendations and decisions to be overturned by governments on the grounds of national budgetary competences. However, together with the new ESAs for the banking sector, the ESRB is likely to have considerable influence over future measures to counter the build-up of risk in the European financial system, such as capital boosts, counter-cyclical capital buffers or maximum loan/value ratios.

* EU budget.

The common agricultural policy (CAP), an elaborate mechanism to maintain prices of agricultural goods, was central to setting up the EU’s forerunner more than half a century ago. Although it has been reformed to be less market-distorting and costly for European taxpayers, many members wish to see further reforms designed to diminish EU intervention, whereas others are adamantly opposed. Recent extreme volatility in food prices and concerns about security of supply have strengthened the latter grouping. The CAP currently accounts for just under half of the total EU budget. Negotiations on how the CAP will be structured and funded for the next budgetary period (2014-21) will be time-consuming and contentious. Although the EU budget accounts for a mere 1% of member states’ combined GDP, and is unlikely to rise above this level, the amount that each member contributes generates some of the bloc’s most divisive and protracted disagreements. The next negotiations, which are already under way, will be at least as difficult as any before owing to the historically large deficits that many member governments are facing. The UK is leading a charge to cut the budget and wants the majority of savings to be found in cohesion funds, while maintaining spending on the CAP (which will please France and Germany). This will be fiercely resisted by newer, poorer member states from central and eastern Europe.

Greece was the first country ever to default in the year 4 BC. I looks like Greece is going to do it again, ups….

And a quick look at how the spreads on Irish Credit-default Swaps are moving, I think the Economist-people safely can replace their “ifs” with “when’s.”

But, you know, they are Economists.
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1 US Cent Is Now Worth 3

In Financial Engeneering, Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology, Views, commentaries and opinions on 10.01.11 at 01:17

The special cell of Delhi Police, on Friday, claimed to have busted two illegal factories involved in melting old Indian coins and converting them to metal slabs for sale in the open market for making artificial jewellery and antiques worth a couple of crores of rupees. I wonder if this is just the tip of an iceberg? Or a sign of things to come?

“US 1 cent copper coins in circulation (minted between 1909 to 1982) now have a metal value of 280% of their face value. Please do not melt coins! As collector items they could be interesting.”

Collector’s Blog


“As the price of a series of base metal (and precious metal) have gone up, so has also the theoretical melt value of many coins. Well precious metal coins typically do not sell below the melt value. However standard coins in circulation can typically be bought at face value. US 1 cent copper coins in circulation – minted between 1909 to 1982 – now have a metal value of 280% of their face value. Please do not melt coins, as collector items they could be interesting,” Dr. Espen Gaaarder Haug writes in his latest blog post.

“As the price of a series of base metal (and precious metal) have gone up, so has also the theoretical melt value of many coins. Well, precious metal coins typically do not sell below the melt value. However standard coins in circulation can typically be bought at face value,” Haug writes.

Adding: “I say theoretical melt value, because in many (most?) countries it is illegal to melt coins. But clearly some people got more than tempted to buy coins at their face value and then melt the coins to sell them for the metal value.”

In a research paper published in 2009, Dr. Espen Haug and Dr. John Stevenson shows that physical money – in this case coins – is in fact a very complex derivative with several embedded options. The value of the metal being one of them.

(Here a copy of the paper: “Options Embedded in Physical Money”)

There has not been too much focus on the subject, but with the price of most commodities, metal included, I assume it’s just a matter of time before we see a lot more cases like the one reported from India on Saturday.

Five persons; factory owner Mohd Jameel,  his acquaintances and his laborers were arrested on January 5 in connection with the case, Arun Kampani, deputy commissioner of police (special cell), says.

According to Times of India, raids were conducted in two factories at Johripur and Karawal Nagar from where nearly 1.550 kg metal slabs, huge quantity of coins, dyes, air pumps, motors, weighing machines, tools and other gadgets were recovered.

Another raid was conducted in Shahbad Dairy and Sadar Bazar and 350 kg of metal slabs were recovered from the premises owned by one Shyam Sunder, the Times of India writes on their website.

“These old coins, which had been issued by the Government in 1970s, 80s and 90s, had substantial metal weight. With the passage of time, metal value of the coins increased vis-à-vis denomination value of the coins due to the rise in metal cost. The situation led to this racket of fraudulently melting old coins of 50 paise, Re 1 and Rs 2 denominations into bricks, and further selling these to metal dealers,” Kampani says.

According to the Collector’s Blog at Wilmott.com, 1 US cent copper coins in circulation (minted between 1909 to 1982) now have a metal value of 280% of their face value.

“Please do not melt coins, as collector items they could be interesting,” The Collector urges.

Dr. Espen Gaarder Haug is a regular contributor at The Swapper and other blogs under the Econotwist’s umbrella.

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