Nuclear Option: UK Says Kick Russia Out of SWIFT

To be cut off from SWIFT is to be cut off from international finance.

Here we go again: a few months ago I wrote about Western powers having designs on kicking Russia out of the Society for Worldwide Interbank Financial Telecommunication system or SWIFT. Since it handles most of the international transfers for trade, investment, and simply moving money around, SWIFT is a must-have for conducting commerce in the modern world. Yes, Russia has actually forecast a scenario wherein it would be kicked out of SWIFT due to its various shenanigans in Ukraine (see the link above). However, coming up with a financial transfer system of its own is not exactly viable at present since an interbank system of one nation doesn't quite cut it for obvious reasons.

Citing the perceived effectiveness of bringing Iran back in line after cutting it off from SWIFT, the British are now mulling the EU doing the same to recalcitrant Russia since SWIFT is based in Brussels, Belgium:

Excluding Russia from the SWIFT banking system should be an option in lieu of sanctions if a truce in Ukraine is not respected, British Prime Minister David Cameron said. Russia last month said it would retaliate strongly if it were to be cut off from SWIFT, the international financial industry's secure messaging system that facilitates transactions. 

Speaking to a parliament committee on Tuesday, Prime Minister David Cameron vowed that Britain would push for tougher sanctions against Moscow if a tattered truce between pro-Russian rebels and Ukrainian forces falls apart. "I would hope that the European Union collectively would respond very robustly with new sanctions, including so-called 'tier three' sanctions, really hitting the economy of Russia," Cameron said.

British PM Cameron's argument is that if Russia wants to behave like a rogue state, then it might as well not participate in the global financial system (an estimated 90% or more of Russian banks' international transactions are coursed through SWIFT):

"But were that not possible then, of course, we should look at other avenues as well -- obviously looking at the SWIFT banking issues is a big decision but there is a logic for it."

"If Russia is going to leave the rules-based system of the 21st century, then they have to start thinking about whether it's going to be in the 21st century system when it comes to investment, when it comes to banking, when it comes to clearinghouses."

It is, of course, easy for the UK's leader to suggest this course of action since it does not rely much on Russia for natural gas supplies. Unfortunately for him, the real Europeans--those on the mainland using the euro currency--are quite reliant on Russia for gas supplies. The UK relies on Russia for less than ten percent of its gas needs; Belgium, for instance, relies on Russia for over 40%. With 30% or so of total EU gas consumption met by Gazprom alone, Russia has a fairly big gun whose trigger it can pull on the EU if push comes to shove. You don't have to be a genius to figure out that Russia will wield the gas weapon for leverage over this matter.

Bottom line? I would be surprised if the EU even considers cutting Russia out of the Belgium-based SWIFT since it would probably mean being cut off from Russian gas supplies in turn. Unless relations deteriorate to such an extreme extent, that is.

The Sartorial Bankruptcy of Greece's Socialist Leaders

"Tspiras, you dress as crappily as you 'govern'"

Ah, the tieless Greek leaders. Aside from their unreasonable demands--how can Greece stay afloat rehiring several thousands of laid off government workers basically pushing paper and not much more--the Syriza party flunkies also strike me as sartorially inept. The problem is that these flunkies are neither here nor there with their outfitting choices. If they really wanted to convey an air of rebellion against the EU establishment, then they wouldn't bother to wear business suits with dress pants and jackets. How defiant does not wearing a tie make you, after all? If I really wanted to show Western Europeans my retro-Communist leanings, why I'd show up at EU gatherings wearing an ushanka like Carlos the Jackal. Or a Nehru jacket with a bolo tie and clown shoes. Anyway...

What Greek voters might not have expected was the first big reaction to Tsipras's maverick streak would be all about his sartorial choices. As soon as the 40-year-old was sworn in as prime minister, people began asking one question over and over again. Where is his tie?

It didn't go unnoticed. When Martin Schulz, head of the European parliament, met with the Greek leader last week, reporters saw him apparently making a comment on the lack of tie to Tsipras. According to the Associated Press, French finance minister Michel Sapin also made some kind of similar gesture when he met the new Greek leader.

Their excuse is that they are no part of the "political class" (whatever that means):

There's no codified protocol for attire during meetings like these: European leaders are simply more used to seeing their peers wearing ties. But given that the entire Greek government can be seen without ties at points, it looks as if the ministers are trying to convey a deliberate political message.

So what lies behind the new Greek political classes rejection of ties? At first, Tsipras told reporters that he may never wear a tie, a comment that played into finance minister Yanis Varoufakis's idea that Greece's new leaders were "reluctant" politicians who simply want to fix Greece's problems: They were average guys, not of the political class.

This is of course nonsense. Just as you wouldn't show up at a formal wedding wearing bermuda shorts and a tank top, you must look the part when meeting with Eurocrats. Not wearing a tie is a sign of flippancy, and even more so when the persons you're talking to are your creditors to the tune of hundreds of billions of euros. The halfway step of wearing business suits without ties doesn't cut it at all--you might as well show up in ponchos and Megadeth T-shirts.

Finance Minister Varoufakis looks even more ridiculous.

Tspiras (and company): you think it's "cool" not to wear a tie, but really, you end up looking like a bunch of dorks way out of your league. The promise to wear a tie when Greece's situation is resolved is hilarious: given the extent of its problems, it will take more than a generation to sort out its situation. Being unfit to be in the EU--economically or sartorially--is the Greek meta-narrative since the country got into the EMU under false pretenses to begin with.

Friends, Comrades: the Venezuela-ization of Greece

They do [bank] run run, they do run run.

Recalling the statement that Argentina was becoming Venezuela and Venezuela was becoming Zimbabwe, here's my international spin: Greece too is becoming Venezuela, while Argentina is becoming North Korea. Like the Kirchners' Argentina or the Chavistas in Venezuela, the new socialism in Greece is taking its toll. But before we get to that, here's your daily dose of Venezuelan conspiracy theory lunacy. It shows the severity of the situation there when the source is the left-leaning Think Progress that ice cream parlors and crossword puzzles are now being tarred as American conspiracies to overthrow the government:

As Venezuela’s economy has flailed, government officials have cast blame on ice cream shops and crossword puzzles for what they allege is a conspiracy to topple the administration by crippling the economy. Venezuelan President Nicolas Maduro said on Sunday that the owners of a chain of pharmacies were “conspiring” to “annoy the Venezuelan people” by artificially creating long lines at their registers. The did cut back employees, but that may well have more to do with a shrinking economy than a conspiracy to irritate their customers.

Last month, the country’s tourism minister refuted the claim that the closure of a shop that sold more than 800 flavors of ice cream could be blamed on a lack of milk. “It’s false,” he said, adding that the owner staged the closure with the media “as part of the low-intensity war against the present government.” Crossword puzzles have also earned conspiratorial glances from the government. In March, Venezuela’s information minister said that puzzles in a regional paper were used to encrypt messages to stoke revolt against the government.

Not to be outdone, the new Greek government is making plenty of outre statements itself. Witness its scary finance minister, a self-styled "libertarian Marxist."  For some reason unfathomable to them, the international community is spooked by the neo-Communist stylings of Syriza. They're supposedly ruling out asking for Russian aid, but Chinese aid may be on. In the meantime, Greeks are taking all their euros out of the banks in fear of sequestration. That is, the newly-installed Communists may freeze all accounts or even turn euros into the new drachma or whatever currency they will have after leaving the EMU.

So, regular folks are coming up with all sorts of creative places to shove wads of cash where the socialists (hopefully) will not find them as withdrawals continue apace:

Georgios Karavelas drives a taxi in Athens and for the past month has been a silent witness to what ordinary Greeks are doing with their cash. One passenger, he said, told someone on his mobile phone that he’d withdrawn 25,000 euros from the bank, taken it home, worked loose a tile in the bathroom and stashed the money there. Another took the cash to his village and buried it in the garden. Yet another fashioned a small safe box in the air-conditioning unit on his balcony. “I can’t fault these people,” said Karavelas, 37. “They were obviously people who had worked hard for their money, with families and jobs, not oligarchs.”

Withdrawals from Greek banks may have exceeded 15 billion euros ($17.2 billion) in the run-up to the elections that catapulted Alexis Tsipras and his anti-austerity Syriza party to power, including at least 11 billion euros in January, according to four bankers citing preliminary data. Tensions between the new government, which won on a platform of debt relief, and Greece’s creditors, including Germany, may keep up the pressure.

“Talks with the creditors is going to be a protracted process so you can’t rule out more pressure on deposits,” said Wolfango Piccoli, managing director at Teneo Intelligence in London. “There is plenty of uncertainty and that can make depositors nervous again.”
Greece’s bailout program ends on Feb. 28 and failure to come to an agreement with the troika of lenders from the European Commission, International Monetary Fund and European Central Bank could leave the country without funding to repay billions of euros in debt due in the coming months. Germany is prepared to wait until April or May, when Greece hits a cash crunch to strengthen its bargaining position, a person familiar with the matter said.

The smart money's already left the Greek banks, which are teetering on the edge of solvency as a result of a "bank marathon," not a bank run:

“The story of the Greek deposits is not one of a bank run but a bank marathon,” said Andreas Koutras, a partner at In Touch Capital Markets Ltd. in London. “The smart money is long gone and there are few accounts with more than 100,000 [euros]. The true barometer of fear is the amount of hard cash that is withdrawn, not how much is transferred outside Greece. This has gone up the past two months...”

In Dec. 2009, the outstanding balance of deposits in banks was 237.5 billion euros, compared with 160.3 billion euros at the end of 2014, the latest figure from the central bank. The figure plummeted to 150.6 billion euros at the end of June 2012 on fears Greece would leave the euro. In May and June that year, 15 billion euros in deposits fled the country’s banks, central bank data shows. 

From Caracas to Athens, I believe these folks have forgotten the reasons the Iron Curtain collapsed in the first place: socialism sounds great on paper, but in practice it's rather horrid and brings out the worst in people. Apparently, this phenomenon may need to be re-learned every quarter century or so. I am not necessarily a fan of the EU ministers, but I think the new Greek leadership has a very weak bargaining chip in threatening to leave the EMU since the German powers-that-be have decided this may be a legitimate course of action at this point. It would save them from sinking further money into a seemingly lost cause. Besides, the wrath of Greece's citizenry would be upon Syriza for taking such a drastic course of action. After all, so many people wouldn't be hoarding euros unless they had value and worse could come like the return of the drachma.

Stay tuned.

UPDATE: The cash spigot, AKA Emergency Liquidity Assistance--ELA in which Greek sovereigns could be exchanged for euros at a relatively low cost by local banks--has been turned off. While the European powers-that-be are showing who's boss, it raises the chances for an extreme Greek reaction like leaving the EMU.

"Kicking Out Greece Bodes Well for the Euro"

Sorry, Greece, but you're on the way back to drachmas (and the EMU may be glad you're gone).

Sherlock Holmes once said something to the effect that if all other alternatives have been ruled out, then the remaining one, however implausible, must be true. Today, we saw the election of an anti-austerity party in Greece in Syriza. Its leader, Alexis Tsipras, has threatened at various points in his short but eventful political career to upend the status quo by leaving the Eurozone, repudiating Greece's debts, or at least renegotiating the terms of its obligations to the EU and the IMF. Consider:

As for investors. there are two reasons why Syriza's victory is significant. First, and as I've mentioned, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the IMF, and a write-off of at least some of the country's massive public sector debts.

At the moment, he and his colleagues are stressing that they want to negotiate and are sending out emollient signals. But the Germans are saying that the deal done with Greece in the rescue is the deal that holds. So compromise may prove impossible - Greece rudely ripped from or bolting from the eurozone is not an impossibility,

The reaction of markets to Syriza becoming the party in power was a distinct yawn. The euro went nowhere and actually strengthened a touch in the aftermath of the result. The thing is that polls already foretold this outcome well in advance, so no one was surprised. So, one argument is that the Greek revolt was already "priced in" by the euro dropping in value days before as the likely result of the elections became evident. However, a more intriguing one is that, instead of keeping Greece in the Eurozone as a precondition for the single currency's continued viability, it would be better off if Tsipras got his death wish and Greece got kicked out of the EMU:

So why aren't investors in a state of frenzied panic? Why have the euro and stock markets bounced a bit this morning? One slightly implausible explanation is that investors believe the eurozone would actually be stronger without Greece, so long as no other big country followed it out the door. 

Think about it: other countries bailed out like Ireland and Portugal are regaining their footing, leaving Greece in a standout position as an exceptionally troubled economy. (It must be to vote in a bunch of economic extremists, after all.) Might the situations of these other troubled economies be "manageable" in relation to Greece? Instead of Greece dragging everyone down by adjusting monetary policy to the weakest link, why not remove the weakest link from the chain? The assumption, of course, is that the remaining links will not be in similarly dire condition.

There may only be one way to find out if this is true (that market participants actually prefer by now).

Got $50B? IMF's Ukraine Money Pit & Franklin Templeton

There's "postwar reconstruction," but the IMF has completely lost the plot with "duringwar reconstruction."

I am unsure of many, many things, but this I know: Ukraine is a bottomless money pit. I figured this out a long time ago when I said that if the West really wanted to "punish" Russia, it should have let the Putinists "have" Ukraine. Think of the untold sums of money the Russians would have wasted instead of the West. Predictably if stupidly enough, the powers-that-be thought that the "country" of Ukraine was worth saving and have forced the IMF to act on their cause. You can read the hilarious econospeak elsewhere, but the situation remains the same: they believe a financial fix is possible for an ongoing security crisis. I have never heard of such a thing.

[I] As I keep repeating, there is no such country "Ukraine" anymore as the Crimea has been annexed and its eastern parts are controlled by externally-funded militias. To expect "Ukraine" to pull through is like expecting "Afghanistan" or "Somalia" to do the same--these are failed states whose problems are far beyond the salvation of IMF-style financial fixes. If there were IMF peacekeeping forces I'd be a smidgen more optimistic about its prospects, but no. Why does the IMF persist in this nonsense, though? Again, Western powers-that-be have forced it to "do something" about Ukraine despite its unsuitability to the task of keeping a crumbling nation apart. Witness:

The country has been choked by the loss of control to pro-Russia rebels of its key industrial region in the east, sapping productive output and revenues for the government. A new IMF program "will allow us to gain access to additional resources, which in turn will enable us to return to economic growth, restore adequate foreign exchange reserves, and ensure economic and financial stability going forward," said Ukrainian Finance Minister Natalie Jaresko.

Whoever this Natalie Jaresko woman is, she is completely nuts since she suffers from the same delusion that the IMF which has failed time and again to resuscitate Ukraine and must now do so under conditions of civil war will succeed. The situation is surreal:

With Ukraine it has to reach into its pockets for a country brought economically to its knees by nine months of civil war. "The IMF is entering unchartered waters," [former IMF Board Member Domenico] Lombardi said. "In recent times it hasn't supported a country at war with such a substantial package..."

Peter Doyle, a former economist with the IMF and strong critic of its policies, said it would be a mistake, and that the IMF is being "compulsive" in a desire to "be visible". "Until the civil war is successfully resolved, the IMF is absolutely the wrong institution to take the lead in financing," he told AFP.

"In particular, given the conflict, continued IMF lead compromises further its rules requiring that borrowing country policies are sufficient to secure sustainability." Moreover, the IMF is weighing more money for Ukraine just as it mulls a restructuring of the country's huge debt to commercial lenders, already equal to more than 73 percent of gross domestic output.

We then get to the kicker: Ukraine is estimated to need another $50 billion just to stabilize its financial situation--to say nothing of its security situation--likely making Greece like a bargain for the West since at least it's not at war (yet?):

It is a complicated equation, according to Mitov. A debt restructuring, especially one that forces investors to write off some debt, would alleviate financial pressures on the country. But it also "risks alienating foreign creditors for quite some time," meaning Ukraine would have limited access to debt markets, he noted.

The financing needs are Dantean. According to the Institute of International Finance, the country will need $50 billion from now through 2018, as it sinks into its worst recession since the Second World War.

[II] Speaking of which, one of those hoping for a bailout is Franklin Templeton, the American investment firm. It is on the hook for a lot of Ukrainian debt denominated [demoninated?] in US dollars. A massive haircut for those dumb enough to have bet on Ukraine is certainly in order, but we once again get into this Asian financial crisis-like situation that whenever American financial firms get in trouble during foreign misadventures, Uncle Sam is always there to bail them out:

[Franklin Templeton's Michael] Hasenstab will be an important figure in these [debt restructuring] negotiations. He runs bond funds for Templeton that held $8.8 billion of Ukrainian debt at the end of September 2014. (They have not yet reported newer data.) In June, the fund manager, who has won big on Irish and Hungarian debt in the past, painted a rosy picture of this investment...

Granted, it only constitutes a small part of the $185 billion in bonds he runs for Templeton, but for someone who has a reputation as a successful contrarian to maintain, the almost inevitable restructuring is a blow quite out of proportion to the actual financial effect of the losses. 

You have to give credit to Franklin Templeton though for daring to stay with their Ukraine, er, "investments." As the saying goes, no guts, no glory--but this time around it's been proven foolhardy more than anything else. That said, being paid, what, 60 cents to the dollar for bonds as the restructuring is believed to offer when they bought these bonds at 80 cents isn't so bad.

For the funders of the IMF, though, it's another story since their commitment seems limitless and open-ended--a money pit, in fact.

After Swiss Capitulation, Will Danes Keep Their Peg?

Older bills feature a homburg wearer. Should we keep faith in homburg wearers?

First off, you can discount the headline from the rather sensationalistic Daily Telegraph--bastion of economic illiteracy--that the removal of Denmark's krone (DKK) peg may cause similar effects to the disruption caused by the Swiss uncoupling the franc's value from that of the euro. From BIS figures, the Swiss franc (CHF) is the world's sixth most-traded currency in global markets--involved in 5.2% of all transactions--whereas the Danish krone's share of 0.8% is a rounding error in comparison. It's simply not one of the world's most widely traded currencies, and Denmark is not quite a global trading powerhouse despite being a very advanced country due to its size.

That said, the Danes are wading into dangerous territory by attempting to ward speculative money away through negative interest rates on short-term deposits. That is, they are trying to prevent speculators from going "long" on krones since you would actually lose money holding onto it:

Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.”

The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2 percent, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.

What the Daily Telegraph unsurprisingly neglects to mention [surprise!] is that the Danish authorities actually have an agreement with the ECB formalizing its longstanding peg. Unlike the Swiss authorities who are Johnny-come-latelys to the pegging sweepstakes, the Danes have been at it since the German occupation:

According to the exchange-rate agreement between Denmark and the ECB, currency interventions to defend the peg will “in principle be automatic and unlimited...” Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” [Economy Minister Morten] Oestergaard said. “This situation should not be overly dramatized.” 

On one hand, then, global consequences of the Danish krone breaking its peg to the euro from around its current level of 7.43 should be minimal (outside of Denmark). Whether it's in the interests of Danish officials to do so is another question. Sure Danish officials say their situation is different from that of Switzerland and that they will defend at all costs, but the latter reassurance was also made by the Swiss a week before their peg was broken.

My take? The Danes will attempt to tough it out--perhaps by making short-term rates even more negative in the coming days. However, if these attempts prove unsuccessful or too costly, they will remove the peg...and reset it at a somewhat lower EUR/DKK level. Like Dick Cheney and waterboarding, I believe pegging is in their blood. 

Counting Ways the Swiss Franc Shook the World

Some folks didn't know when to fold 'em, hurting FXCM.

Less than a month into 2015, we already have a candidate for its biggest economic story for the year. Catching nearly everyone off-guard, the Swiss National Bank (SNB) indicated on Thursday (15 January) that it would no longer push down the value of the Swiss franc against the euro. You see, since 6 September 2011, the SNB had kept the Swiss franc (CHF) at 1.20 to the common currency to maintain the competitiveness of Swiss exports--especially to the Eurozone where over half of them go. The trigger of this guarantee was the CHF brutally gaining against EUR [1, 2] as the European Central Bank (ECB) started emulating American-style easy money policies in trying to reflate the Eurozone from its moribund state.

By the end of Thursday, CHF had gained nearly 40% against the euro--kind of unbelievable, but it really did happen. We all know of the massive Swiss multinationals that have loudly complained about the SNB's action given the loss of competitiveness that will surely follow: ABB in construction, Nestle in food, Hoffman-LaRoche and Novartis in pharmaceuticals, etc. The beating Swiss exporters received on stock markets on Thursday and the uncertainty this action caused for banks that were caught "short" on Swiss francs the world over walloped any number of financial service concerns and dragged global equity indices down.

However, there is also a long list of victims of the SNB move that are somewhat less obvious. Nothing is for certain, and mistaking something temporary--albeit long-lasting--as permanent gives rise to all forms of financial distress when the self-inflicted delusion is revealed. In order of culpability, these include:

(1) Eastern Europeans who took out home loans denominated in CHF:

Eastern European currencies tumbled and banking stocks slumped after Switzerland’s move to allow its currency to appreciate stoked concern individuals will struggle to repay loans denominated in Swiss francs. Poland’s zloty weakened 15 percent to 4.1533 against the the Swiss currency by 5:56 p.m. in Warsaw, paring an earlier loss of as much as 28 percent. Hungary’s forint and the Romanian leu tumbled to records. Warsaw-listed Getin Noble Bank SA sank 16 percent, while Bank Millennium SA and PKO Bank Polski SA, the country’s biggest lender, slid at least 6.5 percent.

The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate is threatening to spur a rise in bad debt as the move raises the cost of paying off loans in francs, including mortgages. Many Poles and Hungarians opted to borrow in francs in the run-up to the 2008 financial crisis because loan rates were lower than for local currencies. Their payments increased as the franc appreciated against the zloty, forint and leu in all but one of the past five years.

“Massive Swiss franc appreciation is extremely bad news for foreign-currency borrowers in central Europe,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed note. “It will make servicing franc loans more expensive, reducing disposable income and hurting consumption. That’s bad news for growth and the banking sector as the non-performing ratio of Swiss franc mortgages is likely to increase.”

(2) One of the world's largest online foreign exchange brokers, FXCM:

Retail foreign exchange broker FXCM got a $300 million bailout on Friday after taking huge losses on the Swiss National Bank's (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro.

Leucadia National invested $300 million cash in FXCM in exchange for a $300 million senior secured term loan with a two-year term and a 10 percent coupon. If FXCM is sold Leucadia will get a portion of the proceeds. FXCM shares plunged more than 70 percent in afterhours trading Friday. The stock was halted for the entirety of the regular session.

To make a long story short,  FXCM had to cover margin calls for clients considerably in excess of their account equity, causing losses for the broker itself. In other words, it loaned money for clients to gamble against the Swiss franc with, and this magnified their losses when the CHF strengthened. Meanwhile, FXCM held the bag in compensating counterparties for losing bets its customers made against the Swiss franc.

(3) And perhaps the most obvious of them all, a large hedge fund that was reportedly shorting Swiss francs:

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private.

The stereotype most have of the Swiss is of rather staid people. Ever been to Geneva? Whoever thought that it would be the Swiss who would drop this kind of bombshell on the world economy so early in 2015? A happy new year it is not for any number of folks embroiled in forex shenanigans involving the Swiss franc.

How the Pirate Bay Was Dismembered

The Pirate Bay folks go to jail; the site went to the big cloud server in the sky.

In the interest of, ahem, academic research, I've noticed that what was once one of the world's largest torrent sites has been inoperational for two weeks now. The Pirate Bay, we hardly knew ye. Whatever your views are of torrent sites, it is always interesting to follow the cat-and-mouse game between the authorities--usually Western trade or intellectual property agencies acting on behalf of copyright holders--and the torrent sites. So the Pirate Bay is (was?) one of the largest torrent trackers. That said, there are literally dozens more out there which feature largely the same content. Why is it, then, that the Pirate Bay has succumbed rather easily? After all, aren't the Swedes a bunch of libertarian, Julian Assange-loving folks?

On 9 December, Swedish authorities mounted a rather large raid on the Pirate Bay's facilities:

However, over in Sweden authorities have just confirmed that local police carried out a raid in Stockholm this morning as part of an operation to protect intellectual property. “There has been a crackdown on a server room in Greater Stockholm. This is in connection with violations of copyright law,” read a statement from Paul Pintér, police national coordinator for IP enforcement. Police are staying quiet on the exact location of the operation and the targets involved but the fact that the national police IP chief is involved at this early stage suggests something sizable.

In addition, expert file-sharing case prosecutor Fredrik Ingblad has commented on the raid, further adding weight to the incident. “There were a number of police officers and digital forensics experts there. This took place during the morning and continued until this afternoon. Several servers and computers were seized, but I cannot say exactly how many,” Ingblad told SR.

Some news from a few months back suggested the Pirate Bay acquired a greater degree of insulation from the authorities by migrating to cloud servers. Obviously, we now know that was not really the case. There has been a fairly large international dragnet to detain those affiliated with the Pirate Bay over the past few years. In terms of scale and scope, it strikes me as the cyber-equivalent of the Israeli intelligence agency Mossad tracking down and terminating every Palestinian believed to be with the Black September group that kidnapped Israeli athletes during the 1972 Munich Olympics, but I digress...

One by one the key players behind The Pirate Bay have been captured by police and forced to complete jail sentences previously determined by Swedish authorities. The most recently detained was Fredrik Neij, a key player in the operations of The Pirate Bay right from the very early days of the site.

After realizing that his fate in Sweden involved a 10 month jail sentence, Neij fled to Laos in Asia where he lived until recently with this young family. He traveled from Laos into bordering Thailand on many occasions but last month his luck ran out. On November 4, immigration police announced that Neij had been detained while crossing the border into Nong Khai, a city in North-East Thailand. What followed was a very public press conference in which a bewildered looking Neij was paraded before the media while flanked by several officers.

To no one's real surprise, the powers-that-be that have instigated, ah, tracking down the nefarious (or heroic depending on your point of view) TPB folks were major US media conglomerates:

But while the rest of the world had to wait until November 4 to hear the news, leaked emails obtained by TorrentFreak show that the Hollywood studios knew about things well in advance. In an email dated the day before Neij’s arrest was made public, the MPAA advised chiefs at Disney, Paramount, Sony, Warner Bros, NBC Universal and FOX of the Swede’s arrest. But things went deeper than that.

Already there had been rumors in Thai media that “U.S. movie companies” had hired a law firm to track down Neij and that a house on the island of Phuket plus a bank account containing five million baht ($153,000) had been discovered. Emails seen by TF confirm the MPAA’s involvement, but also that they didn’t want that noticed in public.

What are the lessons for torrent sites here based on the Pirate Bay's example? I think the most obvious one is that having servers located in the West is just plain stupid. Even in Sweden where they are relatively relaxed about IP and copyright--Swedes are generally laid-back people--American pressure likely resulted in the major action against the Pirate Bay's facilities. Kickass Torrents with its Somali domain notwithstanding, moving one's top-level domain (TLD) to exotic places like Sint Maarten or Ascension Island doesn't seem to help that much.

Since the Pirate Bay episode has put into question the ruse of moving to a "cloud server," I guess two possibilities remain: First, you can try to hide the location of these servers as best as you can. Witness the private tracker site Demonoid being resurrected when I thought it had bitten the dust a few years ago. True, activity hasn't been what it was before the long closure, but hey, it's still there and that counts for something. Second, you can base your servers where the long arm of American law can't reach you. Given Russia's "New Cold War" with the West, the irony of it all is that sites like Rutracker.org with much of its tracked content being served up to foreigners will have staying power. Sure you may be hit by the odd Ukranian DDOS attack, but those things usually blow over quite quickly.

Make no mistake: even in the so-called "digital age," there is no "death of distance" as geography still matters--for torrent sites, at least.

2014's Worst 'Currency' is Bitcoin; Its Best Surprises

I've been following currency gyrations in 2014 with great interest since their movements do correlate with internal and external disturbances related to wider economic phenomena and geopolitical events. To no one's surprise, Russia's ruble and Ukraine's hryvnia have followed each other to near-oblivion. A while ago, I also explained why I believed Bitcoin was a dud while Apple Pay held out much more hope for becoming a "mainstream" form of money. Oh, if only I had tracked it more closely.

At year-end, the world's three worst-performing monies are, (3) the Russian ruble, (2) the Ukrainian hryvnia, and, taking the cake--(1) the hapless Bitcoin. Bloomberg charts don't lie:

The accompanying write-up offers all she wrote:

The digital currency peaked at a value of $1,130 just over a year ago. Its plunge of more than 56 percent in 2014 makes it the world's worst performing currency this year, according to Bloomberg, which tracks 175 foreign-exchange values...

At a current value of about $326, Bitcoin isn't dead, yet it may be mortally wounded. The Dec. 20 sentencing of Charlie Shrem, one of the digital currency's most vocal cheerleaders as vice-chairman of the Bitcoin Foundation and chief executive of an exchange called BitInstant, to two years in prison for illegal money transfers doesn't help.

While innovation should always be encouraged, Bitcoin isn't yet fit as a place for orphans and widows to shelter their nest eggs -- although there are admittedly plenty of gold bugs who would say the same about fiat currencies.

I hope to explore some of the reasons why I believe that Bitcoin is another victim of (likely short-lived) dollar strength, but that's a topic for another post. Anyway, let's try to forget about the Eastern European mess and focus on the magic of Christmas since others' currencies have done rather better. Do you believe in magic? The world's best-performing currency of 2014 is, of all things, the Somali shilling:

Here’s a pecuniary peculiarity to rival Bitcoin – the world strongest currency over the past 12 months belongs to a small, war-torn African state without foreign currency reserves or any discernible monetary policy and a central bank of only three years’ standing. Yet the Somali shilling, Somalia’s official currency, has overcome such disadvantages to appreciate against the US dollar by just under 60 per cent since March last year, becoming the strongest among global 175 currencies tracked by Bloomberg. Its surge has been so pronounced that the second most robust currency over the same period – the Icelandic Krona – could only manage a measly 10.2 per cent rise.

The key chart is above even if it's a bit dated. Note that its direction is opposite to the one above since it's expressed in USD/SOS terms. That is, a falling exchange rate means a strengthening Somali shilling. It all reminds us that issuing fiat currency is a confidence game--one that Somalia is winning against all odds as it regains a very slight semblance of normalcy (i.e., statehood) while such normalcy flees from Russia and Ukraine:

The key lesson, though, is that money remains at heart a confidence trick. Minor things, like being backed by a country or countries, being minted by a government, and having a physical form you can put in your pocket, still matter. All of which could come into sharp focus the day hackers reduce our checking-account balances to zero, the financial system crashes into chaos and the fragility of the world's banking infrastructure is laid bare for all to see. Let's hope 2015 isn't the year when we find out that zeroes and ones in a computer aren't really money.

In a few more hours, Christians will celebrate the birth of the savior. Make no mistake: there is a long list of developing world currencies that need "saving" in the coming year.Former Soviet bloc nations have it especially bad so those Orthodox churches should be packing 'em in the pews with those wishing for divine (currency) intervention.

Will Ferrari Leave Italy for Tax Reasons?

Ferrari leaving Maranello is the secular equivalent of the Pope leaving the Vatican.

While Ferrari is a world-famous marque, its situation is no different from that of many other European multinationals attempting to cope with the lukewarm business climate in Europe. Motor racing fans know it's been a tumultuous year for Ferrari. Longtime Ferrari Chairman Luca de Montzemolo--mastermind of its early 2000s resurgence in motor racing and the revamp of its road car lineup--was forced out in September. Among other things, he supposedly didn't want to increase the marque's production of about 7,000 vehicles annually since demand existed to easily shift more than that. Meanwhile, at the Formula One team, there have been several leadership changes and the departure of star driver Fernando Alonso given its consignment to mid-table, non-race-winning form.

As if controversies over parent company Fiat becoming more of an "American" company weren't enough, we now have word that Ferrari itself--the quintessential pride of Italy--may be relocating because of tax purposes:

Ferrari SpA is considering moving its fiscal residence outside Italy to save on corporate taxes as the supercar maker prepares for its spinoff from Fiat Chrysler Automobiles NV (FCAU), people familiar with the matter said. The manufacturer, which uses the colors of the Italian flag in its logo, may follow in the footsteps of Fiat Chrysler, which is registered in the Netherlands, listed on the New York Stock Exchange and based in London for tax reasons, said the people, who asked not to be identified because the discussions are private.

Other options including keeping its Italian residence are still on the table, and a shift in its fiscal residency wouldn’t affect its manufacturing and engineering operations in Maranello, about 190 kilometers (118 miles) south of Milan, the people said. A final decision will be made in coming months, the people said. Fiat Chrysler representatives declined to comment.

Ferrari shifting its corporate headquarters outside Italy would represent a symbolic blow for the country, which is struggling to end a cycle of recessions. Prime Minister Matteo Renzi is attempting to push through labor and tax reforms to make the Italian economy more competitive. Those efforts have already come too late for Fiat Chrysler and CNH Industrial NV, the truck and tractor maker spun off from Fiat in 2011. Both companies have already moved their headquarters to the U.K. from Italy. 

Make no mistake: doing business in Italy has not been a walk in the park these past few years:

Fiat Chrysler and CNH benefit from the U.K.’s corporate tax rate declining to 20 percent next year from 21 percent. Income from patents will eventually be as low as 10 percent, offering potential for additional relief. By comparison, Italy’s corporate rate is 31.4 percent. The country is ranked 56th in the World Bank’s Doing business ranking, just after Turkey and Hungary. The U.K. is 8th.

Hampered by stifling policies, the Italian economy has stagnated over the past 14 years and contracted 10 of the last 11 quarters. Unemployment rates are near record levels, and thousands of Italians have left the country in search of a better future. Last year, the number of emigrants from Italy rose 19 percent to 126,000, according to statistics agency Istat.

The situation of Fiat is illustrative of the lengths modern corporations go to in order to reduce tax burdens. Actually, Fiat Chrysler is a holding company in the Netherlands whose tax domicile is in the UK. None of its main operations are in either the Netherlands or the UK, but they are structured to appear that way on paper for tax purposes. It's a long story, but these sorts of structures are common for all sorts of MNCs nowadays--even sellers of chicken. On one hand, the crackdown of tax authorities which prompts these sorts of moves illustrates the situation of many Western European nations circa 2014. On the other hand, the brazenness with which companies "headquarter" themselves elsewhere depicts the multitude of structures that have been developed for hust this purpose.

EU-Canada FTA as a Precursor to an EU-US Deal

European activists believe stopping Canada precedes stopping America.

It appears that the EU-Canada FTA, a.k.a. the Comprehensive Economic and Trade Agreement (CETA), may soon be a done deal with Germany's SPD junior coalition partners indicating that they will let it push through despite initial misgivings about investment protection clauses that many left-leaning folks believe infringe on national sovereignty in the interests of global capital. Actually, bilateral EU-Canada negotiations were wrapped up a few months ago; these clauses and what to do with them have been among the principal sticking points:

German Vice Chancellor Sigmar Gabriel said he expected his Social Democrat party (SPD) would back Europe's free trade agreement with Canada (CETA), which has faced opposition from party left-wingers due to its investment protection clause. The deal, which could increase bilateral trade by a fifth to 26 billion euros ($34 billion) and is widely seen as a template for a larger trade pact between the EU and the United States, was wrapped up in August after five years of tricky negotiations.
However, critics say the investor protection clause, allowing companies to bring claims against a state if it breached the treaty, would give multinationals too much power and could lead to governments being pressured into ignoring laws on labor, the environment, data protection or food standards.

It is unclear whether all 28 EU states will have to ratify CETA. The EU Commission believes it is not necessary, but member states want a say, which means the dispute may have to be settled by the European Court.

The concern of European anti-globalization activists is not so much Canada as it is the United States. For, US firms with Canadian operations may use these investment protection clauses to sue EU nations over unfavorable state policies even if the EU-US FTA--a.k.a. the Transatlantic Trade and Investment Partnership (TTIP)--does not have them:

American multinationals could use investor-state dispute settlement (ISDS) provisions in the European Union-Canada trade deal to sue EU governments in costly legal battles that could stymie policymaking, campaigners have warned.

Corporations with Canadian subsidiaries and holdings could use the Comprehensive Economic and Trade Agreement (CETA) to take countries to international arbitration tribunals, even if the ISDS clause is dropped from the EU-US Transatlantic Trade and Investment Partnership (TTIP). US companies with “substantial business interests” in Canada would be able to use the CETA ISDS mechanism, if it is ultimately cleared by European and national parliaments.

They include ExxonMobil Investments, which used ISDS in the North American Free Trade Agreement (NAFTA) between Canada, the US and Mexico, to successfully sue Canada in 2007. The energy giant’s investment arm with Murphy Oil claimed about €49 million, but their final award was never made public. US food processing company Cargill would also qualify. In 2004, Cargill sued Mexico through NAFTA ISDS, winning €71.8 million. Mexico had tried to introduce a tax on drinks containing high fructose corn syrup. The syrup is linked to obesity.

American multinational conglomerates raise fears seldom matched by few others.  Uncle Sam is always the big, bad guy.

25 Years Later, are Post-Communist Europeans Better Off?

Did 1989 really matter all that much economics-wise?

9 November 1989 is the date when the historians consider the Berlin Wall to have gone down. Festivities in Germany have marked the twenty-fifth anniversary of this momentous occasion. For Francis Fukuyama, this event symbolized the End of History in which all political economies would converge on democratic capitalist systems in the absence of other viable alternatives. Alas, such has not been the case with the persistence of other systems--especially those of China and Vietnam which have successfully combined elements of an authoritarian state, central planning, and capitalist institutions on the margin. However, that counterexample pales in comparison to an even greater blast from the past: are "post-Soviet" states actually better off economically?

An interesting article in Businessweek suggests "not always" as many newly-formed countries are actually falling behind in the global economic league tables:

According to World Bank figures, the low and middle-income countries of Eastern Europe and Central Asia as a region have increased their average GDP per capita 43 percent since 1990. That’s slightly better than Sub-Saharan Africa but worse than South and East Asia, Latin America, or the Middle East and North Africa. For 25 countries in the former Eastern bloc, the per-capita GDPs of 13 (containing most of the region’s population) have expanded more slowly since 1990 than the global average. Of the 165 countries for which the World Bank has data, Russia’s GDP per capita (measured in purchasing power parity) was 33^rd highest in 1990 and 42^nd highest in 2013. Ukraine dropped from 55^th to 93^rd. Bulgaria and Latvia dropped one spot, Romania four, and Hungary eight. Poland did manage to climb 16 spots, to 45^th richest, but it was very much in the minority. While Albania, Poland, Belarus, and Armenia have more than doubled their income per capita since 1990, six countries in the region are poorer than they were that year, including Ukraine and Georgia.

More alarming yet is the notion that these countries actually did better during the Soviet era:

It isn’t just compared with countries in the rest of the world that growth rates across much of the former communist bloc are disappointing—it’s compared with their performance under communism. The Maddison project has historical data for 46 economies covering 1939, 1989, and 2010. That includes Bulgaria, Hungary, the former Yugoslavia and its successor states, and the former USSR and its successor states. In 1939, Bulgaria was the 36^th richest of the 46 countries. It climbed to 31st richest by 1989 and reached 30^th richest by 2010. The USSR was in 27^th place in 1939. It reached 26^th place by 1989, before the successor states as a group fell back to 34^th by 2010.

Having mentioned China and Vietnam, it all brings to mind the common accusation that Western one-size-fits-all prescriptions of deregulation, liberalization and privatization do not necessarily promote growth:

The trouble for such theories is that as a group, post-Communist countries have performed badly—and some of the countries that have adopted the most liberal policies have seen the weakest growth. It’s true that Poland introduced stronger reforms than nearly all other former communist states and has since fared much better in economic performance. But Georgia has also been a darling of the international community for the strength of its reform program; the World Bank’s Doing Business report, which purports to measure the quality of regulation surrounding starting and operating a business, suggests Georgia’s regulatory environment is better than Canada’s, Taiwan’s, or that of the Netherlands. Yet the country (wracked by Russian interventionism) remains poorer than it was at independence.

As it so happens, the IMF which made many post-Communist states implement such reforms via conditionalities for liberalization, privatization and deregulation has also just released another report entitled 25 Years of Transition: Post-Communist Europe and the IMF. The IMF is more sanguine on the fate of these states, and unsurprisingly suggests that incomplete reform is to blame for certain cases of underperformance:

The past 25 years have seen a dramatic transformation in Europe’s former communist countries, resulting in their reintegration into the global economy, and, in most cases, major improvements in living standards. But the task of building full market economies has been difficult and protracted. Liberalization of trade and prices came quickly, but institutional reforms in areas such as governance, competition policy, labor markets, privatization and enterprise restructuring often faced opposition from vested interests. 

For some strange reason, the IMF does not include Georgia in its survey. Another thing it does is compare the performance of post-Communist states solely in terms of their rankings relative to other European states (Western ones included). Is this a fairer comparison to look at pan-European performance instead of on a global basis? Also, they do not compare Soviet-era performance with post-Soviet era performance. For what it's worth, they offer the illustration below and its accompanying description:

The macroeconomic ranking is based on a weighted average of seven macroeconomic indicators (current account balance, inflation, unemployment, government balance and debt, GDP per capita at PPP and real GDP growth). Weights were generated by principal components analysis [factor analysis] of EU14 countries (EU15 excl. Luxembourg) using 2000–14 averages, which yielded results fairly close to equal weighting across the seven variables (with all taking the expected signs). The variables were normalized against 2000-14 EU14 benchmarks. 

While it may be fair to point out that European countries' economic performance has lagged that of other regions (and therefore excuses the measured performance of certain post-Communist European states), the IMF skirts the issues of comparing post-Communist European states' performance on a global basis and over time--especially the Communist era. Granted, the accuracy of economic record-keeping during Communist times is somewhat suspect, but unless the relevant comparisons are made, there will always be doubters. 

Re-Trying Carlos the Jackal, Celebrity Terrorist

bin Laden is dead and gone, but Carlos rambles on.

Whereas Osama bin Laden struck me as a po-faced fanatic, Venezuelan Carlos the Jackal always had an ironic streak to him. At the height of his infamy, his pseudo-socialist leanings gave lie to his high living nature as a self-styled "professional revolutionary." The contradictions inherent in Carlos the Jackal are what make him interesting in a manner that eluded bin Laden. The latter was simply a blowhard, whereas the former always had a nudge and a wink ready. As he jetted from one America-hating safe haven to another the world over in between (attempted) acts of terrorism against the West, his actual threat was well-exceeded by his inflated self-image. This was a guy caught, after all, after France effectively bought off the Sudanese. For all that, I hardly think anyone is going to make a five-and-a-half-hour biopic of Osama bin Laden. (And, unlike the movie actor, the real Carlos was always on the chubby side.)

Recently, Carlos the Jackal resurfaced again as his French captors made him stand trial for another terrorist incident in France from long ago. He isn't so young anymore, but he displayed some of the panache that made him the world's most famous terrorist--which he ironically is once more after the killing of bin Laden--wearing a Russian ushanka hat with the flaps tied up while appearing in court late last year. (He didn't get expelled from the Soviet-era Patrice Lumumba Friendship University for nothing.) Now, he's back:

An investigating judge specialising in anti-terror cases had ordered the latest prosecution, French newspaper Le Figaro reported on Tuesday. Ramirez, 64, had admitted carrying out the 15 September 1974 attack on the Drugstore Saint-Germain in an Algerian newspaper five years later, French media said. He has already been given a life sentence for killing 11 people and wounding another 150 in four attacks dating back to the early 1980s:

• In March 1982, a bomb exploded on a train between Paris and Toulouse, killing five people and wounding 28
• A month later a car bomb attack was mounted on an anti-Syrian newspaper in Paris, with one passer-by killed and 60 injured
• On New Year's Eve 1983, a bomb on a TGV fast train between Marseille and Paris killed three people and wounded 13
• A bomb at a Marseille train station killed two

Ramirez has also been linked to several other attacks outside France.

bin Laden's successors at the Islamic State in Iraq and the Levant (ISIL) are even more pointlessly bloodthirsty than he ever was. Carlos the Jackal was from a different age when targets were more Western ones and socialist fervor was more the cause. That is, the "international workingman" was a broad church where people of different ethnicities could work against bourgeois oppressors. With the fundamentalists, it's simplified into a "you're either with or against us," Muslims against infidels struggle.  

Meet America's #2 Real-Estate Buyer, Norway

Where Monopoly money comes from.

As far as Europeans go, Norway has a maverick, independent streak. It is not a member of the European Union, let alone a user of the euro. Unlike most of its neighbors, it has a petroleum-based economy. The latter has given rise to a fairly sizable sovereign wealth fund (SWF) officially known as the "Government Pension Fund Global" as oil proceeds have been saved over the years. Depending on the source quoted, its holdings range from $820 billion to a cool $890 billion--supposedly worth $178,000 for each Norwegian. [Can I retire as a Norwegian?] As you would expect from these smart, non-subprime-loving folks, it is a well-run SWF to boot.

Critics, however, point to its preference for investing mostly in the developed world where returns are rather lower. You can see this from the nifty interactive map on the SWF's site. However, this criticism has not dissuaded it from buying more blue-chip properties all over the world in accomplishing their version of "diversification." Take, for example, the United States:

Norway has vaulted to the top ranks of foreign U.S. commercial real estate buyers as its $870 billion sovereign-wealth fund, the world’s largest, acquires buildings from New York to San Francisco. The country has spent more than $3.2 billion on U.S. real estate this year, including the assumption of debt, according to research firm Real Capital Analytics Inc. and statements from the wealth fund. That makes it the biggest international buyer after Canada. The total is more than double the amount spent in all of 2013, when Norway ranked No. 6 for property purchases.

Norway, which has a smaller population than New York City, is spending billions of dollars on properties globally as its wealth fund seeks to meet a target to invest as much as 5 percent of its assets in real estate. In the U.S., prices for top-quality buildings in major markets are being driven up by foreign funds that often are willing to accept lower yields than domestic buyers in return for a safe place to put their money, according to research firm Green Street Advisors Inc.

“There’s an element of perceived safety in a hard asset in the United States, in New York City, that is harder to replicate in other alternatives,” said Michael Knott, a managing director at Newport Beach, California-based Green Street. Investors such as the Norwegian fund “have the ability to hold indefinitely and probably not be troubled at all by a low going-in yield.”

In a sign of the times, Norway is even buying prime London properties from Singapore's SWF:

Norway’s sovereign wealth fund, the world’s largest, agreed to buy the Bank of America (BAC:US) Merrill Lynch Financial Centre in London for 582.5 million pounds ($944 million) as it expands its bet on the U.K. capital.

The fund acquired the 585,000 square-foot (54,000 square-meter) office complex at King Edward St. from GIC Pte, Singapore’s wealth fund, Oslo-based Norges Bank Investment Management said today in a statement. GIC bought the property from Merrill Lynch & Co. Inc. in 2007 for 480 million pounds.

Norway’s $860 billion wealth fund formed a new real estate group in July to speed up its property investments and is seeking to invest almost $10 billion annually over the next three years. The fund owns properties on Times Square in New York and the Avenue des Champs-Elysees in Paris, as well as in Boston, San Francisco and Zurich. 

Gemany, too, has seen Norwegian investment as of late:

Norway's $840-billion sovereign wealth fund purchased a 94.9 percent stake in several firms that own two office buildings in Munich's Lenbach Gärten quarter, the fund said on Tuesday. The fund purchased the stakes from AM Alpha GmbH for a total consideration of 176.1 million euro, including 75 million euro of third-party debt, it said in a statement.The buildings have 29,000 square meters of total leasable area and are primarily leased to McKinsey & Company Inc. and Condé Nast Verlag GmbH.  

I've been to Norway twice and had a Norwegian boss to boot.  They are easygoing but highly focused folks, so I'm sure their real-estate investments have been thought through. In this day and age, investors for the long haul are to be welcomed like the Norwegians.

Why Catalan Secession Trumps Scots' Case

90,000 at the Nou Camp (and counting) support secession.

Here we go again: the Catalans have scheduled a referendum on remaining in Spain on November 9. However, there is a rather large complication in that the central government in Madrid does not recognize this referendum and would not even consider an outcome that tilts toward secession. So, the stage is set for another secessionist movement. More so than the question of Scottish independence, this one may have greater implications for the fate of the EU. For one thing, Catalunya is the wealthiest region in the country. For another, also consider that Spain is actually in the eurozone and things could get ugly real soon:

The Catalonian independence movement has been gathering strength for many years. But right now, it appears to have reached a tipping point. Following the Scottish vote, the regional government of Catalonia set its own independence referendum for Nov. 9. The question will be very simple. Do you want to remain a part of Spain or not?

The trouble is, the Spanish government has flatly rejected the right of Catalans to choose. The constitutional court has rejected the vote, and it remains to be seen whether it goes ahead. If it does, and Catalans vote yes, it will be hard to resist granting its independence. After all, the days when people were forced to remain in a state against their democratic will are meant to be long behind us. 

While Scotland would have been less viable on its own, prospects are rather better for an independent Catalunya. Instead of being a net beneficiary of being inside the UK like Scotland, most calculations suggest Catalunya subsidizes the rest of Spain:

It would have a gross domestic product of $314 billion, according to calculations by the OECD, which would make it the 34th largest economy in the world. That would make it bigger than Portugal or Hong Kong, which are perfectly viable by themselves. Its GDP per capita would be $35,000, which would make it wealthier than South Korea, Israel or Italy. There is nothing for anyone to be afraid of there...

For all the nationalist rhetoric, Scotland had relatively little to gain from independence. The U.K. is a relatively successful economy, and while Scotland has been doing reasonably well, it has an aging population and faces declining oil revenues. It was subsidized by the larger country it was part of, and was likely to become more dependent on it as time passed.

Although the numbers are hotly debated, there is plenty of evidence that a wealthy Catalonia subsidizes the rest of Spain. Worse, Spain itself is locked into a dysfunctional currency union, which, despite a minor upturn this year, offers little apart from grinding recession, mass unemployment and rising debt.

In a past post, I've discussed the politics of football: Barcelona FC as a rallying point for Catalan independence and Real Madrid as one for the concentration of power in the Spanish capital. Given the importance of football politics to life in Spain, the threat of expulsion from La Liga of the world's second most valuable football club (after Real Madrid) may be the thing that ironically keeps Catalunya in Spain:

The president of La Liga said today that Catalan clubs like Barcelona and Espanyol would be excluded from Spain's top tier should the region succeed in its push for independence from Spain. Javier Tebas said the country's sports law entitles only one non-Spanish territory - Andorra - to legally participate in the league or other official competitions.

The Only Part of Disney Losing Money - Euro Disney

Mona Lisas and Mad Hatters, sons of bankers, sons of lawyers.

I visited Euro Disney in 1994, two years after it opened. After informing our Parisian cab driver that we wanted to go to the new theme park, he nodded quietly, started the meter, and sped off. While a colleague checked on his current destination on the walkie-talkie, our driver chuckled while saying "Euro-disne." The cultural disdain the Frenchman had for this American affront (and the dumb tourists heading there, it must be said) was clearly palpable.

I suppose that this memory stays with me insofar as Euro Disney has been unprofitable for much of its existence. For what reason I have not really understood since it is virtually indistinguishable from any other Disney theme park in the world as far as I can tell. If they do well, then why can't Euro Disney? My memory aside, the fact is that for all the French snootiness about cultural preservation when faced with the onslaught of Americanization-as-globalization, the second-largest market for McDonalds worldwide is France. So, it cannot be a purely cultural phenomenon going on here as Walt's company engages in a debt-for-equity swap:

Walt Disney Company will inject cash into Euro Disney as part of a recapitalization plan worth about 1 billion euros, or about $1.25 billion, in hopes of improving the troubled theme park operator’s financial position. Disney, the California media and entertainment giant, will inject €420 million in cash in exchange for shares. Euro Disney’s debt will be reduced as the parent company converts about €600 million in debt into shares. Disney, which owns 40 percent of Euro Disney, will also defer certain loan payments until 2024.

For another thing, Euro Disney is hardly dependent on the French market. Remember that France is by far the world's most popular tourist destination. Partly chalk this down to a generalized European downturn, then, as bringing the family to the outskirts of Paris is one of the first things to go on the to-do list:

Euro Disney, which opened outside Paris in 1992, has struggled over the years with financial issues, mainly tied to its debt. The French company last turned an annual profit in 2008 ahead of the financial crisis, when it had an occupancy rate of over 90 percent at its resort hotels and more than 15 million visitors. Euro Disney earned €1.7 billion that year. 

It has posted an annual loss every year since then, topping €78 million for the fiscal year ending on Sept. 30, 2013. The company also has seen a severe decline in visitors in the past two years after surpassing 16 million in 2012. That year, Disney agreed to refinance €1.3 billion in debt for Euro Disney. The French company has suffered declining attendance this year, which has cut into its revenue forecasts. Euro Disney had 14.9 million visitors in 2013 but expects to have only 14.1 million to 14.2 million visitors this year.

They make business cases out of Euro Disney since its financial performance remains enigmatic until now. Meanwhile, the parent company is hardly strapped for cash so it's riding in to the rescue as it has so many times before. You have to wonder though if it may throw in the towel sometime after spending good money after bad time and again.

Lose Money Quick Scheme: EU Airlines in, er, Europe

Those were the days, my friend: aboard Lufthansa in the Fifties.

My grandparents belonged to a generation when there was still novelty and romance associated with commercial flight. They would dress in their finest as they jetted off to American or European capitals for work or leisure. "Put on your finest suit, dear; we're flying to Vienna tonight." I am sure this memory was not something I made up: until the early Seventies, it really was like this. Since air travel was oh so very costly. you might as well live it up while airborne. For better or worse, deregulation and the accompanying democratization of flight has made air travel mundane. So much so that the shirtless, lardy American bloke you would rather avoid in public ends up next to you on the plane...snoring rather loudly...drooling on your shoulder. Yuck.

For many a flag carrier, glamour and now passenger civility are not the only things which have been jettisoned. Profitability is another thing as national carriers have found it hard to deal with legacy costs, unprofitable routes, and competition from low-cost carriers. Ask Malaysia Airlines. All things considered, things are even worse for European carriers that now find the most unprofitable routes to be those at home:

The biggest airlines across Europe are finding it tricky to make money in their own backyards. Air France-KLM said on Thursday it will transfer a major portion of its European flights to Transavia, a low-cost airline acquired by KLM 11 years ago, as part of a major restructuring aimed at reversing losses on short flights. The same strategy has been adopted in Germany with Lufthansa’s steady shift since 2012 of its European flying from Frankfurt and Munich to its lower-cost Germanwings unit.

The shunning of European routes by the global flag carriers reflects the cutthroat nature of fare competition in the continent, where airlines such as EasyJet, Ryanair, and Wizz Air dominate the short-flight market. Those carriers’ labor costs are substantially lower than at Lufthansa, Air France, and British Airways, which also have routes that don’t touch their hubs. Flying routes off their hubs offers very little revenue upside, says Seth Kaplan, managing partner of industry journal Airline Weekly, and this is one reason U.S. airlines have virtually eliminated flights that don’t involve one of their hubs. “Non-hub, short-haul flying is all a cost game, and that’s a game the true low-cost carriers like Ryanair and EasyJet will always win,” Kaplan says.

It appears unionized workers are still hanging on to a bygone age when cutthroat competition did not exist:

These flight-shifting and cost-cutting tactics have infuriated airline employees in Europe, with three pilot strikes against Lufthansa in the past two weeks. Air France, meanwhile, is now bracing for a weeklong pilot strike tentatively set to start on Sept. 15; the airline has urged customers to reschedule their trips. Air France-KLM pilots contend that Transavia cockpit crews should be paid the same as their peers across the company.

All I can say to these unionist-dreamers is this: Wake up, those days are gone and they will never come back. Ours is such an unglamorous age in so many ways. I am of two minds about this. Sure you can go to all sorts of places for much lower fares nowadays, but getting there is now such a chore that sometimes you'd rather wish you'd have stayed home.

Way back when, you actually looked forward to traveling to the destination.