German Antifa Group Posts Revenge "Hit List" Of 54 Police Officers

A "left-wing extremist" group in Germany associated with Antifa published a list of 54 police officers believed to have taken part in raids of suspected rioters protesting the G20 summit in Hamburg, with  the group calling for the public to "dox" the officers by sending in their personal information.

"We would be pleased about tips regarding where they live or can be met privately," reads the post

The list was posted Sunday evening on an extremist website, reports Die Welt, and is thought to be revenge for the publication by Hamburg investigators of over 100 photos and videos G20 riot participants in the hopes that the public will assist in their investigation.

German Police prepare for G20 riots Hamburg

The German Police Union (GdP) has called the list of officers "abominable, defamatory and the result of a fundamental attitude that glorifies and exerts violence," noting the danger of "left-wing extremist terrorists" who "stir up hatred," adding that "this must be stopped and done quickly."

?????????????? #MerkelLand: Here, the left-extreme black bloc riots in the #Elbchaussee at #Merkel"s 400-million-euro #G20 show in #Hamburg. pic.twitter.com/6vyWcnSjx3

— Onlinemagazin (@OnlineMagazin) July 7, 2017

Violence broke out after 20,000 people took to the streets to protest the July G20 meeting held in Hamburg, Germany - 1,000 or so of which were described as "hard-left militants." Reuters reported at the time: 

"for the 1,000 hard-left militants who wreaked havoc on the streets of Hamburg, German Chancellor Angela Merkel could not have chosen a better location to hold the G20 summit." That"s because the dense, urban environment allows them to disperse and hide easily, and the city is full symbols of the wealth they detest - from the gleaming 800 million euro ($913 million) Elbphilharmonie concert hall to the shipyards that build luxury yachts.

As the July 7-8 summit started, Black Bloc anarchists and other anti-capitalist protesters sat in groups on main intersections, blocking streets and bridges leading to the summit venue as well as a road used by trucks at Hamburg Port. On Thursday night, they hurled beer bottles, blocked roads using trash bins and set cars on fire.

A total of 186 people were detained and 225 were arrested, while around 500 police officers were reportedly injured. Arrest warrants were issued for 51 individuals following the riots. 

Ich hab schon viel in Hamburg gesehen - aber sowas noch nicht. #g20 #G20HAM17 #Blockg20 pic.twitter.com/BdRN6TddcB

— Stefan S. (@StefanSkibbe) July 7, 2017

live police r3move protesters against g20 Hamburg https://t.co/Ym0XFep691

— Lizzie Phelan (@LizziePhelan) July 7, 2017

Aftermath of #G20 protests #G20Hamburg pic.twitter.com/BLYMyt4urU

— Emma Anderson (@emkanderson) July 7, 2017

Hamburg authorities faced accusations of abuse of power during the summit, as German media reported the use of a banned combat weapon, to fire on attackers. The MZP 1multipurpose pistol was used to shoot rubber bullets on 15 occasions, while tear gas was deployed 67 times between July 6 and July 8.

H&K MZP 1 pictured on a German police officer during G20 riots (Twitter)

Hamburg police insist that the MZP 1 is a permitted weapon, however a Finance Ministry document seen by Spiegel reveals that it is in fact a banned combat weapon. The manufacturer of the weapon, Heckler & Koch, classifies the MZP 1 as a grenade launcher. 

Iceland"s New Government Has Cunning Plan Of Tapping Banks To Boost Growth, Improve Infrastructure

We like Iceland, we’ve never been there, but that doesn’t matter. Besides the outstanding natural beauty, Iceland, unlike the US, UK and practically everywhere else, holds bankers accountable. Last time we checked, 29 had been jailed. As we discussed, it also holds its leaders accountable (partially – see below) when they are complicit in exonerating convicted child rapists. Such an event brought down Iceland’s government in September.

Last week, it emerged that Prime Minister Bjarni Benediktsson knew of attempts by his father, Benedikt Sveinsson, to have the Ministry of Justice grant “restored honor” to a convicted child rapist. Benediktsson kept this secret as the rapist, a friend of his father’s was essentially exonerated.

Restored honor is the controversial process by which convicted criminals can have their crimes expunged and return to society with all rights and privileges restored. It requires that the convicted person serve between two to five years of their sentence on their best behavior and that they have multiple letters of recommendation. Sveinsson provided one such letter.

Iceland held new elections on 28 October 2017 and a new coalition government came in to power this week. Iceland’s economy has been booming, in part due to the influx of tourists visiting its thriving capital city, Reykjavik, along with the Geysir geyser and the Gullfoss waterfalls. On any given day, tourists are likely to account for about 10% of the island’s population. However, as the FT explains, Iceland is paying a price for its success.

These challenges include everything from the poor quality roads and overburdened infrastructure to a lack of accommodation and simmering popular discontent over how tourism is being handled. At Geysir and Gullfoss in central Iceland, dozens of buses and cars park at both attractions for free before disgorging tourists who pay no entrance fee. The roads across Iceland are under intense strain from hire cars and a tourist died just after Christmas in a head-on collision on a single-track bridge.

“What are we sacrificing when we don’t put a levy on tourists? The roads here are dangerous,” says Asta Helgadottir, an MP for the anti-establishment Pirate party…Accommodation is also a problem. Cranes everywhere in Reykjavik attest to the surge in hotel construction but the increase in rooms still lags behind the growth in tourism.

However, all is not lost. The new government has a plan…which involves Iceland’s banks and tapping their excess capital. According to Bloomberg.

Iceland’s new left-right coalition government is gearing up for a spending drive to fix the nation’s dilapidated infrastructure after years of austerity and it could tap its banks for the some of needed cash.

Iceland got a new government on Thursday, in a coalition between the Left Greens, the Progressive Party and the conservative Independence Party. The parties have pledged to spend more on roads and other infrastructure to catch up on an estimated 400 billion kronur ($3.9 billion) in missing investments.

Even in Iceland, it seems, discredited politicians can bounce back into public life almost immediately, which is precisely what’s happened in the case of Bjarni Benediktsson, usually known as “Bjarni Ben”.

Bloomberg spoke to the man himself, “According to Finance Minister Bjarni Benediktsson the government has an ace in the hole that can help finance the spending: the excess equity in its three largest banks, Arion Bank hf, Landsbankinn hf and Islandsbanki hf. The banks have leverage ratios in the 16 percent to 18 percent range at the end of June, far above the 3 percent minimum, according to Iceland’s central bank.

“We have hundreds of billions of kronur, way more than any other European nation, tied up in financial institutions,” said Benediktsson, a former prime minister who will now take over at the Finance Ministry, in an interview on Thursday “And we in the three parties are ready to shake loose this capital to use it toward an infrastructure build up.”

With a plan like that, the government must have considerable leverage over Iceland’s major banks...and it does.

The government owns most of Landsbankinn and all of Islandsbanki and has a stake in Arion. The banking assets were acquired after the 2008 collapse when the government stepped in to save the financial industry. The crisis is now largely in the rear-view mirror and the new government is being handed a booming economy.

The government will now put together a white paper on the financial system and have a broad discussion in parliament.

We hadn’t fully appreciated how rapidly Iceland’s economy has been growing - last year it grew faster than China (6.7%) and even faster than India (7.1%). However, the growth rate is declining rapidly, so the coalition government’s plan might be timely, if it can be executed.

There are signs that the economy may be cooling after growing at a whopping 7.4 percent last year. Economist surveyed by Bloomberg are forecasting gross domestic product growth at 4.2 percent this year, while the central bank recently lowered its forecast for 2018 to 3.4 percent from 5.5 percent.

Despite the differing left-right ideologies in the new coalition government, Bjarni Ben and the new prime minister are cautiously confident, especially the former.

Internally, the government may find it hard to reconcile the policies of its two biggest party’s, the Left Greens and the Independence Party. But both party leaders on Thursday insisted they would make it work.

“The outer circumstances are working in our favor in forming this government,” Benediktsson. “We are the European nation that is growing at one of the fastest rates — we have no unemployment in Iceland to speak of, we have a budget surplus since 2014 and forecasts predict continuing growth, a great increase in tourism next year.”

Taking over as prime minister will be Left Green leader Katrin Jakobsdottir, the first time the party holds the top spot after emerging as the second biggest group in October’s election. While she faced some internal party turmoil for joining with the Conservatives, she is now “optimistic but realistic” that she can make it work.

Having cratered the economy during the crisis, it would be poetic justice if the major Icelandic banks were its saviour as we head towards the next one.

Russia Plans First-Ever Sale Of Yuan Bonds

As Russia braces for further sanctions from Washington D.C. over their alleged role in "meddling" in the 2016 U.S. election, they are reportedly prepping a $1 billion yuan-denominated bond issuance in an effort to preemptively diversify financing risks away from the West.  According to Bloomberg, the sale will total 6 billion yuan and could come as early as next week.

Russia hired Bank of China Ltd., Gazprombank and Industrial & Commercial Bank of China Ltd. to arrange investor meetings for the sale of 6 billion yuan ($907 million) in five-year notes, according to people familiar with the plans. The issuance is slated for the end of this year or beginning of 2018, they said, speaking on condition of anonymity because the deal isn’t yet public.

 

The sale has been under discussion since U.S. and European sanctions in 2014 over the takeover of Crimea blocked many state-owned Russian companies’ access to Western capital markets. A report due next quarter from the U.S. Treasury on the potential consequences of extending penalties to include Russian sovereign debt has increased pressure on the Finance Ministry to seek out alternative means of borrowing.

 

“It would be wise of Russia to tap the yuan market now,” said Vladimir Miklashevsky, a senior economist at Danske Bank A/S in Helsinki. “China remains Russia’s biggest trade partner, China’s enormous financial system has lots of buying potential, too.”

While Bank of Russia Governor Elvira Nabiullina has said there will be “no serious consequences” from U.S. sanctions on new domestic government debt, economists in a Bloomberg survey estimated the move could add 50 basis points to 150 basis points to borrowing costs.

The Yuan-denominated bonds, known as dim-sum bonds, would be listed on the Moscow Exchange and available for investors to purchase via the Moscow branch of ICBC.

Of course, in addition to advancing Russian diversification interests, a successful sale of yuan-denominated Russian debt would also advance China"s interests in the internationalization of the yuan. 

If Russia goes through with the sale, it would be the first sovereign issuance of a yuan-denominated bonds outside of China since 2016, according to Dealogic, with prior issuances in Hungary, Mongolia, the U.K. and the Canadian province of British Columbia.

Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

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

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

 

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

 

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

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

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

 

In a website statement announcing the deal, Russia’s Finance Ministry said, “The debt relief provided to the republic from the restructuring of its liabilities will allow funds to be allocated for the country’s economic development, to improve the debtor’s solvency and increase the chances of all creditors to recoup loans granted earlier to Venezuela.”

Of course, the deal with Russia comes as attempts to hold talks with Venezuela"s other creditors faltered this week. President Nicolas Maduro had summoned holders of some $60 billion of bonds issued by the government and PDVSA to begin a renegotiation as the nation’s cash crunch worsens, but as we noted previously (see: S&P Downgrades Venezuela To "Selective Default" After Bondholder Meeting Devolves Into Total Chaos), the meeting turned out to be nothing more than a photo op. 

Meanwhile, as the Financial Times noted yesterday, failure of ISDA committees to determine whether or not a default event actually occurred when Venezuela blew through its grace period, has only added to the confusion of the restructuring process.

A finance industry committee convened to discuss whether Venezuela’s state oil company has defaulted on its debts has elected to delay the decision once again, underscoring the uncertainly swirling around the country’s bond payments.

 

Venezuela belatedly came through with a $1.1bn PDVSA bond payment last week, but only well after a three-day grace period following the bond’s maturity on Nov 3. That led to a request that the International Swaps and Derivatives Association’s “determinations committee” consider whether PDVSA was in default.

 

The Isda committees have the power to declare a “failure to pay”, which would trigger insurance-like contracts on PDVSA’s bonds, known as credit-default swaps, even if the actual bondholders haven’t declared it a default. But in a statement on its website on Monday, Isda said that the committee had decided to reconvene on Tuesday at 11am to discuss the PDVA question further.

All of which has left bondholders in limbo...

The Only 'Real Europe' Is Greece

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

European Commission president Jean-Claude Juncker, famous for his imbibition capacity and uttering -not necessarily in that order- the legendary words “when it becomes serious, you have to lie”, presented his State of the Union today. Which is of pretty much limited interest because, as Yanis Varoufakis’ book ‘Adults in the Room’ once again confirmed, Juncker is nothing but ventriloquist Angela Merkel’s sock puppet.

But of course he had lofty words galore, about how great Europe is doing, and how that provides a window for more Europe, in multiple dimensions. Juncker envisions a European Minister of Finance (Dutch PM Rutte immediately scorned the idea), and he wants to enlarge the EU by inviting more countries in, like Albania, Montenegro and Serbia (but not Turkey!).

Juncker had negative things to say about Britain and Brexit, about Poland, Prague and Hungary who don’t want to obey the decree about letting in migrants and refugees, and obviously about Donald Trump: Brussels apparently wants ‘to make our planet great again’.

What the likes of Jean-Claude don’t seem to be willing to contemplate, let alone understand or acknowledge, is that the EU is a union of sovereign countries. The meaning of ‘sovereignty’ fully escapes much of the pro-EU crowd. And if they keep that up, it will break the union into pieces.

The European Court of Justice has ruled that Poland, the Czech Republic and Hungary must accept their migrant ‘quota’, as decided in Brussels, and that, too, constitutes an infringement on these countries’ sovereignty. And don’t forget, sovereignty is not something that can be divided into separate parts, some of which can be upheld while others are discarded. A country is either sovereign or it is not.

The single euro currency is already shirking awfully close to violating sovereignty, if not passing over an invisible line, and a European Finance Minister would certainly constitute such a violation. At some point, the politicians in all these countries will have to tell their voters that they’re about to surrender -more of- their sovereignty and become citizens of Merkel Land. But they don’t want to do that, because as soon as people would realize this, the pitchforks would come out and the union would be history.

The EU will be able to muddle on for a while longer, but Europe is not at all doing great economically (however, to maintain the illusion ECB head Draghi buys €60 billion a month in ‘assets’), and when the next crisis comes people will demand their sovereignty back. It really is that simple. And what will the negotiations look like to make that happen? 27 times Brexit?

*  *  *

The real Europe is not the one Juncker paints a portrait of. The real Europe is Greece. That’s where you can see the economic reality as well as the political one. Greece has no sovereignty left to speak of, despite the fact that it is guaranteed it in EU law. Europe’s political reality is about raw power. About the rich waterboarding the poor, to the point that they are turned from sovereign citizens of their countries into lost souls in debt prisons.

This week, another chapter has been added to the dismal annals of the Greek adventures in the European Union. It’s like the Odyssee, I kid you not. Like the previous chapters, this one will not solve the Greek crisis, or even alleviate it, but instead it will deepen it further, and not a little bit. This chapter concerns the forced auctioning of -real estate- properties.

Not to Greeks, 90% of whom can’t afford to buy anything at all, let alone property, but to foreigners, often institutional investors. At the same time, bad loans, including mortgage loans, will be offloaded for pennies on the dollar to that same class of ‘investors’. Once the Troika is done with this chapter, Greece will have seen capital destruction the likes of which the world has seldom if ever witnessed.

People in the country have a hard time understanding the impact:

Greece Property Auctions Certain To Drive Market Prices Even Lower

Ilias Ziogas, head of property consultancy company NAI Hellas and one of the founding members of the Chartered Surveyors Association, said that the property market is certain to suffer further as a result of the auctions: “The impact on prices will be clearly negative, not because the price of a property will be far lower at the auction than a nearby property, but because it will diminish demand for the neighboring property.”

[..]Giorgos Litsas, head of the GLP Values chartered surveyor company, which cooperates with PQH [..] told Kathimerini that the only way is down for market rates. “I believe that unless there is an unlikely coordination among the parties involved – i.e. the state (tax authorities, social security funds etc.), the banks and the clearing firms – in order to prevent too many properties coming onto the market at the same time, rates will go down by at least 10%.”

He noted that “we estimate the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year. Therefore the rise in supply will send prices tumbling.” Yiannis Xylas, founder of Geoaxis surveyors, added, “I fear the auctions will create an oversupply of properties without the corresponding demand, which translates into an immediate drop in rates that may be rapid if one adds the portfolios of bad loans secured on properties that will be sold to foreign funds at a fraction of their price.”

A 10% drop? Excuse me? Even in the center of Athens, rental prices for apartments that are not yet absorbed by Airbnb have plummeted. With so many people making just a few hundred euro a month that is inevitable. You can rent a decent place for €200 a month, and if you keep looking I’m sure you can find one for €100. An 80% drop?! But property prices would only go down by 10% in a market that has 20 times more unsold properties than it sells in a year?

The Troika creditors found they had to deal with attempts to prevent the wholesale fire sale of Greek properties. They now think they’ve found the solution. First, they will force the government to lower official valuations concerning the so-called “primary residence protection”, which protected homes valued at below €300,000 from foreclosure. Second, they will bypass the associations of notaries who refused to cooperate in ‘physical’ auctions, as well as protesters, by doing the fire sale electronically:

E-Auctions Of Foreclosed Property For First Time This Month In Greece

Environment and Energy Minister Giorgos Stathakis confirmed the development in statements to a local television station, announcing the relevant justice ministry is ready to begin electronic auctions in the middle of next week.At the same time, Stathakis noted that a law protecting a debtor’s primary residence from creditors will be expanded until the end of 2018. According to reports, the e-auctions will take place every Wednesday, Thursday and Friday over a four-hour period, i.e. from 10 a.m. to 2 p.m. or 2 p.m. to 6 p.m. Some 5,000 foreclosed commercial properties will be up for sale by the end of the year, which translates into 1,250 properties per month, on average.

Currently, the primary residence protection against foreclosure extends to properties valued (by the State tax bureau) at under €300,000, a very high threshold that shields the “lion’s share” of mortgaged residential real estate in the country, if judged by current commercial property values in Greece. Creditors and local lenders have called for a decrease in the protection threshold, a prospect that is very likely.

The development is also expected to generate another round of acrimonious political skirmishing, given that both leftist SYRIZA, and its junior coalition partner, the rightist-populist Independent Greeks party, rode to power in January 2015 on a election campaign platform that included an almost universal protection of residential property from bank foreclosures and auctions.

Associations representing notaries – professionals who in Greece are law school graduates specializing in drawing up contracts and maintaining registries of deeds, property transactions, wills etc. – had also blocked old-style auctions from taking place in district courts by ordering their members not to take part. The e-auction process aims to bypass this opposition, as well as disruptions and occupations of courtrooms by anti-austerity protesters.

The claim is that Greek banks must be made healthy again by removing bad loans from their books. The question is if selling both properties and bad loans to foreign institutional investors for pennies on the buck is a healthy way to achieve that. But yeah, if 50% of your outstanding loans are bad, you have a problem. Still, at the same time, the problem with that is that many if not most of those loans have turned sour because of the neverending carrousel of austerity measures unleashed upon the country. It’s a proverbial chicken and egg issue.

If Brussels were serious about Greek sovereignty, it would make sure that Greek homes were to remain in Greek hands. You can’t be sovereign if foreigners own most of your real estate. By bleeding the country dry, and forcing the sale of Greek property to Germans, Americans, Russians and Arabs, the Troika infringes upon Greek sovereignty in ways that will scare the heebees out of other EU nations.

It’s not for nothing that the entire Italian opposition is talking about a parallel currency next to the euro. That is about sovereignty.

5,000 Greek Properties Under the Electronic Auction System by End of 2017

Auctions of foreclosed properties to settle bad debts are seen as key to returning Greek banks to health by helping reduce the burden of non-performing loans. These currently stand at roughly €110 billion, or 50% of the banks’ total loans. Under pressure from its lenders, in the summer of 2016 the Greek government passed measures allowing the sale of delinquent mortgages and small business loans to international funds, a move seen by many as yet another betrayal by the SYRIZA-led government.

Greek banks won’t return to health, they’ll simply shrink the same way the people do who can’t afford to rent a home or eat decent food. Austerity kills entire societies, including banks. If Mario Draghi would decide tomorrow morning to include Greece in his €60 billion a month QE bond-buying program, and Greece could use that money to stop squeezing pensions and wages, and no longer raise taxes and unemployment, both the people AND the banks could return to health. It would take a number of years, but still.

Attica! Attica!

Whatever you call what happens to Greece, and what’s been happening for nearly 10 years now, whether you call it fiscal waterboarding or Shock Doctrine, it is definitely not something that has a place in a union of sovereign nations bound together in mutual respect and dignity. And that will ensure the demise of that union.

*  *  *

Another aspect of the fire sale is the valuation of the properties austerity has caused to crumble (so many buildings in Athens are empty and falling apart, it’s deeply tragic, at times it feels like the entire city is dying). The press calls it a hard task, but that doesn’t quite cover it.

It’s not just about mortgages, many Greeks simply give up their properties because they can’t afford the taxes on them. People that inherit property refuse to accept their inheritance, even if it’s been in their families for generations, and it’s where they grew up. In that sense, it may be good to lower valuations to more realistic levels. But tax revenues will plunge along with the valuations, and the government is already stretched silly. Add a new tax, then?

Greece Property Value Review A Hard Task

The government is facing a daunting task in adjusting the so-called objective values (the property rates used for tax purposes) to market levels by the end of the year, as its bailout agreement dictates. The huge slump in transactions and the forced sales of properties due to their owners’ debts do not lead to any safe conclusions for the values per area. One in four sales are conducted with prices that lag the objective value by 60-70%, and the prices of 2008 by 70-80%. The Finance Ministry must overcome all the obstacles to bring to Parliament all the necessary adjustments and regulations.

Moreover, once the objective values are brought in line with market rates, the government will have to maintain the same amount of revenues from the Single Property Tax (ENFIA) either by raising the tax’s rates or by introducing a new tax in the form of the old Large Property Tax.

Furthermore, once the objective values are reduced by 40-50% to match the going prices, banks may see problems with their capital adequacy, as lenders will incur losses by having to revise the collateral they get. Mortgage loans in Greece amount to €59.44 billion, of which 42%, or €25.4 billion are nonperforming.

Yeah, there’s the health of the banks again. And the government. And the people. A wholesale fire sale is the worst possible thing that could happen at this point in time. Greece needs help, stimulus, hope, not more austerity and fire sales. Juncker and his Berlin ventriloquist have this all upside down and backwards, squared. The one thing the EU cannot afford itself to do, is the one thing it engages in.

They may as well pack in the whole thing today, and go home. Actually, that would be by far the best option, because more of this will inevitably lead to the very thing Europe prides itself in preventing for the past 70 years: battle, struggle, war, fighting in the streets, and worse. If the EU cannot show it exists for the good and benefit of its people, it no longer has a reason to exist.

Saving the banks in the richer countries by waterboarding an entire other country is not just the worst thing they could have thought of, it’s entirely unnecessary too. The EU and ECB could easily have saved Greece from 90% of what it has gone through, and will go through going forward, at virtually no cost at all. But yes, German, French, Dutch banks would likely have had to cut the bonuses of their bankers, and their vulture funds couldn’t have snapped up the real estate quite that cheaply.

Summarized: the EU is a disgrace, morally, politically, economically. I know that French President Macron on the one side, and Yanis Varoufakis’ DiEM25 movement on the other, talk about reforming the EU. But the EU is the mob, and you don’t reform the mob. You dismantle their organization and then you lock them up.

Greeks Rejoice - Government Scraps Controversial Wine Consumption Tax

While austerity still reigns supreme over Greek society, amid resurgent refugee arrivals, still near-record high youth unemployment, record-high suicide rates, and a constant brain-drain exodus of young talent, this weekend saw a brief silver lining as the government decided to scrap the controversial special consumption tax on wine.

The measure, which not only did not meet revenue targets, but actually boosted illegal trade in wine and grapes, will be halted by the end of the year.

As KeepTalkingGreece reports, inaugurating the Wine Days of Nemea 2017 in one of wine producing regions of Greece, Minister for Rural Development, Vaggelis Apostolou said that the ministry is working on the legislation to scrap the special consumption tax on wine and it is expected to be ready before the end of the year.“It is a commitment by prime minister Alexis Tsipras that the tax will not exist in the new year,” Apostolou stressed.

Finance Ministry sources told daily Efimerida Ton Syntakton that the special consumption tax on wine caused more damage to the sector of wine producers than it brought revenues to the state.

In November 2015 and in terms of  additional modifications to the third bailout agreement, creditors and the Greek government had agreed to impose an  special consumption tax on wine, as the country’s lenders had decided they needed to collect an extra 300 million euros in indirect taxes per year. As this amount could not come from the grapes juice alone, they also imposed an extra tax on gambling.  Grapes  would bring €100 million, the gambling €200 million, creditors had calculated. Later they had modified their calculations down to 55 million euros per year.

The original proposal was that the extra tax would be 0.20-0.30 euro liter bottle, regardless of whether Greek or foreign wine.

Ultimately, the tax was 0.20 euro, some extra fees were added, a drop of tax here and a drop of fee there, the retail price reached 1 or 2 euros more per bottle for the consumer – although the average bottle has 700ml and not even one liter. In the magic world of Greek commerce, prices for average table wine of not worth mentioning quality ended up to be sold at €6.90 per bottle in the supermarket – from €4.90 before the tax.

The special consumption tax not only did not increase state revenues but literally backfired. It increased illegal trade in wine and grapes for wine making.

In 2016, the state collected less than 24 million euros from the extra consumption tax on wine. Instead of a permanent win from wine, the state in fact suffered a loss, if one takes into consideration the amount of money that did not land in state cash registers due to the illegal trade.

We are yet to hear what Germany thinks of this plan.

The Empire Strikes Back: Japan Jacks Up US Beef Import Tariffs To 50%

President Donald Trump’s decision to withdraw the US from the 12-nation Trans Pacific Partnership angered the Japanese, provoking fears of a bruising trade showdown between the world’s largest and third-largest economies. On Friday, the Japanese instituted a new policy that will do little to assuage those concerns.

After Japan signed a sweeping trade agreement with the European Union, a move that pundits warned would weaken the US’s position as a dominant player in the global economy, the country has taken another dramatic step clearly aimed at retaliating against the US: Japan said it would impose a temporary 50% tariff on frozen beef from the US and several other countries.

According to the Wall Street Journal, Japan’s decision to crack down on frozen beef imports was mandated by a 1994 global trade deal that would’ve been scrapped under the TPP. US trade groups are already warning about how the decision will negatively impact beef prices stateside.

“The U.S. Meat Export Federation said Japan’s move would have negative implications for both U.S. beef producers and Japanese restaurant chains that rely on frozen American beef. The group “will work with its partners in Japan to mitigate the impact” of the move as much as possible, said Chief Executive Philip Seng.

Under Japanese law, an additional tariff known as a safeguard is triggered when frozen-beef imports from all countries and frozen-beef imports from countries lacking free-trade deals with Japan - or “non-EPA countries” because they lack an economic partnership agreement with Japan - both increase by more than 17% from the same period a year earlier. The import volumes are reviewed each quarter.

US government officials couldn’t be reached immediately for comment.”

According to Japan’s Ministry of Finance, Japan imported 89,253 tons of frozen beef during the second quarter, with 37,823 tons coming from non-EPA countries. Both surpassed the “safeguard volume” initiated by the 1994 trade agreement. In Japan, frozen beef is widely used at restaurants to make hamburger patties and bowls of beef over rice, a popular fast-food item, according to WSJ. The safeguard duty affects around 12% of total beef supply in Japan, said Finance Ministry tariff official Koyu Izumi.

In recent months, frozen beef imports have been rising as merchants have sought to lock in prices before China resumes US beef imports as a part of a trade deal. China cracked down on US beef imports 14 years ago during a mad-cow diseases scare. But as beef grows in popularity among Chinese consumers, while memories of the scare have mostly faded, in the world’s second-largest economy are excited about the return of US beef to store shelves.

"American steak is delicious," said one user on China"s Twitter-like Weibo service. "It doesn"t have the mutton smell of domestic beef,” according to Fortune Magazine.
Japan also temporarily blocked US beef imports in 2003 after the mad-cow scare, but it resumed imports in late 2005, halted them again shortly afterward, then fully restarted them in mid-2006. The US exported $1.5 billion of beef to Japan last year, according to data from the US Meat Export Federation cited by Reuters.

Furthermore, while Trump"s protectionist rhetoric has helped escalate tensions between the US and its partners, the US trade situation is improving. According to the latest reading on the US trade balance, released earlier this month, the US trader deficit shrunk in May. The trade deficit decreased in May 2017 from an unrevised $47.6 billion in April (revised). The most notable declines were seen in China and the European, where deficits declined by $2.6BN and $2.0BN respectively.

Several rival countries do have economic agreements with Japan that has exempted their beef imports from the restrictions, potentially granting them an opening to supplant US suppliers and increase their market share. These countries include as Australia, Mexico and Chile, according to Reuters. The wire service reported that Japan’s Finance Minister Taro Aso is calling foreign leaders of the affected countries to explain the increase in tariffs. But seeing as much of the US beef industry is centered on midwestern states like Nebraska that sided with Trump during the election.

We suspect Trump won’t let this go that easily.
 

Norway's "Voluntary" Tax Collects A Paltry $1,325

It’s too bad for Norway’s ruling center-right party that Warren Buffett isn’t a resident. After becoming the object of unceasing criticism by their politicized slashing of taxes and funding a profligate spending program with the country’s oil wealth, Norway’s center-right party hit upon a novel idea: Impose a “voluntary” tax, according to Bloomberg.

However, when it came time to tally the total for this past fiscal year, the great northern policy ploy failed to evoke in the country’s 5.3 million citizens a patriotic fervor: When it was all said and done, the government collected $1,325.

Launched in June, the initiative has received a lukewarm reception, with the equivalent of just $1,325 in extra revenue being collected so far, according to the Finance Ministry. That’s not much for a country of 5.3 million people, many of whom are already accustomed to paying some of the highest taxes in the world (the top rate of income tax is 46.7 percent).

“The tax scheme was set up to allow those who want to pay more taxes to do so in a simple and straightforward way,” Finance Minister Siv Jensen said in an emailed comment.

“If anyone thinks the tax level is too low, they now have the chance to pay more.”

Left-of-center opposition parties claimed the tax cuts would benefit the richest and boost inequality. Jonas Gahr Store, the wealthy Labor Party contender who is leading in the polls ahead of the September 11 elections, has so far refused to take up the government’s offer.
 
Ironically, it was Store, whose net worth is $8 million, who prodded the government into action by complaining earlier this year that he had ended up paying less taxes under the current administration.

“This is an election campaign showcase by the government,” said Harald Jacobsen, a political adviser at the Labor party, who argues that the scheme has cost more than what it has generated

Rather than engaging in political distractions, the government should aggressively target multinationals like Facebook or Google, which skirt the law to minimize their tax contributions, Jacobsen said

Bitcoin Surges Back Above $2700 As India "Legalizes" Cryptocurrency

After crashing 30% last week, Bitcoin is now up over 33% in the last few days helped by a surge in demand from India exchanges after the India government ruled Bitcoin as legal in India...

Yet another big rebound... this time as India - the world"s second most-populous nation rules in favor of regulating Bitcoin...

As CoinTelegraph reports, over the past three years, the big three Indian Bitcoin exchanges including Zebpay, Coinsecure and Unocoin operated with self-regulated trading platforms with strict Know Your Customer (KYC) and anti-money laundering systems in place, despite the lack of regulations in the digital currency industry and market.

The efforts of the Bitcoin exchanges in India to self-regulate the market allowed the Indian government to reconsider the Bitcoin and digital currency sectors, regardless of the criticisms by several politicians that significantly lack knowledge in cryptocurrency.

On March 24, Cointelegraph reported that Kirit Somaiya, a member of parliament of the ruling BJP in India, was harshly criticized for his description of Bitcoin as a Ponzi scheme.

In a letter to the Finance Ministry and the Reserve Bank of India, Somaiya explained that Bitcoin is a pyramid Ponzi-type scheme. However, Somaiya was criticized for his inability to understand the structural and fundamental difference between a Ponzi scheme and Bitcoin.

The legalization of Bitcoin in India

In spite of the negative attitude of certain politicians, the Indian government has come to a decision to regulate the market and provide an even playing field for Bitcoin exchanges that have allocated a significant amount of resources to standardize the market and industry.

Back in April, Mohit Kalra, CEO of Coinsecure, one of the largest Bitcoin exchanges in India, told Cointelegraph in an interview that the Indian government has finally started to take Bitcoin seriously and are considering the possibility of regulating the market.

Kalra said:

“Finally, something positive for the industry. Authorities are now taking this technology seriously. We have been trying to get their attention for years now. I am glad it"s all happening at the right time. At Coinsecure, we are seeing a massive increase in the number of users and volumes. We are positive with what will happen in these coming three months.”

On June 20, CNBC India announced that the Indian government committee has ruled in favor of regulating Bitcoin and is currently establishing a task force to create various regulatory frameworks with the aim of fully legalizing Bitcoin in the short-term.

Prior to the announcement of the Indian government, Chris Burniske, ARK Invest’s crypto lead, noted that the trading volumes in India have been on the rise. Burniske previously revealed that the Indian Bitcoin exchange market is responsible for processing around 11 percent of Bitcoin-to-USD trades.

Greek Authorities To Launch Mass Confiscation Of Safe Deposit Boxes, Securities, Homes In Tax-Evasion Crackdown

Last week, the Greek parliament once again approved more austerity to unlock withheld Greek bailout funds in Brussels: a symbolic move, which has little impact without any actual follow through, like for example, actually imposing austerity. And while Greeks have been very good in the former (i.e. promises), they have been severely lacking in the latter (i.e. delivery).

That may be changing. According to Kathimerini, Greek Finance Ministry inspectors are about to start seeking out the owners of all local undeclared properties, while the law will be amended to allow for financial products and the content of safe deposit boxes to be confiscated electronically. The plan for the identification of taxpayers who have “forgotten” to declare their properties to the tax authorities is expected to be ready by year-end, according to the timetable of the Independent Authority for Public Revenue.

What follows then will be a wholesale confiscation by the government of any asset whose source, origins and funding can not be explained.

The Greek tax authorities will receive support from the Land Register to that end, as by end-September IAPR inspectors are set to obtain access to the company’s database to draw details on properties. Any taxpayers identified as having skipped the declaration of their assets to the tax authorities will be asked to comply and declare them, along with paying the tax and fines dictated by law. Should taxpayers fail to do so, the asset will be "sequestered."

Kathimerini also notes that the IAPR is also waiting for Parliament to pass regulations permitting the mass confiscation of safe deposit box contents and financial assets such as securities.

To date the process has been conducted in handwriting and is therefore particularly slow in locating the assets of taxpayers who have either concealed incomes or have major debts to the state. It is about to get much more streamlined: once the necessary regulations are in place for the operation of an automatic system to collect debts, the tax authorities will be able to issue online confiscation notices and immediately get their hands on the contents of safe deposit boxes, confiscating cash, precious stones, jewelry and so on. They will also be able to confiscate shares and other securities.

This year the tax authorities will focus their efforts on confiscations as they try to reduce the huge pile of expired debts to the state. In this context the Independent Authority for Public Revenue will auction 27 properties belonging to state debtors by the end of next month, with the aim of collecting 2.7 billion euros by the end of the year from old debts and another 690 million euros of new debts from major debtors.

We will share the details of the auctions with readers as some notable bargains may emerge in the coming months.

Package Containing Explosives Found At German Finance Ministry

A suspicious package found earlier today at the German Finance Ministry in Berlin on Wednesday contained explosives, police said, adding that the item was found in an area where mail is processed Reuters reports.

"The first investigation results show that the package contained a so-called explosives mixture, which is frequently used to produce pyrotechnics. It was designed to cause considerable injuries when the package was opened," police said in a statement quoted by Reuters.

A spokeswoman for the ministry declined to comment, saying an investigation was underway.

While it is unclear who is responsible for the deadly package, earlier today Bild reported that German finance minister Wolfgan Schauble told reported that Germany had stopped the planned aid package for Turkey because of the jailed German-Turkish reporter Deniz Yucel. Schaeuble also said that Turkey had to ensure the conditions were in place to enable it to talk about receiving financial aid but added the current situation was lamentable.

Asked if Germany would stick by its initial offer to look into a Turkish request for economic aid, Schaeuble was quoted by Reuters as telling reporters: "The answer is yes. But of course Turkey must keep to or recreate the conditions (needed) as at the moment it is really largely (a situation) that makes you cry."

Ukraine Nationalizes Its Largest Bank, Which Holds 36% Of All Domestic Deposits

It was just a few short days ago, on Wednesday of last week, that Ukraine"s largest lender, PrivatBank, said that reports it will be nationalized were "attempts to create panic and destabilize the political situation in the country."

Local media, quoted by Reuters, speculated that Privatbank, which is part-owned by one of Ukraine"s richest men, billionaire Ihor Kolomoisky, could be privatized if it does not meet a year-end deadline for Ukraine banks to reach a capital ratio requirement agreed under an International Monetary Fund bailout program. However, what made Privatbank unique, is that with some $6 billion in private deposits - or 36.5% of Ukrainian banks" total - it puts America"s own TBTF banks to shame: the bank is an absolute giant which controls nearly half of the local banking sector.

On Wednesady, the bank"s deputy chairman reaffirmed that there was nothing to worry about and said its customers had received phone calls and messages telling them the bank would be taken under state control due to a failure to meet the required capitalization level. "Exploiting the ignorance of citizens about nationalization, they stir up panic," Oleg Gorokhovsky said, without saying who was behind the reports.

Separately, the bank stated that "the information attack on Ukraine"s largest bank, Privatbank linked to the "pseudo-nationalisation" of the bank is primarily directed at clients of the bank and is an attempt to destabilize the political situation in the country." It added that the reports of its imminent nationalization were politically motivated.

* * *

Fast forward four days, when late on Sunday night, the "attempts to create panic and destabilize the political situation" in Ukraine turned out to be true after all, and whether politically motivated or otherwise, the Ukrainian government announced hours ago that it would nationalize the suddenly very ironically named PrivatBank, unleashing one of the biggest shake-ups of the banking system since the country plunged into political and economic turmoil two years ago.

In a statement late on Sunday, the government made no mention of the size of the potential burden to the state budget, but said it would ensure a stable transition and the smooth functioning of the bank.

According to Reuters, The Finance Ministry would take over PrivatBank, with Finance Minister Oleksandr Danylyuk adding that depositors" money was safe and secured by the state, and that the bank was functioning normally. It was not immediately clear if Ukraine had $6 billion in liquid funds to distribute to PrivatBank depositors should there be a run on the bank tomorrow, as some expect.

"The private shareholders of PrivatBank proposed to the government that it become the bank"s owner in the interests of its clients," the government said in a statement.

"The transition period begins on 19 December. The state will ensure a smooth transition and the stable functioning of the bank."

The unprecedented bailout could fuel instability in Ukraine, where opposition parties have repeatedly called for snap elections to unseat the pro-Western leadership that took power after the 2014 Maidan protests. As Reuters notes, the opposition has harnessed the anger of depositors from banks that were previously shut down in a sweeping cleanup of the financial system, mobilizing rallies and demanding the central bank chief"s resignation.

The nationalization announcement came just days before parliament was to vote on next year"s budget, which must stick to a shortfall of 3 percent of economic output, as agreed with Ukraine"s international backers.

There was no official statement from PrivatBank. Oleg Gorokhovsky, PrivatBank"s deputy chairman, wrote on Facebook that the bank had seen increased withdrawals in recent days of 2 billion hryvnia ($76 million) daily against previous peaks of around 1.5 billion hryvnia ($57 million). "Of course, the bank needed a capital increase and to improve the collateral for loans," he said.

The plan was to do this over a period to 2018. However, Gorokhovsky said after the outbreak of violence in the east and against the backdrop of a sinking economy, the bank experienced what he described as a series of "information attacks" that led to an outflow of funds from individuals and corporate clients.

"The decision on a voluntary and peaceful transfer of the bank to state ownership was made at a time when we realized that we could not survive the (latest) information attack," he wrote.

In other words, while the real reason for the nationalization, it appears the owners were eager to dump what remains of the bank into the lap of Ukraine"s taxpayers, most of whom also happen to be the bank"s depositors.

Incidentally, recapitalizing PrivatBank and other large lenders and reducing their lending to shareholders was one of the tasks mandated by a $17.5 billion IMF aid-for-reforms program.

Meanwhile, the political future of former PrivatBank owner, Kolomoisky, remains unclear: his control of strategic industries, including energy and media holdings, has put him at the center of ongoing power battles among the political elite since street protests ousted Moscow-backed Viktor Yanukovich and the pro-Russian rebellion erupted in the east.

PrivatBank"s nationalization is the culmination of the banking sector cleanup, which has closed dozens of lenders that were seen as little more than personal piggy banks for their owners. Should there be a major run on the bank in the coming days, Ukraine may once again emerge as a centra of financial and economic instability in the region, despite the IMF"s implicit backing

"Brace For Economic Disruption" SocGen Sees "Sharp Rise In Gold" As India Plans Cap On Cash Holdings

India"s "de-monetization" scheme has caused chaos across the nation, and while SocGen says the government"s plan may have some short-term success in curbing so-called "black-money", investors should "brace for economic disruption" as Bloomberg reports the Indian government is considering a cap on cash holdings for individuals. As SocGen concludes, "people will now be more inclined to park their black income in gold rather than in currency."

The daily images of utter chaos in India that has brought the conutry"s economy to a standstill since they unleashed their war on cash...

Are perhaps about to get worse, as Bloomberg reports, India is set to consider a cap on cash holdings for individuals...

Measure planned to prevent people from hoarding cash and generating income that could evade taxes, according to government officials with direct knowledge of the matter.

Planned measures include limit on large cash withdrawals from bank, the officials said, asking not to be identified citing rules on speaking to media.

Budget, due in February, may have steps to encourage use of checks, credit and debit cards.

Purchase of gold jewelry said to be made more stringent to prevent switching of asset from cash.

Finance Ministry spokesman D. S. Malik couldn’t be reached for comment.

But, as SocGen"s Kunal Kumar Kundu writes, the demonetisation scheme (banning the use of old high-denomination banknotes – INR500 and INR1000) announced by India’s PM Modi on 8 November is likely to have only a short-term impact on corruption and black money, unless it is followed by multiple other moves aimed at curbing these issues.

However, we do expect short-term disruption to the economy, especially in rural areas, due to a sharp drop in consumption as the cash crunch hits. The extent of the disruption will depend on how soon new banknotes come into the system. If this takes place over the next three to four weeks (as promised by the government) the damage should be limited. Otherwise, the disruption could be prolonged. At the same time, there is also a possibility of a short-term increase in tax revenue collection which could enable the government to keep its deficit within target and continue with all its desired expenditure (including capex) which we earlier feared may have to be curtailed as deficit challenges manifested. In the interim, sectors that are heavily dependent on cash transactions (essentially because these are gateways to parking black income), i.e. construction, real estate and gems & jewellery, are likely to be adversely affected over the short term.

On the macro front, weaker consumption could mean lower inflation, thereby opening up the possibility of an earlier rate cut by RBI. Additionally, with people being forced to deposit large quantities of high-value notes, banks are seeing a surge in low-cost deposits which should lower cost of funds and result in faster transmission of monetary policy action through the interest rate channel. However, given the current weak credit environment, we see a spike in credit growth as unlikely. The only potential long-term effect of this move could be deterioration in India’s current account deficit (CAD), as people will now be more inclined to park their black income in gold rather than in currency, thereby leading to sharp rise in gold imports.

India’s fight against black money – the end has corrupted the means

At around 8pm on 8 November, India’s PM Modi announced, in a broadcast to the nation, that India’s INR500 and INR1000 banknotes would no longer be recognised as legal tender from midnight and that citizens would be able to exchange their existing notes of these denominations for other available (and legal) tender until 31 December 2016. The aim of the action was to counter tax evasion, counterfeiting and corruption. The idea of eliminating large denominations is that it makes it harder to hide large amounts of cash.

The problem with the move is that, in one fell swoop, just over 86% of all banknotes in circulation became just paper. Fact is, high percentage of transactions take place in cash in India, especially in the rural areas. The potential fallout from such a nationwide measure could have been averted if the government had been better prepared to handle the contingencies. However, the need for the government to keep the move a secret — so that tax evaders wouldn’t be alerted before the demonetisation took place — affected preparedness. Even Finance Minister Jaitley admitted that it would take two to three weeks to reconfigure the ATMs to handle the newer and larger notes. Given that India currently has about 202,801 ATMs all over the country, it could potentially take longer.

Existing loopholes have provided an escape hatch

Before discussing the economic impact of the move, it is important to understand the potential impact it could have on the existing block of black money in the economy and its ability to stop generation of further black money in the economy in the future. We think that while the existing stock of black money will be negatively impacted, only part of it will actually come to the fore. There are still many loopholes in the system through which a large portion of black money is able to enter the formal banking channel without the government’s knowledge. While the country is receiving virtually one notification per day from the RBI to plug loopholes that are coming to light (another indication of lack of preparedness), this process looks set to continue. Thus, only part of the black money will actually be reported and experts think that some of it will never come back.

Black money represents only a small fraction of black wealth

The problem is that black money forms only a small portion of the black wealth held in the economy. In the past five years, income tax raids have found that only 5-6% of black money is kept in hard cash. Moreover, those who have amassed a sizable amount of black money are equipped at finding ways around demonetisation by converting their existing cash into bullion, gold jewellery, real estate and foreign currencies through middle men. To that extent the demonetisation scheme will only impact part of the overall stock of black wealth in the economy.

The important thing is, however, to remember that black income is a flow concept and not a stock concept. Hence, the impact will only be temporary, and black money will eventually begin to be generated again as the move will have no impact on the generation of black income itself. This is because there are a large number of mechanisms by which such incomes are generated, and these may or may not depend on cash circulation. Normally, black income is generated by manipulating the books of accounts of businesses — revenues are understated while costs are overstated. Black income becomes a stock when it is parked – be it through property, gold, currency, etc. This scheme will only impact the black income that is parked in the form of currency. Given that only around 6% of black wealth is parked in currency form and only a part of that will be impacted, the overall impact of the measure is likely to be limited and of short duration.

Demonetisation is not enough to fight the black money menace

For a sustained crackdown on black money, multiple other attendant measures need to be taken to rein in black wealth generation. These include:

• Direct tax reforms – While much discussion has taken place over the last decade, no action has been taken so far. There are indications that the government may want to implement reform in this area – widening the tax base, lowering tax rates and removing exemptions. If an announcement in this regard is indeed made during the forthcoming budget could be positive for the economy in the long term.


• Transparency in political funding – In India, the process of political funding remains very opaque and has evolved into a major end-use for black money. Unfortunately, we are yet to see any concrete action to tackle this menace.


• Agriculture income tax – Agricultural income is not taxed at all in India. For a country with such a poor direct-tax to GDP ratio, it is incomprehensible how virtually 15% of the economy remains untaxed. In fact, this has emerged as a significant conduit for tax evasion as a large chunk of income is shown as agricultural income and hence there is no incidence of tax.


• Investment through the Participatory Notes route – Participatory Notes (commonly known as P-Notes or PNs) are instruments issued by registered foreign institutional investors (FII) to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India - SEBI. This anonymity allows many individuals with illbegotten wealth to invest in the Indian stock markets. Stricter measures need to be imposed to control the flow of such funds into the market.

Like the expected impact on black money, we believe the impact on counterfeit currency will also be temporary. For sure, the existing stock of such banknotes will be extinguished, but it will only be a matter of time before the counterfeiters get back into action.

Economic impact

In the short term, the effect is likely to be negative on balance. However, we do not expect any long-term impact from this policy alone.

Negative

We feel this move could be negative for consumption in the short term. In India, especially in the rural areas, cash transactions account for the largest share of overall transactions in the economy. In urban areas, it is less. However, the challenges are multiple. According to data from the finance ministry, only about 32% of India’s population has access to financial institutions like banks and post offices. Moreover, the distribution of banks is highly skewed, with around a third of all bank branches being concentrated in only 60 Tier 1 and Tier 2 cities/towns. More importantly, close to 60% of workers earn their wages in cash, of which more than half are daily wage earners. The majority of small mom-and-pop shops deal only in cash, especially in rural areas. With 86% of banknotes moving out of circulation at just a few hours’ notice and with a limited amount of cash being made available in lieu, the effect has so far has been quite disruptive. This is no surprise given that as per an estimate by the Fletcher School at the Tufts University, in India 86.6% of transactions by value were carried out in cash in 2012. While this figure would have come down since then, it will still be very high. The fact is that India remains largely a cash economy. According to the same Fletcher School study, the ratio of currency to GDP in India (12.2%) is higher than for countries like Russia (11.9%), Brazil (4.1%) and Mexico (5.7%). Changing age-old habits is a long-term process and the demonetisation will have caught a lot of people on the wrong foot. Also, as mentioned earlier, in an effort to keep the decision secret, the actual implementation fell short of expectations. Even the banks, which were responsible for implementing this enormous project, were kept in the dark, thereby affecting their preparedness. Whether normalcy will return in another month’s time, will depend on the government’s ability to make new cash available based on its stated timeline. Having said that we think that the stress in rural areas will persist for some time.

Overall, we expect consumption in urban areas to be lower, at least until December, while the impact on rural areas could continue for longer. Nevertheless, we will keep tracking the situation and by mid-January we should have a better sense of the level of demand
destruction.

Positive

As some black wealth gets tracked, we expect a short-term spike in tax (and penal) revenue collection. This should allow the government to plug the gaping hole in the overall revenue collection budgeted for the year. Hence it should be able to maintain its fiscal deficit target for the year and continue with its overall expenditure plan (including capex), which we felt would be compromised by a build-up of revenue pressures. This benefit, however, will be a transitory in nature unless the move is followed by the tax reforms mentioned above. In the event that reforms do take place simultaneously, we would likely see a long-term structural improvement in the economy as government capex would continue unhindered resulting in more job creation.

Overall macro impact

GDP growth: The short-term demand destruction could be partly offset by continued government capex, which we previously expected to peter out. At this point we have limited visibility on the extent of the demand destruction that is likely to take place. On balance though, we see potential downside risks to our existing growth forecast. And the longer the disruption lasts, the greater the impact it will have.

Inflation: In the short term, we see potential downside risks to our inflation forecast given the demand destruction.

Monetary policy: With inflation likely to ease more than expected, there is a possibility of RBI opting for a rate cut at its December 2016 meeting as compared to our expectation of a rate cut at the April 2017 meeting. Also, with the vast amount of low-cost deposits flowing into the banking system, the banks are able to pass on the benefits of lower costs to lending rates, thereby improving the pace monetary policy transmission. However, we do not expect this to translate into higher credit growth. With credit growth currently at its weakest level, credit remains a demand issue and not a supply issue. Fiscal deficit: We believe the government will be able to meet its fiscal deficit target for the year (@ 3.5% of GDP) without having to compromise on its expenditure including capex. We had feared earlier that expenditure would be curtailed given that India’ fiscal deficit was already at 84% of the budget in the first half of FY17.

Current account deficit: The monetisation scheme could potentially lead to a higher deficit in the longer term as many of the people who generate black income could seek to park their income in gold rather than cash in anticipation of periodic repeats of the demonetisation scheme.

For now, the Rupee is in freefall...