It's a Mad, Mad, Mad, Mad World Banking System

January 13, 2015

...it must be the whole of the City-dominated European banking system which is reorganized, because it is all bankrupt. They are only talking about a "Greek" debt crisis to cover their bankrupt rear ends
Lyndon LaRoucheJanuary 12th, 2015

Lyndon LaRouche made those comments after having heard a report yesterday of the new proposals by leading Greek parties for a European conference to write down Greek debt by treaty. Discussion of Greece among Trans-Atlantic banking circles has proved very worrisome over recent weeks, with the expectation that the anti-Euro Syriza party will handily win the upcoming Jan. 25th election.

What is not being discussed is the only solution to saving Greece, Europe, or the entire Transatlantic banking system. Namely, LaRouche's four cardinal laws, beginning with Glass-Steagall.

It is for that reason that we discuss below some earlier periods of international debt discussions, notably the 1953 London Debt restructuting conference, which occurred during a period where the Glass-Steagall banking standard existed in the United States.

Also included are a recent commentary by Liam Halligan, on the utter insanity of the policy of Quantitative Easing, and a short piece on the upcoming pitfalls of the failed oil-price drop policy.

                                                                                                                                                                                                                                                                                        

SUPPORTING MATERIAL


Euro Debt Crisis: The London Debt Conference Revisited

[Excerpted with permission from the January 12th, 2015 European Strategic Alert]

Both the Greek Syriza party and the Independent Greeks have been making headlines in the European media calling for a European-wide debt conference similar to the conference that led to the London Debt Agreement of 1953 that settled the foreign debts of Germany.

In an interview with BBC4 recently, the leader of Syriza, Alexis Tsipras, said,

"What we are asking for is a European conference in order for all of us united to address this European problem. There is no other solution to the problem but to delete a big part of the debt, [to issue] a new memorandum on the repayment and a new development clause....Obviously we will negotiate with our partners in order for all of us united to address the Greek debt issue. Such a conference would not only deal with the Greek debt but that of other bailout countries including Ireland, Portugal, Cyprus, etc., and Europe as a whole."

Convening such a conference is an excellent opportunity not only to settle the Greek debt crisis but to reorganize and reform the entire European financial system. The real issue is not the Greek debt but the bankruptcy reorganization of the entire Eurozone, and more broadly, the trans-Atlantic financial system.

The London Debt Conference ... settled the German inter-war public and private foreign debt, as well as the post-war Marshall Plan concessionary loans debt, on the following principles:

• The purpose of the negotiation was to ... facilitate the most rapid recovery and expansion of the German economy, which was seen as crucial for the recovery of Western Europe as a whole.

• All the foreign debt, public and private debt was to be settled by treaty.... There were no exceptions, such as hedge funds or vulture funds receiving any special treatment. The agreement was in the form of a treaty between the respective states and therefore final, and not subject to foreign court actions such as in the Argentine case.

• An average 50% cut in the principal of the debt, with low interest rate. Payments were made through [Germany's] surplus export earnings. That is to say, if Germany enjoyed a surplus of trade, and hence foreign exchange, payments would be made based on that surplus. If there was a deficit, no payments would be made. Part of this formula [stipulated that] Germany was encouraged to implement a policy of import substitution.

• Absolutely no conditionalities were attached....

Most importantly, this occurred under a financial system that was on a Glass-Steagall standard of full separation between commercial and investment banking, where the former was forbidden by law to engage in the trading of derivatives and other forms of exotic financial instruments. At the same time, powerful credit institutions existed, most notably the Kreditanstalt fur Wiederaufbau, which served as Hamiltonian credit institutions to finance industry and infrastructure which rapidly led full employment....

There has never been such a debt restructuring since, and none that has been as successful as the so-called German economic miracle made so manifest.

Such a restructuring could never be done under the current system, primarily because the debt is part of a system of casino banking where these so-called sovereign bonds are linked to a labyrinth of derivatives and speculative securities. Therefore, the entire system of European banking and credit has to be reorganized in an orderly manner as was done under Franklin Roosevelt when the Glass-Steagall Act was passed, beginning with the separation of banks, and the creation of a national credit institutions in the form of the Reconstruction Finance Corporations. This kind of action, with all EU nations at a conference table, makes it possible for Europe as a whole to craft a productive solution for the debt crises of Greece, Ireland, Portugal, Cyprus etc....

The most efficient way to carry out this task would be through returning powers to the sovereign states. With a return to national banking, the European Central Bank could be replaced by a European Development Bank to extend credits to the necessary infrastructure and industrial projects that would integrate Europe into the world land-bridge perspective of the BRICS.


Halligan: The Policy of Quantitative Easing Is "Madness"

Writing in the Daily Telegraph, Liam Halligan, a strong supporter of Glass- Steagall banking reform, calls the push for a policy of quantitative easing (QE) "madness." While discussing the fact that there is pressure on German Chancellor Angela Merkel to approve massive QE to fight "deflation," Halligan writes,

"No matter that 'deflation' is an almost entirely bogus argument. Strip out an oil-driven 6.3% drop in energy prices, and inflation was positive in December. Yes, we're below the ECB's 2% target, but that's because the economy has stalled, with survey data pointing to fourth quarter growth of barely 0.1%. But that's not down to a lack of printed money. Firing up the ECB's virtual presses will do nothing to address the genuine obstacles to Eurozone growth—the silted-up labor markets, the ghastly demography, the still massively debt-soaked banking sector that is too fragile to lend, so starving creditworthy firms and households of finance, in turn strangling aspiration and commerce...But to think that QE will fix the Eurozone, and solve 'deflation' is just nonsense. Once begun, fully-blown Eurozone QE will go on for years. By cossetting busted banks and draining resources, a euro-QE drip-feed will send Europe into a decade or more of near-zero growth."

He then writes that even QE will not solve the political reality if anti-bailout Syriza wins the Greek elections on Jan. 25.

"If Germany then punishes Athens, the Greeks could walk, putting us in extremely dangerous Eurozone break-up territory. Even if Syriza agrees to negotiate, other bailed-out countries will then demand less onerous terms, which could send bond markets hay-wire...History shows, time and again, that this policy is madness and, ultimately, deeply counter-productive. But since when did we learn from history?"


Day of Reckoning Nearing for the Banks' Oil Debt

With all grades of oil now down into the $45 range and credit disappearing in the energy sector of the U.S. economy, the New York Times led its business section yesterday with "As Oil Prices Fall, Banks Serving the Energy Industry in for a Jolt."  The Times reported that the big Wall Street banks have lost their revenue from oil/gas debt, and that the banks with the biggest exposure to this debt are Wells Fargo (15% of all its investment banking revenue last year), with Citigroup at 12%, and the much-more-exposed big Canadian banks, led by Scotiabank at 35%.

The paper further pointed out that Wall Street firms that financed energy deals now have trouble offloading the debts. 2014 was a frothy return to record levels of mergers and acquisitions — $3.4 trillion "worth," more than in 2007 — and energy mergers were the biggest chunk of that at $409 billion. But merger waves need following price increases (plus austerity) to handle the huge resulting debt; this wave is getting the opposite.

"Morgan Stanley, for instance, led a group of banks that made $850 million of loans to Vine Oil and Gas, an affiliate of Blackstone, a private equity firm. Morgan Stanley is still trying to sell the debt.... Goldman Sachs and UBS led a $220 million loan last year to the private equity firm Apollo Global Management to buy Express Energy Services. That debt has not been sold. A precipitous drop in oil prices can quickly turn loans that once seemed safe and conservatively underwritten, into risky assets."

• OilPrice.com reported Jan. 7 that there will be a $1.6 trillion loss of earnings of oil companies in 2015 if the price stays around $50, and "without a swift rise in oil prices, a wave of write-downs and impairment charges is about to wash over the industry."

• Moody's announced Jan. 7 it is preparing to downgrade debt of TransOcean to junk. This is the largest builder/operator of offshore oil rigs in the world, with debt of $9.1 billion.

• Canadian oil sands producer Laracina Ltd. defaulted on $127 million in debt. Texas oil driller WBH Energy LP declared bankruptcy, its lender had cut off credit, debts about $50 million. Three other publicly traded oil firms went bankrupt in October-November.

• CreditSights Inc. said Jan. 7 that 25 U.S. shale firms are in near-term danger of defaulting on leveraged debt. This is the $200 billion loans part of the $500 billion shale debt bubble, to which rollover credit has essentially disappeared.

• Junk bond interest rates in the energy sector, 4% about investment-grade last July, are now 11% above — there is no credit. For the overall "high-yield," $2.2 trillion bubble, interest rates were 2.5% above investment grade; they are 4.75% above now, so the oil/gas "contagion" is spreading.

• Capital expenditure is falling fast. Among 40 publicly traded U.S. exploration and production (E&P) companies in oil/gas, the average cut in capital expenditure for 2015 has been 31% from 2014. Overall, energy is one-third of all capital expenditures, so this means a total cut by at least 10% from 2014 to 2015 for the whole economy.

                                                                                                                                                                                                                                                                                        

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