by Roy Tov
Thursday, June 14th, 2012
clear signs of a Cold War against the European currency
Certain wars cannot be formally declared. Pakistan and Israel do not recognize each other. The escalating arms race between them may turn violent in the foreseeable future, but a formal declaration of war between entities that do not recognize each other is unlikely to happen. Other wars are never formally declared. The term Cold War was coined by George Orwell in 1945, and was used to describe the long conflict between the USA and the USSR, which continued until the dissolution of the latter in 1991. Considering the millions that died in it, defining this war as “cold” is difficult; yet, this war never existed formally. Moreover, the two sides never fought directly. All the combats took place among pawn-states; the Vietnam War is probably the best example of that. The difficult reality faced in 2012 by the European currency—the euro—seems to be related to an ongoing currency war.
Yesterday, June 13, 2012, Moody’s Investors Service downgraded Spain’s bond rating, placing it just a notch above being defined as junk-bond. This came days after a massive bailout of Spanish banks by Europe, which secured over 100 billion euros for them as guarantees. Before this, Spain concentrated all its failed loans in a few banks, and then asked for a banks’ bailout, claiming that except for these banks, its economy is sound. This was different from the done in the other European state-bailouts of the last year only in style. Portugal, Ireland and Greece were helped by the European Union, the International Monetary Fund, and the European Central Bank when they gave up hope of market funding. That turned out not being a good solution, as the ongoing troubles in Greece prove. Moody’s downgrading of Spain clearly shows that the international markets didn’t buy the Spanish thinly-disguised bailout. Following Moody’s decision, Spanish 10-year bond yields hit the 7 percent level; this was the level that triggered full international bailouts of the other euro zone members. In other words, the Spanish economy may soon collapse. If looking closely at the details, it looks that a Cold War was declared on the euro. As with the former Cold War, nothing was declared openly; yet, the odd combats at the European flanks hint at a violent reality.
Spain tried everything before accepting the bailout. In February, I reported in Spain as Western China, how European leaders asked help from China. On February 14, 2012, Chinese Premier Wen Jiabao offered co-operation to help stabilize debt-ridden EU nations, but made no specific promise to invest in the proposed European bailout fund. This was especially meaningful considering that China owns much of Spain. During the first week of January 2011, Li Keqiang, China’s Vice Premier visited Spain and was welcomed by then Spanish Prime Minister Jose Luis Rodriguez Zapatero. The visitor announced that his country would buy $7.9 billion in Spanish bonds, when China already owned 10% of Spain’s foreign debt. China bought debt also from other troubled countries of the EU. The Spanish El País newspaper dubbed Li Keqiang the new “Mr. Marshall,” in a reference to America’s post-World War II Marshall Plan. Yet, just one year later, China refused to help the failing economies of the European Union. This unexpected step indicates that China considers its former investments in Spain almost as lost. Other indicators support this. Spain is important in the current crisis because it is not like Greece, Portugal, Ireland or—still un-bailed—Italy. Spain played by the EU rules, and yet it is collapsing. When it joined the euro in 1999, Spain broke the EU debt rule, with a debt/GDP ratio of 62.3%. However, since then the Spanish government had a balanced budget on average—that means its borrowing was zero—every year until the 2008 financial crisis. Yet, Spain is failing. If Spain fails, it may mean the euro is not viable, and that Germany and France may also collapse.
On April 16, 2012, Spain was hit hard. Argentinean President began then the expropriation of 51% of Class D YPF shares from Repsol, a Spanish oil company operating also in Argentina (see Argentina Endangers Euro). This move transferred the ownership of the oil company from Repsol to the Argentinean government. The Argentinean government took over the administration of the confiscated company, through a government minister overseeing its activities until the ownership transfer is completed. Spain was fast to declare the move was illegitimate and that it will react harshly in the near future. “This is a hostile step by Argentina,” said Mariano Rajoy, the recently elected Spanish Prime Minister. Argentina completed the expropriation and Spain began a judicial process in international courts that will take years. That doesn’t matter anymore; the damage has already been done. Shortly afterwards, a tiny Spanish company in the business of electricity-transport was confiscated by Bolivia, which got envious of its southern neighbor success in the theft of Repsol. Spain probably was relieved by this latter expropriation; a mountainous country, Bolivia is not a profitable location for such companies. Yet, both events sent a message to the markets: Spanish companies operating in Spain’s former colonies may be expropriated without notice at any time. This additional instability may have had an important role in the current troubles.
Few would guess the importance of the companies involved. Moreover, after reading a short summary of Argentinean history, few would be brave enough to invest in the country’s economy. Thus, one cannot help but define Spaniards as the bravest people on earth, since they are the largest foreign investor in Argentina. Over the years, major Spanish corporations had invested major sums in their former colony. Spanish Telefonica—the third largest phone provider in the world—is active in Argentina (see Spain as Western China). Santander Group is a Spanish banking group and the 6th largest company in the world, operates banks in Argentina. The same goes for BBVA, the 7th largest financial institution in the Western world. Overall, more than 400 Spanish companies have substantial investments in what turned out to be nothing more than a robbers den. Two large Spanish companies are involved in the Argentinean energy market: Gas Natural and Repsol. The first is still untouched, the other-which is the 15th largest petroleum refining company-was robbed yesterday by the Argentinean government. After the confiscation of Repsol, Argentina may confiscate the Spanish banks; given this, the reaction of the markets towards Spain is understood, even after the informal bailout of this week. If there is a war on the euro, it hit at Spain’s flank. Given the abovementioned importance of this country one can only applaud Europe’s hidden enemy for its choice. Destroy Spain’s economy and the euro will probably fall.
During the second American attack on Iraq, I was fascinated by the American administration’s rhetoric. We all remember the “Weapons of Mass Destruction” lies, but there was much more than that. “Financing the war” was also a key phrase said by frenzied politicians while looking for juice to run their toys of mass destruction. There was no better testimony than this mantra to the fact this was a war of choice—and thus unacceptable—aimed to create financial profits through cheap oil and the revival of American military industries. The phrase also reflected the American mindset as a world financial center and the main printer of a fiat money known as American dollar, the world’s main reserve currency at that moment in time. A very different future awaits America.
The USA won’t disappear from the international arena as a significant player as a result of a military defeat. Granada won’t retaliate for the American crimes; neither would Afghanistan or Iraq. Attacking the weak is another characteristic of America. By the end of 2010, the media was full with articles announcing China having become the second largest economy, after bypassing Japan. The same number of articles tried to predict when China would bypass America. Some said 2020, others 2015. All of them ignored a rapidly changing financial situation which would control the economic development in the near future. Most economists use linear models in their predictions, while reality is often non-linear and non-derivative; this is due to the low-level mathematics learned at financial faculties. The result of this overlook will be dramatic; probably all predictions will fail.
America is #1 only because economic output is measured in the current reserve money, i.e. American dollars. There is a simple but excellent way of describing the problematic of these statistics. Bolivia is a producer of coffee. A pound of average coffee in Bolivia costs around one American dollar. In the US, a coffee of similar quality would probably cost around $4. Let’s say that both economies sell just one pound of coffee per year. If measuring the production of each economy in dollars, then the US economy could be claimed as being four times larger than the Bolivian one; however, if measuring by weight, both economies would be the same size. The world’s economy is measured in US dollars and thus it is highly biased toward the American economy, presenting it as much larger than it is.
In order to keep this illusion of economic size, a key goal of the US government is to keep its currency as the global monetary measurement unit. However, this won’t last. It makes no sense calculating the trade between China and India in US dollars; the distortions in such a case are multiple. In the case of Thai products reaching Nepal via India, measuring the events in American dollars is ridiculous. One solution would be adopting a basket of carefully balanced measurements methods; this would probably happen in the next decades. Measuring under a more accurate system, the US would probably rate as the third largest economy in the world. If measuring the EU as one economic unit, then the US would be just fourth. Moreover, not everyone is happy with the ongoing situation. In 2010, Russia and China scrapped the dollar in their mutual transactions. The same applies for a few other countries, mainly in Asia. At the beginning of February 2011, the IMF issued a report on a possible replacement for the dollar as the world’s reserve currency. The report recommends using Special Drawing Rights that could help stabilize the global financial system. Simply, heavily indebted America cannot provide a stable currency anymore. Roughly at the same time, the Asian Development Bank said in a joint study with Columbia University’s Earth Institute, that the Chinese Yuan could rapidly become an internationally used currency and serve as an alternative to the US dollar in central bank reserves. In fact, China owns not only a substantial part of the American debt, but also the debt of European countries as Spain, forcing a future in which the Yuan would grow in importance. As such, the opening of the Yuan as a floating currency that can be traded everywhere is almost inevitable. Despite some decentralization in its trading during recent years, Yuan is still heavily controlled by the Chinese government. America and Europe are waiting and pushing for this moment; vulture bankers will pray on the new reserve currency and speculate on its future.
The USA is interested in keeping its status as main reserve currency for as long as possible. In 2012, the euro is the second largest reserve currency and the second most traded currency in the world after the dollar. Yet, there are signs the euro was about to take over the dollar in popularity. In February 2012—roughly at the time of the European visit to china abovementioned—the euro surpassed the dollar as the currency with the highest combined value of banknotes and coins in circulation in the world. Alarms shook Washington.
Many years ago, the IDF published a thin but important book. Oddly enough it came out of the Galei Tzahal—Israel Military Radio—prints. The book deals with methods used by the USA to control South American regimes. Apparently I was one of its few readers; years later—when I found myself a refugee in that obscure part of the world—I could appreciate the frightening exactitude of that little book. There were two levels to the American control of their “backyard,” as South America is nicknamed in the book. The first was political and was best defined by the Monroe Doctrine of 1823. Monroe—then Secretary of State of the USA—defined an American position regarding the Americas: European powers are to be kept out at all costs. This has been strictly kept: French and Spaniards were ruthlessly sent away with the exception of a small failure at the French Guyana, which is still part of Metropolitan France. The second level is military; the book deals mainly with the situation in Argentina, but it applies also to what is known as the “Southern Cone” (Argentina, Chile and Uruguay). Interestingly, the last is also a dark star in Phillip Agee’s INSIDE THE COMPANY: CIA DIARY. Other South American countries are essentially similar and experienced some of the most ruthless military-terror dictatorships during the 20th century; ignoring human rights, torturing and assassinating citizens were their credentials. This military-terror machinery had been trained by the USA and was designed to perform exactly that: civil terror for the profit of Empire (see Netanyahu: Between Uganda and Argentina for more details on the military characteristics).
Despite the isolationist rhetoric of South American presidents, the Monroe Doctrine is still well and alive. Bolivian Evo Morales may have kicked the American ambassador out in 2008, but that was done for propagandistic goals. The relations and commerce between the countries continued, and a new ambassador was appointed when everybody forgot about the issue. Skirmishes between the countries may happen from time to time, but they all stick to that 19th Century doctrine. Seeing the success of the euro in the international arena, America may have panicked, and quietly asked for help from the South-American puppet-regimes. “Stick a nail on Spain’s flank,” Obama may have said to its Argentinean counterpart in a secret meeting. Argentina lacks the proper technology for oil-extraction; the ongoing talks about the replacement of Repsol by an American oil company further support this view. Considering all these, it is hard not to conclude that America is conducting a quiet Cold War against the euro, in a desperate—and eventually futile—attempt to keep its monetary hegemony.