World
Why a European version of quantitative easing (QE) will be tough
In the US, UK and Japan quantitative easing is straight forward. The central banks just add a couple of extra zeros to their balance sheets and then go on a spending spree buying the country’s debt. If the ECB wanted to do quantitative easing it would have to buy the debt of its members. This might be exceptionally difficult
 
I wrote last May that the European economy was stagnating. It still is. With the exception of the equity and bond markets, the European economy has not got better since the beginning of the summer. Last month, the French gross domestic product (GDP) was flat. The Italian economy was in recession. Even the mighty German economy went negative. The Eurozone, as a whole, had stopped growing at all. So as usual, Mario Draghi and the European Central Bank (ECB) rode to the rescue. Last week, they announced a new stimulus package. The markets loved it at least for a day, but will it actually work?
 
Markets are all hoping and praying for a European version of quantitative easing (QE). But there is a problem. In the US, UK and Japan, quantitative easing is relatively straight forward. The central banks just add a couple of extra zeros to their balance sheets and then go on a spending spree buying the country’s debt. The ECB has no such luxury. If it wanted to do quantitative easing, it would have to buy the debt of its members. This might be exceptionally difficult.
 
It is not clear how the ECB would decide, how much of its member’s bonds to buy, but the effect would be uneven. If it bought bonds relative to output, it would buy mostly German bonds. Since the German 10-year bonds are already under 1%, it is doubtful that further buying will have much of an effect.
 
Buying other Eurozone sovereign bonds entails a large credit risk. Many of the countries are deeply in debt. Forecasts expect Greek debt to rise to 177.2% of GDP this year, Italy's to 135.2 %, Cyprus to 122.2 % and Spain's to 100.2%. Greece has already had a technical default. Ireland, Portugal, Greece and Cyprus have had bailouts. Italy’s bonds are rated Baa2, two levels above junk, as are Spain’s bonds.
 
It is not only the credit risk that a Eurozone QE would entail. There is also a large investment risk. Both, Italian and Spanish bonds are extremely high and yield less than much higher rated US bonds. Given their high debt and the weakness in the European economy, they have to fall sometime. If these bonds were owned by the ECB, it, or rather German taxpayers, might have to bear the loss.
 
So rather than attempt to tackle the political issues surrounding a full-blown QE, the ECB opted for purchasing asset backed securities (ABS). Asset backed securities are loans made by banks and other financial institutions, which then are sliced, diced and repackaged as bonds with various risk levels and resold to investors. The loans could be for anything from used cars to houses. You might remember them from the financial crisis. In the bad old days, US financial institutions repackaged loans secured by mortgages from risky borrowers known as subprime. At the time it was deemed “toxic sludge”. How times have changed.
 
Under the proposed plan, the ECB will buy up an unspecified amount of ABS. The idea is to take the ABS off the books of the banks in order to free up capital. In theory, the ECB would purchase hundreds of billions of euros of these instruments. But there is a problem. Since the financial crisis, the ABS market in Europe has been moribund. In the second quarter of 2014 to total amount for ABS issue was only €19 billion, which was 6% less than last year. The total amount issued last year was only €79 billion and the total outstanding instruments are only about €150 billion. Even if you add in the €200 billion mortgage backed securities, you really don’t get to the size contemplated by the ECB.
 
There are also many other problems. The infamous toxic sludge of the US markets was created to fill a burgeoning demand. The regulatory environment put in place since the crash, is supposed to prevent this, but it will also make the creation of new ABSs more difficult. If the regulations are relaxed, which is not under ECB control, all the money pouring into this sector almost guarantees a lot of really bad paper to be stuffed onto the ECB’s balance sheet.
 
This is especially true because the ECB has signalled its willingness to buy riskier ‘mezzanine’ tranches, provided Eurozone members are willing to guarantee the paper. The temptation to guarantee the debt of politicos’ cronies will be huge. You can just smell the corruption.
 
This is assuming that Europeans really want to borrow. Americans used to be more indebted than Europeans. Not anymore. Now American’s household debt in 105% of income after tax. Europeans are burdened with 110%.
 
It’s not just consumers. Many parts of the Eurozone are still hobbled by unsustainable debt built up by both the public and private sectors prior to the crash. With so much debt, they are actually paying it down, not adding to it. The additional cash is simply not wanted.
 
The cheap money already created by the ECB and other central banks has created real estate bubbles in various European countries: Belgium, Finland and France within the Eurozone. Norway, Sweden and Britain outside of it. Buying mortgage backed ABS will make this problem worse.
 
Since it will be extremely difficult for an ABS program to achieve the scale desired by the ECB, it is almost certain that QE will be back on the agenda. The risks I discussed earlier will make it extremely difficult. To get it passed Mario Draghi will need to get the Germans on board. It might be possible if France and Italy carried out structural reforms, which seems highly improbable.
 
The paradox is that more money will probably not have the desire effect on European economies without the structured reforms, but the extra money lessens the need for reforms. European countries wasted the years when the ECB bought them with the low interest rates. Their voters certainly do not see any need now.   
 
Rock bottom interest rates have forced investors in Europe and elsewhere to pile into riskier assets in the search for yield. Many of these assets from real estate, to junk bonds, equities, sovereign bonds are arguably well into bubble territory. More money is not going to help. Further, it helps prop up weak creditors or zombie companies, preventing those from going under and reallocating capital to more successful enterprises that could actually help grow economies.
 
For years, investors and markets have been enthralled with central bankers. European wars and African plagues barely made it above the radar. Slow or no growth doesn’t matter. Just a few sentences from a central banker about more easy money were good for a rally. It is appealing to think that a few computer strokes can cure a continent’s ills, but I am afraid it doesn’t. This is one illusion that may be on its last legs and the hangover could last quite a while. 
 
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.) 
 

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Floods in J&K: Massive rescue operations underway
Rescue teams will be focusing on the inundated city of Srinagar and south Kashmir belt where an estimated four lakh people are believed to be trapped in floods which have claimed nearly 200 lives in the Jammu & Kashmir
 
Mammoth multi-agency rescue efforts were underway in Jammu and Kashmir  (J&K) to rescue lakhs of people trapped in flood-ravaged areas, with choppers from Indian Air Force (AIF) and transport aircraft undertaking non-stop sorties overnight to carry men and relief material to the submerged parts.
 
Rescue teams will be focusing on the inundated city of Srinagar and south Kashmir belt where an estimated four lakh people are believed to be trapped in floods which have claimed nearly 200 lives in the State.
 
Two more units of Army and NDRF have been airdropped to Pancheri in Udhampur where 30 people are missing after a landslide hit the area.
 
“Seven bodies and a limb of a person have been so far recovered in Udhampur but the operation to locate those trapped is very difficult,” DIG Garib Das said.
 
However, the situation in the rest of Jammu belt has stabilised and the focus is now on providing relief material on the ground, officials said.
 
They said a massive rescue and relief operation is on in Kashmir Valley with more helicopters and rescue material, including boats, pressed into service.
 
floods, J & K, Jammu & Kashmir, Srinagar, rescue operations, Indian Air Force,  DIG Garib Das.Almost 30 sorties of IL-76 and AN 32 have been undertaken to Srinagar overnight to carry men and relief material, boats cutters and other equipment, besides huge quantity of medicines and water bottles.
 
Speaking about the rescue efforts, Army Lt Chetan said: “We are rescuing 10-15 people in every round we make per boat. We make 50-60 rounds per day. We have all equipment to rescue people. We will move out only after rescuing everybody.’’
 
Army Chief Gen Dalbir Suhag had said in Delhi that “Soldiers won’t return to barracks until last man is helped.”
 
Army medical officer Jagdish Singh said, “We have set up medical camps and are treating 230-300 people everyday."
 
“We have ambulances and surgeons. District hospitals and NGOs are also working with us,” he added.
 
Lt Gen DS Hooda, General-Officer-Commanding of the Army’s Northern Command had said yesterday that the focus will be now on Srinagar.
 
The heavy floods triggered by torrential rains have snapped the Valley’s telecommunication links with the rest of the country.
 
BSNL has launched an operation on a war-footing with the Army and IAF to restore mobile services through satellite network and the telecom network is expected to be partially restored today, officials said.
 
To provide relief to the displaced, 68 camps have been set up in Jammu.
 
Seven helicopters have been pressed to ferry relief material to Rajouri, Poonch, Reasi, Mahore, Doda, Kishtwar belts, officials said.
 
The Centre has rushed more National Disaster Response Forces (NDRF) teams equipped with boats and other flood relief equipment to Kashmir Valley. Naval commandos have also been deployed for the first time.
 
Army, Air Force, NDRF and state agencies have so far rescued more than 25,000 people and lodged them in higher places in the Valley.
 
Boats have been pressed into service in many flooded parts to rescue the residents huddled on rooftops and upper floors of their houses.
 
Meanwhile, the pilgrimage to Vaishno Devi shrine in Reasi district was on with over 25,000 people offering prayers since yesterday.
 
Efforts are on to restore helicopter services to the cave shrine, Das said.

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Woman Involved in Security Lapse at Arizona Terror Center Stripped of Citizenship
Immigration case leads to likely exile of Chinese immigrant who had role in embarrassing episode in Phoenix
 
To find out more about how a Chinese national gained access to Arizona's terror center, read last week's exclusive piece from ProPublica and The Center for Investigative Reporting.
 
Xunmei Li, the Chinese immigrant and businesswoman who played a role in a large-scale security lapse inside the Arizona Counter Terrorism Information Center, lost her U.S. citizenship last week and likely faces exile from the country.
 
Federal Judge David Campbell ruled that Li's 2009 conviction for immigration fraud, combined with evidence that she was knowingly married to two men at once, is sufficient cause to denaturalize her. Li, 44, lied to immigration officials about how many times she'd married and whether she has children while applying for citizenship a decade ago. She denied being a mother despite having two U.S.-born daughters.
 
The order against Li is the latest chapter in the murky, long-buried story of how a Chinese national came to work inside the counter terrorism center in Phoenix. Lizhong Fan, a computer programmer from Beijing, spent five months in 2007 working with confidential records, including Arizona's database of five million driver's licenses. Fan abruptly left for China with computer equipment, potentially holding reams of sensitive data.
 
Li, who emigrated to the U.S. from Shanghai in 1994, has said she was the person whose recommendation led to Fan working inside the intelligence center. Li said she suggested Fan as a candidate to work on a facial recognition program owned and operated by a small security company called Hummingbird Defense Systems. Li was the girlfriend of the company's chief executive, Steve Greschner.
 
The Maricopa County Sheriff's Office hired Hummingbird to set up the facial recognition system, and then persuaded officials to install the system in the intelligence center. The center, formed in 2004, allows more than 20 police agencies to work together to thwart possible terror attacks.
Arizona state and local officials did not disclose the possible breach at the center to the public. A joint investigation by ProPublica and The Center for Investigative Reporting detailed the security failure in an August 26 story.
 
It remains unclear how closely law enforcement looked into the incident or whether it moved to prevent future breaches. The FBI opened a probe shortly after Fan disappeared in June 2007, according to records and a former federal investigator, but the bureau hasn't made its findings public. The Arizona Department of Public Safety, which operates the intelligence center, has refused to comment.
 
Federal investigators came to worry that Li was a spy for China, said Paul Haney, a retired U.S Immigration and Customs Enforcement agent. Haney's criminal immigration investigation of Li led to her fraud conviction and, ultimately, the denaturalization case.
 
The government has never filed espionage or national security charges against Li. She did not respond to calls for comment this week, but has repeatedly denied any involvement in espionage.
"Absent a confession, we can only speculate," Haney said of whether Li served as a Chinese spy. "Maybe she's telling the truth and she's not an operative. I don't know."
 
Don Bivens, Li's lawyer, said in a statement that he cannot understand why government lawyers took such severe action against his client, "who in our view simply made mistakes on her naturalization application that are commonly made by hundreds of immigrants every day."
Patricia Corrales, a former U.S. Immigration and Customs Enforcement attorney who was involved with many denaturalization cases in her career, said revoking citizenship has been used in situations that involved national security concerns, particularly when it involves false testimony, without disclosing secrets or such suspicions.
 
"Now, most people think, "Bigamy, what's the big deal with that?" said Corrales, who is now an immigration attorney in Southern California. "We want only people who deserve to be U.S. citizens in this country to have that status. If you're going to lie about your kids what else are you going to be lying about?"
 
Christopher Dempsey, a U.S. Justice Department attorney who represented the government at trial, referred calls for comment to the Justice Department.
 
A Justice Department spokeswoman said the government is pleased with the court's decision and the order "speaks for itself."
 
The U.S. Attorney's Office has said it intends to start deportation proceedings against Li. She can appeal her denaturalization. Bivens, Li's lawyer, declined to comment on whether his client will continue to fight for her citizenship.
 
Judge Campbell scheduled a hearing for later this month to establish how to proceed with Li's denaturalization.
 
Andrew Becker, a reporter at The Center for Investigative Reporting, contributed to this report.
 
Courtesy: ProPublica.org

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