John R. Houk
© December 22, 2015
What is the global effect on Capitalist market economies when an avowed Communist dictatorial nation is welcomed as an elite currency in the global finance? It truly is something serious to ponder.
I can hear the hollering and cries now that the Cold War (U.S. led West vs. Communist USSR [and to a lesser extent China]) has been over since the Presidency of Ronald Reagan in the 1980s. In the case of the former Soviet Ruble and the Chinese Renminbi (aka yuan), no Communist nation ever achieved a financial rating as elite. Or at least that is until now.
The People’s Republic of China (i.e. Communist despotism) had its national currency the Renminbi declared an elite currency by the International Monetary Fund (IMF) in November 2015 (official elite start date October 2016). The Renminbi thus joins the American Dollar, the EU Euro, British Pound and Japanese Yen as a stable currency. This banks and nations can trade with the Red Chinese currency to add to reserves to back an economy. To place this in perspective check out this WaPo excerpt:
Here are a few things the four countries in the IMF’s current “basket” all have in common, beyond their exports and tradable currencies. They are all market democracies, with well-established property rights and rule of law; their achievement of those institutional advances preceded their becoming issuers of currencies dependable and liquid enough for other countries to use them as reserves. The notion of a Chinese-issued global reserve currency assumes that Beijing can essentially reverse-engineer such development, and the market confidence it inspired, in a communist nation founded and still operated on the basis of party-state control over everything from banks to courts. (Bold text is Blog Editor’s – China moves into the global currency elite; By Editorial Board; Washington Post; 12/2/15)
For all of Communist China’s strides in becoming the world’s second largest economy the fact remains it is a ONE-Party nation with property rights and the rule of Law are under the foundation of State controlled Marxist ideology which has morphed into Chinese Communism.
The pseudonymous writer Tony Newbill projects the feeling that the Renminbi will cause a bit of global financial instability as the Chinese currency becomes a reserve option threatening the stability of the Dollar, Euro, Pound and Yen. I think he is on to something as evidenced by the Islamic Supremacist dictatorship of Sudan and the Communist dictatorship of North Korea will now have greater capability of trading in Renminbi in making deals with transnational terrorists thus avoiding restrictions and sanctions from nations that use the Dollar, Euro, Pound and Yen. AND that is just one example.
In introducing an article from the NYT Newbill provokes your thinking toward the West’s banking reformation involving how the Western governments address financial crises when banks begin to fail due to bad investments, especially in the case of transnational giant too big to fail banks. Instead of using the bailout path, the G20 nations have imposed a banking rule (See Also HERE) involving Bail-inabled Bonds. Hence the term Bail-in instead of a taxpayer supported government Bailout.
Since I am not exactly a big depositor in any bank I was somewhat clueless on the difference between a Bailout and a Bail-in. To comprehend the NYT article Newbill sent me to post, I had to read up on what the heck a bail-in entailed.
Here is a just over a minute explanation of the difference between a Bailout and Bail-in:
Posted by Mike Maloney
Published on Nov 13, 2014
More: “Just the term ‘Bail-In’ is a lie. This is something that is a marketing tool to basically…cover up a theft.” – Mike Maloney. Learn more about the film here: If you’d like to watch the whole film, you can rent or buy the film online using this link and discount code for 30%: “maloney-rent” and “maloney-buy”
From the film’s press release:
From award-winning filmmaker Tim Delmastro comes a new film about … READ THE REST
New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners
By Ellen Brown
December 1, 2014
On the weekend of November 16th, the G20 leaders whisked into Brisbane, posed for their photo ops, approved some proposals, made a show of roundly disapproving of Russian President Vladimir Putin, and whisked out again. It was all so fast, they may not have known what they were endorsing when they rubber-stamped the Financial Stability Board’s “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” which completely changes the rules of banking.
Russell Napier, writing in ZeroHedge, called it “the day money died.” In any case, it may have been the day deposits died as money. Unlike coins and paper bills, which cannot be written down or given a “haircut,” says Napier, deposits are now “just part of commercial banks’ capital structure.” That means they can be “bailed in” or confiscated to save the megabanks from derivative bets gone wrong.
Rather than reining in the massive and risky derivatives casino, the new rules prioritize the payment of banks’ derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called “bail-inable” bonds.
“Bail in” has been sold as avoiding future government bailouts and eliminating too big to fail (TBTF). But it actually institutionalizes TBTF, since the big banks are kept in business by expropriating the funds of their creditors.
It is a neat solution for bankers and politicians, who don’t want to have to deal with another messy banking crisis and are happy to see it disposed of by statute. But a bail-in could have worse consequences than a bailout for the public. If your taxes go up, you will probably still be able to pay the bills. If your bank account or pension gets wiped out, you could wind up in the street or sharing food with your pets.
In theory, US deposits under $250,000 are protected by federal deposit insurance; but deposit insurance funds in both the US and Europe are woefully underfunded, particularly when derivative claims are factored in. The problem is graphically illustrated in this chart from a March 2013 ZeroHedge post:
More on that after a look at the new bail-in provisions and the powershift they represent.
Bail-in in Plain English
The Financial Stability Board (FSB) that now regulates banking globally began as a group of G7 finance ministers and central bank governors organized in a merely advisory capacity after the Asian crisis of the late 1990s. Although not official, its mandates effectively acquired the force of law after the 2008 crisis, when the G20 leaders were brought together to endorse its rules. This ritual now happens annually, with the G20 leaders rubberstamping rules aimed at maintaining the stability of the private banking system, usually at public expense.
According to an International Monetary Fund paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:
[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.
The language is a bit obscure, but here are some points to note:
o What was formerly called a “bankruptcy” is now a “resolution proceeding.” The bank’s insolvency is “resolved” by the neat trick of turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual.
o “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings.
o The power is statutory. Cyprus-style confiscations are to become the law.
o Rather than having their assets sold off and closing their doors, as happens to lesser bankrupt businesses in a capitalist economy, “zombie” banks are to be kept alive and open for business at all costs – and the costs are again to be to borne by us.
The Latest Twist: Putting Pensions at Risk with “Bail-Inable” Bonds
First they came for our tax dollars. When governments declared “no more bailouts,” they came for our deposits. When there was a public outcry against that, the FSB came up with a “buffer” of securities to be sacrificed before deposits in a bankruptcy. In the latest rendition of its bail-in scheme, TBTF banks are required to keep a buffer equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency.
Called “contingent capital bonds”, “bail-inable bonds” or “bail-in bonds,” these securities say in the fine print that the bondholders agree contractually (rather than being forced statutorily) that if certain conditions occur (notably the bank’s insolvency), the lender’s money will be turned into bank capital.
However, even 20% of risk-weighted assets may not be enough to prop up a megabank in a major derivatives collapse. And we the people are still the target market for these bonds, this time through our pension funds.
In a policy brief from the Peterson Institute for International Economics titled “Why Bail-In Securities Are Fool’s Gold”, Avinash Persaud warns, “A key danger is that taxpayers would be saved by pushing pensioners under the bus.”
It wouldn’t be the first time. As Matt Taibbi noted in a September 2013 article titled “Looting the Pension Funds,” “public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.”
Wall Street-based pension fund managers, although losing enormous sums in the last crisis, will not necessarily act more prudently going into the next one. All the pension funds are struggling with commitments made when returns were good, and getting those high returns now generally means taking on risk.
Other than the pension funds and insurance companies that are long-term bondholders, it is not clear what market there will be for bail-in bonds. Currently, most holders of contingent capital bonds are investors focused on short-term gains, who are liable to bolt at the first sign of a crisis. Investors who held similar bonds in 2008 took heavy losses. In a Reuters sampling of potential investors, many said they would not take that risk again. And banks and “shadow” banks are specifically excluded as buyers of bail-in bonds, due to the “fear of contagion”: if they hold each other’s bonds, they could all go down together.
Whether the pension funds go down is apparently not of concern.
Propping Up the Derivatives Casino: Don’t Count on the FDIC
Kept inviolate and untouched in all this are the banks’ liabilities on their derivative bets, which represent by far the largest exposure of TBTF banks. According to the New York Times:
American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them.
These biggest of profits could turn into their biggest losses when the derivatives bubble collapses.
Both the Bankruptcy Reform Act of 2005 and the Dodd Frank Act provide special protections for derivative counterparties, giving them the legal right to demand collateral to cover losses in the event of insolvency. They get first dibs, even before the secured deposits of state and local governments; and that first bite could consume the whole apple, as illustrated in the above chart.
The chart also illustrates the inadequacy of the FDIC insurance fund to protect depositors. In a May 2013 article in USA Today titled “Can FDIC Handle the Failure of a Megabank?”, Darrell Delamaide wrote:
[T]he biggest failure the FDIC has handled was Washington Mutual in 2008. And while that was plenty big with $307 billion in assets, it was a small fry compared with the $2.5 trillion in assets today at JPMorgan Chase, the $2.2 trillion at Bank of America or the $1.9 trillion at Citigroup.
. . . There was no possibility that the FDIC could take on the rescue of a Citigroup or Bank of America when the full-fledged financial crisis broke in the fall of that year and threatened the solvency of even the biggest banks.
That was, in fact, the reason the US Treasury and the Federal Reserve had to step in to bail out the banks: the FDIC wasn’t up to the task. The 2010 Dodd-Frank Act was supposed to ensure that this never happened again. But as Delamaide writes, there are “numerous skeptics that the FDIC or any regulator can actually manage this, especially in the heat of a crisis when many banks are threatened at once.”
All this fancy footwork is to prevent a run on the TBTF banks, in order to keep their derivatives casino going with our money. Warren Buffett called derivatives “weapons of financial mass destruction,” and many commentators warn that they are a time bomb waiting to explode. When that happens, our deposits, our pensions, and our public investment funds will all be subject to confiscation in a “bail in.” Perhaps it is time to pull our money out of Wall Street and set up our own banks – banks that will serve the people because they are owned by the people.
Here is the Tony Newbill email conspiracy theory email.
This is BAD
Sent by Tony Newbill
Sent: 11/30/2015 12:07 PM
Here comes the Run on the Dollar and USA and Euro Bank Bail-ins!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
China’s Renminbi Is Approved by I.M.F. as a Main World Currency
NOV. 30, 2015
NY Times VIDEO: Chinese Currency Named as a World Reserve
By REUTERS | Nov. 30, 2015 | 0:52
Christine Lagarde, the managing director of the International Monetary Fund, announces that China’s renminbi will become a world reserve currency alongside the dollar, euro, pound and yen.
HONG KONG — The Chinese renminbi was anointed as one of the world’s elite currencies on Monday, a milestone decision by the International Monetary Fund that underscores the country’s rising financial and economic heft.
The move will help pave the way for broader use of the renminbi in trade and finance, securing China’s standing as a global economic power. Just four other currencies — the dollar, the euro, the pound and the yen — have the I.M.F. designation.
But the path to the I.M.F. decision, a bumpy process that stretches back years, also introduced new uncertainty into China’s economy and financial system.
To meet the I.M.F. requirements, China was forced to give up some of its tight control over the currency, culminating in the abrupt devaluation of the renminbi that shook global markets in August. The changes could inject fresh volatility into the country, at a time when its economy is already slowing.
The I.M.F. designation, an accounting unit known as the special drawing rights, bestows global importance.
Many central banks follow this benchmark in measuring their reserves, which countries hold to help protect their economies in times of trouble. By adding the renminbi to this group, the I.M.F. effectively says that it considers the currency to be safe, reliable and freely usable.
It is a “recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Christine Lagarde, the managing director of the I.M.F., said in a statement in Washington. “The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
The designation is a point of pride for Beijing, which had made it one of its highest economic policy priorities.
In the months before the fund’s decision, China moved aggressively to expand the currency’s standing on a global stage, building trading hubs in Europe and developing a raft of renminbi-denominated bonds and commodity contracts. In devaluing the currency, China changed the way it sets the value of the renminbi each morning, allowing market forces to play a bigger role.
The I.M.F. decision also says a lot about the waning influence of Europe: The renminbi is mainly replacing part of the euro’s role in the special drawing rights. Assessing currencies for the accounting system, the fund put a greater emphasis on their different roles in international finance. The dollar still dominates in finance and trade, while the renminbi is quickly gaining ground on the euro.
The United States Treasury said it “supported” the I.M.F. decision.
Besides its symbolic weight, the I.M.F. label, which will take effect at the end of September next year, carries specific benefits. The renminbi will become one of the currencies used in the disbursement and repayment of international bailouts denominated in the fund’s accounting unit, like Greece’s debt deal.
The renminbi’s new status “will improve the international monetary system and safeguard global financial stability,” President Xi Jinping of China said in mid-November.
While the renminbi may gain favor internationally, the I.M.F. designation does not mean that China’s economic overhaul is complete. China maintains heavy regulatory control over the country’s financial system. The country also falls short in legal protections, with the Communist Party continuing to play a strong role in deciding court cases.
Such issues could limit the overall appeal of the renminbi — and China’s ambitions.
“It is a historic moment in international finance for an emerging market economy, with a per-capita income barely a quarter that of other reserve currency economies, to be anointed as the issuer of one of the world’s major reserve currencies,” said Eswar Prasad, a former head of the I.M.F.’s China division who is now the Tolani Senior Professor of Trade Policy at Cornell University. But “the most likely scenario is that the renminbi will erode but not seriously rival the dollar’s status as the dominant global reserve currency.”
The changing currency dynamics also create new geopolitical concerns.
As the renminbi becomes more deeply woven into the global economy, it undermines the ability of the West to impose financial sanctions on countries accused of human rights abuses and other violations, like Sudan and North Korea. Such countries can increasingly carry out transactions in renminbi.
China contends that it is crucial to respect nations’ sovereignty and that leaders should be allowed to set policy without fearing international criticism or intervention. China remains a close business and financial partner of Sudan and North Korea. Mr. Xi invited the president of Sudan to a recent military parade in Beijing.
“As the renminbi rises, countries will have more choices about where they do their banking — and how to potentially circumvent sanctions,” said Christopher Brummer, a Georgetown University law professor specializing in currencies.
Beijing’s effort to position the renminbi as a rival to the dollar traces back to the innocuously named “Document 217.”
The Chinese central bank posted the document on its website with little fanfare in August 2010. But buried in the document’s technical jargon was an important measure with global implications.
Under a new rule, China would start allowing other countries’ central banks to begin buying its bonds in Shanghai. Officials in other countries just had to get permission first from the People’s Bank of China.
Nigeria was paying close attention. Lamido Sanusi, the governor of the Central Bank of Nigeria, had already been mulling whether to park part of the country’s $40 billion in foreign exchange reserves in renminbi.
A prominent Islamic scholar, he was the son of an influential Nigerian prince who served as his country’s ambassador to China during the Cultural Revolution. Back then, his father advocated a shift by Africa away from Western dominance and toward closer relations with China.
When Mr. Sanusi became the central bank chief in 2009, Nigeria had extensive trade ties with China. In shifting a portion of reserves, he bet — correctly, as it turned out — that the renminbi would appreciate. Interest rates on renminbi-denominated bonds were also several percentage points higher than yields on comparable Treasuries.
Inclusion of the renminbi in the I.M.F.’s elite reserve currency group was so important to China’s leaders that they named it in October as one of their highest economic policy priorities in the coming years. CreditAgence France-Presse — Getty Images
Nigeria started purchasing large sums of renminbi in the little-regulated Hong Kong market in 2010, rather than Shanghai as the Chinese rules prescribed, and without seeking Beijing’s permission. Mr. Sanusi then stunned the Chinese government by mentioning at a conference a few weeks later in Nigeria’s capital, Abuja, that his country was ready to put up to a tenth of its entire reserves, or $4 billion, into renminbi.
“The Chinese Embassy came over and met me,” said Mr. Sanusi, who last year was crowned Emir Muhammadu Sanusi II, the traditional and religious leader of Kano State in northern Nigeria. “They just wanted to have clarity.”
Chinese officials, he said, were pleased that a major trading partner in Africa liked the renminbi. But Nigeria’s move also posed a dilemma. Large-scale purchases of renminbi by overseas central banks would make it more difficult for China to prevent the renminbi from appreciating, which in turn would make exports less competitive.
When Nigeria eventually requested permission to buy bonds in Shanghai, the Chinese central bank agreed, although it tightly capped the purchases. “We got something less than what we applied for,” said Lamido Yuguda, the director of reserve management at the Central Bank of Nigeria, declining to provide precise figures. “It was something we could live with.”
After the experience with Nigeria, China moved slowly and cautiously on further currency liberalization over the next four years. The government did not encourage other central banks to buy large sums of renminbi. Instead, China entered into a series of swap agreements with dozens of countries like Australia, Brazil, South Africa, Germany and Iceland.
Under these agreements, China said it would provide billions of renminbi if the other country needed them in a crisis. But China would keep the renminbi until that point, so that any interim purchases would not be sufficient to push up the value of the currency.
Beijing’s cautious strategy backfired this year, when China ramped up its campaign for I.M.F. reserve status. One of the I.M.F.’s main considerations is that the currency be “freely usable.”
The People’s Bank of China acknowledged last spring that other central banks held a modest $108 billion worth of renminbi, about 1 percent of total foreign exchange holdings by central banks. By contrast, central banks had $500 billion worth of swap agreements to obtain renminbi, more than for any other currency, including the dollar.
Beijing lobbied hard through the spring to persuade the I.M.F. to consider the swaps as evidence that the renminbi was “freely usable.” But the United States and other countries opposed bending I.M.F. rules.
The fund decided during the summer to stick to more traditional criteria, like the amount of currency that central banks had been able to buy and how easily the renminbi could be traded. After that, the I.M.F. pressed the Chinese central bank to make its currency more responsive to market forces.
China had to move fast. After this year, the next chance to push the renminbi into the fund’s accounting system would not come until 2020.
During the summer, Chinese officials made a series of rapid-fire moves, most notably devaluing the currency by 4.4 percent against the dollar as part of a new method for setting the daily trading range of the renminbi. The process would give the market more influence over the daily value of the renminbi, which is set each morning by the central bank.
The aftermath of the devaluation has been a shock to China’s system, providing a window into the uncertainty the country now faces with a more globally oriented currency.
After the devaluation, many Chinese companies moved to pay off foreign debts for fear the renminbi would fall further. Investors also sold huge sums of renminbi and switched into other currencies. China’s central bank spent nearly $100 billion in August alone to prop up the renminbi.
“Making it more market-based makes it more difficult to manage,” said Larry Hu, the chief China economist in the Hong Kong office of Macquarie Capital Securities. “But making it more market-based also makes it more efficient.
Exploring Newbill’s Renminbi Thoughts, Bail-ins & This is Bad- ‘China’s Renminbi Is Approved’
John R. Houk
© December 22, 2015
New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.
China’s Renminbi Is Approved by I.M.F. as a Main World Currency
A version of this article appears in print on December 1, 2015, on page A1 of the New York edition with the headline: I.M.F. Adds China’s Currency to Elite Global Financial Club.
New York Times home page