Monthly Archives: August 2022

Europe’s Energy Crisis is Tipping Legions of Small Businesses Over the Edge

After reeling from one crisis to another, Europe’s heavily indebted and deeply debilitated small businesses — the backbone of the economy — face the ultimate threat from energy shortages and soaring prices. 

With the specter of stagflation looming large over Europe and the price of energy rising at a blistering pace, hundreds of thousands, perhaps even millions, of small businesses face the grim prospect of closure this winter. In the UK, much of the news cycle in recent weeks has been dominated by the plight of struggling families grappling with surging energy bills. But many businesses are, if anything, in an even worse pickle, since they don’t have price caps on the energy they pay. Some business owners are facing an increase in bills of more than 350%.

Unsurprisingly, energy-intensive businesses, including bars, restaurants, hotels, hairdressers, small manufacturing and construction firms, are absorbing the worst of the pain. Fish and chip shops could even be facing “extinction”, warned a recent article in the BBC, as a trifecta of forces — surging energy prices, shortages (and hence rising prices) of other basic inputs (potatoes, some fish, sunflower oil), and falling demand among cash-strapped customers — take their toll.

The Final Straw?

Across Europe small and medium-sized businesses (SMBs), particularly in sectors like travel and tourism, culture and hospitality, have borne much of the brunt of the economic fallout of the pandemic. The stimulus packages — including furlough programs, debt moratoriums and low-interest emergency loans — helped to tide over many (but not all) of the worst-hit businesses but that support has ended. Meanwhile many of the economic problems spawned by the pandemic, including supply chain bottlenecks and labor shortages, continue to linger. Energy shortages and surging prices are likely to be the final straw.

In the UK, some energy providers are even refusing to supply small businesses out of fear they could go bust. Some are demanding £10,000 upfront, according to The Guardian:

In the latest sign of the deepening energy crisis, business owners said they were struggling to find a supplier in the run-up to the busy October period for renewing gas and electricity contracts, leaving them facing “extortionate” bills or demands for a deposit.

Suppliers named as having refused service, or asked for a downpayment, include SSE, Scottish Power, E.On Next, Drax and Ecotricity.

Business owners called for urgent action from the government, warning that sectors such as hospitality, which is already struggling with inflation and the lingering effects of the Covid-19 pandemic, are at particular risk.

Teresa Hodgson, landlord of the Green Man pub in Denham, near Uxbridge, was initially told by her supplier SSE that it could not give her a quote for energy because prices were increasing so fast. “When I did pin them down, they said before we can go any further, we want a £10,000 deposit,” Hodgson said.

“When I asked why, because they’ve never had an issue with me, they said: ‘We don’t think a lot of pubs are going to make it this year and we need security.’ There were other suppliers who just wouldn’t entertain it at all because it’s hospitality,” she added.

Many small in-person businesses only managed to weather the lockdowns of 2020-21 by taking on huge amounts of debt, which they now have to pay off. The only way the debt gets cancelled is if the business in question goes into insolvency. According to research published by the Bank of England in November last year, 33% of small businesses have a level of debt more than 10 times their cash in the bank, versus 14% before the pandemic. Many of those businesses had never borrowed before and some would probably not have met pre-pandemic lending criteria.

In total, £73.8 billion has been lent under the UK’s coronavirus emergency lending programs — the equivalent of 3.5% of GDP. Almost two thirds of that money — £47 billion — went to 1.26 million small businesses — in a country of roughly 5 million businesses. Through the Bounce Back Loan program SMEs were able to borrow up to 25% of their revenues to a maximum of £50,000. The loans, interest-free for 12 months, are administrated by private-sector banks, but are 100% backed by the government.

Suffice to say, the government does not expect to recoup much of the money. In 2021, the Department for Business, Energy and Industrial strategy estimated that 37% of Bounce Back Loans, worth around £17.5 billion, may not be repaid, mainly because the businesses concerned would not survive over the longer term. Other estimates are even higher. The department has already written off £4.3 billion of Covid loans due to fraud. Since banks were not liable for unpaid debts from the BBL scheme, they were happy to release the funds with little in the way of background checks, thus creating a goldmine for enterprising criminals.

But that write-off is likely to be eclipsed by around £20 billion in expected loan defaults as businesses fail to repay their debts, Duncan Swift, a restructuring and insolvency partner with Azets, told City AM in February. That was just before Russia’s occupation of Ukraine and the EU and UK’s subsequent decision to unleash arguably the most self-destructive sanctions of modern history. Since then inflation in the UK has surged to 10.1%, its highest reading in 40 years. For many small businesses, passing on rising input costs to customers is not an option. That is particularly true in the case of soaring energy prices, which threaten to be the final straw for many struggling companies.

Deja Vu in Southern Europe?

In the meantime, the European Union is no doubt growing increasingly concerned (or at least one would hope so) at the risk of rising default rates in the two systemically important economies of Southern Europe, Italy and Spain.

A sense of deja vu should be setting in by now as the yields on Italian 10-year bonds hover around eight-year highs of 4%. According to the Financial Times, “hedge funds have lined up the biggest bet against Italian government bonds since the global financial crisis on rising concerns over political turmoil in Rome and the country’s dependence on Russian gas imports.” On Friday, the European Commission quickly and quietly gave its blessing to Italy’s latest plan to shift certain state-guaranteed loans from banks to a new platform managed by state-owned bad loan specialist AMCO, ruling the move free of any state aid.

“This scheme will enable Italy to maximise the recovery of loans while reducing the impact of the existing state guarantees on the national budget and the effects on the borrowers with good prospects of viability”, EU Competition Commissioner Margrethe Vestager said. The Commission also pointed out that, under the scheme, Rome will be remunerated in line with market conditions, meaning it will be paid a tiny fraction of the loans’ original value.

This is probably just the beginning of what is likely to be a long, painful process, given that Italy underwrote €277 billion in COVID-related corporate debt during the pandemic, significantly more than many other European countries. Some of the 2.7 million small and mid-sized (SME) Italian businesses that took on state-guaranteed debt are now on the sharp end of skyrocketing electricity and gas prices, which is impairing their ability to honour the debts. According to Rai News, small firms in the tourism and services sectors face an additional €8 billion in costs over the next 12 months as a result of the energy crisis.

“Without support, the system of small businesses will be crushed by these cost increases,” said Patrizia De Luise, president of the retail association Confesercenti. “The government in office should act using all the powers at its disposal.”

But Italy, like the UK, currently has a caretaker government in office. What’s more, the root cause of the problem is in Brussels, not Rome. As Yves pointed out in her article yesterday, the EU’s wholehearted support of a sanctions regime against Russia is not only backfiring spectacularly; the damage it is causing to the West, most of all Europe, is accelerating rapidly. While in the UK new regulations could possibly be introduced to ease the price pressures (see “We Could Massively Reduce the Price of Energy in the UK – By Changing the Way We Regulate Energy Prices“), in the EU any significant regulatory changes would almost certainly have to come from Brussels.

Italy’s Debt Disappearance Act

The good news is that Italy’s non-performing loans (NPL) ratio is currently at its lowest level since the Global Financial Crisis. The bad news is that this is largely thanks to the mass-securitization of Italian banks’ huge trove of toxic loans. Over the past five or so years, Italian banks, with help from Wall Street’s finest, have been slicing, dicing, and repackaging non-performing financial assets, such as loans, residential or commercial mortgages, or other sometimes uncollateralized Italian “sofferenze” (bad debt) into asset-backed instruments which can then be sold to yield-starved gullible investors all over the world.

As part of a deal reached with the European Union in January, 2016, Italian banks were given permission to bundle bad loans into securities and buy state guarantees for the least risky portions, provided those notes have an investment-grade credit rating. So the taxpayer would not only be on the hook for a portion of the NPLs underlying these securities, but also for the fees and profits generated along the way to securitize them. As I noted in a 2017 piece for WOLF STREET, this was far riskier than the subprime mortgage-backed securities in the US that played a major role in the global financial crisis:

The FT describes the idea of securitizing NPLs as “subprime derivatives on steroids,” but only in relation to China’s plans to do exactly the same thing with its own non-performing loans, which according to official figures recently surpassed the $200 billion mark. The FT has been a lot less critical of the same plans being hatched in Italy. Some economists are even calling for a Europe-wide securitization of toxic debt.

So, while this scheme has allowed many of Italy’s largest banks to shift most of their toxic assets off their balance sheets, thereby reducing the immediate threat of a banking crisis, it has put Italy’s already over-indebted government, with a public debt-to-GDP ratio of 150%, on the hook for a large chunk of these securities should they suddenly begin to collapse in value. It will also be interesting to see what happens with these “subprime derivatives on steroids” as interest rates climb and growing numbers of heavily indebted Italian businesses and households stop paying their debts all over again, this time due to soaring energy costs…

Read the full article on Naked Capitalism

Mexican Drug Cartel Imposes Price Controls on Corn Tortillas, As Inflation Surges to 21-Year High

In Mexico, it is not just the government and the central bank that are trying to keep a lid on rising food inflation. So, too, is a drug cartel in the Pacific state of Guerrero. 

The price of tortilla, the iconic staple in Mexico that is consumed in myriad forms, flavors and colors, is on the rise. And that is likely to be a major cause of concern for the Mexican government. Despite his continued high approval ratings, President Andrés Manuel Lopéz Obrador (aka AMLO) will no doubt recall that when prices of the mainstay spiralled in 2006, it sparked nationwide food riots.

The average price of corn tortilla has already increased 13% so far this year, to just over 20 pesos (roughly one dollar) per kilo. But in some parts of the country prices have reached as high as 30 pesos. With inflation reaching 8.62% in July, its highest level in 21 years, and food inflation reaching 14%, its highest level since records began in 2004, the strain on many consumers’ pockets is becoming unbearable.

“Whatever It Takes” to Keep Inflation At Bay

Inflation has continued to rise even as Mexico’s central bank has hiked rates on an almost monthly basis. The Bank of Mexico was one of the world’s first largish central banks to embark on a rapid tightening of monetary policy, back in June 2021. Since then it has raised its benchmark rate ten times, to its current level of 8.5%. Borrowing costs are now at their highest since November 2005, yet inflation continues to surge, mainly because today’s inflationary pressures are predominantly supply side-driven as well as global in nature, and as such far beyond the control of a middling-sized central bank.

Last month, President Lopéz Obrador unveiled a raft of anti-inflation measures that will, according to El País, set the country back some 574 billion pesos ($29 billion). But it is not just the government and the central bank that are trying to keep a lid on rising food prices. So, too, is the Sierra drug cartel, also known as Los Tlacos, in the southern Pacific state of Guerrero, as the Mexican daily El Excelsior reported (translation my own) last week:

Members of the Sierra Cartel imposed a discount on the price of tortillas in Iguala, Guerrero, by putting up notices in various places from Monday.

On social networks, photographs were shared of the messages… bearing the new recommended per-kilo prices of tortilla, dough… [The message was] signed off by “La Sierra”…

The price of a kilo of tortilla dropped to 21 pesos, that of corn dough to 12 pesos and the special price for taco vendors to 19 pesos…

As can be seen in the messages,… the lower prices [imposed by the cartel] is to help support families…

It is not the first time that the Sierra Cartel has set tortilla prices in Iguala. On October 11 of last year they imposed a 3-peso discount on tortilla and dough, pushing prices down from 26 to 23 pesos and from 15 to 12 pesos, respectively.

One reason why tortilla prices are above the national average in Guerrero is the higher transportation costs due to the prevailing insecurity in the state, which is primarily a result of the drug cartels’ criminal activity and constant territorial disputes. The town of Iguala may sound familiar to readers, since it was the scene of the brutal massacre of 43 students in 2014. Another reason for the high prices is that vendors must pay the cartels what have come to be called “derechos de suelo” (floor rights) — weekly or monthly fees for the right to operate a business in the locality. Businesses that don’t pay up tend not to prosper.

So, on the one hand the Sierra cartel is trying to keep a lid on rising tortilla prices, ostensibly to help out struggling local families, while at the same time helping to fuel rising prices by shaking down local tortilla vendors. In fact, according to the news website Noventa Grados, in June of this year the same criminal group ordered tortilla shops to increase their prices, in order to make enough money to pay their extortion fees.

Rising Tortilla Prices, Falling Global Corn Prices

There is, however, something rather strange about the latest rise in tortilla prices, in that it follows a three-month period of largely falling prices of corn on global commodity markets. Despite rebounding in recent days, corn prices are still down around 20% since mid-May. Yet during that time, tortilla prices in Mexico have continued to rise…

Read the full article on Naked Capitalism

Are “Payment Strikes” About to Become a Regular Feature of the Economic Landscape?

The reemergence of “payment strikes” is perhaps a sign that as economic conditions deteriorate, people will begin to leverage the only real power they have left in today’s hyper-consumerist societies — i.e., as consumers. 

In 1990, British people did the most unBritish of things — they revolted en masse against a deeply unpopular government policy. Across the country, beginning in Scotland, hundreds of thousands of people rioted against the Thatcher government’s poll tax, which was levied as a fixed sum on every liable individual, regardless of income, resources or ability to pay. Households covering almost a third of the British population initially refused to pay the tax even though such an act could lead to prosecution. It was the largest payment strike of modern British history and ultimately sowed the seeds of Margaret Thatcher’s downfall.

Now, the UK may be about to see another, albeit very different, mass payment strike. In response to runaway energy price rises, a seemingly grassroots movement called Don’t Pay UK, modelling itself on the poll tax resistance, has called on one million of the UK’s 28 million electricity consumers to boycott the energy companies this Fall. Formed in June, the campaign has already gathered over 110,000 pledges not to pay energy bills after October 1, unless the government and large energy companies reduce bills to an affordable level.

The goal of Don’t Pay UK is simple, says the campaign’s website:

We are demanding a reduction of energy bills to an affordable level. Our leverage is that we will gather a million people to pledge not to pay if the government goes ahead with another massive hike on October 1st.

Mass non-payment is not a new idea, it happened in the UK in the late 80s and 90s, when more than 17 million people refused to pay the Poll Tax – helping bring down the government and reversing its harshest measures.

Even if a fraction of those of us who are paying by direct debit stop our payments, it will be enough to put energy companies in serious trouble, and they know this.

We want to bring them to the table and force them to end this crisis.

Even by European standards, energy prices have soared for British households over the past year. In April, the UK’s Office of Gas and Electricity Markets (Ofgem)– tasked with overseeing the country’s privatized grid — hiked its price cap on energy bills (the maximum amount energy suppliers can charge each year) by 54% to £1,971. The next price cap, for October, is due to be published this Friday. Energy market intelligence consultancy Cornwall Insight has forecast it could rise by as much as 70%, taking the cap to an estimated £3,582 a year for a typical home.

From October, the price caps will change every three months instead of every six, opening the way to more regular price rises in the future. Ofgem may raise the price cap to £4,266 in January, says Cornwall Insight and to over £5,000 in April, according to Citi’s estimates.

That would represent a more than four-fold increase in energy bills in the space of just one year, at a time when most people — particularly those at the lower levels of the income scale — have seen their real salaries fall sharply. To make matters worse, as the British chartered accountant and political economist Richard Murphy notes in a piece for The Scotsman, the burden of the price rises will fall disproportionately on lower income households:

Whilst the top 20 per cent might see [energy] inflation of about seven per cent in the UK, those in the lowest twenty per cent of income earners could experience energy inflation of around 16 per cent, in the IMF’s estimation…

But why has the price for those on low incomes increased so disproportionately?

First, many in this group are forced onto pre-paid meters. Second, these have the worst tariffs. And third, the standing charges for simply having any meter in your house are disproportionately high for those on low incomes because, relatively, they consume less energy, and those standing charges have increased considerably.

There is plenty that both the government and Ofgem could do to relieve the pressure on the most vulnerable households if they wanted to, says Murphy, including scrapping the standing charge and including it in the tariff, making charges progressive to ensure that the more energy a household consumes the more they proportionately pay for that energy, and requiring that pre-paid users, who are normally on the lowest incomes, pay the lowest tariffs.

But none of these are likely to happen. Despite the gravity of the situation, with as many as two-thirds of British families and over 85% of pensioners expected to slip into fuel poverty – where at least 10% of net income is spent on fuel – by January, there is still no meaningful help on offer from the UK’s rudderless government. At the same time, many of the UK’s largest energy companies are recording bumper profits.

But hard-up consumers may end up taking matters into their own hands…

Read the full article on Naked Capitalism

Latin America Is Back on the Grand Chessboard, as Race for Resources and Strategic Influence Intensifies in New Cold War

Latin America is once again in the cross-hairs of the world’s great (but in some cases, declining) powers as the new Cold War heats up.

Vladimir Putin upped the ante this week in his standoff with the West by offering Russia’s allies in Latin America, Asia and Africa advanced Russian weaponry — all in the name of safeguarding “peace and security” in the emerging multipolar world. Speaking at the opening ceremony of the International Military and Technical Forum 2022 and the International Army Games-2022, the Russian leader heaped praise on non-aligned countries for not kowtowing to the global hegemon and instead choosing to steer a more independent course of development:

“We highly appreciate the fact that our country has many like-minded allies and partners on different continents. These are the states that do not succumb to the so-called hegemon. Their leaders show a real masculine character and do not bend.

Putin did not name any names but when it comes to Latin America it is not hard to decipher which countries he is probably referring to. While there may be a growing roster of nations in the region wishing to steer a more independent course of Washington, three of the region’s countries already enjoy close military ties with Russia: Venezuela, Cuba and Nicaragua.

By deepening those ties, Putin puts the US on alert in its own neighborhood. As I previously noted in “Is Russia About to Put the Monroe Doctrine to the Test?“, Daniel Ortega’s government in Nicaragua recently renewed a long-standing military partnership with Russia, despite repeated warnings from Washington not to cooperate with Russia since its invasion of Ukraine. Nicaragua now faces the prospect of a fresh round of US sanctions, after the Ortega government shuttered radio stations belonging to the Catholic Church and banned processions.

Further south, Venezuela is currently hosting the Sniper Frontier competition, with representatives from Russia, Bolivia, Abkhazia, Belarus, Uzbekistan and Myanmar competing to win the title of the world’s best sniper. The competition forms part of the International Army Games, an annual Russian military sports event organized by the Ministry of Defense of Russia (MoD). Now in its eighth year, the two-week event brings together participants from close to 30 countries, including China, Iran, Algeria, Syria, Sudan and Vietnam, all vying to prove which is the most skilled in dozens of competitions.

In recent years, the US and a number of EU Member States, including Germany, France and Austria, have taken part as observers in the event, which is sometimes referred to as the “War Olympics”. Suffice to say, that won’t be happening this year.

Zelensky Gives First Speech Ever in Latin America

Two days after Putin’s speech, Ukraine President Volodymyr Zelensky was given his first chance to address a Latin American audience. The videoconference was organized by the Pontifical Catholic University of Chile and (according to its dean) was broadcast to 300 universities around the world. During his address Zelensky urged Latin America to abandon its position of neutrality and join global sanctions against Russia.

“What matters to us is that Latin American countries know the truth and share our truth with others,” Zelensky said. Asked about what he expected from Latin American countries, the Ukrainian leader replied: “I want them to join those policies carried out by the United States, to make the sanctions policy more effective.”

It is a tall order given that most countries in Latin America, including the two largest, Brazil and Mexico, resolutely oppose sanctions, for an array of economic, geostrategic and ethical reasons that I have outlined in previous posts (here and here). They are also terrified, understandably, by the precedent the U.S., EU and friends have set by attempting to excise Russia from the global financial system. If it works, they know they could be next.

Already around one-quarter of the global population is already suffering the direct effects of US-led sanctions, including Venezuela, Cuba and Nicaragua. In March 2020, as the COVID-19 pandemic was ripping global supply chains apart, those three countries joined Russia, China, Syria, Iran and North Korea in signing a letter to the Secretary-General of the United Nations, the Office of the UN High Commissioner for Human Rights and the Director-General of the World Health Organization calling for an end to sanctions. Although UN Secretary-General Antonio Guterres requested an immediate end to the sanctions, nothing happened.

Snubbed Again

Chile is one of the few countries in the region that has endorsed sanctions, albeit in half-hearted fashion. Yet Chile’s President Gabriel Boric and its Foreign Minister Antonia Urrejola Noguera were both conspicuously absent from the event despite having received invites. The snub came almost exactly a month after the South American trade bloc Mercosur refused to host Zelensky at its 60th Summit. The US and EU have both pressured countries in the region to join the sanctions pile-on, to no avail.

Now, as tensions rise between the West and Russia and China and as more independent-minded governments come to power in Latin American countries including Mexico, Brazil,  Honduras and Colombia (of all places), both the US and EU are beginning to ratchet their response in the region…

Read the full article on Naked Capitalism

Is Cold, Hard Cash Making a Comeback?

While the use of physical money has been declining in many places for years, the trend may have reached its apogee. In some countries, including the UK and Spain, it even appears to be staging a fragile comeback. 

There are few more cashless places in Europe than the United Kingdom — the continent’s fourth most cashless economy in 2021, according to research by personal finance website money.co.uk. The transition began in earnest some years ago as more and more Brits happily embraced the ease, speed and convenience of contactless card or mobile payments. In 2017, debit card payments overtook cash for the first time. The COVID-19 pandemic turbocharged the trend, leading many consumers and retailers to abandon cash altogether.

“Cash use has been declining over the last ten years, with a particular drop during the pandemic as many retailers encouraged contactless payments and businesses such as pubs and hairdressers closed,” Adrian Buckle, head of research at trade body UK Finance, told Euronews Next. Cash accounted for 56% of payments in 2010, falling to 45% in 2015, and to 17% in 2020, according to UK Finance. The big banks’ ruthless culling of ATMs and branches during that time has helped accelerate this trend, making life increasingly difficult for people who depend on face-to-face bank transactions and cash to pay for everyday purchases.

“Anything But a Cashless Society”

But the trend may have reached its apogee, at least for the time being. Indeed, cash may even be staging a fragile comeback. Data published last week by the Post Office shows that more and more people are increasingly relying on notes and coins to help them manage their budgets amid the so-called “cost of living” crisis. In July, £3.31bln in cash was deposited and withdrawn across the Post Office’s 11,500 branches,  — a record high for any month dating back over three centuries of operations. Per the Guardian:

While the pandemic accelerated the UK’s embrace of card and digital payments, the economic crisis – with inflation going up and many bills expected to rise further – has led a growing number of people to turn once again to cash to help them plan their spending.

The Post Office said its branches handled a record £801m in personal cash withdrawals last month – an increase of almost 8% on June, and up 20% on the July 2021 figure of £665m.

In total, more than £3.3bn in cash was deposited and withdrawn at its 11,500 branches. The Post Office said this was the first time the monthly amount had exceeded £3.3bn in its 360-year history.

The organisation said it was “seeing more and more people increasingly reliant on cash as the tried and tested way to manage a budget.”

“Our latest figures clearly show that Britain is anything but a cashless society,” said Post Office Banking Director Martin Kearsley. “We’re seeing more and more people increasingly reliant on cash as the tried and tested way to manage a budget”.

While some British people may be turning back to cash or using it more often than before, actually spending physical money is easier said than done due to the growing number of high-street retailers refusing to accept cash payments. According to a report published this weekend by the UK’s number-one tabloid, The Sun, many retailers and hospitality chains in London, Birmingham and Newcastle, including Pizza Hut, Caffe Nero and sushi chain Itsu, have gone fully cashless since the pandemic. So too have many smaller retailers.

This is possible due to the fact that legal tender has a very narrow definition in the UK, and strictly applies to money used by a debtor to settle a court-awarded debt when offered (‘tendered’) in the exact amount that is owed to a creditor. In other words, if a debtor is offering to settle a debt in court with legal tender such as cash, the creditor is not allowed to refuse it. Shops and hospitality businesses, by contrast, are.

Demonization of Cash During Pandemic

Many retailers, particularly in the more salubrious parts of towns and cities, are taking full advantage of this loophole, despite the discriminatory effects it has on the millions of people who still depend on cash, including the roughly 1.3 million who are unbanked. The decision to refuse cash also has little basis in public health. As confirmed by a growing body of research, including a recent paper in the journal Risk Analysis, cash remains safe to use and poses a “very low” risk of spreading COVID-19.

This is not what people were told in the early months of the pandemic. In March 2020, as countries were locking down around the world, a World Health Organization (WHO) spokesperson responded to a question about whether banknotes could spread the coronavirus by saying: “Yes it’s possible and it’s a good question. We know that money changes hands frequently and can pick up all sorts of bacteria and viruses … when possible it’s a good idea to use contactless payments.”

Around the world, media outlets and long-standing enemies of cash such as credit card companies and fintech start-ups seized on the comments and magnified them, sparking fears over the safety of cash. The WHO eventually walked back its comments but in many countries the damage was already done. In the UK, cash withdrawals at ATMs fell sharply. Today, only 17% of payments are now made with coins and notes, according to the Royal Society of Arts’ latest Cash Census report.

At the same time, demand for physical dollar and euro notes (and many other currencies) has surged, even as the use of cash has fallen. Two and a half years after the first lockdowns of 2020, the total value of dollar and euro notes in circulation is respectively 18% and 21% higher. This surge in demand for bank notes, at a time that cash use was falling in most countries, is taken as a sign that many people have been “hoarding” cash (i.e., taking it out of the bank and storing it at home) during this time of acute economic uncertainty.

Banning Cashless Businesses

The situation in the UK contrasts starkly with recent developments in parts of the US in another major way. In the US, local or state authorities in places such as New York City, New Jersey, Philadelphia and San Francisco have approved laws banning businesses from banning cash (click here for Jerri Lynn’s analysis of these developments last year).

Another country that recently passed a law prohibiting businesses from rejecting cash is my country of residence, Spain, where pensioners recently won a milestone victory against the big banks’ war on cash…

Read the full article on Naked Capitalism

Is Germany About to Take A Leaf Out of China’s COVID-19 Digital Playbook?

Germany’s health minister unveils plans to launch a color-coded digital app to confirm citizens’ COVID-19 vaccination status. Different colors will confer different rights.

The German people’s vaccination status will soon be “recognizable by color,” thanks to an upgrade to the Health Ministry’s Corona-Warn-App, reports German newspaper Berliner Zeitung. “Different colors will give different rights in the future,” the article notes, adding that a similar “system already exists in China.” Which is hardly comforting, especially given how some Chinese authorities appear to be abusing that system.

While many EU countries, including even neighboring Austria, have softened or suspended their COVID-19 vaccine passport restrictions, Germany’s Health Minister Karl Lauterbach seems determined to take them to a new level. This week, he unveiled Germany’s Corona plans for the autumn in the latest iteration of the so-called “Infection Protection Act”. Some of the proposed plans have not gone down well with the public. Even politicians and some newspapers are kicking up a stink.

Different Colors, Different Rights

Most controversial of all is the Health Ministry’s plan to repurpose the Corona-Warn-App into a color-coded system as a means of more easily corroborating people’s vaccination status. As already mentioned, the app’s different colors will confer different rights in the future. Those rights will apparently include the ability to access certain public places as well as the right not to wear a mask in hospitality venues. In order to qualify, you need to have been vaccinated in the past three months or have recently recovered from infection.

Lauterbach has previously stated that forcing the unvaccinated or undervaccinated to wear a mask in public — almost like a badge of shame — might cause them to reconsider their position on the vaccines: “It will certainly be an incentive… to think about whether they would like to be vaccinated.”

All of this no doubt sounds familiar to American readers. After all, it is a virtual replica of the Biden Administration’s “Mission Accomplished” mask reversal back in May ’21. As Yves noted at the time, “the CDC [thought] it was reasonable to operate on a vaccination honor system and have the vaccinated ditch masks and social distancing.” That was despite the fact that only 35% of Americans were fully vaccinated and it was not yet known whether “breakthrough” asymptomatic cases could spread the disease.

Now, we know they can. We also know that the current crop of vaccines do precious little when it comes to actually protecting against transmission of the virus. Lauterbach himself knows this from first-hand experience, given he is currently grappling with his second  COVID-19 infection — despite having received four shots of COVID-19 vaccines. Given what he knows about the vaccines’ leaky nature, encouraging, or perhaps better put, compelling recently vaccinated people to dump their masks makes zero sense from a public health perspective — unless, of course, the only goal is to maximize vaccination.

Of course, by the time the draft law is in place, in early October, Pfizer-BioNtech may have already launched its new Omicron-adapted vaccine. For the moment, the average rate of uptake for a second booster among adults in the EU is extremely low, at just 7.5%. That compares to 64% for the first booster. Of course, Lauterback’s policy proposals may help to boost demand for the largely German-manufactured product once it does hit the market.

Color-Coded Control

Germany’s color-coded app was developed by SAP and T-Systems, the IT services arm of Deutsche Telekom, and is an update on the previous system that showed whether someone falls into the 3G, 2G or 2G-plus (Germany’s Covid pass rules) category. A color coded system will apparently make it quicker and easier to process vaccine passport holders.

With the contract for the app set to expire at the end of 2022, its developers have been lobbying for the contract to be extended and its applications expanded, reports Der Spiegel. They argue that the app’s high level of support among the scientific and medical communities and its wide installation base mean that “it is far too good for a place in the Museum of Communication.” They would much prefer it either to be recalibrated as a general federal warning app or to be expanded to include the electronic patient file (ePA) of every citizen. So far, the health ministry has rejected these proposals…

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Costa Rica’s New Government Overturns Covid-19 Vaccine Mandate, Launches Investigation Into Pfizer Contract

“We could end up in jail” if we disclose details of the former government’s contract with Pfizer, says the country’s Health Minister.  

The recently elected President of Costa Rica Rodrigo Chaves last week announced the end of compulsory vaccination against COVID-19. Speaking alongside his health minister, Joselyn Chacón, Chaves said that not only are the vaccines no longer mandatory; any action taken against anyone who does not want to get vaccinated will be in violation of the law. Chaves also called for unvaccinated workers who had lost their jobs to be reinstated and announced the launch of an investigation into the vaccine contracts the previous government signed with Pfizer-BioNTech.

Costa Rica: A Pioneer of COVID-19 Vaccine Mandates

Costa Rica was the first country in Central America to implement a COVID-19 vaccine mandate. That was in September 2021, when Chaves’ predecessor, Carlos Alvarado Quesada, was holding the reins. In November 2021, Costa Rica became the first country in the world to mandate Covid-19 vaccines for minors, with all children 5 and older obligated by law to get vaccinated, barring medical exemptions. It was a hugely controversial decision that, as in the US and other countries, represented a line in the sand for many parents.

The mandate meant that a child could get vaccinated even if their parents did not consent, said Roman Macaya Hayes, then-director of Costa Rica’s Social Security Institute. Macaya Hayes is now under investigation by the Deputy Prosecutor’s Office of the 1st Judicial Circuit of San José for alleged prevarication. So too is Daniel Salas, the former Minister of Health who now works in the US with the Pan American Health Organization (PAHO), as well as six members of the National Vaccination and Epidemiology Commission (CNVE), two of whom purportedly participated in decisions regarding COVID-19 immunization even though their appointments to the CNVE had expired.

That alone is enough to invalidate the acts agreed upon by the CNVE, says President Chaves. His government will also investigate the former Alvarado government’s massive purchase of COVID-19 vaccines in April 2022, even as the vaccination campaign was losing steam.

“We are going to investigate why it is they bought so many vaccines when the data available showed the market was already saturated,” Chaves said in his weekly press conference last week. “Millions of dollars’ worth of vaccines were purchased at a time that the vaccination rate was already waning. I have no idea how much money was squandered on vaccines that are not going to be used and are going to expire”.

Of course, Chaves, a right-wing populist and former World Bank-economist, could be doing all of this just to score political points against his predecessor. However, given his predecessor, Carlos Alvarado Quesada, was already a political corpse on leaving government with an approval rating of just 18%, while Chaves has an approval rating of 70% following his first two and a half months in office, it is unlikely.

Costa Rica’s health minister, Joselyn Chacón, said she could not divulge any of the details of the Pfizer contract due to secrecy clauses embedded deep within the contract. She also alleged that Beatriz Solís Worsfold, the daughter of former President of Costa Rica Luis Guillermo Solís (2014-18) and a corporate lawyer with Pfizer since 2018, was instrumental in drawing up the contract: “If we release details of the contract we could end up in jail because we would be violating a contract drawn up by the daughter of former president Luis Guillermo Solís.”

Pfizer has denied the allegations. In remarks to Costa Rican fact-checking website Doble Check, the company said that Solís Worsfold’s responsibilities “do not include participation in the negotiation processes with the government of Costa Rica or with any other government for the purchase of the Pfizer-BioNTech vaccine against COVID-19.” Pfizer added that the negotiation processes for the distribution of COVID-19 vaccines are conducted by the company’s local, regional and global teams, and that these processes are broadly similar throughout the region and at a global level.

Pfizer’s Sordid Vaccine Sales Practices

Those processes have also been highly controversial wherever they have been deployed. In Latin America the company was accused of holding the governments of even the largest countries to ransom, as I noted in a previous article (Pfizer’s Sordid Vaccine Sales Practices in Latin America Could Be a Big Boon for China and Russia):

It is a time-honoured custom of business that manufacturers provide certain basic guarantees to prospective buyers about their product’s quality and safety. But U.S. pharma giant Pfizer wants to turn this on its head as it sells its experimental mRNA vaccine to desperate governments around the world. For Pfizer, it’s the buyer — not the seller — that should provide all of the guarantees. And that includes countries putting up sovereign assets, such as federal bank reserves, embassy buildings and military bases, as insurance against the cost of any future legal cases involving Pfizer BioNTech’s vaccine, reports the Bureau of International Journalism (TBIJ):

Officials from Argentina and the other Latin American country, which cannot be named as it has signed a confidentiality agreement with Pfizer, said the company’s negotiators demanded additional indemnity against any civil claims citizens might file if they experienced adverse effects after being inoculated. In Argentina and Brazil, Pfizer asked for sovereign assets to be put up as collateral for any future legal costs.

One official who was present in the unnamed country’s negotiations described Pfizer’s demands as “high-level bullying” and said the government felt like it was being “held to ransom” in order to access life-saving vaccines.

Campaigners are already warning of a “vaccine apartheid” in which rich Western countries may be inoculated years before poorer regions. Now, legal experts have raised concerns that Pfizer’s demands amount to an abuse of power.

According to Professor Lawrence Gostin, director of the World Health Organization’s Collaborating Center on National and Global Health Law, what Pfizer appears to want is total immunity from all forms of liability:

[T]he company would not be held liable for rare adverse effects or for its own acts of negligence, fraud or malice. This includes those linked to company practices – say, if Pfizer sent the wrong vaccine or made errors during manufacturing.

Some liability protection is warranted, but certainly not for fraud, gross negligence, mismanagement, failure to follow good manufacturing practices. Companies have no right to ask for indemnity for these things.

At the time of that article’s publication (March 2021), governments of countries both large and small were desperate to get their hands on enough vaccines for their population, and as such were willing to kowtow to almost every demand from Pfizer to get their hands on what was then being marketed as the most effective vaccine against COVID. Now, many of those same governments have vast stockpiles of unused Pfizer-BioNTech vaccines in their possession, and those vaccines have proven to be not nearly as effective or as safe as initially claimed.

In the interim, more information has seeped out about Pfizer’s vaccine contracts, allowing journalists and researchers to piece together a more (but far from) complete picture of the company’s sordid negotiating practices. In October 2021, Public Citizen released a report revealing that Pfizer:

  1. Reserves the Right to Silence Governments. Brazil’s contract with Pfizer included an additional term that Public Citizen had not seen in other Latin American agreements. The Brazilian government is essentially prohibited from making “any public announcement concerning the existence, subject matter or terms of [the] Agreement” or discussing its relationship with Pfizer without the prior written consent of the company. Just like that, Pfizer was able to silence the government of Latin America’s biggest country. In most other contracts the non-disclosure agreement applies to both parties.
  2. Controls donations. The Brazilian government is also prohibited from accepting donations of Pfizer vaccines from other countries without Pfizer’s prior authorization. It is also barred from donating, distributing, exporting, or otherwise transporting the vaccine outside Brazil — again, without Pfizer’s permission. Contravention of this clause would be considered an “uncurable material breach” of Brazil’s agreement with Pfizer, allowing the US pharmaceutical to immediately terminate the agreement. Upon termination, Brazil would be required to pay the full price for any remaining contracted doses.
  3. Secures “IP Waivers” for Itself. Despite Pfizer’s strident defence of intellectual property — at least when said property is its own — the vaccine contracts its has signed with governments shift responsibility for any intellectual property infringement that Pfizer might commit to the government purchasers. As such, the contracts affect allow Pfizer to use anyone’s intellectual property it pleases — largely without consequence.
  4. Can take any and all disputes to arbitration. No great surprise here. Public Citizen cites the UK as an example. In the event of a contractual dispute between Downing Street and Pfizer, a secret panel — not a national court — is empowered to make the final decision. The arbitration is conducted under the Rules of Arbitration of the International Chamber of Commerce (ICC). Both parties are required to keep everything secret. The Albania draft contract and Brazil, Chile, Colombia, Dominican Republic and Peru agreements require the governments to go even further, with contractual disputes subject to ICC arbitration applying New York law.
  5. Can seize state assets. In the case of Brazil, Chile and Colombia, the government “expressly and irrevocably waives any right of immunity which either it or its assets may have or acquire in the future” to enforce any arbitration award (emphasis added). For Brazil, Chile, Colombia, and the Dominican Republic, this includes “immunity against precautionary seizure of any of its assets.”
  6. Calls the shots on key decisions. Colombia’s contract with Pfizer includes a gem of a clause stipulating that the Colombian government must “demonstrate, in a manner satisfactory to Suppliers, that Suppliers and their affiliates will have adequate protection, as determined in Suppliers’ sole discretion” (emphasis added by Public Citizen) from liability claims. In other words, if suppliers fail to supply the goods requested by the time agreed in the contract, Colombia’s government has agreed that it will have no means of recourse.

Given the contractual conditions outlined above, it is hard to imagine any country in Latin America — let alone one as tiny and as dependent on the US as Costa Rica — managing to overturn or override any of the clauses in their contract with Pfizer. As Public Citizen notes at the end of its report, “Pfizer’s ability to control key decisions reflects the power imbalance in vaccine negotiations. Under the vast majority of contracts, Pfizer’s interests come first.”

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The Dystopian Dream of Global Central Bank Digital Currencies (CBDCs) Hits Another Snag: The Japanese People’s Love of Cash

Japan is not the only G7 economy where cash is still King, and that could complicate the roll out of CBDCs in so-called “advanced” economies.

On June 20, Asia Times ran an op-ed by Sayuri Shirai, a former policy board member of the Bank of Japan, on the Bank of Japan’s recent decision to shelve its plans to introduce a central bank digital currency (CBDC). Given Japan is the third largest economy on the planet and is often at the leading edge of technological advances, this is a major development. Yet it received virtually no airtime in the international mainstream press.

Cash Still King in Tech-Obsessed Japan

Since 2021 the BoJ has been conducting experiments to test the technical feasibility of the core functions and features of a retail CBDC ecosystem. The second phase of testing began in April 2022. But according to Shirai, the bank has decided to abandon the idea, at least for the foreseeable future. Shirai lists a number of factors behind the decision, foremost among which is the undimmed popularity of physical cash as a means of payment in Japan:

Cash remains king in Japan…

The Japanese public has virtually universal access to the banking system and so the issue of promoting financial inclusion has never been a major policy issue. The use of digital and mobile technologies initiated by the private sector when paying for goods and services is also widespread.

The CBDC idea has not received significant support due to the prevalence of internet banking services, credit card usage and e-money payment tools. The public may not find it attractive to use the CBDC since private sector-based payment tools provide tangible benefits — for example, points that can be gained from using payment services and can be accumulated and used for shopping or payment for other services.

Cash is a safe and highly liquid instrument for the payment of goods and services. As legal tender, cash fulfills the functions of unit of account, means of exchange and store of value. The amount of cash issuance remains high in Japan despite the declining use of cash — accounting for about 20% of nominal gross domestic product.

Cash becomes more useful when natural disasters or military conflicts cause serious damage to communities – for example, via power shortages or the destruction of buildings and computer systems or by weakening trust in the private-sector banking system.

In tech-obsessed Japan, the country that first popularized mobile wallets and smartphones, cash is still king. As I noted in an article for WOLF STREET back in 2016, the value of banknotes in circulation, at ¥90 trillion ($885 billion), or about a fifth of gross domestic product, is the highest in the world as a proportion of the economy.

Demand for cash remains solid, to the increasing consternation of global credit card companies. In a 2013 report, MasterCard estimated that 38% of the total value of the country’s retail transactions were in cash — almost twice the rate in the U.S. and five times the rate in France.

It is not just credit card companies that have been left scratching their heads frustratingly at Japanese people’s soft spot for physical lucre. In October 2016, Tim Cook vented his spleen against cash during a visit to Tokyo, telling the Nikkei that “we don’t think the consumer particularly likes cash.” It was a bizarre conclusion to reach in a country where cash is offered and accepted reverentially even when paying for groceries and where every ¥10,000-note is treated with utmost care. As a rule, they are pristine.

Six years on, the Japanese affection for cash remains undimmed, despite the disruptive effects of the COVID-19 pandemic, including the demonization of cash as a vector of contagion. In a survey by Statista in January 2021, more than 90% of respondents named cash as their preferred payment method, citing reasons such as security and reliability. Fifty-five percent of respondents expressed concerns about the risk of personal data leakage when using electronic payment methods. Nearly 42% worried about credit cards and account details being stolen while around 38% said cashless options made them less aware of the amount of money they are spending, increasing the risk of spending too much.

Shirai proffers another reason why cash has not lost its luster — namely the Bank of Japan’s application of a zero interest rate policy (ZIRP) over the past decade and a half:

[Even as bricks-and-mortar retailers have upgraded their cashless payment systems], cash in circulation has been rising. This is partly because of the long-standing low retail deposit interest rate — which was below 0.2% from 2007 through 2010 and below 0.02% from 2011 through 2016, and has been at 0.001 per cent since 2017 for ordinary retail bank accounts.

That has transformed cash into a substitute for bank deposits, contributing to Japan’s rising cash hoarding trend. Cash hoarding refers to cash lying idle without being utilized for economic and investment activities.

In a paper released in May the Bank of International Settlements reported that 90% of 81 central banks surveyed from October to December 2021 were “engaged in some form of CBDC work,” with 26% running pilots on CBDCs and more than 60% doing experiments or proofs-of-concept related to a digital currency. The BIS attributed the growing interest around CBDCs to the recent shift to digital solutions during the COVID-19 pandemic as well as recent growth in stablecoins and other cryptocurrencies.

So-called retail CBDCs offer a range of potential benefits including reduced transaction costs, more efficient cross-border transactions, real-time payments and reduced illegal transactions. But the biggest benefits would almost certainly end up accruing to the central banks themselves, which would gain far greater centralized control over the economy. That is where the potential drawbacks for the rest of us begin.

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Is Mexico’s AMLO Willing to Walk Away from USMCA?

As the Mexican government’s commitment to energy independence smashes into US financial interests, President López Obrador threatens to put sovereignty above the USMCA trade deal. 

The US is not only fighting (and to all intents and purposes losing) a proxy war against Russia in Ukraine while escalating tensions with its biggest geostrategic rival, China; it is also locked in a high-stakes game of economic brinkmanship with its second largest trading partner, Mexico, which could, in an extreme case scenario, end up shattering the US-Mexico-Canada (USMCA) Trade Agreement just four years after its inauguration.

The latest escalation occurred on July 20 when the US Trade Representative Katherine Tai revealed that the US has requested dispute settlement consultations with Mexico under USMCA over alleged violations of the trade agreement in the energy sphere. The news came just days after Mexican President Andres Manuel Lopez Obrador, or AMLO for short, had met with President Joe Biden to discuss shared policy interests. In her statement Ambassador Tai accused Mexico’s government of:

  • Granting competitive advantage to the Mexican state-owned companies to the detriment of private companies.
  • Obstructing the operation of private companies, particularly in the renewable energy sector; in the import, export and storage of fuels and electricity, as well as in the construction and operation of fuel stations.
  • Granting Mexico’s state-owned oil company Petroleos de Mexico (Aka Pemex) a deadline extension to comply with sulphur content limits in automotive diesel.
  • Favoring Pemex, the Federal Electricity Commission (CFE) and their products in the use of Mexico’s natural gas transportation system, again to the detriment of private companies.

Sovereignty Versus Trade

Canada quickly followed suit and requested its own consultations on the matter. Last Thursday, AMLO responded by upping the ante. In his daily morning press conference he argued that the US’s decision to request consultations under the USMCA trade deal is not only unfounded but infringes on Mexico’s sovereignty. Using his strongest language yet in the dispute, AMLO declared that if it came down to a choice between national sovereignty and the USMCA Agreement, he would choose the former.

“Even if [the US] is the most important market in the world, if having access to that market means giving up sovereignty, we do not accept it. We will not surrender our independence to any foreign government,” AMLO said, adding that such a rupture will not occur, since it is in the interest of neither country. But as Jacobin contributor Kurt Hackbarth noted in a tweet, the implicit threat is there.

This is not the first time that a dispute settlement consultation has been brought against a USMCA member. In fact, there have already been four since the trade agreement was signed in 2018, three of which have been brought by the US. The last one was brought last year by Canada and Mexico against the US over interpretation of content rules for automobiles. If the consultation against Mexico’s energy policies doesn’t lead to a resolution in 75 days, the US can request the formation of an arbitration panel to settle the dispute.

Trying to resolve the differences between Mexico and its two northern trading partners is not going to be easy. Crucially, the changes AMLO is seeking to make in Mexico’s energy policy mix are not administrative or technical in nature but structural. What AMLO ultimately wants to ensure is that control over Mexico’s energy resources lies in the hands of the Mexican nation. And that flies in the face of what Washington wants, which is ultimately an energy-rich neighbor to the south that is open to unrestricted foreign investment.

Another reason why AMLO is unlikely to back down in this battle is that energy independence is the capstone of his so-called “fourth transformation” program. What’s more, it enjoys even stronger public support today than on his election four years ago. This is partly due to the recent masterclass the European Union has given the world on the dangers of depending excessively on foreign states to meet your own energy needs, especially if you then decide to declare economic war against the state you most depend on.

Crucially, AMLO’s government is not even talking about nationalizing Mexico’s energy market — unlike, say, French President Emmanuel Macron, who is in the early stages of fully nationalizing France’s heavily indebted electricity giant EDF. By contrast, what AMLO seeks is to fortify Mexico’s public energy providers, Pemex and the Federal Electricity Commission (FCE), as a means of bolstering Mexico’s energy independence, while leaving plenty of room for private enterprise.

To that end, he has reversed some the 2014 liberalization reforms of his predecessor Enrique Peña Nieto. Those reforms were supposedly meant to usher in lower energy prices for domestic consumers as well as thrust Mexico into a more prominent position in the global hydrocarbons market. Instead, the opposite happened: domestic prices of gas, diesel and natural gas soared as public subsidies were withdrawn while Pemex got weaker and weaker as private companies, most of them foreign-owned, moved in on its turf.

Hilary Clinton’s Role

The irony is that much of the damage AMLO is now trying to undo, which the Biden Administration is trying its damnedest to prevent, was largely the result of behind-the-scenes pressure from Hilary Clinton’s State Department…

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