"The Greek Endgame Is Here": Probability Of IMF Default Now 70%, Says Deutsche Bank

As the farcical negotiations between Greece and its creditors unfold ahead of a June 5 IMF payment and as Alexis Tsipras is forced to spread false hope just to avoid a terminal bank run, a picture of the Greek endgame has emerged. 

We’ve discussed the political implications of both an agreement or a Grexit and we’ve also taken an in-depth look at what a missed IMF payment means for the country’s EU creditors. On the political front, the troika is intent on sending a strong message to leftist political parties (such as Spain’s Podemos and Portugal’s “ascendant" socialists) that using the threat of a euro exit as a way to extract austerity concessions is not a viable negotiating strategy. What this amounts to is an attempt on the part of the “institutions” to subjugate the political process to economics. In terms of skipping a payment to the IMF — who, as a reminder, effectively paid itself earlier this month by allowing Greece to tap its SDR reserves to pay the bills — there are a number of cross acceleration concerns which you can review by referring to the following graphic:

Now, amid accelerating deposit outflows and an hourly flow of conflicting headlines, Deutsche Bank is out with a fresh take on the Greek endgame including an analysis of both the political wrangling that would need to take place in order for parliamentary approval of concessions to creditors and the mechanics of a default to the IMF. 

Via Deutsche Bank:

Little has changed in terms of developments on the ground. Despite a number of reports that negotiations may be split into separate chapters and disbursements with more difficult issues left for September, this remains unlikely. The consistent European position has been that a full staff-level agreement between the institutions - inclusive of the IMF - and Greece is required to unlock funding. Talks in this direction has been progressing in stop-start fashion over the last few weeks, with the Brussels Group (former Troika) reconvening again yesterday to continue negotiations. But progress remains slow, with multiple European and IMF officials over the last twenty four hours stating that more needs to be done to reach agreement…

The Greek government's liquidity position will ultimately drive the timelines over the next few weeks. Close to 1.5bn EUR is due to the IMF in four instalments over the course of June, with Greek government officials repeatedly stating that there are insufficient cash buffers to satisfy these payments. Given that the last IMF payment was made by drawing down Greece's SDR reserves at the fund, an exhaustion of cash buffers is a fair assumption. The most likely catalyst in coming weeks is therefore likely to be the Greek government's ability or not to pay the IMF...

A number of press reports have suggested that there is a one-month grace period relating to a failure to pay the IMF. This likely confuses two issues: a non-payment and the implications this has on cross-default provisions on other loan instruments. IMF loans do not include any formally defined grace period, with fund staff required to send an urgent cable demanding payment to the Greek authorities immediately. This is then followed by a formal notification by the IMF Managing Director to the Executive Board of the failure to pay. It is this notification that is defined as an event of default in Greece's EFSF and other official-sector loans, triggering cross-default. If this materializes, European creditors then have the right (but not the obligation), to accelerate EFSF loans, causing them to be immediately payable. In turn such an acceleration event would trigger cross-default and potential acceleration in the post-PSI Greek government bonds. The timing of the IMF notification letter is itself a political decision, however, as is the decision to accelerate EFSF loans. IMF guidelines suggest the notification to the board happens in a month. Our understanding is that the notification period may be flexible, with some reports last week suggesting that the Executive Board has requested that this notification happens sooner in the event of a failure to pay from Greece.

Either way, it is important to note that it is not the response of the IMF that will matter in the event of a non-payment. It is the role of the ECB that is crucial. The funding of the Greek banking system remains highly dependent on the central bank's Emergency Liquidity Assistance, with a suspension or cap to this financing equivalent to an inability to make deposit withdrawals (or foreign transfers) from Greek banks and de facto capital controls. 

The above underscores two important points that we’ve made on any number of occasions. First, whether, when, and to whom Greece defaults is ultimately a political decision that rests in the hands of the IMF and EU creditors. Once again, it’s all about using financial leverage to influence the future course of the currency bloc’s political landscape.

Second, the ECB ultimately controls the fate of the Greek banking sector and therefore Greek depositors because without ELA, banks simply can’t keep up with withdrawals, lending the lie to Tsipras’ Wednesday contention that there is “absolutely no danger” to depositors.

Next, Deutsche takes a look at possible outcomes to the Greek tragicomedy: 

No agreement reached, followed by non-payment to the IMF (40% probability).This scenario would likely provoke the most negative reaction from the ECB. Even if cross-default provisions on Greek loans are not triggered immediately, the ECB would likely severely restrict Greek bank access to ELA financing. Rather than declaring the banks insolvent (similar to Cyprus), the most likely avenue for this would be to refuse to raise the regularly reviewed ELA financing ceiling, or more likely, to raise the haircuts required on Greek bank collateral. Our current calculations suggest that Greek banks have around 30-40bn of liquidity available to draw under existing collateral arrangements. An ECB decision to raise haircuts aggressively could leave an implicit "hard" ELA cap that is much smaller, effectively requiring the authorities to reach agreement within a matter of days depending on the pace of deposit outflows and collateral exhaustion.

Agreement reached, but no time/unable to pass through the Greek parliament before IMF payment (30% probability). European creditors will require passage of prior actions through parliament before any disbursements are made. An agreement by the government at the last minute is possible, but there may be no time to secure financing before the domestic political process plays out. The current ruling majority and/or the opposition may refuse to support an agreement requiring a change in government coalition. In this event, it is possible the ECB provides interim financing to pay back the IMF via raising the amount of treasury bills that the Greek government is allowed to issue. However, we would consider it more likely that Greece is allowed to fall into arrears at the IMF and the ECB makes a less binding increase in haircuts on ELA collateral. The latter would maintain the pressure on the Greek side to ratify an agreement, but at the same time would allow ongoing liquidity provision to the banks so long as the approval process is moving in the right direction.

 

Agreement reached, followed by timely passage through the Greek parliament (30% probability). This would be the most positive scenario, with the government able to quickly draw upon support from its own majority or the opposition to pass the agreement. Assuming the upcoming Friday June 5th IMF payment cannot be made, this would require a staff- level agreement 2-3 days before. In this event we would expect the ECB to tolerate an increase in t-bill financing to make whole on the IMF payment if disbursements haven't been made in time due to other national approval processes. 

In sum, there is a 40% chance that Greece simply doesn't pay the IMF next month triggering, at the very least, restrictions on ELA access and, in short order, capital controls as withdrawals could accelerate and (literally) break the bank within "a matter of days."

Alternatively, there's a 30% chance that a deal is reached but proves so politically contentious that its provisions can't be approved in time, making a payment to the IMF logistically impossible and putting the ECB in the rather unpalatable position of having to decide how lenient it wants to be based on the central bank's perception of ratification progress which, incidentally, is essentially the same position Mario Draghi has been in for quite sometime only next month, creditors stop getting paid. 

And just in case there were any lingering doubts about where talks are headed or about whether the IMF will be willing to compromise on either pension reform or its demands for the EU to writedown Greek debt in order to make the country's debt-to-GDP ratio more 'sustainable', we'll close with the following three headlines that hit the wires this morning:

• GREECE SAID TO BE FAR APART WITH CREDITORS ON DEBT TALKS
• IMF SAID TO INSIST ON GREEK REFORMS INCLUDING PENSION CHANGES
• IMF SAID TO BELIEVE DEBT RELIEF FOR GREECE MAY BE NECESSARY

*  *  *

Upcoming event and payments

Thursday May 28th - Eurogroup Working Group to discuss Greece

Wednesday June 3rd - Weekly ECB review of ELA (and every Wednesday thereafter)

Monday June 1st - Bank holiday in Greece

Wednesday June 3rd - ECB monetary policy meeting Friday June 5th - 306mio EUR IMF payment

Friday June 12th - 344mio EUR IMF payment

Tuesday June 16th - 574mio EUR IMF payment Wednesday June 17th - ECB non-monetary policy meeting

Thursday June 18th - Regular Eurogroup meeting

Monday July 13th - 459mio EUR IMF payment

Monday July 20th - 3.5bn EUR maturity due to the ECB Tuesday July 14th - 87mio EUR interest payment

Thursday August 20th - 3.2bn EUR maturity due to the ECB

http://www.zerohedge.com/news/2015-05-28/greek-endgame-here-probability-imf-default-now-70-says-deutsche-bank

Poroshenko Threatens To Declare Martial Law In Ukraine Within Hours "To Demonstrate Readiness For War"

In the case of any advance of Ukrainian army positions - and who is to say whether there is or not -Ukraine's President Poroshenko says he will declare martial law across his country within hours. As RT reports, Poroshenko added that Ukraine will "demonstrate its readiness for war, for victory, for defense and for peace."

For martial law to be enacted, the parliament has to approve a corresponding ruling by the Ukrainian president. It can be declared in the whole country or selected regions. And as RT reports,

[Poroshenko]  said he would sign a decree introducing martial law immediately, should there be an offensive against Kiev's army in the east of the country: "My key position: if the ceasefire is broken now, if the line of confrontation is crossed, if an advance against the Ukrainian armed forces is organized, at that very moment I will sign the decree on introducing martial law and pass it to parliament.

"I have no doubt that within hours, martial law will be enacted," Poroshenko continued, saying that it will allow Ukraine to "demonstrate its readiness for war, for victory, for defense and for peace." The Ukrainian president claims that during his term the martial law protocol was significantly "improved."

The latest edition does include a number of new features.

One of those is the extrajudicial detention and forced relocation of citizens of a "foreign country that threatens or undertakes aggression towards Ukraine." This might be any Russian since Russia is considered an "aggressor state" at an official level. Kiev believes it to be supporting anti-government fighters in eastern Ukraine, which Moscow vehemently denies.

Apart from the forced relocation of foreigners, martial law allows the authorities to confiscate private property, take full control of any media and ban any political parties and organizations that are deemed a threat. It will also be able to prohibit any and all rallies and mass gatherings.

*  *  *

The death toll in the Ukraine conflict has exceeded 6,000 people. Over 15,000 have been injured, according to UN estimates.

http://www.zerohedge.com/news/2015-05-28/poroshenko-threatens-declare-martial-law-ukraine-within-hours-demonstrate-readiness-

It's Official: Austria Repatriates Gold, Confirms Loss Of Faith In Bank Of England

One week ago, the world was not exactly shocked to learn that after Germany and the Netherlands, one more country had unofficially joined the ranks of nations who have seen this all before and know how it ends, when reports emerged that Austria would repatriate 140 tons of gold from the Bank of England (appropriately immortalized in "this is what happens when you hand your gold over to The Bank of England for "safekeeping".) As of today, it is official.

Earlier today the Austrian Central Bank confirmed the Kronen-Zeitung report, and said that by the year 2020, it would hold 50%, or 140 tons, of its gold domestically, up from 17% currently. This means that Austria will withdraw some 140 tons of gold from the BOE which holds 80% of Austria's gold currently (and will soon hold only 30%) and send 92.4 tons back home to Vienna with another 47.6 tons being sent to Switzerland.

Which is also the biggest news: Austria is explicitly demonstrating a lack of confidence in the "pro-western" system of which the Bank of England is a critical cog, and instead opting for "neutral" Switzerland, which will hold nearly 50 tons of the gold formerly located at the Bank of England.

Why?

As AFP notes, the central bank said it took the decision after recommendations made by the Austrian Court of Audit in February, which warned of a "heightened concentration risk" linked to storing the majority of its reserves in Britain. At the time, the bank had argued the policy was warranted because London was a major international centre for the gold trade."

Well, London still is a major international center, but in the past three months the bank surprisingly changed its mind after reviewing the court's advice to diversify storage locations.

Vienna confirmed it would begin to gradually repatriate 92.4 tonnes this summer. A further 47.6 tonnes will be transferred from Britain to Switzerland.

From the Austrian Central Bank:

In May 2015, the gold reserves held by the OeNB amounted to 280 tons, having remained unchanged since 2007. Austria’s gold reserves are fully owned by the OeNB, which maintains and manages them with utmost care. In line with the OeNB’s current gold storage policy, 17 % of its gold holdings are at present kept in Austria, 80 % in the United Kingdom and 3 % in Switzerland.

Recently, the Governing Board of the OeNB adopted the 2020 gold storage policy following a regular in-house gold strategy and storage policy review, while also considering the recommendations made by the Austrian Court of Audit. The cornerstones of this policy are as follows:

• By the year 2020, 50% of Austria’s gold reserves are to be held in Austria (OeNB and Münze Österreich AG), 30% in London and 20% in Switzerland.
• Starting from mid-2015, the new storage policy will be gradually implemented in keeping with security and logistical requirements.
• A comprehensive review and, if need be, adaptation of the storage policy is scheduled for 2019.
• The OeNB will regularly report on the progress in its upcoming annual reports.

* * *

Good luck Austria with that repatriation and be sure to triple check that gold. After all you don't want to be like the Bundesbank which in 1968 got the short end of the stick following some questionable collusion between the BOE and the Fed as we reported in "Bank Of England To The Fed: "No Indication Should, Of Course, Be Given To The Bundesbank...""

http://www.zerohedge.com/news/2015-05-28/its-official-austria-repatriates-gold-confirms-loss-faith-bank-england

Greece Owes $1.2 Billion To Drugmakers As Government Can No Longer Afford Basic Medical Supplies

Talks between Greece and its creditors went full-retard on Wednesday when the following soundbite from Canada’s FinMin Joe Oliver hit the wires:

“No Greek payment to IMF would be default to IMF”

That seemed self-evident to us, but in a world governed by debt, we suppose everyone occasionally needs to remind themselves that failure to make good on one’s obligations constitutes default.

In any event, Greece apparently owes quite a bit of money to the world’s drug suppliers because, as we reported earlier this week, Athens is now running short on bed sheets and painkillers in its hospitals as the consequences of being completely beholden to the ”institutions” which control the printing of a fiat currency become increasingly clear.

Here’s what we said on Sunday:

The idea that a developed country cannot provide basic emergency medical care because it is in poor standing with the institutions that print a fiat currency is patently absurd and simply isn't tenable meaning that one way or another, this 'situation' will resolve itself in the coming weeks, an event which will put Europe's broken bond markets to a rather difficult test.

And now, we get this from Reuters:

Cash-strapped Greece has racked up mounting debts with international drugmakers and now owes the industry more than 1.1 billion euros ($1.2 billion), a leading industry official said on Wednesday.

The rising unpaid bill reflects the growing struggle by the nearly bankrupt country to muster cash, and creates a dilemma for companies under moral pressure not to cut off supplies of life-saving medicines.

Richard Bergstrom, director general of the European Federation of Pharmaceutical Industries and Associations, told Reuters his members had not been paid by Greece since December 2014. They are owed money by both hospitals and state-run health insurer EOPYY.

And in a further sign that, regardless of whatever outcome emerges from fraught talks between Syriza and group of creditors determined to use financial leverage as a means of subverting the democratic process in the EU, contingency plans are being discussed not only amongst 'the institutions' but amongst private sector firms as well:

Drugmakers and EU officials are now discussing options in the event Greece defaults on its debt or leaves the euro zone, disrupting imports of vital goods, including medicines.

"We have started a conversation in Brussels with the European Commission," Bergstrom said. "We want the Commission to know that our companies are in this for the long run and are committed to Greece."

There is a precedent for the pharmaceutical industry to agree exceptional supply measures during a financial crisis. It happened in Argentina in 2002, when some firms agreed to continue to supply drugs for a period without payment.

But the situation is complicated in Europe, given EU competition rules. They mean the Commission would need to take the initiative in approving any special scheme.

Drugmakers want any emergency program to include steps to mitigate spillover effects on other markets, including curbs on re-exports of drugs and a block on other governments referencing Greek prices when setting their own drug prices.

Simply turning off the supply is not an option for the industry, as Novo Nordisk discovered at the start of Greek debt crisis five years ago when it faced a storm of protest over plans to halt some insulin deliveries.

And while leaving Greeks with a shortage of "life-saving" drugs may "not be an option," Greece has run out of options as well when it comes to coming up with the money to pay for basic medical supplies which means that without a deal, the world's largest drugmakers could find themselves in the same financial place as the IMF and the ECB — that is, holding what amounts to IOUs from the Greek government. 

The drugs industry has been here before. Greece also ran up large debts for its medicines in 2010-12, although they have since been repaid, with some companies receiving payment in government bonds that were subsequently written down in value.

Whether or not this is a precedent the industry will be willing to follow remains to be seen.

http://www.zerohedge.com/news/2015-05-27/greece-owes-12-billion-drugmakers-government-can-no-longer-afford-basic-medical-supp

Greece Feigned Deal Progress, Launched Rumors To Avert Bank Run

By now, investors are mostly desensitized to conflicting reports out of Athens and Brussels regarding “progress” on Greece’s negotiations with creditors. Indeed it’s quite rare that a day goes by without an “unnamed” Greek official reporting that a deal is “close” only to have someone on the other side of the negotiating table dispel any notion that discussions are headed in the right direction. 

That said, Wednesday’s version of this merry-go-round seemed even more absurd than usual with Greece indicating that a deal between Syriza and the troika was imminent. In fact, PM Alexis Tsipras posted the following message to his official website:

As you are aware, the government operates collectively. Over time, we have established a collaborative decision-making process. Obviously, though, the ultimate responsibility lies with the Prime Minister and the Cabinet. I’d like to state that we have taken many steps and we are now in the final stretch, we are close to an agreement. This agreement will be positive for the Greek economy, this agreement will redistribute the [financial] burdens and I believe that, very soon, we will be in a position to present more information.

Additionally, I would like to add one thing: it is obvious that during this final stretch, composure and determination are required. We are not alone, we are dealing with three separate institutions, which often hold conflicting views and mainly, we are dealing with our partners -many different countries- among which there exist different approaches, but also within those countries there are differing political interests. As such, during this time there may be pressure, and there may be those that seek to create a false sense of danger.

I want to reassure the Greek people that we are negotiating to obtain secure and stable conditions, in advance, for the Greek economy. Today and tomorrow, salaries and pensions will be paid as they have been all this time; for the past four months now, some have been constantly claiming, in an attempt to spread alarmist and false news, that the Greek economy is on the verge of collapse.

I am optimistic that we will soon have positive results. We all, however, need to turn a deaf ear to those spreading doom, the alarmists. There is absolutely no danger to salaries and pensions or to the banks and people’s savings. And I believe that very soon we will be able to look ahead with greater optimism. However, we need composure and determination in this final stretch.

So, unpacking that, Greece is “in the final stretch”, is “close to a deal”, public sector employees will be “paid as they have been all this time”, and despite commentary from “alarmists” determined to “spread doom”, there’s “absolutely no danger to the banks and people’s savings.” 

Here is what Germany had to say about the idea that an agreement is imminent:

• LITTLE PROGRESS SEEN IN GREECE TALKS, GERMAN GOVT OFFICIAL SAYS
• GERMAN GOVT SURPRISED BY GREEK REPORTS OF PROGRESS: OFFICIAL

As for banks and depositors, Kathimerini reported that according to some sources, as much as €300 million in deposits disappeared from Greek banks on Tuesday alone after FinMin Yanis Varoufakis indicated the government may consider a special levy on ATM withdrawals in an effort to encourage the use of credit cards over cash. Meanwhile, the ECB declined to raise the ELA ceiling for the Greek banking sector citing a “stable” situation. 

What all of the above seems to suggest is that Greek officials are now desperately attempting to convince the public that the country, its banks, and its citizens are not hurdling towards the economic abyss with no agreement in sight when in fact, the situation is deteriorating rapidly on the way to an ugly climax on June 5.

That suspicion was confirmed today. As Kathimerini reports, PM Tsipras was advised by his aides to essentially lie in order to halt a terminal bank run. Here’s more:

Prime Minister Alexis Tsipras said Wednesday that a deal with creditors was “close” and government officials said an agreement was being drafted but representatives of the country’s creditors made it quite clear that they do not share such optimism.

In comments after a meeting at the Finance Ministry, Tsipras said a deal with creditors was “close” and that “very soon we will be able to present more details.” He stressed the need for “calm and determination,” noting that Greece would come under additional pressure in the final stretch of negotiations. He also referred to “conflicting views between institutions” and to “countries with different approaches.” Tsipras added that there is “absolutely no risk to salaries and pensions, nor to bank deposits.”

According to sources, Tsipras was advised to make the statement by aides fearing that jitters were creeping back into the markets and could prompt a new wave of deposit outflows. Tsipras chose to make the statement flanked by Finance Minister Yanis Varoufakis to underline the government’s backing for the latter, who has come under fire over his confusing statements about the content of a potential deal.

Earlier in the day, the European Central Bank decided not to raise the ceiling on emergency liquidity to Greece. A Greek government official commented that the Bank of Greece had not requested an increase to emergency liquidity as the current ceiling of 80.2 billion euros is regarded as adequate “following a stabilization of deposit outflows.”

Meanwhile, Greece is busy refuting creditors' refutations by swearing it really believes its own rhetoric...

"This optimism is not just words, it is based on the experience of the previous weeks and the progress achieved."

...and The Eurogroup is sticking to its script as well...

"We’re not there yet. There are open issues which need to be resolved."

We imagine these "open issues" are related to Syriza's attempt to uphold its campaign promises in the face of an unyielding attempt by creditors to dictate political outcomes using financial leverage and for better or worse, it's likely the "institutions" will succeed.

http://www.zerohedge.com/news/2015-05-28/greece-feigned-deal-progress-launched-rumors-avert-bank-run

Greece Postpones Meeting With Creditors, Denies ATM Tax

With the countdown to default now at just 10 days, Greece and its creditors are scrambling to come to some kind of agreement that will allow the country to repay the IMF on June 5. The payment is not possible without the disbursement of all or a portion of a €7.2 billion tranche of aid under Athens’ current bailout program. 

On the heels of a vote which betrayed fractures within PM Alexis Tsipras’ ruling Syriza party, a Eurogroup meeting in Brussels scheduled for today has now been postponed, according to a Greek official who did not give a reason for the cancellation. Negotiations will reportedly take place over the phone later today once Athens has had time to conduct “preparatory discussions.”

• GREEK OFFICIALS TO MEET CREDITORS IN BRUSSELS TMRW: OFFICIAL
• GREECE, CREDITORS TO HOLD TELECONFERENCE TODAY: GOVT OFFICIAL

Meanwhile, there are rumors that the country will impose a levy on ATM withdrawals in an effort to encourage Greeks to use credit cards and thereby stem the deposit outflow that’s crippling the Greek banking sector. These reports were promptly denied by the Finance Ministry.

First there was this, via Bloomberg:

Greece considering to impose levy on bank transactions, such as cash withdrawals,Greek Finance Minister Yanis Varoufakis tells reporters in Athens.

And then this shortly thereafter:

• GREECE WON'T IMPOSE LEVY ON ATM TRANSACTIONS: FINANCE MINISTRY

There were suggestions earlier this month that Athens had floated a levy on certain bank transactions as a concession to creditors. 

And meanwhile...

• FAILURE TO REACH GREEK DEAL MAY MEAN UNCERTAINTY: U.S. OFFICIAL
• http://www.zerohedge.com/news/2015-05-26/greece-postpones-meeting-creditors-denies-atm-tax

Chinese State Paper Warns "War Will Be Inevitable" Unless U.S. Stops Meddling In Territorial Dispute

Whereas over the past year, ever since the outbreak of the hostilities over the fate of Ukraine following the Victoria Nuland orchestrated presidential coup, relations between Russia and NATO have devolved to a Cold War 2.0 state as manifested by countless interceptions of Russian warplanes by NATO jets and vice versa as depicted in the following infographic...

... at least China was mercifully allowed to stay out of the fray between the Cold War enemies.

This all changed this month when first the Pentagon's annual report to Congress this month cast China as a threat to regional and international peace and stability, followed several weeks ago when, with China aggressively encroaching into territories in the South China Sea claimed by US allies in the region such as Philippines, Vietnam and Japan, the US decided to get involved in yet another regional spat that does not directly involve it, and started making loud noises about China's territorial expansion over the commodity-reach area.

China promptly relatiated by threatening a US spy plane during a routine overflight, while immediately thereafter the US retaliated at China's escalation, and warned that building sea "sandcastles" could "lead to conflict."

Far from shutting China up, earlier today China said it had lodged a complaint with the United States over a U.S. spy plane that flew over parts of the disputed South China Sea in a diplomatic row that has fuelled tension between the world's two largest economies.

Quoted by Reuters, Chinese Foreign Ministry spokeswoman Hua Chunying said on Monday China had lodged a complaint and that it opposed "provocative behaviour" by the United States.

"We urge the U.S. to correct its error, remain rational and stop all irresponsible words and deeds," she said. "Freedom of navigation and overflight by no means mean that foreign countries' warships and military aircraft can ignore the legitimate rights of other countries as well as the safety of aviation and navigation."

China had noted “ear-piercing voices” from many in the U.S. about China’s construction on the islands and reefs.

In other words, China just imposed an effective "no fly zone" for US spy planes, a dramatic shift from its recent posture when it tolerated and turned a blind eye to US spy plane overflights. Going forward, the US has been explicitly warned not to fly over China or risk the consequences.

This handout photo taken on March 16, 2015 by satellite imagery provider Digital Globe shows a satellite image of vessels purportedly dredging sand at Mischief Reef in the Spratly Islands in the disputed South China Sea

And just to confirm that if the US had hoped it could threaten Beijing into submission and force the Politburo into curbing its expanionist appetit, it was dead wrong, the nationalist Global Times, a paper owned by the ruling Communist Party’s official newspaper, the People’s Daily, said in a Monday editorial that war was “inevitable” between China and the United States unless Washington stopped demanding Beijing halt the building of artificial islands in the disputed waterway.

PressTV has more details:

A war between the United States and China is “inevitable” unless Washington stops demanding Beijing halt its construction projects in the South China Sea, a Chinese state-owned newspaper warns.

“If the United States’ bottom line is that China has to halt its activities, then a US-China war is inevitable in the South China Sea,” The Global Times, an influential newspaper owned by the ruling Communist Party’s official newspaper the People’s Daily, said in an editorial Monday.

“We do not want a military conflict with the United States, but if it were to come, we have to accept it,” said The Global Times, which is among China’s most nationalist newspapers.

Beijing last week said it was “strongly dissatisfied” after a US spy plane defied multiple warnings by the Chinese navy and flew over the Fiery Cross Reef, where China is reportedly building an airfield and other installations.

“The intensity of the conflict will be higher than what people usually think of as ‘friction’,” it warned.

The paper also asserted that China was determined to finish its construction work in the South China Sea, calling it Beijing’s “most important bottom line.”

Such commentaries are not official policy statements, but are sometimes read as a reflection of government thinking.

More importantly, they serve as populism-timestamped warnings that US demands for a Chinese retreat over what the world's most populous nation considers' its own national interest, will backfire dramatically and the next time a US spy plane flies over the Spratly Islands, or Beijing's smog for that matter, a very serious diplomatic incident may ensue.

http://www.zerohedge.com/news/2015-05-25/war-will-be-inevitable-unless-us-stops-meddling-terrotorial-dispute-chinese-state-ne

Greece Was 20 Votes Away From Defaulting This Weekend

Up until this moment, Greece may not have had the financial wherewithal to pay its creditors, forced instead to use circular math gimmicks in which the IMF paid the IMF for the country's most recent €750 million due on May 12 when it effectively pre-defaulted and used SDR reserves as "payment", but at least it had a united facade when facing Europe and political cohesion when dealing with the Troika.

That too may have just evaporated over the weekend, when in a surprisingly close vote showing just how deeply the ruling Greek Syriza party has splintered, the hard line "Left Platform" a faction within Syriza, proposed that Greece stop paying its creditors if they continue with "blackmailing tactics" and instead seek "an alternative plan" for the debt-racked country. Its motion called for the government to default on the IMF loans rather than compromise to creditor demands, among which a change to value-added tax rates, further liberalization of the labor market and changes to the pension system, including further cuts to pensions and wages.

According to the NYT, which first reported the vote outcome, the proposal was narrowly rejected with 95 people voting against and 75 in favor.

The WSJ adds:

The Left Platform’s leader, Energy Minister Panagiotis Lafazanis, told the meeting default was preferable to surrender, even if it meant Greece tumbling out of the euro.

“Who says that an exit from the euro and a return to the national currency is a catastrophe?” Mr. Lafazanis said at the meeting.

Who? Well, all those - mostly bankers - who for the past 5 years bailed out European banks at the expense of preserving Greek participation in a doomed monetary union and avoiding the collapse of the Eurozone, an outcome which would lead to massive losses for the oligarchic status quo.

But back to Greece where with a vote as close as that, the genie of the full-blown dissent within Syriza, which has a tiny majority of just 12 seats in Greece's 300 seat partliament, is out of the bottle which could mean that the Troika's long sought after goal of pushing Greece into a political crisis, may be just around the corner.

As the WSJ reports, "Tsipras’s difficulty in selling a painful compromise to Syriza’s hard left, as well as to other parts of his ideologically diverse party, has become the largest obstacle to a deal. European officials and analysts—and privately even Greek government officials—say they don’t know whether the roughly 30 lawmakers who make up Left Platform will vote as defiantly as they talk if creditors’ terms are put before the Athens Parliament."

That may be a moot point, since Greece needs a deal yesterday: as a reminder, Greece has about 10 days of cash left, and this time there is no kicking the can - if there is no deal by June 5, Greece will be indefault first to the IMF, and soon to everyone else.

Worse, while Greece may not have decided to formally prioritize pensions and wages over IMF repayments, at least not yet, it has absolutely no working proposal to present to the Eurogroup ahead of this week's latest meeting.

The Central Committee agreed on a text saying any deal with creditors must involve no pension cuts, a small budget surplus before interest, increased public investment and a restructuring of Greece’s debt—terms that lenders are unlikely to accept. The text isn’t binding on Mr. Tsipras’s government but indicates how hard it will be to sell a deal to Syriza.

But while some may have harbored hope that the Troika may agree to at least the smallest of concessions, after Sunday's municipal vote in Spain which showed a dramatic plunge in popularity of the ruling PP, a harbinger of even even more "anti-austerity" platforms coming to power, Merkel will do everything in her power to make an example of Greece that nobody can dictate terms to the Troika and in the end it is a very simple choice: the German way or the autbahn.

And just like that Greece is suddenly caught between the devil and the deep red lines: an intransigent Troika and potential rebels within the party itself.

“The biggest threat may not end up being Mr. Lafazanis, but other parliamentary members who lack party discipline, who are newly elected and are completely unpredictable,” said Dimitris Keridis, an associate professor of international politics at Panteion University in Athens.

Parliamentarian Ioanna Gaitani, a self-described Trotskyite in the Left Platform, said Greece can survive a debt default and lenders aren’t respecting Syriza’s mandate.

“When faced with the pseudo-dilemma of ‘euro or national currency,’ the answer is a unilateral write-off of most of the debt, the taxation of large wealth, and the implementation of Syriza’s program,” she said. “For the Left, the needs of the people are above profits and debts.”

The best news perhaps for Greece and everyone else who has been following this ultra slow motion trainwreck for the past 5 years, is that it is nearly over (one can hope), and that when it comes to defaulting, Greece has a truly exceptional range of choices how to make sure its last Euro-denominated check bounces in the most dramatic fashion possible.

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http://www.zerohedge.com/news/2015-05-25/greece-was-20-votes-away-defaulting

Bank Of England Accidentally E-mails Top-Secret Brexit Plan To Newspaper

The first rule of “Project Bookend” is that you don’t talk about “Project Bookend.”

In retrospect, maybe the first rule should have been “you don’t accidentally e-mail ‘Project Bookend’ to a news agency”, because as the Guardian reports, one of its editors opened his inbox and was surprised to find a message from the BOE’s Head of Press Jeremy Harrison outlining the UK financial market equivalent of the Manhattan project. 

Project Bookend is a secret (or ‘was’ a secret) initiative undertaken by the BOE to study what the fallout might be from a potential ‘Brexit’, but if anyone asked what Sir Jon Cunliffe and a few senior staffers were up to, they were instructed to say that they were busy investigating “a broad range of European economic issues.”

Here’s more from The Guardian:

Bank of England officials are secretly researching the financial shocks that could hit Britain if there is a vote to leave the European Union in the forthcoming referendum.

The Bank blew its cover on Friday when it accidentally emailed details of the project – including how the bank intended to fend off any inquiries about its work – direct to the Guardian.

According to the confidential email, the press and most staff in Threadneedle Street must be kept in the dark about the work underway, which has been dubbed Project Bookend…

MPs are now likely to ask whether the Bank intended to inform parliament that a major review of Britain’s prospects outside the EU was being undertaken by the institution that acts as the UK’s main financial regulator. Carney is also likely to come under pressure within the Bank to reveal whether there are other undercover projects underway.

Officials are likely to have kept the project under wraps to avoid entering the highly charged debate around the EU referendum, which has jumped to the top of the political agenda since the Conservatives secured an overall majority. Many business leaders and pro-EU campaigners have warned that “Brexit” would hit British exports and damage the standing of the City of London.

The email indicates that a small group of senior staff are to examine the effect of a Brexit under the authority of Sir Jon Cunliffe, who as deputy director for financial stability has responsibility for monitoring the risk of another market crash. 

Cunliffe also sits on the board of the City regulator, the Prudential Regulatory Authority.

The email from Cunliffe’s private secretary to four senior executives, was written on 21 May and forwarded by mistake to a Guardian editor by the Bank’s head of press, Jeremy Harrison.

It says: “Jon’s proposal, which he has asked me to highlight to you, is that no email is sent to James’s team or more broadly around the Bank about the project.”

It continues: “James can tell his team that he is working on a short-term project on European economics in International [division] which will last a couple of months. This will be in-depth work on a broad range of European economic issues. Ideally he would then say no more.”

*  *  *

In sum: Mark Carney accidentally pulled a Coeure who intentionally pulled a Yellen. 

On the bright side for Carney, it looks like he’s making big strides when it comes to his goal of providing “greater transparency over [the BOE’s] decision-making.”

http://www.zerohedge.com/news/2015-05-22/bank-england-accidentally-e-mails-top-secret-brexit-plan-newspaper