E.I.R.STRATEGIC ALERT

E.I.R.STRATEGIC ALERT



WEEKLY NEWSLETTER

Volume 30, No. 28 - July 14, 2016

The European Financial System About to Blow: Time to Split Deutsche Bank

Italian Prime Minister Matteo Renzi has managed to shift the focus of the global financial crisis onto the real issue, which is the derivatives bubble. In reference to the problem of non-performing loans in Italian banks, he said, that if that “is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred”.

Renzi, who made those remarks at a July 6 press conference with the Swedish Prime Minister, was referring to Deutsche Bank which, with its 54 trillion derivatives portfolio, has also been correctly characterized by the IMF as the largest systemic risk in a recent report.

The focus on Deutsche Bank helps to define the nature of the problem and the solution. The banking system is on the verge of a gigantic blowup and the only solution is the immediate separation of commercial banks from investment banks, with all state and central bank protection lifted for the latter. While the “gambling casino” side can go under, the commercial side, including deposits and credits, must be protected and recapitalized, in order to launch a recovery of the real economy, based on real productivity.

Instead, the EU/ECB are stubbornly insisting on implementing a bail-in, which means confiscating the money of depositors and bondholders to save the gamblers. Politically, the bail-in is suicidal, and a conflict has already broken out with the Italian government, which refuses to implement EU rules.

Rome is asking for the lifting of the bail-in rules and for approval of a 40 bn government bailout plan. Brussels, Frankfurt and Berlin have answered “No”. The conflict has escalated to the point that the head of the Italian Banking Association Antonio Patuelli launched an ultimatum on July 6: either you accept our conditions or we will kill the Banking Union.

That same day, Deutsche Bank of all banks, launched an SOS that dramatically confirms Renzi’s j’accuse. DB chief economist David Folkerts-Landau called for a suspension of the bail-in and for a large European bailout in an interview with Welt am Sonntag (July 10). “To strictly follow rules would create more damages than to suspend them”, Folkert-Landau said.

“Europe is very sick, and must deal with current problems with extreme rapidity, otherwise an accident will occur“, he warned further.

EIR founder Lyndon LaRouche agreed only in part with the Deutsche Bank economist. “Clean the whole thing out, set up a program which will secure the banking system of Germany to function”, in terms of financing the real economy. “Once that has happened, you can work from there”, he said on July 10.

Such a one-time move would necessarily involve cancelling out the 54 trillion in derivatives and going in the direction of a bank separation and other measures needed to allow credit to flow to the real economy.

The ECB Deliberately Failed to Assess the Risks

Marco Zanni, member of the Economic and Monetary Affairs Committee of the European Parliament, gave a presentation to the Schiller Institute conference in Berlin on June 25, exposing the “wrong policies” of EU governments and Brussels that led to the collapse of the European financial system. More especially, he accused the European Central Bank of “failing deliberately to assess this risk” for political reasons.

The key issue, Zanni said, is that after the 2008 crisis, regulators decided to focus on controlling the consequences of a crisis instead of preventing one. Thus, they set up the European Single Supervisory Mechanism on the wrong premises. The SSM has only intervened on the credit risk side of banks, completely neglecting the assets side, which, in the Too-Big-To-Fail institutions, is largely speculative. It “decided not to assess and not to consider the risk related to Level 3-derivatives exposure of the European banking system, and this is a huge mistake that is threatening the stability of the European banking system.”

Level 3 assets are financial assets that are illiquid, so the corresponding figure posted on the balance sheet of a bank is totally unrealistic, since it is set by an internal model prepared by the bank itself, to suit the bank’s interest.

Thus, the SSM stress tests discriminated against banks with Non Performing Loans to the real economy, which are in trouble as a result of the austerity policy implemented by the EU. A contario, it privileged large banks with a blown-up derivatives portfolio such as Deutsche Bank or Paribas, according to Zanni.

The Italian banking system, he went on, shows the inequity of this approach. “Italian banks have problems related to the exposure to nonperforming loans, but it is, I say usually, an ‘error-induced crisis,’ because if your economy shrinks, if your SMEs go into bankruptcy, if your homeowners cannot pay their mortgages, borrowers cannot pay mortgages, clearly the banking system will suffer a huge exposure to NPLs. If your economy is not performing well, you will experience problems in the credit market and problems related to the NPLs.”

2

EIR STRATEGIC ALERT

WEEKLY NEWSLETTER

Zanni then outlined two proposals put forward by the M5S group in the European Parliament: 1) “A sort of modern European Glass-Steagall that will simplify the regulation on the banking system, and will make separation between the core part of a bank and a speculative bank, in order to create a banking system that is no more focused on speculation, but on the needs of the real economy, on the needs of people”. 2) government intervention in the urgent case of Monte dei Paschi di Siena, to turn the bankrupt bank into a government-sponsored development bank, an example of what a bank devoted to the development of the real economy should be.

Warsaw: A Tale of Two Summits

NATO heads of state met in Warsaw, Poland from July 8-9 for the long-awaited summit, where the escalation of military provocations against Russia went forward, as scheduled. The leaders endorsed the deployment of four rotating combat battalions to the three Baltic States and Poland, and created a beefed-up unified command for Romania, where the ground component of the US-NATO missile defense system is already being installed.

But aside from those long-resolved actions, the summit was actually dominated by the growing panic and splits within the Alliance itself. The June 23 Brexit vote was the dominant theme in the hallway discussions, according to UK Foreign Secretary Philip Hammond. No one could say for sure whether the European front would hold firm in the anti-Russia rhetoric that Britain had engineered, along with its Washington puppet/ally Barack Obama. No one could say for sure whether the EU itself would survive, or what the more immediate consequences of the Brexit would be for Europe’s disintegrating banking system.

The second “hallway theme” of the event was the growing fault lines within Europe over the continuing campaign to demonize and target Russia and President Vladimir Putin. German Foreign Minister Frank-Walter Steinmeier was a particular target of venom, but he was joined in the opening moments of the summit by French President Francois Hollande, who told reporters, on arriving in Warsaw, that Russia was neither an enemy nor a threat to France, and that NATO has no business telling Europe what its relations with Russia should be.

Among the Europeans, the sanctions continue to be hugely contested, as we have reported, in particular in Greece and in business circles (cf. below).

The New York Times took careful note of the actual mood at the heads of state summit, noting also that President Obama had met privately with Europe’s two top executives, Donald Tusk and Jean-Claude Juncker, to effectively lobby on behalf of the British for a rapid and satisfactory negotiated agreement to maintain Britain’s pivotal role in shaping European security and financial policy, even from outside the EU.

The Russian media and top Russian officials made clear that they see the new NATO deployments right up to the borders of Russia as a threat -- a threat that to which they will respond with force.

However, in spite of the disagreements within the Alliance, all the governments decided to toe the line. Thus, the 32-page document that came out of the two-day summit was nothing short of a diatribe against Russia, blaming Moscow for all of the security tensions of the past two years -- ignoring the fact that the US and NATO carried out a bloody coup in Ukraine in clear violation of all of the NATO-Russian agreements of the post-Cold War era.

To put the reality of the “Russian threat” to NATO countries in perspective, NATO’s defense budgets is $842 billion, that of Russia $46 bn. The Pentagon’s budget alone is nine times greater than Russia’s. And NATO countries have over 3.6 million troops, against Russia’s mere 765,000.

U.S. Intelligence Veterans Urge Dialogue with Russia

On the eve of the NATO summit in Warsaw, the American organization “Veteran Intelligence Professionals for Sanity” (VIPS) issued an open letter to German Chancellor Angela Merkel, urging that, “before things get still worse, seasoned NATO leaders need to demonstrate a clear preference for statesmanship and give-and-take diplomacy over saber-rattling. Otherwise, some kind of military clash with Russia is likely, with the ever-present danger of escalation to a nuclear exchange.”

The letter is signed by outspoken former intelligence officers such as Ray McGovern, Larry Johnson, Sen. Mike Gravel, Daniel Ellsberg and Scott Ritter.

“Many of us have spent decades studying Moscow’s foreign policy. We shake our heads in disbelief when we see Western leaders seemingly oblivious to what it means to the Russians to witness exercises on a scale not seen since Hitler’s armies launched ‘Unternehmen Barbarossa’ 75 years ago, leaving 25 million Soviet citizens dead. In our view, it is irresponsibly foolish to believe that Russian President Vladimir Putin will not take countermeasures -- at a time and place of his own choosing.”

The VIPS letter weighs in clearly on the dispute underway inside Germany, as well, supporting the position taken by Foreign Minister Frank-Walter Steinmeier (cf. SAS 25.26, 27/16).

The letter reviews in some detail the coup d’etat in Ukraine as the proximate cause that triggered the escalation between the US/NATO and Russia, noting the lack of progress on the Minsk accords by Kiev. The VIPS also suggest areas of joint work with the Russians: “It would be highly constructive if NATO would take responsibility for assessing the fundamental factors behind the hideous outbreak of the terrorist acts that took so many lives over recent days in Istanbul, Dhaka, Bangladesh, and Baghdad. In this context, as well as in central Europe, violence begets violence.”

Unfortunately, it seems that Angela Merkel did not heed the advice of the VIPS, once again.

South China Sea: Chinese Delegation in Washington Urges Restraint, with EIR

The Chinese Government is making great efforts to warn Washington about the danger of a collision between the two countries in the South China Sea on the eve of a major decision by the Permanent Court of Arbitration expected to be handed down on July 12, concerning maritime territorial disputes with the Philippines. Beijing does not recognize the authority of that court on that matter.

The Obama Administration has staged numerous provocations in those same waters, and is deploying naval vessels there, including two aircraft carriers. In light of the tensions, former State Councilor Dai Bingguo came to Washington on July 5 to urge the White House to “scale down” the deployment and tone down the confrontational rhetoric. Dai came at the head of a prominent delegation of Chinese scholars from the Chongyang Institute for Financial Studies and the National Institute for South China Sea Studies.(The former institute had sponsored a conference in Sept. 2015 to present the Chinese edition of EIR’s report on the World Land-bridge.)

In his comments at a forum at Carnegie Endowment for International Peace on July 5, Dai urged that measures be taken

n°28 / 2016

3

EIR STRATEGIC ALERT

WEEKLY NEWSLETTER

to ease the tensions, calling on the Philippines to withdraw their submission to the arbitration court. He also urged the United States to adopt a different attitude to the all-important US-China relationship. “What we need is not a microscope to enlarge our differences, but a telescope to look ahead and focus on cooperation,” he said.

At the same time, Dai was very clear that if the U.S. attempted to pressure China to give up on its legitimate territorial claims, it would be prepared to react.

Over the following days, the Chinese delegation met with a number of U.S. scholars and diplomats, deeply concerned about the crisis, to try to find a way to bring down the tensions and to create a meaningful dialogue with the United States in dealing with this dangerous state of affairs.

To a press conference concluding their visit on July 7, the Chinese delegation invited Schiller Institute President Helga Zepp-LaRouche and EIR Washington Bureau Chief, William Jones, both of whom had been involved in the dialogues, asking Jones to be on the podium as one of the two Americans presenting a U.S. viewpoint. The other representative was Brendan Mulvaney, a professor at the U.S. Naval Academy. While Jones criticized the Obama pivot and underlined the danger of war, Mulvaney dutifully defended Obama policy. When Zepp-LaRouche asked Mulvaney why the U.S. couldn’t begin to move away from geopolitics toward a new paradigm in the region and avoid the danger of war, Mulvaney responded, that he believed any crisis that might erupt in the region would be “small” and with regard to moving to a new paradigm, he replied, not without a distinct taint of cynicism, that he “was hopeful” but that “the history of mankind of mankind doesn’t bear that out.” In other words, he showed “pragmatists” can’t change history.

The Chinese news coverage following the press conference quoted extensively from Jones’ comments, and a number of interviews with other Chinese media were generated from that coverage.

Chilcot Report on Iraq War: Blair Lied and Continues to Lie

When former British Prime Minister Tony Blair was in New York City for a public engagement on June 27, he was welcomed by a group of LaRouche Movement activists signing a special “Jail Blair” canon. Inside the event, two activists loudly accused the PM of being a “liar” and “mass-killer”, whose policies were “genocidal”. While Mr. Blair himself and the audience were displeased with this inconvenient truth, the Chilcot Report has proven the activists 100% correct.

Indeed, the July 6 release of the report of the Iraqi Inquiry, chaired by Sir John Chilcot, into the British role in the 2003 invasion and subsequent occupation of Iraq, is a stunning indictment of Blair’s policy and person.

The most damning conclusion from the report, as recounted in a statement that Chilcot delivered on its release, is that the war was completely unnecessary, which de facto makes it a war of aggression. In March of 2003, he said, there was no imminent threat from Saddam Hussein; the strategy of containment could have been adapted and continued for some time; and the majority of the Security Council supported continuing UN inspections and monitoring. In short, the Commission concluded that Blair lied about the threat of weapons of mass destruction coming from Saddam Hussein’s Iraq, lies which were used to launch a completely illegal war.

In a matter of weeks after the terrorist attacks of September 11, 2001, Blair was already making suggestions to U.S. President Bush as to strategies for “regime-change” in Baghdad, the report notes. And the attempt to gain UN Security Council backing for the war was also Blair’s project, while he was privately assuring Bush that, resolution or no, British troops would join the US-led invasion.

Chilcot also clearly refuted testimony by Blair that the difficulties encountered in Iraq after the invasion could not have been known in advance. “We do not agree that hindsight is required. The risks of internal strife in Iraq, active Iranian pursuit of its interests, regional instability, and Al Qaeda activity in Iraq, were each explicitly identified before the invasion,” he said.

Nonetheless, true to his habit of twisting truth, Blair still claimed after the release that the “report should lay to rest allegations of bad faith, lies or deceit,” saying he did everything in “good faith” Even more despicably, he refused to fully apologize for launching the war, and defended the decision to remove Saddam Hussein.

London Guardian columnist George Monbiot reminded his readers that Chilcot’s statement that the war was not the last option clearly echoes the UN Charter, “which lays out the conditions required for lawful war”. Thus, in effect, the invasion of Iraq was a “crime of aggression, which was described by the Nuremberg Tribunal as ‘the supreme international crime differing only from other war crimes in that it contains within itself the accumulated evil of the whole’.”

Indeed, the wars and terrorism that the invasion and occupation of Iraq set into motion far beyond Iraq’s borders continue to this day to kill, maim and send millions fleeing as refugees.

Brexit, Chilcot Inquiry, Financial Crisis: Tony Blair Is Finished!

In addition to the Brexit vote, which Tony Blair violently opposed, and to the Chilcot Inquiry, which found that the Iraq war was based on lies, the former Prime Minister has also lost his latest attempt to throw Jeremy Corbyn out of the presidency of the Labour Party.

Indeed, on June 30, 172 MPs of the Labour Party (who owe their seats to Blair) cast a vote of “no confidence” in the leadership of Corbyn, with only 40 voting against, on the claim that he had not campaigned strongly enough against the Brexit. But Corbyn refused to be intimidated.

In fact, under the leadership of the highly popular Corbyn, over 100,000 new members have joined the party since the Brexit vote, bringing total membership to 500,000 – the highest in modern times. This compares with the Conservative Party’s membership of about 150,000.

In an article for the Guardian of July 8, Corbyn underscored that “The damning verdict of the Chilcot report on the Iraq war confirmed that while the political establishment got it disastrously wrong, the majority of our people called it right. This political sea change is also what led to my own election nine months ago, by 60% of Labour members and supporters.”

He pointed out that the Brexit vote was not just about immigration, but also about the current economic policies that are not working for most people. We must, he said, “negotiate a new relationship with the EU: one that protects jobs, living standards and workers’ rights – and also ensures we have the freedom to reshape a 21st century economy for all our people.”

During the referendum campaign, the Labour party, “argued for an end to EU-enforced liberalization and privatization of public services – and for freedom for public enterprise and

n°28 / 2016EIR STRATEGIC ALERT WEEKLY NEWSLETTER 4

public investment, now restricted by EU treaties... Labour also campaigned for tougher regulation of the jobs market and of the exploitation of migrant labor to undercut pay and conditions, as the best way to protect jobs and living standards in the EU.”

Of course most of the Labour Party MPs who are seeking to oust him are the same ones who supported Blair’s war policies, as well as his “New Labour” neoliberal economic policies, which also prevail in the EU.

German Mittelstand and Other EU SMEs Reject the TTIP

A thoroughly discredited EU Commission President (Jean-Claude Juncker) assured a lame duck United States President (Barack Obama) on July 7 at the NATO summit in Warsaw, that the free-trade agreement between the U.S. and the EU would be reached by the end of the year. In reality, that agreement, the Transatlantic Trade and Investment Partnership (TTIP), highly contested on both sides of the Atlantic, is far from being secured.

Not only because the position of the next U.S. President is unknown, as are the consequences of the Brexit, but also due to the growing hostility in Europe, notably from Small and Medium-Sized Entreprises (SMEs), and from the agricultural sector.

French Prime Minister Manuel Valls was most outspoken on the issue, stating June 26 that there will be no agreement on TTIP. France’s State Secretary for trade and commerce Matthias Fekl also confirmed on July 5 “a deal in 2016 is impossible and everyone knows it, including those who say otherwise.”

At the international Schiller Institute conference in Berlin June 25-26 (cf. SAS 27/16), a representative of the German Mittelstand explained why the small and medium-sized entreprises are against the signing the TTIP. Egbert Drews, board member of the Marwiko company in Berlin, which provides services to SMEs, told participants that after carefully and critically assessing the situation, they have concluded that “the risks greatly outweigh the opportunities.”

Such agreements, Drews said, are “generally advantageous for transnational companies and detrimental for SMEs”. In the case of Germany, the TTIP would “harmonize” (i.e., lower) the quality standards, which are very high among German SMEs, and would also eliminate the current restrictions on trade by calling them “public instruments of protection”. Thus, “transnational competitors, which have the advantage of economies of scale, would be able to oust middle-sized innovators from the market through a low-price strategy which is more or less harmless for them.”

Normally, government regulations should protect SMEs, Drews said, but under TTIP, all such measures are considered as barriers to free trade. In the same way, the new treaty would do away with the “preferential treatment currently granted to medium-sized companies when public contracts are awarded”.

Mr. Drews also pointed in his presentation to the importance of developing relations with the BRICs. Indeed, according to official statistics published back in 2012 already, “German foreign trade with the BRICS countries increased nearly sevenfold, while the entire foreign trade only grew twofold.”

But those same markets would be jeopardized under the TTIP, which consider those countries as adversaries. “Thus, German exporters in the foreign trade association BGA warn against a kind of ‘economic NATO’ at the expense of other trade partners,” Drews warned.

How Did the Solar System Form? Juno’s Mission at Jupiter

Just one second off schedule, NASA’s Juno spacecraft was captured into orbit around Jupiter on July 4, after traveling more than 1.7 million miles over more than five years. The mission should unveil not only some of the secrets of the formation of our Solar System, but also of the extrasolar planets that orbit other stars.

Juno is not the first spacecraft to orbit the Solar System’s largest planet, which is second in mass only to the Sun, but it is the first that will dip below its clouds, coming within only 3,000 miles of the top layer of its atmosphere. Although scientists have observed near-surface phenomena, such as the great red spot, for hundreds of year, how deep it extends, and how it formed and changes, are unknown.

Juno is the first spacecraft designed to withstand the planet’s intense radiation and its gigantic magnetic fields, which create the largest polar auroras in the Solar System. In order to take measurements to understand the interaction of Jupiter’s magnetosphere with the solar wind, the spacecraft has been placed in a polar orbit around the planet, and will travel through its radiation field, in order to create a three dimensional map of this intensely active region.

Because the composition of this largest of the gas-giant planets is so similar to that of the Sun, it is assumed that Jupiter formed very early in the evolution of the Solar System, out of the Sun’s gaseous proto-planetary disc. Thus, Jupiter would contain some of the Solar System’s primordial material, which later evolved to create the heavier elements, and formed the other planets. But scientists are intrigued by the previous discovery that Jupiter is enriched with small mounts of heavier elements, such as carbon, nitrogen, and lithium, as compared to the Sun. Dr. Scott Bolton, Principal Investigator of the mission, explained in late June that this is important because “the stuff that Jupiter has more of, is what we’re all made out of. It’s what the Earth is made out of.”

What form these heavier elements take is also of importance. It has been impossible until now to determine if Jupiter has a rocky core at the center, or if it is a gaseous body throughout. Scientists explain that if a rocky core is found, this would mean that solid material formed in the solar disc very early, because anything later would have burned up in its atmosphere before it could reach the center. Juno’s gravity measurements will allow scientists to determine if a rocky core exists, which would help determine the process of planetary evolution in our Solar System.

Scientists hope that Juno will be able to withstand the intense radiation surrounding the planet for about 20 months, after which time it will be de-orbited and burn up in the giant planet’s outer atmosphere. This will avoid any possible impact, and biological contamination, with any of Jupiter’s moons.

E.I.R. STRATEGIC ALERT www.eir.de

Published by: E.I.R.GmbH, Bahnstr. 9a, 65205 Wiesbaden

Tel.: 0611/73650, Fax: 0611/7365101, Email: eirna@eirna.com

Verantwortl. f. d. Inhalt: Dean Andromidas, Claudio Celani

Subscription: EUR 3000/ ISSN 0936-7527

© E.I.R. GmbH Alle Rechte vorbehalten, auch die des Nachdrucks

von Auszügen, derphotomechanischen Wiedergabe und der Übersetzung,

Printed in Germany

n°28 / 2016