ISIS MAKES UP TO $3 MILLION A DAY SELLING OIL

ISIS ARE TRYING TO ESTABLISH A STATE, AND OIL AND GAS REVENUES ARE IMPORTANT FOR THE STATE’S FORMATION 

For two weeks, the Islamic State of IRAQ and SYRIA (ISIS) and forces loyal to Bashar al-Assad have been battling for control of the Shaar gas field, one of SYRIA’S largest, near the landmark city of Palmyra. It was reported that the Sunni militant group had killed 270 regime fighters, taking control of the field in what was reportedly one of the conflict’s deadliest 48-hour periods to date.

As ISIS steams further into SYRIA, analysts say a significant portion of its financial resources come from the crude oil it sells on the black market; accordingly, oil fields have become prime targets in the fight. So do gas fields like Shaar, where disruption of lines lead to electricity shortages and power cuts in regime-controlled areas as far as Damascus.

We asked Robin Mills, a Dubai-based energy analyst and author of “The Myth of the Oil Crisis,” and Theodore Karasik, research director at Dubai-based think tank INEGMA, to weigh in on why oil fields have become so important to ISIS and how turning them into battlefields could disrupt energy production – as well as the jihadi group’s cash flow.

Q: What has been happening over the past period of time?

Robin Mills: The latest fighting is around Shaar, which is a gas field near Palmyra, further west. Reports are that the government has recaptured it, but ISIS says it has withdrawn or destroyed the field. It was a gas field, and there was nothing that ISIS could do with the gas itself unless it continues to sell to the government – [throughout the conflict], they have reportedly had deals with the Assad government, to sell them oil and gas.

Theodore Karasik: It should have been obvious to the SYRIAN government that energy fields were going to become a source of contention because of their value. These fields were probably under guard, but not in a robust nature that could take overwhelming force from groups like ISIS. They are trying to establish a state, and these types of revenues are important for the state’s formation because it makes up a significant chunk of their revenue. They can take over eastern SYRIA without oil revenue, but seizing these types of fields [like Shaar] are part of an ongoing plan to develop their own economic system.

$100 MILLION PER MONTH 

Q: How much does ISIS make from oil?

Karasik: Officials from the IRAQI oil industry have said that ISIS reaps $1 million per day in IRAQ in oil profits and that if they get the SYRIAN fields in [areas where they're advancing], the total would be $100 million per month for both IRAQ and SYRIA combined. They sell it for $30 a barrel because it’s a black market. It’s not pegged to international standards for oil prices, which are over $100 a barrel. The oil is bought through TURKEY from SYRIA, and it’s sold to black market traders who function throughout the Levant.

Mills: The $1 million a day figure is coming out of the IRAQI fields of which they have control. IRAQ and SYRIA together could reach up to $3 million a day, so they’re still getting more oil out of SYRIA [than IRAQ]. Production is at 10 percent of pre-war levels – they’re old, mature fields that need a lot of special technological work, and they’re not getting it, so production is falling very sharply. We’ve seen from reports that ISIS controls most of the oil fields in eastern SYRIA and Deir Ezzor, right up to the northeast, where some are under KURDISH control.

Source: ABC

ARGENTINA AND BEYOND: IS THERE AN EFFECTIVE GLOBAL SOLUTION FOR COUNTRY BANKRUPTCIES?

IF ARGENTINA WERE A BANKRUPT US CORPORATION, THERE WOULD BE NO VULTURES. 

The US should do better than having its legal system hijacked by extremely reckless financial operators. US bankruptcy courts regularly deal with all creditors and “cram down” the resolution on any holdouts. 

Hedge funds like Elliott Management are out for themselves. They are also deliberately playing with fire. ARGENTINA recently defaulted on its foreign bonds because a New York judge prevented ARGENTINA’S New York bank from transferring the June interest payment to its many bondholders around the world.

COUNTRY BANKRUPTCIES AND THE SHACKLES OF U.S. LAW

People tell different versions of this drama. In one version, the ARGENTINE government is a rogue debtor that can afford to pay, but is trying to avoid its responsibilities to legal bondholders who only want to collect what is owed them.

In another version, ARGENTINA, having recovered from its 2001 crisis, is trying to settle all its leftover debts in a way fair to its creditors, which is not good enough for the greedy speculators.

The drama should not be happening. Instead of the current to and fro — or rather Helter Skelter — there ought to be a sovereign parallel to national bankruptcy regimes. In that process it could be decided how much should be paid when and to which creditors.

WHAT’S GOOD FOR GENERAL MOTORS OUGHT TO BE GOOD FOR THE WORLD’S GOVERNMENTS

The purpose of the whole exercise? To get a fair, effective and durable resolution of sovereign debt crises that hurt everyone in the crisis countries.

There would also no longer be a potentially huge profit for uncooperative creditors, whether at the expense of an embattled government or at the expense of the majority of creditors who accept the reality of insolvency and the losses that entails all around.

In a rational world the point ought to be that the entity – here the ARGENTINE Republic — can successfully emerge from bankruptcy. What’s good for General Motors ought to be good for the world’s governments.

THE ARGENTINE DRAMA

The ARGENTINE story starts with a species of hedge fund known as “vultures.” They bought some of Argentina’s defaulted bonds and chose not to exchange them for new bonds that were offered in the settlement of ARGENTINA’S default.

Instead, they sought to collect the full face value of the bonds through the U.S. courts. Their probability of success was not high, until they managed to convince Judge Griesa, an elderly federal district judge in New York, of their unique interpretation of a standard phrase in the fine print of bond contracts, called “pari passu.”

As a result of this interpretation, the judge required the ARGENTINE government to pay the vultures the full value of the bonds they held plus accrued interest, said to total about $1.5 billion.

IRONICALLY, THE ONLY ATTACHABLE ARGENTINE ASSET WAS THE MONEY THE GOVERNMENT TRANSFERRED TO A NEW YORK BANK TO DISTRIBUTE TO ITS CURRENT BONDHOLDERS, TEMPORARILY PUTTING THOSE FUNDS WITHIN THE REACH OF U.S. LAW.

The judge told the bank not to follow ARGENTINA’S routine instruction to distribute the funds to the bondholders — unless ARGENTINA also agreed to top up the funds with money for the vultures.

ARGENTINA has instead offered to convert the speculators’ bonds to the same bonds that over 90% of ARGENTINA’S bondholders now hold. Those bonds have a much lower face value, but they have steadily paid interest, plus a bonus based on ARGENTINA’S economic growth rate.

UNEQUAL TREATMENT

With those terms, ARGENTINA’S minister of economy, Axel Kicillof, estimates the vultures would get a 300% profit on their investment. But vultures being vultures, Elliott Management wants more.

It would not be fair if the vultures win. It would also throw into doubt the permanence of other debt restructurings, as they could also be vulnerable to vulture attacks.

If ARGENTINA were a bankrupt U.S. corporation, there would be no vultures. The bankruptcy court would arrange a comprehensive workout with all the creditors and “cram down” the resolution on any recalcitrant holdouts.

It is not hard to conceive the outline of a comprehensive sovereign insolvency mechanism. It would have to be an informal but politically supported arrangement among governments, as the debtor would be a sovereign country.

Such an arrangement was agreed upon in the 1990s for a group of heavily indebted poor countries (HIPCs), mostly in AFRICA, who owed most of their debt to other governments and international institutions like the IMF and the World Bank, although they also owed money to private creditors.

The HIPC Initiative, led by staff of the Bank and the IMF, oversaw the relief given by all the creditors with the goal of returning the country to debt sustainability. All but 3 of the 39 countries deemed eligible have completed the debt relief process.

BAILED IN

In fact, the IMF recently had related discussions concerning how to finance middle-income countries when they try to overcome debt difficulties.

The IMF is considering whether bondholders might agree to postpone some payments, in essence to refinance the country’s obligations to these creditors, while the IMF also extends loans. If handled in that manner, the private creditors would be “bailed in” — instead of being bailed out by public creditors.

While the matter is far from resolved, it addresses what a bankruptcy judge faces in deciding what specially protected credits might be given to a firm while in bankruptcy.

While this mechanism does not address the actual workout from insolvency, it is a start to bring rationality, reason and principle to the process.

FENDING OFF VULTURES

But to end the vulture fund-inspired joy riding through the New York courts – or the British courts, another favorite venue for vultures – requires an internationally agreed debt workout process.

It would be a pity to leave it as it is now — a free-for-all, as each creditor group fights to get the biggest piece of whatever funds can be squeezed out of the debtor during and after its negotiation.

A system of principles and rules that an informal “judge” or “arbitrator” or “special master” would apply would be a great step forward.

The solution to be agreed to would give the government in question — and its people — a fresh start. And it would make sure that, as part of working their way out of their financial morass, they would not have to deal with vultures in national courts.

The United States can – and should – do better than having its legal system hijacked by some extremely reckless financial operators.

Hedge funds like Elliott Management are just out for themselves. They are also deliberately playing with fire.

By Barry Herman

FINANCE AND DEFENSE: THE NEW COLD WAR WILL BE FOUGHT WITH FINANCE

FIGHT AGAINST THE WEST’S FINANCIAL PRIMACY

RUSSIA and CHINA are working on a powerful weapon to stand up to the West. This isn’t a new rocket system or a cyber-espionage satellite — the two nations have launched a frontal attack on WESTERN financial might to achieve equal power on the markets. 

Until now, the two countries had been powerless against Western countries on this front. From the leading currency (dollar) and global monetary transactions of Visa and Mastercard to the all-powerful rating agencies, the financial markets tick entirely to Western time. Countering those markets is part and parcel of becoming political and military superpowers.

So RUSSIA and CHINA plan to change the status quo by forming their own rating agency. The two countries have signed an agreement to that effect. In a first step, the new institution will evaluate joint investment projects, RUSSIAN Finance Minister Anton Siluanov announced during a recent visit to CHINA. The agency will be built based on existing models.

“Our idea is for ratings to be completely apolitical,” a statement released by the Ministry of Finance read.

RUSSIA and CHINA have been jolted by the three big established AMERICAN credit rating agencies, Standard & Poor’s (S&P), Moody’s and Fitch, whose ratings currently dominate financial markets. The agencies rate credit worthiness of both states and companies. Their grades play a decisive role in determining the conditions under which money can be borrowed on the markets.

POLITICALLY MOTIVATED RATINGS 

Moscow recently discovered just how expensive a negative rating can be. The leading agencies S&P and Moody’s downgraded RUSSIA because of the Crimea crisis, and Fitch threatened to do the same. According to S&P, the country with the biggest surface in the world is rated just one grade above junk, and the situation isn’t much better with the other two agencies.

The bond market reacted strongly to the downgrades. Interest rates shot so far up that Moscow had to scrub plans to issue new government bonds. The downgrades also damaged the ruble and stocks on the Moscow exchange. After the S&P downgrade at the end of April, the Central Bank of RUSSIA was forced to intervene and hiked its key interest rate to stop the exodus of investors from the country.

Moscow has alluded to politically motivated ratings by the Western agencies, and now appears to be hitting back with this new cooperation with Beijing. Indeed, CHINA had also been dissatisfied with its treatment by the big Western rating agencies and had created its own agency, Dagong, which is now slated to be incorporated into the new RUSSO-CHINESE entity.

There is a marked difference between Western and Dagong credit ratings. Whereas Moody’s, Fitch & Co. give the UNITED STATES on average the top AAA grade, Dagong rates it A-, i.e. six grades lower.

DIFFERENT STANDARDS

RUSSIA and CHINA fare a great deal better with Dagong: Beijing gets AAA, and RUSSIA gets an A, which puts it two grades higher than the UNITED STATES. The Western agencies rate RUSSIA three grades below the U.S., and CHINA two grades below it.

Dagong bases its ratings more strongly on fundamental data such as debt ratio, where both CHINA and RUSSIA are in considerably better positions than the UNITED STATES. Measured against economic performance, Moscow’s liabilities don’t even add up to 13%. That’s as far as gross debt is concerned. If you include reserve assets from the sovereign wealth fund into which part of energy proceeds flow, then RUSSIA is debt-free. CHINA’S debt ratio is a good 20% as compared to the world’s largest economic power, where it’s over 100%.

But the U.S. has the leading currency and can print fresh dollars at any time to pay its debts. And the land of unlimited opportunity has a good credit history, whereas RUSSIA had its 1998 state bankruptcy. In addition, under RUSSIAN President Vladimir Putin capital flight from the country has increased considerably. In the first quarter of this year alone, the equivalent of $50 billion has left the country.

The Western credit rating agencies use entirely different criteria for their ratings than the CHINESE Dagong. The way Moody’s & Co. operate has also caused irritation in EUROPE, and the Old Continent wanted to create its own agency too. But so far nothing has come of the plan.

OTHER WEAPONS

Building a new rating agency is one thing, but acceptance on the part of the major economic players is another. As long as the finance world hangs on the every word of the three leading Western agencies, any competition will have a hard time of it. Dagong has yet to get a foot in the door — and that’s something that both RUSSIA and CHINA clearly want to change.

Creating their own rating agency is just another step of the two powers in the fight against the West’s financial primacy. The two countries announced other measures in recent weeks.

One of these is the creation of their own development bank to compete with the International Monetary Fund (IMF) whose power structure still reflects the Western post-war world and in which developing countries have little say.

FINANCIAL DRONE STRIKE - US FINANCIAL WAR

ECONOMIC PEARL HARBOR - THE UNITED STATES IS NO STRANGER TO WAGING FINANCIAL WARFARE............

.......observes David Katz. What’s different now, however, is its unique position within global financial markets. (which ARGENTINA is not part of)  It’s enabling Washington to project power in cutting edge ways.

By David J. Katz for Strategic Studies Institute of the US Army War College (SSI)

Imagine warfare waged in financial cyberspace: electronic, remote, fought in hypervelocity with millions of engagements per second, and with nations forced to construct redundant systems, sacrificing billions in economic efficiency for survival capacity. Financial warfare strikes can blockade vital industries; delink countries from the global marketplace; bankrupt sovereign economies in the space of a few days, and cause mass exoduses, starvation, riots, and regime change.

FINANCIAL WARFARE CAN SUPPORT US POLICY OBJECTIVES BY ATTACKING REGIME ELITES, COLLAPSING TRADE, DRAINING FOREIGN CURRENCY RESERVES, DECREASING ECONOMIC PRODUCTION, SPIKING INFLATION, DRIVING UNEMPLOYMENT, INCREASING SOCIAL AND LABOR UNREST AND ACCELERATING POPULATION MIGRATION. (ARGENTINA - A CURRENT EXAMPLE) 

Financial warfare can assist the warfighter by halting an enemy’s capability to produce and distribute war materials, fund training, operations, or proxies. Financial warfare can amplify and accelerate the damage inflicted by economic warfare. Financial warfare spoofing operations can assist intelligence collection by isolating and mapping crisis response patterns of individual adversaries, organizations, nations, and regime elites.

Background Information: 

ANGLO SAXON MONETARY QUEST
http://geopoliticsrst.blogspot.com/2011/10/food-for-thought_24.html

BANKING INSTITUTIONS ARE MORE DANGEROUS THAN STANDING ARMIES
http://geopoliticsrst.blogspot.com/2011/10/banking-institutions-are-more-dangerous.html

The aim of financial warfare is, quite literally, to disarm opponents by reducing their ability to finance production or distribution, complete transactions, or manage the consequences of a transaction failure. If precisely employed, financial warfare can reduce a targeted society’s will and cohesion by forcing upon it, in stark terms, the daily necessity to choose between “guns” or “butter.” This dilemma highlights and magnifies the real, immediate, and personal consequences of resource allocation. Deployed within an indigenous society’s political framework, financial warfare can deepen the divide between rival constituencies, reducing societal cohesion and inciting civil unrest.

FINANCIAL WARFARE IS NOT A NEW CONCEPT

While many individual policy actions had financial aspects, perhaps the first pure financial warfare campaign in UNITED STATES history occurred in the Eisenhower administration. It was prompted by the SOVIET invasion and suppression of the HUNGARY Revolution on 4 November 1956 and sparked by the seizure of the Suez canal by NATO allies, BRITAIN and FRANCE, in Operation Musketeer on 5 November.

President Dwight Eisenhower determined he could not effectively oppose SOVIET military intervention in HUNGARY, while allowing EUROPEAN military intervention in EGYPT. Diplomacy had not convinced the BRITISH or the FRENCH to withdraw. The UNITED STATES was hesitant to intervene with military force against NATO allies. As an alternative, Eisenhower employed financial warfare. 

With just three offensive strikes, the UNITED STATES achieved its immediate policy aims of forcing BRITAIN and then FRANCE to withdraw from the Suez Canal. 

The three financial warfare strikes were: 

(1) blocking the International Monetary Fund (IMF) from providing Britain with $561 million in standby credit;

(2) blocking the US Export-Import Bank from extending $600 million in credit to BRITAIN; and 

(3) threatening to dump AMERICA’S holdings of pound-sterling bonds unless Great BRITAIN withdrew from the Suez.

The credit blockade froze BRITAIN’S ability to borrow and forced it back onto its negative cash flow, effectively bankrupting it. The pound-sterling threat significantly raised the perceived risk of dealing in BRITISH currency. That threat, if executed, would have directly affected BRITISH ability to trade internationally.

By 1956, BRITAIN was grossly overleveraged and dependent on further international borrowing to maintain its standard of living. 

BRITAIN HAD BORROWED EXTENSIVELY FROM COMMONWEALTH MEMBERS AND BY 1945 OWED ROUGHLY £14 BILLION, CHIEFLY TO INDIA, ARGENTINA, AND EGYPT

The UNITED STATES owned $3.75 billion in BRITISH debt as a result of the ANGLO-AMERICAN Loan Agreement of 1945, while the entire foreign currency reserve of BRITAIN in October 1956 was equivalent to $2.2 billion. To finance its WW II efforts, BRITAIN had borrowed extensively from Commonwealth members and by 1945 owed roughly £14 billion, chiefly to INDIA, ARGENTINA, and EGYPT. Unable to repay in full, BRITAIN froze the principal balances in these accounts.

The sell-off of US-held pound-sterling bonds, if executed, would have been catastrophic. The resulting increase of BRITISH currency in circulation would have deflated the value of the pound-sterling. This deflation would, in turn, have required BRITAIN to drain its foreign currency reserves to buy pound-sterling bonds to maintain its currency’s parity against the US dollar. If it broke parity, and allowed the devaluation of its currency, BRITAIN would not have the purchasing power or the foreign reserves to cover its food and energy imports. Additionally, Commonwealth account holders would probably have withheld further credit until all prior debts were settled. Without credit, BRITAIN would have faced a prolonged liquidity crisis and insolvency.

In his response to the Suez Crisis, Eisenhower waged a modern financial warfare campaign. Without credit-fueled deficit spending, BRITAIN could not import needed oil and food. It would also have destroyed BRITAIN’S trade and its ability to form capital through trade surpluses, and collapse its ability to import goods at a deficit to maintain its standard of living. These financial strikes operated beyond US legal jurisdiction and where informal US influence had failed. Eisenhower’s actions were outside conventional or irregular war. Financial warfare thus supplanted traditional warfare in countering the BRITISH and FRENCH seizure of the Suez Canal.

This Suez Crisis example illustrates the importance of understanding the offensive capabilities and defensive necessities of financial warfare. The UNITED STATES successfully waged financial warfare against the third most powerful nation on the planet at that time; it is likely the UNITED STATES will be targeted by financial warfare in the future.

WHAT IS FINANCIAL WARFARE?

Historically, financial depredation has been at best a subsidiary effect of economic warfare. That has changed. With the emergence of integrated global financial markets, financial warfare has become a viable, distinct, and independent means of projecting power. As Yale Professor Paul Bracken explained: “The economic system deals with the hard and soft outputs of the economy–that is, goods and services. The financial system deals with money and credit.” 

Background Information: 

GOLDMAN  - SACHS AND  EUROPE'S INSIDE JOB 
http://geopoliticsrst.blogspot.com/2011/11/goldman-sachs-and-europes-inside-job.html

Accordingly, economic warfare is circumscribed to attacks on the enemy’s ability to produce and distribute goods and services; financial warfare is confined to attacks on the credit and monetary foundations that underlie production and distribution. Financial warfare is a potent means of power projection because precluding a nation's ability to price and to exchange; to form capital and manage risk; causes production and distribution to cease. Without production and distribution, the economy grinds to a halt and the adversary is dis-armed. 

FINANCIAL WARFARE THUS USES MONEY AND CREDIT TO ATTACK (DEFEND) AN OPPONENT (OR A FRIEND).

In practice, financial warfare identifies systemic areas of opacity, agency and asymmetry in information, risk and reward; focuses on those areas with a high relative degree of centralization and leverage; and determines the ranges of integration and diversification that offer the greatest susceptibility to contagion and cascade failure. Offensive financial warfare seeks to engineer outcomes from altering adversary capabilities to creating “Black Swans,” which are large-scale events of massive consequence that occur far from the means of statistical distributions (fat-tailed events) and accordingly are unpredictable and irregular. Defensive financial warfare seeks to decentralize; de-lever; reduce opacity, asymmetry, and skewness; or construct extra capacity, strength, and layers of redundancy to negative outcomes. 

The intent of financial warfare is to extend the strategic and tactical engagement of the enemy from the kinetic battle space to the financial marketplace. 

It engages an opponent’s financial structure, or operations, by using the three principal functions of finance: 

capital formation, capital liquidity, and risk-management:

• Capital formation is the accumulation of real capital surpluses through public and private savings and borrowings to create or expand future economic activity.

• Capital liquidity is the transaction of capital assets at volume, rapidly without loss of value, between buyers and sellers and among its forms, e.g., commodities to currencies, dollars to yen, stocks to bonds, etc.

• Risk management is the process of optimizing exposure to financial volatility.

Financial warfare engagements occur at both the tactical and strategic levels. Tactical wins, losses, and draws must be used coherently to advance strategy. In financial warfare, there is an added dimension best articulated through the concept of micro and macro. A micro financial engagement is the singular use of one functional avenue, capital liquid-ity, capital formation, or risk management, to affect a single transaction. Macro financial engagements typically occur at system integration points between an adversary and the global, bilateral, or multilateral markets. For example, terminating Protection and Indemnity (P&I) insurance for one ship precludes its use for hauling third party cargo internationally. This is a micro risk-management engagement. Removing an entire country’s P&I insurance uses a macro risk-management engagement to shut down a nation’s international, commercial maritime cargo industry. The difference lies in whether the exploitation of vulnerabilities is individual or systemic, and whether the exploitation occurs within a system or at the interface between systems.

If global finance is an inescapable component of global trade, then its corollary—global financial warfare—is equally inescapable. Every country involved in the global markets has, by necessity, harmonized in some degree at both the micro and macro levels with global financial standards and structures. These harmonized international standards are vital to the proficient and efficient functioning of global trade, which, in turn, is crucial to most national economies. The flipside of that coin is that these harmonized standards offer avenues of approach to wage financial war.

WAGING FINANCIAL WAR

The recent and enormous growth of global financial markets illustrates the reach of purely financial actions. For example, the average daily turnover in the foreign currency exchange markets (Forex) is over $4 trillion. As such, the Forex daily turnover is greater than the annual domestic product of 215 of the world’s 220 countries. Financial warfare’s capabilities and impact will only increase as global financial markets grow. With its high-speed, complex interconnectivity, and the volume of capital moving daily, warfare in the financial marketplace possesses the capability to operate separately from and at speeds far beyond economic, conventional, or irregular warfare.

Background Information: 

ONE HAND FEEDS THE OTHER
http://geopoliticsrst.blogspot.com/2011/10/inside-job-rating-agencies.html

RATING AGENCIES A CONFLICT OF INTERESTS
http://geopoliticsrst.blogspot.com/2011/06/financial-monopoly-game-part-1.html

GLOBAL SOCIETY GAMBLERS - THE PARIS CLUB AND THE IMF - TWO INSTITUTIONS ONE PURPOSE 
http://geopoliticsrst.blogspot.com/2011/07/global-financial-monopoly-game-part-2.html

MONEY MAKES THE WORLD GO ROUND …… AND POLITICS
http://geopoliticsrst.blogspot.com/2011/07/money-makes-world-go-round-and-politics.html

THIS IS A CURRENCY WAR AND THE EUROZONE IS ON THE WAY TO LOSE IT.
http://geopoliticsrst.blogspot.com/2012/01/this-is-currency-war-and-eurozone-is-on.html

The UNITED STATES possesses a discrete and immense capacity for financial warfare. As the provider and guarantor of the world’s reserve currency, the UNITED STATES occupies a unique position in global financial markets. The reach of US currency is global. The Federal Reserve estimated that 60 percent of total US currency in circulation, roughly $450 billion, is held outside the UNITED STATES. Accordingly, the UNITED STATES is the preeminent market for raising as well as investing capital. By 2010, foreign borrowers had $2.1 trillion in debt outstanding from US sources. In the period 2003 to 2007, 55 percent of all highly rated US securities, treasuries, agencies, and AAA-rated private debt issued, $4.5 trillion, were purchased by foreign entities.

From a policy perspective, financial warfare makes sense because it makes policy options available through finance that were previously obtainable solely through armed force; for example, these options could include ending effective and efficient SAUDI financial support to inter-national jihad; reducing IRANIAN defensive capability; and constraining CHINESE economic penetration into AFRICA.

NEW BATTLE-SPACE - INFORMATIONAL, CYBER, ECONOMIC, AND FINANCIAL ACTIONS

For uniformed military leaders, preparation of the battlespace now includes informational, cyber, economic, and financial actions. War plans can and should substitute financial-based risk for manpower-based risk when more efficient or effective. For example, uniformed military leaders may consider the use of structured analytics like Critical Factors Analysis (CFA) to identify the centers of an adversary’s defensive capabilities and target them as well as supporting components of the adversary’s military-industrial base with financial strikes prior to air-strikes. The warfighter now has the choice whether to bankrupt, bomb, or both. 

Lastly, commanders in Unconventional Warfare (UW) and Stability Operations (SO) wield enormous financial clout within their area of operations. They must use financial warfare to erode adversary capacity, build capacity of adversary competitors, and ensure that benefits of association with the UNITED STATES only flow to indigenous parties who actively share risk, comparable in intensity and duration, with the UNITED STATES. To neglect the use of some US capabilities in execution of policy is to overuse, rely on, and risk other capabilities.

If the intent of financial warfare is to extend the battlespace into the financial marketplace, then the operational question becomes how to do it? The answer is through macro and micro engagements or strikes across the three principal areas of finance initially targeting the interface between the adversary and the global marketplace.

CAPITAL FORMATION STRIKES

Inflating or deflating an adversary’s currency, or any medium used to store real capital surpluses, is one way to conduct a capital formation strike. A prior requirement for successfully attacking an adversary’s capital formation capability is to map how he moves capital and where he aggregates it. This mapping provides, in both broad manner and at a precise point, the adversary’s current financial capacity for funding military, paramilitary, or proxy operations, as well as providing significant intelligence on their war-sustainment capability. Feints and spoofing operations can provide insight on how and where an adversary forms capital normally and under duress, as well as uncovering potential targets.

Capital formation strikes encompass the physical, cyber, and informational. Physical strikes can range from general to selective attacks against the telecommunications infrastructure which facilitate financial information flow. For example, interdicting the automated teller machine (ATM) communications system could preclude interbranch and interbank retail capital formation. Capital formation strikes can target and de-legitimize the investment sponsor, the investment, or those channels used to evaluate, price, transact, and own it. Strikes directed against a channel itself can be used to deter, retard, or preclude the use of that channel by the investment or its sponsor.

CAPITAL LIQUIDITY STRIKES

Capital market liquidity, for example, is systematic aggregation of capital transactions which are the individual exchange of capital and financial assets between buyers and sellers at volume, rapidly, without loss of value, and among its forms, e.g., commodities, currencies, equity, debt, etc. Deconstructing or reversing the historic arc of capital market liquidity’s upward progress is a blueprint for systematically waging financial warfare utilizing capital liquidity strikes. The intent of capital market liquidity strikes, in aggregate, is to target markets and disrupt their drivers of upward efficiencies, speed, volume, and scale, to create a downward spiral of inefficiencies driving markets to a measurable policy objective or collapse. The separation between macro and micro in capital liquidity strikes mirrors that of capital formation. Macro capital liquidity strikes target markets. Micro capital liquidity strikes target individual transactions.

Micro capital liquidity strikes directed at a specific transaction can include: precluding a buyer from meeting a seller; interfering with or spoofing that transaction’s price; preventing title transfer; breaching legitimate market behaviors, or introducing unwarranted regulatory requirements into a specific transaction. Macro capital liquidity strikes can target market capabilities such as transaction speed. Transaction speed is limited by the speed at which information flows through market channels. Reduce channel speed and transaction speed will accordingly reduce. Reduce transaction speed and market throughput will reduce. Likewise, market consistency, transparency and uniformity can be targeted through discrete strikes reducing channel speeds only for specific buyers. When the bid ask spreads are small, discrete channel speed reductions may preclude specified buyers and sellers from transacting within a timeframe available to other market participants. The targeted buyer loses the transaction to other, faster buyers. Eventually, targeted buyers exit, eroding trust in the market’s fairness. Trust underlies every market. Erode trust and participants will exit. The competitive margins between markets are typically thin. Affect those margins and disadvantaged participants will exit to seek other, more consistent, transparent, and uniform markets. Additionally, spoofing market participants or deliberately implanting misinformation can attack market transparency, consistency, and the uniform diffusion of data.

RISK MANAGEMENT STRIKES

Risk management is the process of optimizing exposure to financial volatility. Providers or facilitators of risk management include insurance companies, audit and accounting firms, rating agencies and credit bureaus, and underwriters of collateral, warranties, and hedges. Removal or reduction of an adversary’s financial risk management activities can constrain its ability to project power at the granular level (micro) or comprehensively at a systemic level (macro). Eroding or interdicting specific financial risk management mechanisms among adversaries and their commercial enablers can delay or preclude their ability to produce and distribute war materials, project power internationally, support foreign operations or favorably prepare their battlespace through commercial means.

For example, IRAN’S crude oil sales accounts for 80 percent of IRAN’S hard currency reserves and for 50 percent of its national budget. IRAN’S continued ability to ship oil, a strategic commodity, to ASIA gives it significant economic and diplomatic leverage as well as the financial means to support military operations. However, IRAN’S ability to ship crude, and for that matter to maintain shipping overall, is dependent upon maritime insurance. Without 3rd party Protection and Indemnity (P&I) insurance, ships cannot enter most international commercial ports. On February 18, 2011, “IRAN’S biggest crude oil tanker operator NITC said on Friday its ship insurers had declined to renew policy cover for the coming year due to the impact of tightening sanctions in the EUROPEAN UNION.” The ability to disaggregate IRAN from the global oil market by using a simple risk-management mechanism, in this case P&I insurance, illustrates the leverage financial warfare offers.

International maritime P&I insurance requirements illustrate an interesting and under-appreciated aspect of financial risk management strikes. Financial risk management strikes can utilize established international regulatory schemas to attack adversary financial systems, components, or assets. Lacking P&I insurance, adversary commercial shipping fleets are precluded from many international ports. Insurance and credit problems can also attack the international operations of an adversary’s commercial airline industry. Macro risk management strikes can utilize existing safety codes or operating rules to discover fraudulent behaviors or uncover systemic violations of international commerce standards by an adversary or their commercial enablers. Weaponizing and exploiting international commerce schemas can result in delinking entire industries from global trade. For example, increasing ramp inspections or targeting operating audits at adversary commercial enablers could discover violations of safety standards. Many international commercial systems, maritime, aviation, postal, etc. require and enforce safety and behavior standards, particularly where fraudulent behaviors can collapse the system. International commerce rule schemas can legitimately be used to limit or bankrupt an adversary’s commercial enablers.

Lastly, on a cautionary note, just as the UNITED STATES used financial warfare to alter British policy in the Suez, financial warfare may be used against the UNITED STATES in the future. AMERICAN vulnerability to financial strikes includes interruptions to highly centralized capital formation chokepoints like the Fedwire Funds Service and the Clearing House Interbank Payment System (CHIPS) which account for more than 858,000 daily interbank transactions totaling $973 trillion annually. Levered derivative US financial products introduce vulnerabilities when risk is opaque and agency problems exist, as illustrated by the role Credit Default Swaps (CDS) played in the 2008 Mortgage Backed Security (MBS) collapse. The result was bankruptcy and liquidation of major securities as insurance firms induced federal intervention to subsidize failed corporations. Ironically, the whole financial system became less robust rather than more robust. Lastly, deficit fueled (levered) federal spending increases vulnerability to financial strikes across the board by reducing capacity for managing negative outcomes such as errors in forecasting future revenues, constraining current policy due to undercapitalized past actions, and may incent actions such as nationalization of pension assets, forced loans to the government, or currency devaluations.

Financial warfare is a new means of power projection that offers the UNITED STATES significant capabilities in addition to its traditional repertoire. Financial warfare can support US policy objectives by directly attacking an adversary’s sovereign financial structures, individual regime elites, or commercial industries and enablers. Financial warfare spoofing operations can assist intelligence collection through isolating, illustrating, and mapping adversary crisis response patterns. Employing financial warfare strikes within an indigenous society’s political frame-work can provide leverage assisting the warfighter by reducing the enemy’s capability to fund training, operations, or proxies. Lastly, with significant budget deficits and mounting national debt, the United States is highly susceptible to, and must consider study and defensive application of, financial warfare.

DID ARGENTINA DEFAULT OR NOT? IT’S MORE THAN SEMANTICS

Default is Now Spelled # GrieFault 

THE GRIEFAULT 

(Read also soon to be published article: ARE THE USA WAGING A FINANCIAL WAR? on this Blog)

• THEY WOULD HAVE TO INVENT A NEW WORD : "SELECTIVE DEFAULT"
• THERE IS NO DEFAULT; WHAT THIS IS, IS AN ABSOLUTELY UNPRECEDENTED LEGAL SITUATION
• POLLACK: IMPARTIAL OR PAWN OF FINANCIAL INSTITUTIONS ?
• GRIESA DOES NOT HAVE THE AUTHORITY TO KEEP ARGENTINA FROM PAYING ITS DEBTS TO THIRD PARTIES NOT INVOLVED IN THE TRIAL
• CREDIT RATING AGENCIES ARE EAGER TO PAVE THE WAY FOR THE VULTURE FUNDS TO DO BUSINESS, BECAUSE OF THE PAYMENT OF DEFAULT INSURANCE
• FINANCIAL WARFARE
• VULTURE FUNDS: ILLEGALLY INVOLVED IN THE LATEST INTERNATIONAL FINANCIAL CRISIS [WHICH BROKE OUT IN 2008] 

ARGENTINA’S supposed “default”, an unprecedented case in the history of world capitalism, sets a legal, political and financial precedent that indicates the need for concrete measures regarding the fine line between legal, ethical business activities and criminal usury.

In the debate, the orthodox financial sectors say ARGENTINA’S failure to comply with U.S. Judge Thomas Griesa’s ruling means it has once again defaulted, while others argue that it has actually honoured its commitments and made its payments, and the fact that the funds have not reached the creditors is not the government’s fault.

THEY WOULD HAVE TO INVENT A NEW WORD : "SELECTIVE DEFAULT"

“Preventing someone from paying is not default,” said President Cristina Fernández in a Jul. 31 nationally televised address, after a meeting with the so-called vulture funds – opportunistic investors who purchase the debt of heavily indebted countries at pennies to the dollar and then vigorously pursue full repayment in court – which failed to come up with a solution to the conflict.

“Now they invented a new term: ‘selective default’. It doesn't exist. Preventing someone from taking our payments is not default. I told them they would have to invent a new word,” she said with irony.

At a Jul. 30 meeting in New York with ARGENTINE officials, the mediator named by the U.S. court, Daniel Pollack, rejected ARGENTINA’S offer to restructure the debt in the hands of “holdout” creditors – those who did not agree to the 2005 or 2010 debt swaps.

Since ARGENTINA defaulted on nearly 100 billion dollars in debt in late 2001, during the worst economic crisis in the country’s history, 92.4 percent of the bonds have been restructured at a deep discount, with lower interest rates and at longer terms.

THERE IS NO DEFAULT; WHAT THIS IS, IS AN ABSOLUTELY UNPRECEDENTED LEGAL SITUATION

But a group of hedge funds that refused to participate in the two debt restructurings sued for full payment of 1.3 billion dollars in ARGENTINE bonds in federal court in New York.

The offer made by ARGENTINA in the Jul. 30 negotiations was for the holdouts to restructure their debt in conditions similar to those accepted earlier by the vast majority of creditors – under late president Néstor Kirchner (2003-2007) in 2005, and under his successor and widow Fernández in 2010. Jul. 30 was the deadline to pay 539 million dollars in interest due on the discount bonds.

The Fernández administration had deposited the funds with the bond trustee, the Bank of New York Mellon (BoNY Mellon). But Judge Griesa blocked the payments to the bondholders because the ARGENTINE government ignored his order to also pay the hedge funds.

POLLACK: IMPARTIAL OR PAWN OF FINANCIAL INSTITUTIONS ?

”Unfortunately, no agreement was reached and the Republic of ARGENTINA will imminently be in default,” Pollack said after the meeting in New York. “Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people.”

In an Aug. 1 court hearing, ARGENTINA’S representatives unsuccessfully demanded that Pollack be removed as mediator, because of his remarks.

Some credit rating agencies lowered the rating on ARGENTINA’S foreign currency bonds to “selective default”, while the judge avoided using that term in the Aug. 1 hearing but said it was clear that there had been no payments.

ARGENTINE Economy Minister Axel Kicillof said “ARGENTINA is not in default, because it has already paid. The bondholders did not pick up their payments because of a ban put in place by Judge Griesa.

“They talk about technical default, selective default — some have called it Griesa default, Griefault. No one knows what to call it because it is new, because it doesn’t exist, because no one would have thought that a judge could come along, and say – after the payment – ‘I’m going to order the banks to not meet their contracts.’ ”

Alejandro Drucaroff, a lawyer who specialises in banks and finance, pointed out that the debt swaps accepted by the vast majority of creditors “involved major discounts of capital and interest and very long terms for repayment.” But he also stressed that ARGENTINA has punctually met all of its payments.

Some of the holdouts – the 7.6 percent of the creditors, who refused to accept the swaps that offered about 35 cents on the dollar – sold their bonds to hedge funds, two of which later sued in federal court in New York for full payment of 1.3 billion dollars in bonds, roughly one percent of the total debt.

The vulture funds acquired the bonds in 2008 at 20 to 30 percent of their nominal value.

In 2012 Judge Griesa ordered ARGENTINA to pay the bonds at full-face value, plus interest and fees – some 1.5 billion dollars.

On Jun. 16, the U.S. Supreme Court rejected an appeal by the ARGENTINE government, thus upholding the earlier ruling, which banned ARGENTINA from making payments on the restructured debt unless it also paid the holdouts.

GRIESA DOES NOT HAVE THE AUTHORITY TO KEEP ARGENTINA FROM PAYING ITS DEBTS TO THIRD PARTIES NOT INVOLVED IN THE TRIAL

“That ban, which has no legal basis and goes beyond the judge’s legal authority, has no practical effect because ARGENTINA met its payments anyway,” Drucaroff said.

But after BoNY Mellon was “warned” by Griesa that transferring the money to bondholders would violate his ruling, the bank held on to the funds.

“Griesa does not have the authority to keep ARGENTINA from paying its debts to third parties not involved in the trial. Nor does he have authority over funds that aren’t from the U.S. – he can’t embargo them,” Drucaroff argued.

“There is no default; what this is, is an absolutely unprecedented legal situation,” the lawyer added.

“BoNY should be held accountable by the 92.4 percent of creditors and by ARGENTINA for failing to comply with its function,” he said. “It could argue that it acted the way it did because it could be found guilty of contempt of court as a result of Griesa’s ruling – and in my opinion, in that case Griesa would also be responsible for preventing the money from reaching the creditors.”

CREDIT RATING AGENCIES ARE EAGER TO PAVE THE WAY FOR THE VULTURE FUNDS TO DO BUSINESS, BECAUSE OF THE PAYMENT OF DEFAULT INSURANCE

According to University of Buenos Aires economist Fernanda Vallejos, the wording in the contracts makes it clear that a default would only occur “if ARGENTINA didn’t pay.”

“However, the country not only has the will and the capacity to pay, but it has already paid and will continue to do so,” she added.

That, in her view, is independent of the credit rating agencies, “which in their eagerness to pave the way for the vulture funds to do business, because of the payment of default insurance, invent terms like ‘selective default’, which have nothing to do with reality or with ARGENTINA’S financial solvency.”

The problem, the ARGENTINE government says, are not the 1.5 billion dollars that the judge and the plaintiff are demanding payment of, but the fact that the debt would skyrocket if the bondholders that accepted a discount sued for repayment at full value as well.

The government said the debt could climb as high as 500 billion dollars in that case, which would throw the country back into a crisis similar to the one that triggered the 2001 default in the first place.

Political analyst Alejandro Horowicz said: “A plunge in our foreign reserves of that magnitude would not only affect international trade but would make the fixed exchange rate impossible to control and hence the rest of the reserves would face the same fate and would end up fleeing in a vain attempt to curb the stampede in the price of the dollar.”

FINANCIAL WARFARE

Vallejo warned that the U.S. court ruling discouraged any process of debt restructuring by favouring “a small minority who represent the most savage face of international financial capital.”

“Who would accept a restructuring like ARGENTINA’S if by bringing legal action in the courts of any country you can get that level of returns and repayment at full face value?” she asked.

The economist said an international regulatory framework is needed “that would preserve debt restructuring processes and put limits on the complete deregulation of the financial markets which trod roughshod over states and subjugate people.”

VULTURE FUNDS: ILLEGALLY INVOLVED IN THE LATEST INTERNATIONAL FINANCIAL CRISIS [WHICH BROKE OUT IN 2008] 

Vulture funds are already under scrutiny from governments and international bodies, among which there is a growing consensus that they should be reined in.

Nearly all of them “were involved in the latest international financial crisis [which broke out in 2008] by means of a range of speculative maneuvers that in many cases were actually illegal,” Drucaroff said.

“In theory a large part of the ‘formal’ financial system rejects them and sees them as running counter to business ‘ethics’. But no concrete step has been taken to curtail their activities which, to a large extent, are carried out through tax havens,” he said.

An area in which the question of whether ARGENTINA defaulted or not is just one tip of the iceberg.

Analysis by Fabiana Frayssinet

Edited by Estrella Gutiérrez/Translated by Stephanie Wildes

Griesa is defaulting, not Argentina.

Debt ruling shows a callous disregard to the effects on Argentina

By Eileen Appelbaum (The New York Times) - There is no way to construe as fair the United States court ruling that Argentina cannot pay 93% of its creditors, unless it first pays a small group of hedge funds. It's not fair to the 93% of bondholders who negotiated a restructuring of Argentina’s debt in 2005 and 2010 with reduced payments.

“It's not fair to the government of Argentina, which cannot pay the vulture funds without facing demands from other creditors to be paid in full”

What gives Judge Thomas Griesa the right to take them hostage in order to force payment to the “vulture funds” that still demand full payment?

Only the hedge funds will benefit, while the Argentine people and struggling countries, who will work out the debt in the future, will suffer.

It's not fair to the government of Argentina, which cannot pay the vulture funds without facing demands from other creditors to be paid in full, a move which would open the country up to many billions of dollars of claims that it cannot possibly pay. Although the news media reports that Argentina has defaulted to the restructured bondholders, this is not clear. The government did make the latest 539 million payment to these bondholders, but Judge Griesa is not allowing the New York bank that received this money to pay the bondholders. Griesa is defaulting, not Argentina. This is unprecedented and wrong.

It's not fair to the people of Argentina, who suffered through a depression from 1998-2002, and could only begin to restore employment and reduce poverty after defaulting on the debt. Not to mention that much of the debt was accumulated by a dictatorship that the people did not even elect.

Lastly, it is not fair to the tens and possibly hundreds of millions of people in countries who will face sovereign debt crises in the future. In these situations, a debt restructuring may be the only way forward, since there is no mechanism for bankruptcy for governments who cannot pay. The court’s ruling will make it more difficult to resolve these problems, since even one bondholder or vulture fund will be able to torpedo such an agreement.

Questions have been raised about whether Judge Griesa understood the dimensions of his rulings. But the case also raises questions about the politicization of the U.S. judicial system, in this unprecedented decision to force a default to creditors by a sovereign government that has both the intent and ability to pay. Griesa may be an outlier, but how did the U.S. Supreme Court decline to review a decision based on bad law, bad economics — violating basic legal principles of equity, with such important consequences?

Eileen Appelbaum is a senior economist at the Center for Economic and Policy Research and a visiting professor at the University of Leicester in the United Kingdom.
 

Argentina: This default is not a drastic change. Nothing much will change.....

.....Due, or thanks to lack of access to 

international borrowing markets after 

the country’s 2001 financial crisis 

“Argentina has been living in a default reality for over 10 years,” said Estanislao Malic, an economist at the Center for Economic and Social Studies of Scalabrini Ortiz in Buenos Aires, referring to a lack of access to international borrowing markets after the country’s 2001 financial crisis. “This default is not a drastic change. Nothing much will change.”

It is not clear whether Elliott expected Argentina to meet its demands by now. The firm managed to obtain payments from Peru and Congo-Brazzaville in somewhat similar cases. Elliott’s supporters assert that the bets that rely on suing governments and state-owned entities make up only a small proportion of its portfolio, and they add that the firm does not pursue countries that are clearly unable to pay their debts. Argentina, they say, is a particularly recalcitrant debtor that clearly has the wherewithal to pay the holdouts.

Mr. Singer, however, thinks that there are broader reasons to protect creditor rights. In particular, he has argued, doing so will help bolster a country’s economy. “Imagine how much capital a country like Argentina might attract,” Mr. Singer wrote in a 2005 article with Jay Newman, another Elliott employee. “If instead of defaulting seriatim and affecting a pose of anger toward creditors, it borrowed responsibly and honored its obligations.”

The big question, however, is whether Argentina will ever pay Elliott what it wants. If the firm fails to collect, that would underscore the limits of its legal strategy. There is no international bankruptcy court for sovereign debt that can help resolve the matter. 

Argentina may use the next few months to try to devise ways to evade the New York court. Debt market experts, however, do not see how any such schemes could avoid using global firms that would not want to fall afoul of Judge Griesa’s ruling.

But some debt market experts say that credit market idealists are going too far when applying their worldview to sovereign bond markets. In dire economic crises, they say, countries need to be able to slash their debt loads. The legal victories of the holdouts may embolden creditors to drive harder bargains after future defaults, these people say.

Professor Stiglitz says that this could prolong or postpone debt restructurings and extend the economic misery of over-indebted countries. “Singer and Elliott have already done a lot of damage,” he said.

Argentine case

“Debt restructuring” and the Argentine case by Joseph Stiglitz

The following piece published in The New York Times was written by Joseph E. Stiglitz, winner of the Nobel Prize in Economics and a former chief economist of the World Bank, and currently a professor at Columbia University.

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“The vultures have invoked the rule of law but we should be clear: This is about greed”, says the Nobel Prize

“The vulture funds — the small number of creditors who held out from Argentina's earlier debt restructuring -- had no interest in the country or its people. They picked up their bonds on the cheap, in hopes that by spending enough on litigation, they would eventually find a sympathetic judge who did not understand what was at issue and rule in their favor.

”All investors in sovereign bonds know that there is a risk of default — that's why the bonds can pay a far higher interest rate than U.S. bonds. But anyone buying bonds after a country announces a debt restructuring knows with virtual certainty that they will not be repaid in full without manipulating the legal system.

“The growing complexity of the market makes it harder for developing nations to free themselves of debt, increasing inequality worldwide.

”The vultures have invoked the rule of law but we should be clear: This is about greed. By arguing for an interpretation of the legal principle that all investors be treated the same — totally at odds from that which is traditionally ascribed to it by both economists and market participants — they have undermined the rule of law, and made debt restructuring almost impossible.

”Such restructurings are necessary for the market economy to work. But unfortunately, while we have a system to deal with private bankruptcy, we have no system for sovereign debt restructuring.

The International Monetary Fund proposed that we should have such a global system at the time of Argentina's default in 2001, and the United Nations Commission of Experts, of which I was the chairman, reiterated the call for such a system in 2009. The U.S. government vetoed the initiative. And now, the U.S. courts have made the problems far worse.

In the 1980s, when sovereign debts were mainly held by banks, restructurings could be done relatively smoothly. But with the growth of capital markets, these matters have become more difficult, as we have repeatedly witnessed. And with the growth of credit-default swaps and derivatives, they have become still worse.

The vultures may not even have an economic interest in a successful outcome. They could have insured themselves against a default; they could even make more money in the event of a default than without a default.

Avoiding default, by transferring money from Argentina — where the per capita income is around 14,800 dollars — to some billionaires will just create more inequality. But this is not just a question of fairness. The vultures have imposed enormous harm on global sovereign debt markets and on those countries whose well-being depends on them, especially in the emerging markets and developing countries.

This is not a zero sum game; it is a negative sum game, where the losses to the rest of the world will, in any case, far exceed whatever gains accrue to the vultures.