LIBORGATE follow up

The Real Libor scandal 

and The Bond Market Armageddon!

Paul Craig Roberts, Economist and Former Assistant Secretary of the US Treasury under Reagan, will discuss what he calls “the real Libor scandal,” and tell us what we may all be missing from this latest hullaballoo.

The dirty little secret (well, not so secret if you can do basic math) is that banks have been living off borrowed time since the onset of the 2008 financial crisis. They have assets on their books that they refuse to mark to market, and are dependent on cheap financing and easy liquidity to keep their insolvency from officially bankrupting their institutions.

This is what characterizes a zombie bank, and zombie banks no longer speak only Japanese. This is a western phenomenon now, with the zombie virus having crossed the pacific, and then again the Atlantic.

The Real Libor Scandal

To sum up, what has happened is that irresponsible and thoughtless--in fact, ideological--deregulation of the financial sector has caused a financial crisis that can only be managed by fraud. Civil damages might be paid, but to halt the fraud itself would mean the collapse of the financial system. 

Those in charge of the system would prefer the collapse to come from outside, such as from a collapse in the value of the dollar that could be blamed on foreigners, because an outside cause gives them something to blame other than themselves.

According to news reports, UK banks fixed the London interbank borrowing rate (Libor) with the complicity of the Bank of England (UK central bank) at a low rate in order to obtain a cheap borrowing cost. The way this scandal is playing out is that the banks benefitted from borrowing at these low rates. Whereas this is true, it also strikes us as simplistic and as a diversion from the deeper, darker scandal.

Banks are not the only beneficiaries of lower Libor rates. Debtors (and investors) whose floating or variable rate loans are pegged in some way to Libor also benefit. One could argue that by fixing the rate low, the banks were cheating themselves out of interest income, because the effect of the low Libor rate is to lower the interest rate on customer loans, such as variable rate mortgages that banks possess in their portfolios. But the banks did not fix the Libor rate with their customers in mind. Instead, the fixed Libor rate enabled them to improve their balance sheets, as well as help to perpetuate the regime of low interest rates. The last thing the banks want is a rise in interest rates that would drive down the values of their holdings and reveal large losses masked by rigged interest rates.

Indicative of greater deceit and a larger scandal than simply borrowing from one another at lower rates, banks gained far more from the rise in the prices, or higher evaluations of floating rate financial instruments (such as CDOs), that resulted from lower Libor rates. As prices of debt instruments all tend to move in the same direction, and in the opposite direction from interest rates (low interest rates mean high bond prices, and vice versa), the effect of lower Libor rates is to prop up the prices of bonds, asset-backed financial instruments, and other "securities." The end result is that the banks' balance sheets look healthier than they really are.

On the losing side of the scandal are purchasers of interest rate swaps, savers who receive less interest on their accounts, and ultimately all bond holders when the bond bubble pops and prices collapse.

We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The UK inflation rate is about 2.8%, and the interest rate on 20-year government bonds is 2.5%. Also, in the UK, as in the US, the government debt to GDP ratio is rising. Currently the ratio in the UK is about double its average during the 1980-2011 period.

The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate.

Why isn’t this happening?

in IPE Review June 5 column, “Collapse at Hand, explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower. 

What was pushing the interest rates lower?

The answer is even clearer now. First, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise. Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices.

In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it.

How long can the government bond bubble be sustained? How negative can interest rates be driven?

Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.

The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. 

The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.

Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.

Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?

The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt 
issued in profusion be bearing negative interest rates?

As villainous as they might be, Barclays bank chief executive Bob Diamond, Jamie Dimon of JP Morgan, and Lloyd Blankfein of Goldman Sachs are not the main villains. The main villains are former Treasury Secretary and Goldman Sachs chairman Robert Rubin, who pushed Congress for the repeal of the Glass-Steagall Act, and the sponsors of the Gramm-Leach-Bliley bill, which repealed the Glass-Steagall Act. Glass-Steagall was put in place in 1933 in order to prevent the kind of financial excesses that produced the current ongoing financial crisis. 

President Clinton’s Treasury Secretary, Robert Rubin, presented the removal of all constraints on financial chicanery as “financial modernization.” Taking restraints off of banks was part of the hubristic response to “the end of history.” Capitalism had won the struggle with socialism and communism. Vindicated capitalism no longer needed its concessions to social welfare and regulation that capitalism used in order to compete with socialism.

The constraints on capitalism could now be thrown off, because markets were self-regulating as Federal Reserve chairman Alan Greenspan, among many, declared. It was financial deregulation--the repeal of Glass-Steagall, the removal of limits on debt leverage, the absence of regulation of OTC derivatives, the removal of limits on speculative positions in future markets--that caused the ongoing financial crisis. No doubt but that JP Morgan, Goldman Sachs and others were after maximum profits by hook or crook, but their opportunity came from the neoconservative triumphalism of “democratic capitalism’s” historical victory over alternative socio-politico-economic systems.

The ongoing crisis cannot be addressed without restoring the laws and regulations that were repealed and discarded. But putting Humpty-Dumpty back together again is an enormous task full of its own perils. 

The financial concentration that deregulation fostered has left us with broken financial institutions that are too big to fail. To understand the fullness of the problem, consider the law suits that are expected to be filed against the banks that fixed the Libor rate by those who were harmed by the fraud. Some are saying that as the fraud was known by the central banks and not reported, that the Federal Reserve and the Bank of England should be indicted for their participation in the fraud. 

What follows is not an apology for fraud. It merely describes consequences of holding those responsible accountable.

Imagine the Federal reserve called before Congress or the Department of Justice to answer why it did not report on the fraud perpetrated by private banks, fraud that was supporting the Federal Reserve’s own rigging of interest rates (and the same in the UK.) 

The Federal reserve will reply: “So, you want us to let interest rates go up? Are you prepared to come up with the money to bail out the FDIC-insured depositors of JPMorganChase, Bank of America, Citibank, Wells Fargo, etc.? Are you prepared for US Treasury prices to collapse, wiping out bond funds and the remaining wealth in the US and driving up interest rates, making the interest rate on new federal debt necessary to finance the huge budget deficits impossible to pay, and finishing off what is left of the real estate market? Are you prepared to take responsibility, you who deregulated the financial system, for this economic armageddon? 

Obviously, the politicians will say NO, continue with the fraud. The harm to people from collapse far exceeds the harm in lost interest from fixing the low interest rates in order to forestall collapse. The Federal Reserve will say that we are doing our best to create profits for the banks that will permit us eventually to unwind the fraud and return to normal. Congress will see no better alternative to this.

The End of the Dollar

But the question remains: How long can the regime of negative interest rates continue while debt explodes upward? 

Currently, everyone in the US who counts and most who don’t have an interest in holding off armageddon. No one wants to tip over the boat. If the banks are sued for damages and lack the money to pay, the Federal Reserve can create the money for the banks to pay. 

If the collapse of the system does not result from scandals, it will come from outside. The dollar is the world reserve currency. This means that the dollar’s exchange value is boosted, despite the dismal economic outlook in the US, by the fact that, as the currency for settling international accounts, there is international demand for the dollar. Country A settles its trade deficit with country B in dollars; country B settles its account with country C in dollars; and so on throughout the countries of the world.

For whatever the reason--perhaps to curtail their accumulation of suspect dollars or to bring Washington’s power to an end--the BRICS countries, Brazil, Russia, India, China, and South Africa, are agreeing to settle their trade between themselves in their own currencies, thus abandoning the use of the dollar. 

According to reports, China and Japan have reached agreement to settle their trade between themselves in their own currencies.

The moves away from the dollar as the currency of international transactions means that the dollar’s exchange value will fall as the demand for dollars falls. Whereas the Federal Reserve can create dollars with which to purchase the Treasury’s debt, thus preventing a fall in bond prices, the Federal Reserve cannot prop up the dollar’s exchange value by creating more dollars with which to purchase dollars. Dollars would have to be taken off the foreign exchange market by purchasing them with other currencies, but in order to have these currencies the US would have to be running a trade surplus, not a long-term trade deficit. 

In the short-run, the Federal Reserve could arrange currency swap agreements in which foreign central banks swap their currencies for dollars in order to supply the Federal Reserve with currencies with which to soak up dollars. However, only a limited number of swaps could be negotiated before foreign central banks understood that the dollar’s fall in value was not a temporary event that could be propped up with currency swaps.

As the value of the dollar will fall as countries move away from its use as reserve currency, the values of dollar-denominated assets also will fall. The Federal Reserve, even with full cooperation from the banking system employing every fraud technique known, cannot prevent interest rates from rising on debt instruments denominated in a currency whose value is falling.

Think about it this way. A person, fund, or institution owns bonds or any debt instruments carrying a negative rate of interest, but continues to hold the instruments because interest rates, despite the increase in debt, are creeping down, raising bond prices and producing capital gains in the bonds. What happens when the exchange value of the currency in which the debt instruments are denominated falls? Can the price of the bond stay high even though the value of the currency in which the bond is denominated falls? 

The drop in the exchange value of the currency hits the bond price in a second way. The price of imports rise, and this pushes up prices. The inflation measures will show higher inflation. How long will people hold debt instruments paying negative interest rates as inflation rises? Perhaps there are historical cases in which bond prices continue to rise indefinitely (or even hold firm) as inflation rises, but I have never heard of them.

As the Federal Reserve can create money, theoretically the Federal Reserve’s prop-up schemes could continue until the Federal Reserve owns all dollar-denominated financial assets. To cover the holes in its own balance sheet, the Federal Reserve could just print more money.

Some suspect that the Federal Reserve, in order to forestall a declining dollar and thus declining prices of dollar-denominated financial instruments, is behind the sales of naked shorts every time demand for physical bullion drives up the price of gold and silver. The short sales--paper sales--cancel the impact on price of the increased demand for bullion.

Some also believe that they see the Federal Reserve’s hand in the stock market. One day stocks fall 200 points. The next day stocks rise 200 points. This up and down pattern has been ongoing for a long time. One possible explanation is that as wary investors sell their equity holdings, the Federal Reserve, or the “plunge protection team,” steps in and buys. 

Just as the “terrorist threat” was used to destroy the laws that protect US civil liberty, the financial crisis has resulted in the Federal Reserve moving far outside its charter and normal operating behavior. 

To sum up, what has happened is that irresponsible and thoughtless--in fact, ideological--deregulation of the financial sector has caused a financial crisis that can only be managed by fraud. Civil damages might be paid, but to halt the fraud itself would mean the collapse of the financial system. 

Those in charge of the system would prefer the collapse to come from outside, such as from a collapse in the value of the dollar that could be blamed on foreigners, because an outside cause gives them something to blame other than themselves.

LIBORGATE

Behind the Libor Scandal

SEE LINKS AT THE END

The recent settlement with Barclays Bank over its LIBOR(1) fixing fraud has gotten.... some.... attention. Not a lot of attention, though. Why is that, given that this fraud potentially affected trillions of dollars in assets?

I think the obvious answer is that (a) it's really complicated and (b) everyone's a little vague about just who got ripped off here. On a list service I subscribe to, a seemingly knowledgeable participant (2) said the victims of the scam include investors who owned floating rate notes, LIBOR-linked CDs, or pay-fixed-receive-floating interest rate swaps; or anyone who traded LIBOR contracts on a U.S. futures exchange and lost  money. And let's face it: that doesn't sound much like widows and pensioners, does it?

What's more, the LIBOR scam wasn't about pushing LIBOR systematically up or down. Sometimes it was pushed up, sometimes it was pushed down, depending on whatever happened to be good for the Barclays trading desk on any given day. 

Nonetheless, it's a big deal, and I think the Economist pretty much nails it here:

The attempts to rig LIBOR [...] not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s “tobacco moment”....Despite the risks of banker-bashing, a clean-up is in order, for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper. 

Right now the scandal is not limited to Barclays, UBS is said to be next in line, and other banks that haven't cooperated as willingly will take longer to prosecute. In theory, though, the news is likely to be even worse once those cases finish up.

Roughly speaking, the view from inside Barclays is that they're being treated unfairly. They cooperated, after all, and they say that other banks were way more involved in the LIBOR-fixing scam than they were. If that's true, one of two things will happen. 

Either this scandal will explode way beyond the financial press, where it's mostly played out so far. Or it will turn out that declining to cooperate makes it really hard to prosecute the other banks and Barclays will look like idiots for doing so. I'm not sure which to put my money on.

1LIBOR is the London Interbank Offered Rate. It's basically the current interest rate banks charge each other to borrow money, and it changes on a daily basis. So if you have an adjustable rate mortgage, for example, your interest rate might be LIBOR + 3, or something like that.

2How's that for a reliable source?

 Culture of Casual Dishonesty

As I spend most of days trying to recover from Traumatic Brain Injury - does one actually "recover" from such? I have been reading Economic materials to stimulate my cognitive processing. And I am beginning to wonder if Bankers have Traumatic Brain Injury they seem to exhibit much of the same traits and behaviors. 

Typical behavioral problems experienced by traumatic brain injury survivors include:

Self-centeredness

Aggression

Inappropriate sexual behavior

Extreme temper

Cursing

Manipulative behavior

If that doesn't describe a banker what does? Shoot I may have a new career as at least mine is official. 

To many the LIBOR scandal is not even on the radar or its thought of as some scandal in England. Well in this case you are half right. But its actually also being handled in England appropriately. And like the Murdoch scandal it is not being ignored. If anyone thinks that the Murdoch's kept their illegality and impropriety in Journalism confined to across the pond I have a bridge to sell you and JP Morgan Chase can finance it for you.

I think Matt Taibbi from Rolling Stone, a writer whose ire I admire, does an excellent job covering technical economic issues I think with plain speaking and the rough edges I admire. Here is the link to his blog articles on the subject: 

See the BOE note in the article 

http://www.rollingstone.com/politics/blogs/taibblog/libor-banking-scandal-deepens-barclays-releases-damning-email-implicates-british-government-20120704

US Treasury Secretary Timothy Geithner is also expected to appear before the Senate Banking Committee in the coming weeks to face similar questions.

Last Friday the New York Federal Reserve, which Mr Geithner was in charge of at the time, released a trove of documents showing that Barclays informed the regulator about its concerns over Libor manipulation as far back as August 2007.

The documents also showed that by June 2008 Mr Geithner was concerned enough to formally contact Bank of England Governor Mervyn King to report the problems relating to Barclays and other banks, and made recommendations to shore up the Libor setting process.

The Bank passed the email on to the British Bankers Association (BBA), which, according to Mr King, assured both the Bank and the NY Fed that it would take on board the recommendations.

The BBA has responsibility for overseeing Libor. It is not yet clear how it dealt with the information from the Fed.

And I have reprinted the article below from today's New York Times and it does a great and simplistic way of explaining why LIBOR matters. 

SEE INFOGRAPHY Click the link below to see the full graphic.
Behind the Libor Scandal – Graphic – NYTimes.com

The British, at Least, Are Getting Tough

NY TIMES : By GRETCHEN MORGENSON Published: July 7, 2012

The unfolding story of how Barclays — and, in all likelihood, other big banks — rigged interest rates is full of telling tidbits about the way Wall Street works. It also represents yet another teachable moment.

By now the world knows that Barclays manipulated the most widely used benchmark rate, the London interbank offered rate. But Barclays is just one member of the cozy club that sets the Libor, which is supposed to be based on the average rate at which large banks can borrow money overnight. It’s not based on actual transactions, however — and that leaves room for mischief.

And mischief there was, according to e-mails and other documents that Barclays has turned over to regulators in the United States and Britain. The upshot: traders colluded by posting rates that either helped their bets in the markets or their bank’s perceived financial strength during the harrowing days of 2008.

In October 2008, a Bank of England official questioned why Barclays’ submissions were high compared with other banks. After this, the Barclays rates fell closer to those of other banks. Barclays has released documents saying that some bank executives believed the official had instructed them to lower its rates, but the official has denied any improper actions.

Manipulating the Libor is a big deal because it affects the cost of money for almost everyone. The Libor is used to set rates on mortgages, credit cards and all manner of loans, personal and commercial. The amount of money affected by the phony rates is at least $500 trillion, British regulators have estimated.

Barclays is not the only bank under investigation for rigging the Libor. It was simply the first to own up to the behavior and settle with regulators, paying $450 million. Other banks will almost certainly follow, and the documents bound to bubble up in those cases will surely prove fascinating.

One of the most revealing exchanges in the Barclays documents came when a bank official tried to describe why Barclays’s improper postings were not as problematic as those of other banks. “We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down.

“Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument.

British authorities have not. Last week’s defenestrations of Marcus Agius, the Barclays chairman; Robert E. Diamond Jr., its hard-charging chief executive; and Jerry del Missier, its chief operating officer, apparently occurred at the behest of the Bank of England and the Financial Services Authority, the nation’s top securities regulator. (Mr. del Missier also seems to have lost his post as chairman of the Securities Industry and Financial Markets Association, the big Wall Street lobbying group. His name vanished last week from the list of board members on the group’s Web site.)

MR. DIAMOND seemed shocked to be pushed out. An American by birth, he probably thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders.

British officials are taking a different approach with this scandal. George Osborne, the chancellor of the Exchequer, was direct in his assessment of Barclays’s activities. “It is clear that what happened in Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees,” he said in a statement on June 28. “Punish wrongdoing. Right the wrong of the age of irresponsibility.”

Later, in a speech to Parliament, Mr. Osborne voiced the question that so many have asked recently in the United States. “Fraud is a crime in ordinary business — why shouldn’t it be so in banking?” he asked.

Perhaps the biggest lesson from the Libor scandal is how dangerous it is to rely on interested parties to set interest rates or prices of financial instruments, rather than on actual transactions conducted by investors. The Libor has been set in the current and vulnerable manner since the late 1960s. Maybe it has never been rigged before, but who knows?

It is far better to have the transparent and verifiable record of prices created by a tape of electronic trading. Such records are standard pricing mechanisms for many securities. But not all.

Prices of derivatives, especially credit default swaps that trade one-to-one, can still be based on one dealer’s say-so. That’s why a rule proposed by the Commodity Futures Trading Commission that would require pretrade price transparency in the swaps market is so important.

But it is also why Wall Street is pushing back, especially on the commission’s proposal that swap execution facilities provide market participants, before they buy or sell, with easily accessible prices on “a centralized electronic screen.” The commission’s rule would eliminate the one-to-one dealings by telephone that are so lucrative to traders and so expensive to investors.

A bill intended to gut the commission’s proposed rule and to maintain dealers’ profits in derivatives failed to go anywhere after being passed last year by two committees in the House of Representatives — Financial Services and Agriculture. That was a good thing.

But there are rumblings in Washington that this bill has resurfaced and that it may be quietly attached to a House Agriculture Committee appropriations bill scheduled for a vote this month. The bill, if passed, would bar the requirement for a centralized pricing platform to shed light on the enormous swaps market. It would also prevent regulators from requiring that a number of participants provide price quotations to customers, a way to ensure fairness.

It’s hard to believe, in the wake of the Libor mess, that Wall Street and its supporters in Congress would continue to battle against price transparency in any market. Then again, that’s precisely what they did after the credit crisis.

With each new financial imbroglio, the gulf widens between Main Street’s opinion of Wall Street and the industry’s view of itself. When Mr. del Missier, the former Barclays chief operating officer, took over as chairman of the Securities Industry and Financial Markets Association last November, he said: “We will continue to work on maintaining and burnishing the level of confidence investors have in our markets, in our own financial institutions, and in the general economic outlook for the future.”

Given the Libor scandal, let’s just say good luck with that.

SOME COMPLEMENTS SEE :

Le Temps LA CHRONIQUE DE JEAN-PIERRE BÉGUELIN Samedi14 juillet 2012

Le Libor: un enfant de bohème

LIBOR: Not a Scandal, but a Funeral

How it works and how it affects everybody 

An history of the lie

Lie’bor, or the art of the lie 

Lies and YOUR money

When it comes to your money, the Libor scandal teaches three simple principles of money management. First off, be suspicious of any steward put in charge of your wealth. At all times, beware of the liar and do your utmost to establish trust. Next, remember the danger of agency risk. For every person you put between you and our money, you compound the risk of a dishonest manger damaging your portfolio. Finally, demand transparency. One of the big problems with LIBOR, according to Ben Bernanke, was a lack of transparency in the process and data used to establish rates.

An history of the lie

Lying has a noble history, hearkening back to the beginning of time itself. By taking a simple jaunt back to the Garden we find God's booming, "Who ate my apple?" met by innocent looks and an eventual and timid chorus of, "Not me."

Little doubt that a few short days later this first lie was followed by Adam’s retort of "No, dear" to Eve's insecure query, "Honey, does this fig leaf make me look fat?"

Lying had a good start with humankind, but its place in history was forever cemented when God sorted through the universe of sins and chose lying for his “Top Ten List of Dos and Don'ts.” Yes, right alongside the other biggies of murder, stealing and coveting, lying took on epic status and grew by leaps and bounds.

Humanity found new and better ways to lie, including, of course, the invention of the game of golf by the Scots in the 1300s. This may have possibly been the single greatest achievement in lying history, committing hordes of men to habitual lying via the infamous and hidden foot wedge, to the more bold "I'll take a mulligan," to the outright blasphemy of "put me down for a four."

And with the ever-growing popularity of lying, it has become increasingly difficult to impart good will and trust to our fellow man.

To the discerning, the lore of George Washington's famous confession to the cherry tree massacre — "I just can't tell a lie, pa" — has the smell of a good quality lie about it. Maybe we can look to honest Abe for hope in our political leaders.

At the turn of the millennium, however, lying seemed to have lost its thrill and become tragically predictable and mundane. The news was filled with trite and overplayed white lies and media brouhahas, from the lip-syncing Grammy scandal of Milli Vanilli to the James Frey ”A Million Little Pieces” autobiographical fantasy so passionately promoted by Oprah as truth.

For a long while, it appeared as if lying had fallen on hard times and couldn't be improved upon. Fortunately, for lying's sake, in recent years, Wall Street, seeing the utter dearth of any truly shocking falsehoods, took it upon itself to stand up and shake the world with profoundly authentic deceits.

It began with the likes of Bernie Madoff, who led the charge with his remarkable $54.8 billion Ponzi scheme, leaving in his wake families and institutions whose life savings evaporated in a day.

Raj Rajaratnam of the Galleon Group joined the fray, adding his insider trading lies to the mix of Wall Street tragedies, picking the pockets of hardworking Americans as he lined his own.

Goldman Sachs joined in on the ruckus by promoting vacuous securities to its clients while privately dumping these wretched investments from their balance sheets.

And then there was the subprime banking scandal — a true jaw dropper. CDOs and other forms of securitized trash were peddled upon the unsuspecting, leaving waves of misery to wash over the world spreading recession and financial ruin.

Now, in recent weeks and in what many hope is Wall Street's grand finale, Barclays has served up the Libor scandal. Libor stands for London interbank offered rate, and it involves a group of bankers who set the daily interest rate affecting an estimated $800 trillions of transactions world-wide, including home mortgages, college loans, credit card fees and beyond.

It turns out that Barclays and other banking insiders were manipulating the index as far back as 2005, raising their profits at your expense during the good years and making their banks look better off during the financial crisis. "The Economist" magazine described it as "the rotten heart of finance."

Just how big it the Libor crisis? Journalist Bill Moyer called it "huge". Eliot Spitzer said, "This is about as big as it gets in the financial world and goes to the heart of every piece of debt that's issued to consumers."

Furthermore, the scandal has grown. What initially involved Barclays has now enveloped 16 banks and will result, according to a study done by Keefe, Bruyette & Woods, in an estimated and historic $35 billion in fines.

It appears that with the Libor scandal, the ignoble art of the lie has been truly and ultimately resurrected to a new and stunning height, capturing the attention of even the most committed fibbers.

The American public, once terrorized by gangsters, now lives in fear of banksters, a new and more terrifying criminal. The bankster is an equal opportunity liar, working stealthily while pillaging the homes of widows and orphans to kings and priests, alike.

GEOPOLITICAL ANALYSIS

Stratfor's Third Quarter Forecast 2012

There are plenty of forecasts out there, but today  Stratfor, a geopolitical analysis company, has one of the most rigorous methodologies out there, and their forecasts provide excellent insight into the outcome of world events in the coming quarter. 
Europe, Syria, and China are the big three to watch the next three to six months.

Though this may not be a quarter of dramatic changes, three evolving issues will require particularly close scrutiny: the European crisis, the Syrian conflict and China's political struggle. From Brussels to Damascus to Beijing, hard realities are setting in, threatening to dismantle decades long political constructs. Though the biggest cracks in the system will take time to appear, this quarter we will see Europe, Syria and China busily trying to stave off harsh but unavoidable consequences.

In Europe, an ideological attachment to a prosperous past is largely blinding the Continent to the consequences of their crisis. Meeting after meeting will be held to conjure a variety of bureaucratic treatments for the crisis, but the fundamental issue will remain: the weakening of the Franco-German relationship. Whereas the European crisis has been largely characterized to this point by a struggle between the economically stronger core and the deeply troubled periphery, the crisis is now starting to consume the core.

Most of the tensions in the Franco-German relationship will emanate from Paris. France's economic model relies mostly on internal consumption and high government spending. Since the creation of the common currency, France's trade deficit with Germany has increased dramatically. The German approach to the crisis aims to curb government spending, going against France's stimulus-oriented approach. This divergence in interests carries enormous consequences for the fate of the European Union, as the Franco-German axis forms the very foundation of a Continental effort to overcome Europe's eternal geopolitical fault lines.

In Syria, there is a growing acknowledgment that the Alawite core of the regime is holding together while the critical Sunni patronage networks surrounding that core are starting to dissolve. Even as the Alawite core endures, we are coming to a point where inner circle members of the regime, as well as foreign sponsors of the regime in Moscow and Tehran, will seriously begin planning for a post-al Assad Syria. Turkey and its NATO partners still lack the appetite for a foreign military intervention in Syria. However, this environment does raise the potential for a palace coup, in which all stakeholders — Iran and Russia on one side, the United States, Turkey and Saudi Arabia on the other — will m aneuver to fashion an alternative regime that best suits their interests.

In China, the Communist Party leadership is anything but blind to history and so is working to battle the consequences of an economic slowdown coinciding with an upcoming political transition. The case of Bo Xilai was a stark reminder to the Party of the dangers of regionalism when a Mao-inspired populist tries to chart a path toward perceived economic and social stability. This quarter, we will see the Party put the Bo case to rest in a decisive and public show of Party solidarity ahead of a leadership transition later in the year. But this will likely do little to conceal a growing behind-the-scenes debate over China's economic and political direction. Once again, the Party will put off any major decisions on China's biggest challenges in hopes of preventing cracks in the system from widening.

Europe

The European Crisis

The driving issue for the third quarter remains the evolution of the Franco-German relationship. The economic performance of France and Germany will likely continue to diverge more strongly in the coming months. Though the political rise of French Socialist President Francois Hollande has accelerated the inevitable deterioration of the Franco-German relationship, a rupture is not expected this quarter.

The French economy is not yet at a breaking point: French unemployment is lower than the eurozone average and Hollande's government will be able to manage socio-political pressures. France will be under increased pressure to reduce its budget deficit. Hollande's administration plans to address the problem by increasing the taxes paid by France's largest businesses and wealthiest households. While these measures do not address France's systemic economic difficulties, they will allow Paris to skirt a harsher backlash to austerity this quarter.

As the core of Europe weakens, calls for deeper EU integration from both the core and the periphery will grow louder. The peripheral countries will call for more integration to ensure a continued flow of financial assistance, while the more economically stable northern industrial countries will call for additional integration to assert more control over member nations and to protect the common market for their exports. This model of deeper integration overlaying increasingly divergent interests is not sustainable, but it is a model that will endure for the next quarter as the European Union prepares for an October summit on EU integration proposals.

France's push against Germany for stimulus-led — as opposed to austerity-led — measures to manage the crisis will continue to provide countries in the European periphery with more political room to push back on austerity and demand more financial assistance (with negotiable conditionality) from European institutions. German intransigence on austerity will relax as Berlin continues to demonstrate a willingness to accommodate countries needing economic assistance in exchange for deeper integration efforts that provide Berlin with more EU-wide authority.

In Germany, Chancellor Angela Merkel's decisions on managing the crisis at the EU level will come under increased scrutiny from within her coalition and government bodies, particularly from the parliament and the Federal Constitutional Court. Though Germany is facing rising internal pressure, Stratfor does not expect a dramatic shift in the German policy of demanding more fiscal discipline and control before discussing forms of debt mutualization and permanent financial aid.

Spain will complete negotiations for a bailout of its banking sector but is unlikely to receive a sovereign bailout this quarter. The European Union cannot afford to cut Spain off from markets because it does not have the funds to support a Spanish bailout and deal with the contagion to other eurozone countries. Should bond yields for Spain and Italy rise to unsustainable levels as these countries issue new debt this quarter, the eurozone will use the short term financial tools at its disposal — short of a sovereign bailout — to alleviate market pressure.

Greece will not leave the eurozone this quarter. Athens will receive further financial aid, which will allow the country to keep operating. The new Greek government will begin a formal renegotiation of the bailout terms with its lenders, which will keep the Greek crisis at status quo for the third quarter.

One of the main consequences of the continued economic slowdown this quarter will be a decrease in summer employment, particularly in Southern Europe, during the tourist season. Social unrest in the form of protests will be more likely in the tourism-dependent periphery, especially in Greece, Italy and Spain.

Middle East

Ongoing Iranian-U.S. Struggle

Military posturing by both the United States and Iran will again punctuate the third quarter, but both sides will again steer clear of an actual military confrontation. Increased sanctions on Iran will have a limited effect as Iran continues to trade via falsely flagged tankers and shell companies, albeit at higher costs. Iran and the United States will maintain a dialogue behind the scenes in search of a broader accommodation, but Stratfor does not expect any negotiation breakthroughs in the lead-up to the U.S. presidential election. Israel will attempt to pressure the United States into taking more decisive action against Iran but will not risk unilateral action.

The Syrian Battleground

The main battleground between the United States and Iran this quarter will be Syria. The defection of the Tlass family — the Sunni pillar of the predominantly Alawite regime — risks unraveling the regime's Sunni patronage networks in the military and business community.

The Alawites face an existential crisis and will likely band even closer together in the face of a broader Sunni opposition threat. Even so, the psychological impact of high-level defections raises the potential for a Syrian palace coup that would eliminate the al Assads from the regime. Iran and Russia, both of which have deep intelligence links in Syria, will continue providing critical support to the regime to facilitate stronger crackdowns, but these powers will also be maneuvering behind the scenes to produce a non-al Assad alternative that would remain friendly to their interests.

The still-fractured Syrian rebel movement will engage in rounds of diplomacy abroad to build international support but is unlikely to receive much more than it is already getting, namely weapons and money primarily from the Gulf states and Turkey and verbal support and limited intelligence and command-and-control guidance from Western powers. Continued support for both the rebels and the Syrian army from their respective benefactors will result in a steady escalation of violence on both sides. The rebels will remain unable to hold and defend significant territory.

Foreign military intervention in Syria remains unlikely, as neither Turkey nor the rest of NATO is eager to deal with the consequences of military action in another fragile, sectarian regional hot spot. Turkey will maintain a strong military posture along its border with Syria, thereby raising the potential for skirmishes as Syrian forces operate near the border to deny sanctuary to Syrian rebels.

As Syrian-Turkish tensions escalate, Syria and Iran could support Kurdish militant activity in Turkey. If Turkey draws a link between Kurdistan Workers' Party attacks and Syria, Turkish domestic opinion could shift in favor of Turkey taking more decisive action against Syria, though any Turkish action in Syria will be limited without NATO reinforcement.

Turkey Recalibrating

The constraints Turkey faces regarding Syria and other foreign policy matters is motivating Ankara to resolve Turkey's domestic issues. With less attention consumed by Turkey's power struggle and the Kurdish problem, the government hopes to be able to play a more decisive role in foreign affairs. This quarter will thus see continued efforts by Turkey's ruling Justice and Development Party to reach out to its political rivals. However, the Islamist-rooted party's agenda to transform Turkey from a parliamentary to a presidential system and other contentious proposals to reform the constitution will deny the party the consensus it seeks.

The ruling party will make some progress this quarter in its Kurdish containment strategy. Turkey is investing in a pipeline connecting Turkey to energy resources in Iraq's Kurdish north, thereby undermining Baghdad's control over Kurdish export avenues while enhancing Turkey's. Ankara's accelerated moves in Iraqi Kurdistan will fuel tensions between Turkey and the Shiite-dominated government in Iraq. The project, which will be subject to Kurdish militant attacks as it progresses beyond this quarter, will also exacerbate the standoff between Turkey and Iran over the fate of Syria.

Political Accommodation in Egypt

The accommodation between the Supreme Council of the Armed Forces and the Muslim Brotherhood that Stratfor forecast last quarter will hold through to the next quarter. The military will go along with a Muslim Brotherhood presidency and the remainder of the political transition but will ensure its authority through the drafting of the constitution. The Muslim Brotherhood meanwhile will try to focus on building political consensus with a diverse Cabinet. Overall, the political instability that has characterized Egypt for much of the past year will quiet down this quarter. Occasional demonstrations will take place, especially by those left out of the grand bargain between the Muslim Brotherhood and the military, but Stratfor does not expect massive protests or clashes with the military and security forces.

Egypt-Israel relations will continue to experience strain as security in the Sinai Peninsula deteriorates further due to the distraction of the Egyptian military with the political transition and a growing influx of Salafist militants into the region. Amid these security concerns, Hamas will be cautious in how it maneuvers with Israel as the group looks to capitalize on the Muslim Brotherhood's political gains and as the Egyptian Muslim Brotherhood begins to engage directly with Israel. Hamas' worsened relationship with Syria will also more visibly orient the organization against the regime and in favor of the Syrian rebellion.

Persistent Instability in Libya

The election of a new government, officially ending the North African country's transition, will not alleviate a deepening rivalry between the hollow authority of the Tripoli-based Libyan central government and the regional city councils (especially Benghazi and Misurata). An overall increase in militant activity in Libya is likely this quarter. We will be closely watching to see if jihadists in Libya shift their campaign from rhetoric to attacks. Given the significance of oil revenues for both the central and regional governments, both will expend efforts to defend Libyan energy infrastructure from tribal and jihadist attacks.

Former Soviet Union

Russia's Domestic Challenge

The Kremlin faces internal challenges in the third quarter as it and various opposition movements prepare for regional and municipal elections in the fourth quarter. The elections will be held under a law that gives non-Kremlin groups a better chance to win gubernatorial and mayoral seats in the regions. For the first time in the past decade, the Kremlin's United Russia party will have to expend considerable effort campaigning in the regions to maintain its hold over the country.

Russia and Its Periphery

Russia will be particularly active in the Baltic states in the third quarter as it tries to rebuild its clout in the energy and security spheres there. The Baltic states will continue initiatives in energy diversification and regional security to distance themselves from Russia. Both Estonia and Lithuania already have implemented provisions under the EU Third Energy Package, which requires natural gas companies to unbundle their sales, transport and production operations, thereby undermining Russia's energy dominance in the region. Meanwhile, Finland is showing more interest in regional security groups like the Nordic Defense Cooperation. Russia may attempt to counter these moves in the third quarter by trying to exploit divisions between Poland and Lithuania and offering economic incentives to countries like Latvia and Finland. But Russia's efforts to reverse these regional initiatives will have limited effect for now.

Russia and the West

Russia's relationship with the West will continue to divide into sour relations with the United States and warmer relations with strategic European partners.

Diplomatic and trade spats will intensify between Russia and the United States in the third quarter. With European powers more concerned with their own affairs, Russia will have more room to maneuver in its efforts to keep the United States focused on the Middle East (and hence away from the Russian periphery) without harming relations with France. Russian backing of Syria through arms sales, sanctions evasion and negotiations will remain a key contentious issue between Moscow and Washington.

A recent energy deal between Russia and Germany will help Russia fortify a long-term relationship with Berlin as these two powers continue to deepen their economic ties. Other Central European states are likely to demand similar deals from Moscow, which will test Russia's ability to maintain its energy leverage in these countries.

Central Asia: Another Dynamic in Strained Relations

Central Asia will remain in a precarious state next quarter with continuing protests in Kazakhstan and the threat of a resurgence of Islamist militancy. Now that Uzbekistan has suspended its membership in the Collective Security Treaty Organization military alliance, Tashkent will be able to entertain alternative security relationships with Washington or Beijing. Russia will seek to build its security ties with Kyrgyzstan and Tajikistan in order to contain and maintain pressure on Uzbekistan.

Caucasus: Increasing Security Tensions

The Caucasus region has seen a number of developments in the past few months that will contribute to an increasingly tense security environment in the next quarter. Azerbaijan has significantly increased its security ties with Israel, signing a major defense deal with it this year. Meanwhile, Russia has been emphasizing its security ties with Armenia by signaling its intentions to increase the number of contract troops among its military presence in the country. These trends have increased tensions, spawning border skirmishes between Armenia and Azerbaijan and causing increased psychological operations between Iran and Azerbaijan — raising the potential for instability and miscalculations. Nevertheless, significant constraints will prevent a broader conflict from erupting in the region.

South Asia

U.S.-Pakistan-Taliban Negotiations

A breakthrough in U.S.-Pakistani talks in early July will allow limited movement toward broader U.S.-Pakistani negotiations over a post-NATO Afghanistan. In spite of many key differences between these two uneasy allies, shared fundamental interests are driving the two toward cooperation as the United States prepares its military exit from the region. Numerous obstacles remain, however, which will hamper these negotiations in the coming quarter.

The Afghan Taliban is a major presence in these negotiations. Stratfor expects the Afghan jihadist movement to use its militant arm during the politically sensitive period ahead of the 2012 U.S. presidential election to try to strengthen the Taliban's negotiating position. For its part, the United States will continue its battlefield operations to keep military pressure on the Taliban. And Pakistan will continue to face domestic political constraints this quarter that could undermine the negotiations. A power struggle between the government and the judiciary could pave the way for e arly elections before the end of the year. The broader negotiations among the United States, Pakistan and the Taliban will continue but are unlikely to see much progress this quarter.

India's Economic Reality and Foreign Policy Concerns

The slump in Indian economic growth in the last quarter of the fiscal year of 2011-12 was unavoidable. It reveals underlying stresses on the economy and served as a wake-up call for New Delhi. The Indian government cannot engage in any meaningful short-term economic measures to offset the slowdown, especially since slashing interest rates further would risk exacerbating already rising inflation. Indian policymakers will try more superficial moves that highlight the government's economic expertise in an effort to maintain the perception that Indian economic growth remains on an upward trend. Though India will remain a significant economy, the government's efforts will not hide the fact that exuberance over India's economic prospects is waning.

On the foreign policy front, India will maintain a cautious approach toward efforts in improving Indian-Pakistani ties. New Delhi will steer clear of major commitments or concessions toward Islamabad as it keeps a nervous watch on progressing U.S.-Pakistani negotiations.

East Asia

China's Economic, Political and Social Challenges

In the third quarter, the Chinese leadership will juggle three interrelated issues: Continued economic problems triggered by the global slowdown and lingering European uncertainty; social pressures arising from these economic problems; and the need to build consensus and rebuild legitimacy for the Communist Party of China ahead of the generational leadership transition through the fourth quarter of 2012 and the first quarter of 2013.

On the economic front, mounting fears of a sharp slowdown mean Beijing will continue to prioritize higher growth. Beijing will continue to push infrastructure projects, reflecting the need to use domestic investment to sustain economic activity. Large state-owned enterprises will see their profits continue to fall in the third quarter, and imbalances in commodity markets may further depress state enterprises producing steel, coal and other core materials. Activity in the real estate sector, meanwhile, will pick up, particularly amid revenue difficulties for local and provincial governments and following the latest interest rate cut. Beijing may choose to ignore rising real estate prices despite an official policy of slowing sales.

Labor protests and public protests over various infrastructure projects and social and economic grievances may bring stronger local and central government responses this quarter. Beijing will seek to maintain social stability as it manages political balances amid the final preparation for the leadership transition.

Beijing will also wrap up the Bo Xilai case in the third quarter, seeking a decisive end to domestic and international speculation over the unity of the Communist Party. The sentences for Bo and his wife will likely be harsh to signal decisiveness and confidence. Behind the scenes, however, the Party will be engaged in intense debates as Beijing seeks a cautious balance between competing economic policies and the stability of the political transition, particularly with a series of key personnel appointments to be settled in the third quarter to pave the way for the transition. In general, this means the government will not be afraid to implement short-term solutions to maintain stability, once again delaying any action on the Party's major challenges.

Rising Maritime Tensions

Regionally, the third quarter will see greater attention paid to maritime territorial disputes, raising the potential for inadvertent clashes. In mid-July, the Philippines will lift a ban on fishing in disputed waters. China will follow suit in August, leading to a rush of competing fishing vessels to parts of the South China Sea disputed by the two, followed by their respective coast guards, maritime police and navies. Competition over energy resources will also spur rhetorical, and potentially physical, confrontations. The Association of Southeast Asian Nations will seek an understanding with China on a binding code of conduct for the South China Sea ahead of the group's fourth quarter summit. The Philippines continues to try to draw the United States and others into the discussions, something China strongly opposes, so Beijing may be more inclined to work through ASEAN as opposed to China's preferred bilateral path to reduce the likelihood of U.S. involvement.

The Rise of the Japanese Regionalists

The expulsion of dozens of members of the ruling Democratic Party of Japan amid attempts to pass new tax legislation is likely going to bring an end to Japanese Prime Minister Yoshihiko Noda's government and necessitate a call for new elections in the third or fourth quarter. Although yet another government turnover is not very unusual for Japan, the election will be a bellwether for determining the status of the country's emerging regionalist parties, which could begin to challenge the political and bureaucratic status quo over the next few years if they can gain momentum.

Latin America

Building Strain on Mercosur

Trade and political tensions will continue to rise within Mercosur as Brazil and Argentina pursue protectionist policies both within Mercosur and on the international market. These measures have had a detrimental impact on the smaller Mercosur members, Paraguay and Uruguay, whose relationships with larger neighbors Brazil and Argentina will come under further strain in the third quarter. Paraguay's political isolation from Mercosur after former President Fernando Lugo's rapid impeachment will add more tension to the bloc, but Paraguay is not in a position to completely withdraw without significant bilateral economic guarantees. Uruguay will push for trade opportunities outside Mercosur to offset the effects of intrabloc protectionism. Despite increasing disunity, the Brazil-Argentina relationship at the core of Mercosur will endure as both rely on the agreement to manage bilateral economic concerns and their strategic geopolitical rivalry.

Pre-Election Tensions in Venezuela

During the third quarter, attention in Venezuela will focus on the lead-up to the Oct. 7 presidential election. Despite more than a year of conflicting rumors about Venezuelan President Hugo Chavez's health, the Venezuelan leader appears poised to stand for re-election Oct. 7. The election season is shaping up to be a relatively straightforward contest between Chavez and his chief rival, Miranda state Gov. Henrique Capriles Radonski, with Chavez likely enjoying more support. As with any Venezuelan election, there will be occasional bursts of violence between members of opposing political factions, bombastic political discourse and large-scale government spending and purchase announcements made by the Chavez administration to win support of key factions such as the military, petroleum sector workers and the urban poor.

Argentina's Search for Financing

Argentina will spend the third quarter seeking investment in oil and natural gas production in an attempt to reverse a growing energy deficit. To do so, the government will continue to use domestic pools of capital — such as private bank and Central Bank reserves — and both the central government and provincial governments will court international investment. Argentina will not fully settle its outstanding international debts in the third quarter due to restrictions on the government's ability to meet key international demands. These include revising its inflation reporting methodology, a process that would rapidly increase Argentina's national debt. Tight budgets at the national and provincial levels will drive further rent-seeking, and the mining sector will see increased pressure to increase revenue shares and investments from provincial governments similar to the pressure initially experienced by YPF ahead of its nationalization.

Mexico's Political Transition and Ongoing Violence

Mexico's politics will be in transition as President-elect Enrique Pena Nieto builds his government, tries to redevelop Institutional Revolutionary Party patronage networks and seeks backing from rival factions on issues like energy investment, tax reform and managing the drug cartels when he enters office in December.

Mexico's security situation will remain turbulent. The Sinaloa Federation and Los Zetas and their respective allies will continue to fight for territorial control in the northeast (particularly in Tamaulipas and Nuevo Leon states), while the Cartel de Jalisco Nueva Generacion will maintain its ongoing turf wars in the central and Pacific states (particularly Guerrero and Michoacan) against the Knights Templar. Los Zetas and the Cartel Pacifico Sur will continue operations against the Sinaloa Federation in Jalisco (including the state's capital, Guadalajara) and Sinaloa states.

Sub-Saharan Africa

Somalia's Battle Against al Shabaab

A pro-Somali government offensive led by African Union peacekeepers to flush al Shabaab from its remaining urban strongholds will intensify in the third quarter. A Kenyan-led military siege on Kismayo will occur around August while other African Union peacekeepers continue a ste ady buildup in Mogadishu. Al Shabaab reprisal attacks against soft targets in Kenya can be expected. Meanwhile, Ethiopia will maintain blocking positions in central and southwestern Somalia. U.S. financial rewards for information on the location of high-value al Shabaab leaders may facilitate the multipronged offensive. Rains that traditionally fall from September to December could hamper the intervention but will not derail it. Al Shabaab fighters will retreat to their clans in the hinterlands where they can regroup. They will not be neutralized by the end of the quarter.

Somalia will hold elections for a new federal government. On Aug. 20, it will select a new president, ending Somalia's transitional government era. With limited financial resources and no established institutional support, the new government faces tremendous challenges in reversing popular support for warlords and militancy by establishing good governance out of a deeply corrupt system. The new government will try to make slow and incremental improvements to government efficiency and service delivery while taking advantage of enhanced security from the African Union Mission in Somalia and other allied military forces.

Nigeria's Struggle with Boko Haram

The Nigerian government will continue operations against Boko Haram in the northeastern region of the country. Military and security forces will receive training and small equipment upgrades. Government and civil society leaders will attempt to split the movement through back-channel negotiations. Though these efforts will disrupt Boko Haram, they will not significantly undermine the group. Political opposition to President Goodluck Jonathan's administration will provide space in northern Nigeria for Boko Haram to operate. Clashes between government forces and Boko Haram militants and low-intensity militant attacks can thus be expected to continue in the third quarter.

Strained Negotiations Between Sudan and South Sudan

Sporadic clashes between Sudan and South Sudan will persist in the third quarter as both sides attempt to redraw the boundaries of the oil-rich borderland through military force. Military clashes will be interlaced with strained negotiations, but a decisive military or political breakthrough is unlikely. Compared to last quarter, Sudan's military offensive against South Sudan may be more tempered in the coming months as both sides confront growing political, military and economic constraints. With neither Sudan nor South Sudan in a position to shift the conflict decisively, external assistance, particularly from China and Japan, will remain limited as foreign players maintain a wait-and-see approach to the negotiations.

Economic austerity measures enacted by both Khartoum and Juba last quarter will weaken popular support for both governments. Demonstrations will persist in Sudan, but will not pose a significant threat to the regime. The austerity conditions may compel energy negotiations between Khartoum and Juba in an effort to revive oil revenue streams, but the two governments will remain focused on developing separate spheres of investment and oil development.

Islamist Militant Containment in Mali

With backing from the Economic Community of West African States, politicians in Mali will be focused on regaining political legitimacy this quarter as civilian and military authorities in Bamako engage in power-sharing negotiations to form a new national unity government. The political distractions will prevent effective coordination or deployment of resources from the capital to counter Islamist militant gains in the northern half of the country.

Militant activity will largely be contained to northern Mali this quarter due to the fractured nature of the Tuareg rebels and their common interest with al Qaeda forces to protect smuggling routes from outside intervention.

The Economic Community of West African States will engage in military operations in Mali, but these will remain limited without Western support. Contingency plans for a West African-led foreign intervention are under discussion, but Stratfor does not expect the plans to become operational so long as militant activity is contained in northern Mali. Western powers with counterterrorism interests in the region, primarily the United States and France, will rely instead on unilateral special operations forces' strikes against al Qaeda forces in the region to contain the transnational jihadist threat.