World View: Mexico’s First ‘Historic’ Attempt to Re-Privatize Oil Industry Flops

This morning’s key headlines from GenerationalDynamics.com

• Greece approves harsh reforms as IMF throws Europe under the bus
• Japan’s Shinzo Abe pushes ‘collective defense’ bill for vote
• Mexico’s first ‘historic’ attempt to re-privatize oil industry flops

Greece approves harsh reforms as IMF throws Europe under the bus

Alexis Tsipras addressing parliament on Wednesday

After a day of violence in the streets outside Greece’s parliament, and bitter screaming and shouting inside the parliament, Greece’s parliament passed a set of harsh reforms that prime minister Alexis Tsipras said that he’s supporting only because European officials were “holding a knife at my neck.”

The reforms included increased taxes and pension reforms that were harsher than the reforms that voters rejected ten days ago in a national referendum. A total of 229 MPs voted for the reforms, while 64 voted against. The vote was overwhelmingly in favor of the reforms only because Tsipras formed a coalition with opposition parties. Of the MPs in Tsipras’s far left Syriza party, 32 voted against the reforms, and 6 abstained. Some of Tsipra’s ministers have been forced to resign with the result that the Syriza party may no longer exist, and Tsipras may have to scramble to stay in power. However, Tsipras has been quoted as saying that he will not resign.

Greece’s communist party led labor union street riots in Syntagma (Constitution) Square outside the parliament building. Protesters were throwing rocks and Molotov cocktails at police, who were firing tear gas at the protesters.

With Greece having fulfilled the demands of the Eurogroup, the Eurogroup can now go ahead and approve by Monday a 6 billion euro bridge loan that will allow Greece to avoid bankruptcy for a few weeks. After that, negotiations can begin on the terms of an entirely new bailout loan, for 86 billion euros.

However, this all comes as the International Monetary Fund (IMF) has essentially thrown Europe under the bus, by saying that it will not participate in the new bailout loan, which would mean that the eurozone would have to provide the loan entirely by itself.

The reason for the IMF decision was that the IMF had done the math and determined that Greece’s debt was “not sustainable.” This will be no surprise to regular readers, as I have been saying for years that no solution exists to Greece’s debt crisis. However, it is a surprise that someone official is finally saying so.

The IMF is saying that the Europeans must make the debt sustainable, and so they must write off a significant portion of the debt, or else stretch out the repayments for several decades, meaning in effect that it will never be paid off. Germany, Finland and the Baltic states oppose writing off any portion of the debt.

In a related note, CNBC economist Steve Liesman has just returned from a trip to Germany. He said that when you speak to Germans about the situation, you begin to sympathize with them not wanting to keep bailing Greece out over and over. He said that many Germans believe that Greeks developed a culture of not paying taxes because they were governed by the Turkish Ottomans for four centuries, and did not want to pay taxes to the Ottomans. With a culture of not paying taxes, there’s no point in continuing to bail them out. Independent (London) and Kathimerini and AFP

Japan’s Shinzo Abe pushes ‘collective defense’ bill for vote

Japan’s prime minister Shinzo Abe is promising to better explain the terms of his security bills, amid large demonstrations shouted opposition to the bills outside the parliament building, while opposition lawmakers yelled and waved signs in frustration.

Since the end of World War II, Japan has had a “pacifist” constitution, prohibiting any military action except in response to a direct attack on Japan itself. Shinzo Abe has stated that he wants to remove this restriction from the constitution, but opposition would prevent him from doing so.

So he has made a decision to “reinterpret” the self-defense clause of the constitution to allow for what is called “collective self-defense.” I discussed this issue in detail in “5-May-14 World View — Japan debates ‘collective self-defense’ to protect America and Japan”.

Under international law, if a nation’s ally is attacked by another country, then the nation may use its armed forces in defense of its ally. This is known as “collective self-defense,” and it particularly can be invoked by either of two countries that have a mutual defense agreement, such as the mutual defense agreement signed by Japan and the United States. However, many people in Japan interpret the constitution’s self-defense restriction to mean that collective self-defense is prohibited in Japan’s constitution. Abe’s reinterpretation makes collective self-defense possible, but has generated heated opposition.

On Wednesday, Abe’s Liberal Democratic Party (LDP) members were able to cut off debate in a key committee. The security bill would then be debated in the lower and upper house before it becomes law. AFP and Shingetsu News Agency (Japan)

Mexico’s first ‘historic’ attempt to re-privatize oil industry flops

Mexico on Wednesday attempted to auction off the rights to drill for oil in 14 different locations (“exploration blocks”) in the Gulf of Mexico. However, oil companies were definitely unenthusiastic, as the 14 were “shallow water” blocks that had previously been drilled for decades by Mexico’s government-run oil monopoly, Pemex. As a result, major oil companies, such as Exxon Mobil Corp., Chevron Corp. and Total SA, refused to participate, and only two of the 14 blocks were actually auctioned off, to a consortium of smaller companies.

Mexico nationalized its entire oil industry in 1938, following a series of labor disputes and crippling national strikes by labor unions demanding greater pay, amid political claims that the foreign oil companies were stripping Mexico of its national resources, with almost no financial benefit to Mexicans. The oil companies retaliated by organizing an international boycott of Mexican goods, including Mexican oil. With the start of World War II, the boycotts were resolved. But the nationalization became a symbol of great national pride and liberation from American imperialism. The calendar date of March 18th, 1938, is remembered throughout the country as the day of “Expropiación Petrolera” (Oil Expropriation). All oil assets were turned over to a state-owned monopoly called Petróleos Mexicanos, today called Pemex. The nationalizing also served as a model for other countries to subsequently nationalize their own oil industries.

As always happens with state monopolies, Pemex has been plagued with corruption. In recent years, oil production has plummeted, and it has been increasingly clear that Pemex was top-heavy with bureaucracy, and lacked the expertise to improve production. Mexico had been the world world’s fifth bigger oil produced, but dropped to tenth.

Despite opposition from most Mexicans, Mexico’s president Enrique Peña Nieto fought for a change in the constitution and laws to re-privatize the energy industry. In 2013, 75 years after the nationalization, Nieto announced the auctions, now being referred to as “historic.”

Unfortunately, Nieto may have waited too long. Since 2013, oil prices have fallen over 50%, making much oil exploration uneconomic. Even Pemex decided not to bid in Wednesday’s auction.

There will be more auctions later this year, but it’s becoming clear that Nieto has to offer much more favorable financial terms to the oil companies if he wants the auctions to succeed, and any such changes will bring stiff domestic opposition. Bloomberg and MexOnline and Forbes and Dallas News

KEYS: Generational Dynamics, Greece, Alexis Tsipras, Syriza, International Monetary Fund, IMF, Germany, Finland, Steve Liesman, Japan, Shinzo Abe, Collective defense, Mexico, Petróleos Mexicanos, Pemex, Enrique Peña Nieto
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