| Prepare for Major Haircuts on Portuguese Debt Posted: 08 Mar 2012 11:09 PM PST Ambrose Evans-Pritchard at The Telegraph says Legal skull-duggery in Greece may doom Portugal. I suggest that Portugal is doomed whether or not there is "Legal Skull-Duggery". However, it's perfectly fair to suggest that LSD will indeed make matters worse. From Pritchard ... Last month the European Central Bank exercised its droit du seigneur, exempting itself from loses on Greek bonds. The instant effect was to concentrate more loss on other bondholders. "This has set a major precedent," said Marchel Alexandrivich from Jefferies Fixed Income. "It does not matter how often the EU authorities repeat that Greece is a 'one-off' case, nobody in the markets believes them."
The ECB holds €220bn (£185bn) of Greek, Portuguese, Irish, Spanish, and Italian bonds. Its handling of Greece implicitly subordinates private creditors in each country. All have slipped a notch down the pecking order.
This might not matter too much if Greece were really a "one-off" case but markets are afraid that Portugal will tip into the same downward spiral as austerity starts to bite.
Citigroup expects the economy to contract by 5.7pc this year, warning that bondholders may face a 50pc haircut by the end of the year. Portugal's €78bn loan package from the EU-IMF Troika is already large enough to crowd out private creditors, reducing them to ever more junior status.
EU leaders said last June that "Greece is unique" and promises that haircuts would "not be replicated in Portugal". They have since pledged that the EU's new bail-out (ESM) fund will not have protected status. ECB Lies It's safe to stop right there. No one in their right mind can possibly believe EU leaders or the ECB. Certainly the markets do not believe in such fairy tales. Portugal is interesting in that neither LTRO had much effect. For example, 10-Year Portuguese government bonds yield 13.86%. 2-year bonds yield 12.54%. Meanwhile German 10-year bonds yield 1.8% and German 2-year government bonds yield .16%. Portugal cannot possibly survive on those spreads. Thus, what has to happen, will happen. Major haircuts are coming. Pritchard notes fundamental reasons why. Combined public and private debt is 360pc of GDP, 100 percentage points above Greece. This is a huge burden on a shrinking economic base. Its current account deficit was still 8pc of GDP last year, much like Greece. Both countries are overvalued by 20pc on a real effective exchange rate, though Portugal has barely begun to cut unit labour costs.
Dimitris Drakopoulos from Nomura said Portugal relied on "fiscal engineering" last year to massage deficit figures, raiding 3.5pc of GDP from private pension funds.
Matters will come to a head soon. The IMF must decide by September whether Portugal needs more money and debt relief. If Portugal now spirals into a Grecian vortex, large haircuts loom. This time EU leaders will have to accept that their own taxpayers will suffer losses - avoided until now - or violate their pledge.
Europe's handling of Greece has guaranteed that global funds will rush for Club Med exits at the first sign of trouble. The next spasm of the debt crisis will that much dangerous if it ever comes. As the saying goes: Hell hath no fury like an abused bondholder. Bleeding Profusely From Help Portugal is poised to blow up anytime now. Greece is already pricing in further writedowns. Expect Ireland and Spain to ask for writedowns. Eventually voters in Germany, the Netherlands, Finland, or possibly even France will get fed up with these repeated bailouts at taxpayer expense and demand action. So will voters in Spain, Greece, Portugal, and Ireland, all bleeding profusely from "help". It is quite amusing to watch these bald-faced liars at the ECB, EMU, and IMF, pretend everything is OK just as the sovereign debt default tsunami is inches from shore. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| "Success" at Gunpoint Posted: 08 Mar 2012 05:11 PM PST I am rather amused by the absurd headline on Financial Times this evening: " Greek debt swap support close to 95%" The largest debt restructuring in history was heading for a successful outcome last night as Greece looked set to see a participation rate of close to 95 per cent for its €206bn bond exchange.
One person involved in the deal said that more than 90 per cent and possibly more than 95 per cent of investors had taken part, assuming collective action clauses (CACs) were used to bind dissenting holders of some bonds.
The high participation rate is only possible through the use of CACs, which will make the offer binding on all holders of Greek-law bonds. That in turn will almost certainly trigger pay-outs under credit default swap insurance.
"This extraordinarily difficult deal … allows Europe to avoid what could have been an enormously costly, disorderly default," Charles Dallara, chief negotiator for Greek bondholders, said on Thursday during a visit to Brazil. Difficult Deal Yes indeed, the deal was so difficult that the Greek parliament chose to enforce it on holdouts by gunpoint, more specifically retroactive collective action clauses (CACs). Here is yet another measure of "success" Financial markets are already betting Greece will default again in the future. Grey market pricing for the new Greek bonds to be issued as part of the exchange ranged from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes seen by the FT.
The pricing equates to a yield on the new bonds of 17 to 21 per cent about where Greek yields stood in the autumn and far worse than the yield on debt issued by Portugal, which has also received a bailout. The definition of "success" at 17 cents on the dollar for new bonds (and even then only achievable at gunpoint) is so preposterous I hardly know what to say. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Gallup Reports Large Jump in Unemployment to 9.1%, Underemployment to 19.1% Posted: 08 Mar 2012 12:30 PM PST In tomorrow's BLS payroll report, economists forecast an increase of 225,000 private jobs and total non-farm payrolls growth of 210,000. ADP expects 216,000 private jobs. I will take the under. Meanwhile Gallup reports U.S. Unemployment Up in February U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December.
The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011.
In addition to the 9.1% of U.S. workers who are unemployed, 10.0% are working part time but want full-time work. This percentage is similar to the 10.1% in January, but is higher than the 9.6% of February 2011.
As a result, Gallup's U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.
Looking Ahead to the Government's Unemployment Report
Last February, the U.S. Bureau of Labor Statistics applied a seasonal adjustment factor of 0.5 points to its unadjusted unemployment rate for the month. If that same seasonal adjustment is applied to Gallup's mid-month unemployment rate of 9.0%, it would produce a seasonally adjusted unemployment rate of 8.5%. Alternatively, if it was applied to Gallup's full-month unemployment rate of 9.1%, it would produce a seasonally adjusted rate of 8.6%. Gallup therefore forecasts an increase in the unemployment rate. Unemployment Rate Not Seasonally Adjusted  Except for the years 2008-2009, and recessions in general, seasonally unadjusted unemployment rate tends to peak in January. Thus it will be interesting to watch Gallup's numbers for the next few months to see if there is a definite change in trend. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Wal-Mart to Offer "Permanently Low Prices" Instead of Rollbacks; More Self-Checkout Lanes Coming Up Posted: 08 Mar 2012 10:39 AM PST Taking a page out of JC Penney's "Every Day Low Pricing" playbook, Wal-Mart to Offer "Consistently Low Prices" Instead of Rollbacks. Wal-Mart is now pushing its grocery suppliers harder to offer consistently low prices, instead of timed promotions or "rollbacks." That means food companies are unlikely to be able to pass through more price increases and will be forced to pull other levers, such as cost-cuts to protect margins or product innovation to drive sales.
"I think we reached the wall in terms of raising price. Consumers can't take any more," said Edward Jones analyst Jack Russo, citing recent Nielsen data showing correlations between price increases and declines in sales volume.
"A lot of these companies are going to have to get back to basics and not raise prices much, and if they want to grow sales they're going to have to do it through innovation, or being razor-sharp on pricing."
For example, General Mills' sales volume fell 11.3 percent in the 12 weeks ended February 18 after the cereal maker raised its average selling price by 11.5 percent with a combination of price hikes and a mix of higher-priced goods, Russo said, citing Nielsen.
FROM "ROLLBACKS" TO "EVERY DAY LOW PRICES"
For Walmart, the biggest grocery seller in the United States, lowering prices on a long-term basis can help it convince shoppers that it is the best place to go for everyday items.
With gasoline prices climbing and many shoppers living from paycheck to paycheck, Walmart wants to win a larger share of shoppers' limited spending , after having lost some customers to dollar stores during the last recession.
"We want to work with vendors on that to see if we can take a price lower and leave it there permanently," Wal-Mart Chief Financial Officer Charles Holley told reporters last month. "The price image for a customer is very important."
Last August, Clorox raised the price of Clorox bleach by 12 percent in the United States, but Walmart kept the price tag steady.
Wal-Mart said margin declines are likely to persist. Walmart U.S. is cutting $2 billion of costs over two years, trimming spending everywhere from construction to staff scheduling. Greeters on overnight shifts, for example, were moved to roles such as restocking shelves.
Wal-Mart's urge to maintain low prices rather than offer short-term sales puts more pressure on vendors.
"For most categories that Wal-Mart competes in, they are in the driver's seat, they can make or break a manufacturer's year," said Telsey Advisory Group analyst Joseph Feldman. More Self-Checkout Lanes Coming Up Reuters reports Wal-Mart to add more self-checkout lanes. Wal-Mart Stores Inc will add more self-checkout lanes at its Walmart and Sam's Clubs stores as it continues to look for ways to lower costs and prices, Chief Financial Officer Charles Holley said on Wednesday.
Holley said he was "very pleased" with traffic and sales at Walmart's U.S. stores this quarter, which started in February. Shoppers using their tax refund checks helped drive some of the sales, he said.
While Wal-Mart expects inflation to moderate this year, gasoline prices remain a "wild card," Holley said. "If oil continues to go up, I think that can be a drag on economies around the world."
Pushing more shoppers to scan their own items and make payments without the help of a cashier, has the potential to save Wal-Mart millions of dollars. For every one second in average transaction time at the Walmart U.S. chain, the company said it spends about $12 million in cashier wages.
The company will not eliminate cashiers, but it does plan to open more self-checkout lanes at Walmart, where some 1,600 of the more than 3,800 U.S. stores already have them. At the Sam's Club warehouse chain, about 80 out of 611 stores already have self-checkout lanes and another 220 will get them this year, Holley said. Price, Job Pressures Everywhere You Look More self-checkout lanes equals fewer hires, no matter what Holley says. It's one of the ways Wal-Mart is handling its own price squeeze. Suppliers have their own margin issues to deal with. Price paid in the service sector have gone up 31 consecutive months as reported in the ISM Non-Manufacturing Report . Prices received are another matter as Wal-Mart shows. For a look at JC Penney's pricing scheme launched in January, please see Chart of the Day: Apparel Import Data in Square Meters and Dollars; J.C. Penney's Slashes Prices on All Merchandise by "At Least 40%", Offers Every Day Low Pricing Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Currency Looniness and Reserve Currency Madness; What Should the Global Reserve Currency Be? Posted: 08 Mar 2012 08:17 AM PST Given the clearly dire consequences associated with Greece being in a currency union with no control over its own currency, one might think such results would put an immediate halt to new currency unions and momentum of countries instituting new currency pegs as well. Yet, about a week ago, the Globe and Mail commented Canadian envoy to Iceland sparks loonie controversy. For 150 years, the rest of the world has shown scant interest in the Canadian dollar – the poor cousin to the coveted U.S. greenback.
But now tiny Iceland, still reeling from the aftershocks of the devastating collapse of its banks in 2008, is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls.
Officially, the Icelandic government is targeting membership in the 27-member euro zone. But support among Icelanders is slipping.
In a recent Gallup poll, seven out of 10 Icelanders said they would happily dump their volatile and fragile krona for another currency. Their favoured alternative is the Canadian dollar, easily outscoring the U.S. dollar, the euro and the Norwegian krone.
Iceland is in a bind. The country imposed strict currency controls after its spectacular banking collapse in 2008. A major downside of those controls is that foreign investors can't repatriate their profits, making Iceland an unattractive place to do business.
Those capital controls are slated to start coming off next year. And many experts fear a return to the wild swings of the past – in inflation, lending rates and the currency itself. Iceland is the smallest country in the world still clinging to its own currency and monetary policy. The krona soared nearly 90 per cent between 2001 and 2007, only to crash 92 per cent after the financial crisis in 2008. Iceland's Problem Why is it the problem (and unintended consequences) that you don't have, always look better than the problems you do have? The fact of the matter is Iceland is recovering from its crisis quite nicely. Hopefully Iceland learned something from its recent crash and burn. Moreover, given Iceland's willingness to do the right thing (default), hopefully the foolish investors who drove up the value of the krona learned something as well. Argentina's Ruinous Currency Peg Entering a currency peg with no control over monetary policy, interest rates, or currency demand as Iceland is considering, has a history of spectacular blowups. Argentina is a classic case although it made numerous flaws in its attempts to maintain a peg to the US dollar between 1991 and 2002. The peg blew up spectacularly as described in the Wikipedia article regarding the Argentine Currency Board. Inquiring minds should also consider Confiscatory Deflation: The Case of Argentina by Joseph Salerno on the Mises website. Existing Currency Pegs Nonetheless, there are many existing currency pegs that for now seem to be working. Please consider the following chart from Wikipedia on Currency Pegs.  Legend: dark blue - EUR users; dark green - USD users; light blue - EUR pegs; light green - USD pegs (including cascaded like Macao->HK->USD); orange - AUD users; brown - NZD users; lila - ZAR users; yellow - INR users and pegs; red - GBP users and pegs; light pink - XDR/other currency basket pegs; dark pink - two-country usage/peg, multiple cases (CHF in Liechtenstein, ILS in PNA, Singapore/Brunei) Reserve Currency Madness Regardless of what Iceland does or does not do, Iceland is essentially irrelevant to the global economy. Nonetheless, every time we see a story like this, someone manages to blow it up way out of proportion to reality. For example, please consider snips by ZeroHedge from Iceland Wants To Adopt The Dollar... No, Not That One, The Other One According to the Globe and Mail tiny Iceland, "is looking longingly to the loonie as the salvation from wild economic gyrations and suffocating capital controls...And for the first time, the Canadian government says it's open to discussing idea.
It is a huge slap in the face of those statists (and the United States of course) who keep repeating no matter the facts that the USD will never lose its reserve status. Here's a hint: it can and it will. Bogus Threats to US Reserve Currency Status Not to belittle Iceland (as I wish them well and also commend them for telling the IMF and EU to shove it) but the United States does not care what Iceland does, at least it shouldn't because Iceland is statistically meaningless in terms of global trade. The irony is the US would gladly give up reserve currency status. Please consider Bogus Threats to US Reserve Currency Status: No Country Really Wants It! In spite of all the hype regarding the Yuan as a reserve currency I have stated many times recently that discussion of the Yuan as a reserve currency is nothing but ridiculous hype.
My reasons are:
- The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
- China is a command economy
- In China, property rights and civil rights are questionable
- Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble
Michael Pettis at China Financial Markets has a similar list of reasons, phrased slightly differently. Pettis does add one key item I overlooked: "Very deep and open domestic bond markets"
From a recent email post Pettis writes ....
Is it time for the US to disengage the world from the dollar?
Last week on Thursday, the Financial Times published an OpEd piece America Must Give Up The Dollar I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency.
My basic argument was that every twenty to thirty years – whenever, it seems, that the American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar's dominance as the world's reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch.
But I think these predictions about the end of dollar dominance are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that the cost is much higher than most countries are willing to accept.... No One Really Wants Reserve Currency Status
I am quite sure that Pettis has this correct. After all, if reserve currency status was such a gift, why doesn't China take the steps that would make it possible. Why doesn't Europe?
The fact is, for all their bitching, nearly every country on the planet does not want to relinquish their "export growth model". Every week there is some trumped-up report by someone about how China is trading more in the Yuan with Russia and Southeast Asia countries. In the grand scheme of things such trade in Yuan nearly meaningless, not representative of a significant adjustment.
Mathematically, the fact remains, the US runs a huge trade deficit, and countries accumulate US assets, most frequently US Treasuries.
The Fed is fighting back by attempting to force the US dollar lower. Mathematically every currency cannot be weak relative to each other. Central bank actions to achieve the impossible are behind the rise in commodities, especially silver and gold.
Unstable Mess
The irony in this mess is those cheering the demise of the US and the US dollar look at baby-step moves countries like China make in that direction as if that would hurt the US.
The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years. .... Who Doesn't Want Reserve Currency Status? - Bernanke would love for the US to lose reserve currency status. He wants a weaker US dollar and his actions prove it.
- Congress is threatening to label China a currency manipulator, seeking to force China to revalue the RMB higher. By its actions, Congress would gladly see the US lose reserve currency status.
- President Obama and Mitt Romney both want a weaker US dollar.
- Brazil does not want a rising currency (see Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle)
- Switzerland does not want a rising currency and pegged to the Euro to prevent it
- Japan clearly does not want a rising Yen
- Europe wants to increase exports to grow its way out of its mess. A rising Euro would hinder that idea.
- China does not want a rising Yuan
The Big Picture - The US will be better off, not worse, were the US to actually lose reserve currency status.
- The Fed, Congress, Obama, and Presidential hopefuls do not want the US dollar to have reserve currency status.
- No other country wants reserve currency status
- The US has the largest economy and the only bond markets outside of Europe deep enough to support being the world's reserve currency
- The US is stuck with reserve currency status as a result of Bretton Woods II, and president Nixon halting gold convertibility.
ZeroHedge missis the big picture. That said, I very much agree with ZeroHedge on one point: The US will indeed at some point lose reserve currency status, possibly as a result of a massive global currency crisis involving the US dollar, Japanese Yen, Chinese Renmimbi, and the Euro. Such a day of reckoning is indeed coming, and from my perspective the sooner the better. In the meantime, just keep in mind that trade agreements between Canada and Iceland, and China and Timbuktu (or whoever), are not worth the massive amount of hype given to them by most writers. What Should the Reserve Currency Be? Fiat money, fractional reserve lending, inane fiscal polices, and central banks all acted together to create the global financial crisis. None of them can be any part of a lasting solution. Thus, as for what should replace the US dollar as the world's reserve currency, let me suggest real money, gold. Gold would also cure these trade imbalances in a flash. For a discussion, please consider Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited. Who Doesn't Want Gold as the Reserve Currency? - Governments who want to print money to fund warmongering without raising taxes
- Bankers who benefit from inflation because they are always bailed out by central banks when they get into trouble
- The wealthy because they have first access to money and get to bid up the price of assets before the greater fools rush in.
The housing bubble is the classic example of point number three. By the time money was available to anyone who could breathe, home prices were so high that an outright crash was inevitable. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Mitt Romney's Foolish Pledge to Re-Fight the Cold War Posted: 08 Mar 2012 02:24 AM PST On the basis of Mitt Romney's latest appeal to the far right, including a vow to " teach Iranians the meaning of American resolve", and also on Romney's pledge to start a trade war with China, I am now willing to state that I would just as soon see president Obama reelected as Mitt Romney be elected. I do not say this lightly. It will likely cost me readership. So be it. Consequences be dammed, I speak my mind. No Hope Elsewhere Rick Santorum and Newt Gingrich are at least as bad. With those statements, I just offended most of the country. So be it. At least I took a stand. Most economic bloggers stay away from politics in fear of offending anyone. Re-Fighting the Cold War Please consider Romney's op-ed in the Washington Post How I would check Iran's nuclear ambition, in which he promises to teach the Iranians "very painful lessons about the meaning of American resolve." Romney stated "My foreign policy will be the same as Ronald Reagan's: namely, 'peace through strength'. "Just as Reagan sought to defend the United States from Soviet weapons with his Strategic Defense Initiative, I will press forward with ballistic missile defense systems to ensure that Iranian and North Korean missiles cannot threaten us or our allies," said Romney. Nowhere did Romney say how he would pay for his vow to re-fight the cold-war that has already been won. Nor did Romney provide any sensible discussion on the merits of ballistic missile defense systems. Romney cannot discuss the merits of new ballistic missile defense systems for the simple reason there are none. Plane hijackings and suitcase bombs smuggled in via diplomatic, unchecked luggage, are a far more credible threat than a missile attack from North Korea. Worse yet, Romney proposes to a war-weary public to "go alone [in Iran] if we must". Horrendous Fiscal Policy Merrill Goozner writing for The Fiscal Times says Romney's Iran Policy Would Cripple the Economy. Citing a decade of unfunded wars in Iraq and Afghanistan, Goozner asks, "is this level of domestic austerity, which would likely throw the U.S. economy back into recession, what a war-weary public wants or needs?" War Not What the U.S. Needs or Wants To answer the question posed by the Goozner, war is absolutely what the U.S. does not need and the citizens of the U.S. do not want. If you disagree, can I please see a show of hands on a proposal to raise taxes to fight a war in Iran? Alternatively, please tell me how you will pay for it. If Romney had the honest decency to pledge to raise taxes to support his absurd ramp in military spending, we would probably see the greatest landslide in election history, in favor of Obama. Smoot-Hawley Trade Policy Yet Again Let's switch gears to vitally important trade issues. Mitt Romney is off his rocker by announcing support for a presidential decree that would label China a currency manipulator. History, namely the Smoot-Hawley Tariff Act, clearly shows how seriously misguided Romney's proposal is. So far, president Obama has resisted such foolish measures. Misguided Appeal to the Far-Right The more Romney appeals to the far-right, the more leeway Obama has to move slightly to the right to capture the middle and thus appear marginally better. - If Romney wants war with Iran, all Obama needs to say is the "US prefers diplomacy but does not preclude anything"
- If Romney wants a trade war with China, all Obama needs to do is act on a few items like steel and tout the imaginary results.
- If Romney wants to trash Obamacare, all Obama needs to do is point out that hypocrite Romney is really trashing his own Romneycare plan.
This is certainly not an endorsement of President Obama because I will not vote for Obama under any circumstances. Rather, I take Romney at his word, and cannot stand a damn thing I hear. Divided We Stand In November, I will write in Ron Paul, because that is the only option that makes any sense. Many independents will feel the same. That said, I expect Republicans to hold the House, and gain in the Senate regardless of who wins the 2012 presidential sweepstakes. Sadly, a divided do-nothing electorate is the best outcome one can reasonably expect at the moment. More Than Two Choices There is little difference actually between Mitt Romney and president Obama. Many will end up flipping a coin. However, that is not a choice anyone has to make. I can and will write in Ron Paul, just as I did four years ago. Don't Blame Me It's a sad state of affairs that a hopeless Democrat president might be reelected in spite of a faltering economy where real wages are declining and jobs extremely difficult to find. Should that happen, don't blame me, the messenger. Rather, blame warmongers and the extreme-right "in-your-face" social moralists for hijacking policy far from what the war-weary, social-weary public wants and needs. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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