The European banking concern run is on , as well as amongst it the slow-motion prepare wreck volition displace to high speed.
The Wall Street Journal reports €600 to 900 million a solar daytime are flowing out of Greek banks , and the outpouring may ascension inwards a higher house a billion euros per day. At the halt of Apr at that topographic point were alone €166 Billion deposits to flow. Count the days. And Greeks -- those who can't displace coin abroad or displace themselves abroad -- are "hiding coin inwards jars , nether the bed , fifty-fifty burying it inwards the mountains."
In related tidings , I read in conclusion calendar week tell that payments are exactly stopping inwards Greece. If there's a run a peril to pay inwards Drachma adjacent calendar month , why pay inwards euros now? Shipments are stopping -- if your invoice mightiness teach paid inwards drachma , no signal inwards sending goods today. This is elementary implosion. Kingdom of Spain has already lost virtually € 100 billion of banking concern deposits as well as Italia is losing them quickly.
What's going on? Keynesian economists honey to verbalise virtually how nifty leaving the euro volition live on , because as well as therefore salaries tin live on cutting past times depreciation rather than explicitly.
But if y'all receive got a banking concern concern human relationship , leaving the euro agency that y'all expire to bed i nighttime amongst € 10 ,000 inwards your banking concern account. The adjacent morn , y'all receive got 10 ,000 drachmas. Those drachmas are going to live on swiftly devalued to virtually 1/3 or therefore of their master copy value. In improver , it's a skillful bet at that topographic point volition live on uppercase controls as well as telephone commutation controls , therefore y'all can't teach coin out of the soil or purchase things amongst euros.
People empathize this. They teach out now. To an concern human relationship holder , the soil leaving the euro is the same every bit the authorities seizing banking concern accounts. Burglars at to the lowest degree know plenty non to advertize their visits inwards newspapers for 2 years earlier they visit.
The run agency everything volition come about super fast from hither on in. The fourth dimension to dither around as well as brand pronouncements is running out.
------------
How practise y'all halt a banking concern run?
1. One mutual prescription is for the authorities to guarantee deposits. But that won't piece of work , since the whole work is that the authorities is out of coin as well as the banks are stuffed total of authorities debt.
Kingdom of Spain discovered a version of this conundrum in conclusion week. Spain borrowed € 100 billion to recapitalize banks. The final result was non alone a continued run on the banks , but a precipitous ascension inwards Castilian authorities involvement rates.
Why didn't it work? "Recapitalize" agency that the Castilian authorities owns stock inwards banks. If the banks lose to a greater extent than coin , the Castilian authorities loses coin -- but the authorities nonetheless has to repay the 100 billion loan. Unfortunately , the Castilian authorities is broke. And what practise these banks own? Castilian existent estate as well as a lot of Castilian authorities debt.
But hold off , isn't the ECB alone supposed to lend against collateral? Yes , as well as that collateral is largely authorities bonds. The ECB knows it's taking junk collateral. If the ECB doesn't halt this massive lending , it understands good that it volition essentially halt upwardly monetizing all the debt of the southern tier , as well as a huge inflation volition eventually pause out. The ECB knows that too. How long volition it expire on to lend?
If the ECB decides to halt this massive lending , as well as therefore the game is up. The banks neglect , the governments guaranteeing the banks neglect , as well as chaos erupts --whether or non the governments create upwardly one's hear to plow the remaining euros inwards to monopoly money.
3. As inwards the United States of America "bank vacation ," governments tin assay to close downwardly the banks , impose uppercase controls , etc. But if it's non exactly really temporary illiquidity , the run starts upwardly the 2d y'all reopen the banks. And if y'all therefore much every bit breathe a discussion you're thinking of doing it , the run starts ahead of time. Whoops , it's every bit good late. Continuing from the journal here
That volition live on hard. Pronouncements at this appointment receive got footling weight. The alone trend to practise it is to live on really clear of the awful things a authorities volition allow rather than leave. It volition default on its sovereign debt. It volition cutting authorities salaries as well as entitlements. It volition allow banking concern failures , as well as it volition allow unusual banks to come upwardly inwards as well as swoop upwardly the assets. All of these things volition live on awful. But the authorities has to persuade voters it understands that leaving the euro volition live on worse.
Even that volition non live on enough. To a authorities inwards financial stress , banking concern accounts human face similar an H2O ice cream bar to a hungry child. Hellenic Republic as well as Italia receive got already passed wealth as well as belongings taxes. "Tax the rich" rhetoric is strong. People amongst banking concern accounts fearfulness expropriation as well as punitive wealth taxation every bit much every bit devaluation. Somehow , the authorities has to persuade them their banking concern accounts are rubber from depredation in the euro.
-----
Why are nosotros here?
I've been writing for 2 as well as a one-half years virtually mistakes inwards Europe , as well as won't repeat all of that now. But at that topographic point are 2 key points to make.
1. The euro was explicitly gear upwardly every bit a currency spousal human relationship without a financial union. (And it turned inwards to i without a banking concern regulatory union.) That can piece of work , a fact which practically all commentators ignore.
The key part is: sovereigns who can't pay their bills default. The European key banking concern does non impress upwardly euros to bail out sovereign creditors , either straight or via the subterfuge of lending to banks who as well as therefore purchase the sovereign debt.
The euro was explicitly gear upwardly this way. The primary work is , when the crisis came , nobody bothered to read the didactics manual.
2. As many times inwards history , strapped governments receive got forced banks to necessitate on their debts. H5N1 sovereign default is manageable. H5N1 country-wide banking crisis is much worse.
The liberal consensus wants "more regulation" to halt banks from taking risk. The regulators stuffed the banks amongst sovereign debts , as well as treated those debts every bit riskfree for years. They also confused "the banking organization cannot fail" amongst "no private banking concern tin fail."
----------
Paul Krugman , writing May 18 , wrote a few almost-sensible paragraphs virtually Europe , echoing many of these points. (His article is for in i lawsuit virtually economic science , non the evil grapheme of Republican politicians , therefore at that topographic point is some meat to verbalise about.) Since I handgrip therefore rarely amongst Krugman , I thought I'd celebrate amongst a few quotes , though amongst some quibbles as well as some interpretations that I'm certain he would disavow.
Mostly , I handgrip amongst his primary signal , that the emerging banking concern run agency the crisis is probable going to displace much to a greater extent than rapidly now.
Not alone is inflation non "the alone way" to render such long-term increase , it isn't a way. When has deliberate , anticipated as well as announced inflation always brought long-term prosperity? You must live on kidding.
On the other paw , I handgrip that inflation is the most likely path that Europe volition choose. Not because inflation industrial plant whatever Phillips bend magic , but because inflation is the "easy" trend to engineer a massive default of authorities as well as banking concern debt.
By arithmetics , hither are the options:
1) Government default. (Restructuring , really) If done correct away , this would receive got meant private-sector losses. Now that therefore much debt has been rolled inwards to banks , it agency banking concern failures too.
2) The Germans pay for everything. Not happening. There is non plenty taxing powerfulness inwards Federal Republic of Federal Republic of Germany to repay the entire debt of Portugal , Kingdom of Spain , Italia , as well as Hellenic Republic , addition their banks losses as well as their ongoing deficits.
3) The ECB buys upwardly the sovereign debt , or lends to banks on sovereign "collateral ," effectively doing the same. By turning trillions of debt inwards to coin , nosotros teach inflation. Inflation engineers the sovereign default as well as banking concern debt default implicitly.
4) Shock liberalization , privatization , freeing of markets , selling province assets. Remove the highly distorting taxes of the "austerity" plans , which said loudly "don't start businesses hither , don't hire anyone hither , as well as if y'all receive got some wealth I propose y'all teach it to the Commonwealth of the Bahamas ASAP." Return rapidly to rigid existent growth. Pay dorsum the debt. Fairly radical reform of unsustainable entitlements.
My obvious alternative is number 4. The Europeans' most probable alternative is number 3. It tin live on sold every bit "stimulus" as well as "liquidity provision ," as well as it kicks the tin downwardly the road. The inflation won't come about for several years. Then it volition live on piece of cake to blame speculators as well as hoarders as well as markets as well as expectations as well as therefore on.
But Krugman's incorrect on the size of the inflation. Several years of 3-4 per centum inflation is nowhere close enough. To write downwardly PIGS debt past times one-half , y'all receive got to double the toll level. And y'all receive got to practise it earlier the debt rolls over. So that agency doubling the toll grade -- 100% inflation -- inwards nether 2 years or so. If y'all practise it over several years , the overall ascension inwards the toll grade has to live on fifty-fifty higher.
To my hear an inflation therefore large that it wipes out one-half of PIGS as well as banking concern debt is virtually the same final result every bit breaking upwardly the euro directly. And the Germans volition likely leave of absence earlier that happens.
But what's kicking off the run is that governments are existence tempted to leave. I wonder whether Mr. Krugman as well as his colleagues receive got whatever regrets for the many elegies they receive got written to the wonders of split upwardly currencies as well as devaluation , the prospect of which is at nowadays causing the run.
---------
Bottom line: I'm pretty pessimistic. The run is on as well as volition intensify. Alternatives be , but they are therefore unpalatable to measure views that I scream upwardly massive intervention past times the ECB every bit the most probable electrical flow policy.
The ECB volition impress euros similar mad as well as lend them to banks , which volition expire on to purchase authorities debt. Southerners volition necessitate the ECB coin as well as set it inwards Northern banks. The ECB ends upwardly owning the debt through the banking system. The ECB understands the danger total good , but volition give in.
After that , at that topographic point is a sliver of hope. H5N1 stupor liberalization could give a render to robust increase as well as sustainable authorities finances inside a year. Then the debt would non default , as well as the ECB as well as its banks could sell dorsum all the sovereign debt they receive got bought.
But unless that miracle happens , inside a twelvemonth or therefore the ECB's collateral volition evaporate inwards the inevitable sovereign defaults , the sovereign defaults volition hateful banking concern defaults , as well as the euro volition inflate away rather than pause up. An immense , as well as utterly avoidable tragedy.
So , given that there's no trend they'd necessitate my radical advice , if I were inwards accuse I would recommend changing the "austerity" atmospheric condition on bailouts as well as ECB financing , amongst their emphasis on higher distorting taxes as well as vague hope of structural reform sometime inwards the adjacent century , to "reform" atmospheric condition demanding a tight schedule of structural reforms inside months.
The Wall Street Journal reports €600 to 900 million a solar daytime are flowing out of Greek banks , and the outpouring may ascension inwards a higher house a billion euros per day. At the halt of Apr at that topographic point were alone €166 Billion deposits to flow. Count the days. And Greeks -- those who can't displace coin abroad or displace themselves abroad -- are "hiding coin inwards jars , nether the bed , fifty-fifty burying it inwards the mountains."
In related tidings , I read in conclusion calendar week tell that payments are exactly stopping inwards Greece. If there's a run a peril to pay inwards Drachma adjacent calendar month , why pay inwards euros now? Shipments are stopping -- if your invoice mightiness teach paid inwards drachma , no signal inwards sending goods today. This is elementary implosion. Kingdom of Spain has already lost virtually € 100 billion of banking concern deposits as well as Italia is losing them quickly.
What's going on? Keynesian economists honey to verbalise virtually how nifty leaving the euro volition live on , because as well as therefore salaries tin live on cutting past times depreciation rather than explicitly.
But if y'all receive got a banking concern concern human relationship , leaving the euro agency that y'all expire to bed i nighttime amongst € 10 ,000 inwards your banking concern account. The adjacent morn , y'all receive got 10 ,000 drachmas. Those drachmas are going to live on swiftly devalued to virtually 1/3 or therefore of their master copy value. In improver , it's a skillful bet at that topographic point volition live on uppercase controls as well as telephone commutation controls , therefore y'all can't teach coin out of the soil or purchase things amongst euros.
People empathize this. They teach out now. To an concern human relationship holder , the soil leaving the euro is the same every bit the authorities seizing banking concern accounts. Burglars at to the lowest degree know plenty non to advertize their visits inwards newspapers for 2 years earlier they visit.
The run agency everything volition come about super fast from hither on in. The fourth dimension to dither around as well as brand pronouncements is running out.
------------
How practise y'all halt a banking concern run?
1. One mutual prescription is for the authorities to guarantee deposits. But that won't piece of work , since the whole work is that the authorities is out of coin as well as the banks are stuffed total of authorities debt.
Kingdom of Spain discovered a version of this conundrum in conclusion week. Spain borrowed € 100 billion to recapitalize banks. The final result was non alone a continued run on the banks , but a precipitous ascension inwards Castilian authorities involvement rates.
Why didn't it work? "Recapitalize" agency that the Castilian authorities owns stock inwards banks. If the banks lose to a greater extent than coin , the Castilian authorities loses coin -- but the authorities nonetheless has to repay the 100 billion loan. Unfortunately , the Castilian authorities is broke. And what practise these banks own? Castilian existent estate as well as a lot of Castilian authorities debt.
...That would enhance pressure level on the Castilian authorities , which has come upwardly to rely on local banks using ECB funds to purchase sovereign debt. According to the latest Castilian Treasury information , piece unusual investors receive got reduced their holdings of Castilian bonds to 32% of the total inwards March from 36% inwards Dec , Castilian banks receive got raised their holdings to 41% of the total inwards March from 35% inwards Dec2. The 2d run-stopping prescription is for the key banking concern -- the ECB inwards this example -- to opened upwardly the spigots. They already are. Ask yourself , where are banks getting the cash to redeem all these deposits anyway? They certain aren't selling assets -- existent estate loans as well as authorities bonds. The response is , the ECB is lending them the money.
But hold off , isn't the ECB alone supposed to lend against collateral? Yes , as well as that collateral is largely authorities bonds. The ECB knows it's taking junk collateral. If the ECB doesn't halt this massive lending , it understands good that it volition essentially halt upwardly monetizing all the debt of the southern tier , as well as a huge inflation volition eventually pause out. The ECB knows that too. How long volition it expire on to lend?
If the ECB decides to halt this massive lending , as well as therefore the game is up. The banks neglect , the governments guaranteeing the banks neglect , as well as chaos erupts --whether or non the governments create upwardly one's hear to plow the remaining euros inwards to monopoly money.
3. As inwards the United States of America "bank vacation ," governments tin assay to close downwardly the banks , impose uppercase controls , etc. But if it's non exactly really temporary illiquidity , the run starts upwardly the 2d y'all reopen the banks. And if y'all therefore much every bit breathe a discussion you're thinking of doing it , the run starts ahead of time. Whoops , it's every bit good late. Continuing from the journal here
According to the senior [Greek] banker , the electrical flow charge per unit of measurement of deposit outflows--of €1 billion or less per day–remains "manageable" since the banks hold large cash buffers on paw to bargain amongst the withdrawals. But if those outflows were to grow four- or five-fold , Hellenic Republic would live on forced to impose deposit as well as other uppercase controls.4. The in conclusion trend to halt this run is to assay , fifty-fifty at this belatedly appointment , to commit fully as well as forecefully that no soil volition leave of absence the euro.
That volition live on hard. Pronouncements at this appointment receive got footling weight. The alone trend to practise it is to live on really clear of the awful things a authorities volition allow rather than leave. It volition default on its sovereign debt. It volition cutting authorities salaries as well as entitlements. It volition allow banking concern failures , as well as it volition allow unusual banks to come upwardly inwards as well as swoop upwardly the assets. All of these things volition live on awful. But the authorities has to persuade voters it understands that leaving the euro volition live on worse.
Even that volition non live on enough. To a authorities inwards financial stress , banking concern accounts human face similar an H2O ice cream bar to a hungry child. Hellenic Republic as well as Italia receive got already passed wealth as well as belongings taxes. "Tax the rich" rhetoric is strong. People amongst banking concern accounts fearfulness expropriation as well as punitive wealth taxation every bit much every bit devaluation. Somehow , the authorities has to persuade them their banking concern accounts are rubber from depredation in the euro.
-----
Why are nosotros here?
I've been writing for 2 as well as a one-half years virtually mistakes inwards Europe , as well as won't repeat all of that now. But at that topographic point are 2 key points to make.
1. The euro was explicitly gear upwardly every bit a currency spousal human relationship without a financial union. (And it turned inwards to i without a banking concern regulatory union.) That can piece of work , a fact which practically all commentators ignore.
The key part is: sovereigns who can't pay their bills default. The European key banking concern does non impress upwardly euros to bail out sovereign creditors , either straight or via the subterfuge of lending to banks who as well as therefore purchase the sovereign debt.
The euro was explicitly gear upwardly this way. The primary work is , when the crisis came , nobody bothered to read the didactics manual.
2. As many times inwards history , strapped governments receive got forced banks to necessitate on their debts. H5N1 sovereign default is manageable. H5N1 country-wide banking crisis is much worse.
The liberal consensus wants "more regulation" to halt banks from taking risk. The regulators stuffed the banks amongst sovereign debts , as well as treated those debts every bit riskfree for years. They also confused "the banking organization cannot fail" amongst "no private banking concern tin fail."
----------
Paul Krugman , writing May 18 , wrote a few almost-sensible paragraphs virtually Europe , echoing many of these points. (His article is for in i lawsuit virtually economic science , non the evil grapheme of Republican politicians , therefore at that topographic point is some meat to verbalise about.) Since I handgrip therefore rarely amongst Krugman , I thought I'd celebrate amongst a few quotes , though amongst some quibbles as well as some interpretations that I'm certain he would disavow.
Mostly , I handgrip amongst his primary signal , that the emerging banking concern run agency the crisis is probable going to displace much to a greater extent than rapidly now.
Right at nowadays , Hellenic Republic is experiencing what’s existence called a “bank jog” — a somewhat slow-motion banking concern run , every bit to a greater extent than as well as to a greater extent than depositors push clit out their cash inwards anticipation of a possible Greek move out from the euro. Europe’s key banking concern is , inwards upshot , financing this banking concern run past times lending Hellenic Republic the necessary euros; if as well as (probably) when the key banking concern decides it tin lend no to a greater extent than , Hellenic Republic volition live on forced to abandon the euro as well as number its ain currency again.Comment: As above. Change "forced to" to "choose to" as well as I'm on board. There is an option. Sovereign default. Let banks neglect -- pregnant their senior debt becomes equity as well as they are recapitalized. Good banks purchase the assets of bad banks. But the Europeans likely won't receive got the tummy for it.
This demonstration that the euro is , inwards fact , reversible would atomic number 82 , inwards plow , to runs on Castilian as well as Italian banks. Once in i lawsuit again the European Central Bank would receive got to necessitate whether to render open-ended financing; if it were to tell no , the euro every bit a whole would blow up.Comment. Right again. The alone matter keeping whatever coin inwards Castilian as well as Italian banks is the thought that leaving the euro actually can't happen. Once it's clear that move out , devaluation -- along amongst probable currency controls , banking concern closures , deposit seizures , as well as sky-high wealth taxes -- are on the tabular array , the run volition start inwards earnest.
Yet financing isn’t enough. Italia as well as , inwards item , Kingdom of Spain must live on offered hope — an economical environs inwards which they receive got some reasonable prospect of emerging from austerity as well as depression. Realistically , the alone trend to render such an environs would live on for the key banking concern to driblet its obsession amongst toll stability , to receive got as well as indeed encourage several years of iii per centum or 4 per centum inflation inwards Europe (and to a greater extent than than that inwards Germany).I handgrip amongst the outset 2 sentences. But the alone hope for such an economical environs is stupor liberalization. (Despite Krugman's "savage cuts" these economies nonetheless pass one-half of gross domestic product , amongst direct intervention , province industries , as well as other off the books interventions bringing the total fifty-fifty larger.)
Not alone is inflation non "the alone way" to render such long-term increase , it isn't a way. When has deliberate , anticipated as well as announced inflation always brought long-term prosperity? You must live on kidding.
On the other paw , I handgrip that inflation is the most likely path that Europe volition choose. Not because inflation industrial plant whatever Phillips bend magic , but because inflation is the "easy" trend to engineer a massive default of authorities as well as banking concern debt.
By arithmetics , hither are the options:
1) Government default. (Restructuring , really) If done correct away , this would receive got meant private-sector losses. Now that therefore much debt has been rolled inwards to banks , it agency banking concern failures too.
2) The Germans pay for everything. Not happening. There is non plenty taxing powerfulness inwards Federal Republic of Federal Republic of Germany to repay the entire debt of Portugal , Kingdom of Spain , Italia , as well as Hellenic Republic , addition their banks losses as well as their ongoing deficits.
3) The ECB buys upwardly the sovereign debt , or lends to banks on sovereign "collateral ," effectively doing the same. By turning trillions of debt inwards to coin , nosotros teach inflation. Inflation engineers the sovereign default as well as banking concern debt default implicitly.
4) Shock liberalization , privatization , freeing of markets , selling province assets. Remove the highly distorting taxes of the "austerity" plans , which said loudly "don't start businesses hither , don't hire anyone hither , as well as if y'all receive got some wealth I propose y'all teach it to the Commonwealth of the Bahamas ASAP." Return rapidly to rigid existent growth. Pay dorsum the debt. Fairly radical reform of unsustainable entitlements.
My obvious alternative is number 4. The Europeans' most probable alternative is number 3. It tin live on sold every bit "stimulus" as well as "liquidity provision ," as well as it kicks the tin downwardly the road. The inflation won't come about for several years. Then it volition live on piece of cake to blame speculators as well as hoarders as well as markets as well as expectations as well as therefore on.
But Krugman's incorrect on the size of the inflation. Several years of 3-4 per centum inflation is nowhere close enough. To write downwardly PIGS debt past times one-half , y'all receive got to double the toll level. And y'all receive got to practise it earlier the debt rolls over. So that agency doubling the toll grade -- 100% inflation -- inwards nether 2 years or so. If y'all practise it over several years , the overall ascension inwards the toll grade has to live on fifty-fifty higher.
To my hear an inflation therefore large that it wipes out one-half of PIGS as well as banking concern debt is virtually the same final result every bit breaking upwardly the euro directly. And the Germans volition likely leave of absence earlier that happens.
Both the key bankers as well as the Germans loathe this thought , but it’s the alone plausible trend the euro mightiness live on saved. For the past times two-and-a-half years , European leaders receive got responded to crisis amongst half-measures that purchase fourth dimension , yet they receive got made no piece of work of that time. Now fourth dimension has run out.I'll expire amongst this alone because "plausible" includes the chances that European leaders volition necessitate it. I handgrip amongst the 2d judgement , though I suspect the "full measures" inwards my hear -- default , banking concern restructuring , commitment to euro as well as opened upwardly markets , stupor liberalization -- are unlike from what I presume from other writing that Krugman does -- endless stimulus financed past times Federal Republic of Federal Republic of Germany
So volition Europe finally ascension to the occasion? Let’s hope therefore — as well as non exactly because a euro breakup would receive got negative ripple effects throughout the world. For the biggest costs of European policy failure would likely live on political.And at nowadays inwards full-throated agreement. The currency spousal human relationship , without financial spousal human relationship , volition live on a horrible matter to lose.
Think of it this way: Failure of the euro would amount to a huge defeat for the broader European projection , the endeavor to convey peace , prosperity as well as commonwealth to a continent amongst a terrible history. It would also receive got much the same upshot that the failure of austerity is having inwards Hellenic Republic , discrediting the political mainstream as well as empowering extremists.
But what's kicking off the run is that governments are existence tempted to leave. I wonder whether Mr. Krugman as well as his colleagues receive got whatever regrets for the many elegies they receive got written to the wonders of split upwardly currencies as well as devaluation , the prospect of which is at nowadays causing the run.
---------
Bottom line: I'm pretty pessimistic. The run is on as well as volition intensify. Alternatives be , but they are therefore unpalatable to measure views that I scream upwardly massive intervention past times the ECB every bit the most probable electrical flow policy.
The ECB volition impress euros similar mad as well as lend them to banks , which volition expire on to purchase authorities debt. Southerners volition necessitate the ECB coin as well as set it inwards Northern banks. The ECB ends upwardly owning the debt through the banking system. The ECB understands the danger total good , but volition give in.
After that , at that topographic point is a sliver of hope. H5N1 stupor liberalization could give a render to robust increase as well as sustainable authorities finances inside a year. Then the debt would non default , as well as the ECB as well as its banks could sell dorsum all the sovereign debt they receive got bought.
But unless that miracle happens , inside a twelvemonth or therefore the ECB's collateral volition evaporate inwards the inevitable sovereign defaults , the sovereign defaults volition hateful banking concern defaults , as well as the euro volition inflate away rather than pause up. An immense , as well as utterly avoidable tragedy.
So , given that there's no trend they'd necessitate my radical advice , if I were inwards accuse I would recommend changing the "austerity" atmospheric condition on bailouts as well as ECB financing , amongst their emphasis on higher distorting taxes as well as vague hope of structural reform sometime inwards the adjacent century , to "reform" atmospheric condition demanding a tight schedule of structural reforms inside months.
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