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Guest post: The Petro and the Assignat

February 26, 2018

In this guest post, Tony Yates compares Venezuela’s initial coin offering to the creation of assignats during the early stages of the French Revolution.The launch of the Venezuelan “Petro” may sound familiar to students of the financial history of the French Revolution.A brief oversimplification of what happened in the early 1790s:The revolutionary government found itself at war with most of its neighbours. That raised the government’s spending needs and also limited its ability to borrow from the many lenders who lived in the countries France was fighting. Other lenders, including people who lived in France, were worried that the war’s progress and political turbulence generally would prevent them from being repaid.The French government solved the problem by auctioning off parcels of

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Guest post: A former Fed insider explains the internal debate over QE3

February 16, 2018

In this guest post, Bill Nelson, formerly a deputy director of the Federal Reserve Board’s Division of Monetary Affairs and now the chief economist of The Clearing House, explains how Fed officials thought about the benefits and risks to an open-ended asset purchase programme.Last month, the Federal Reserve released transcripts, presentations, and Tealbooks for the 2012 Federal Open Market Committee meetings. While the Committee made a number of momentous decisions over the course of the year, the discussion around the decision to start the flow-based asset purchase programme (aka “QE3” or “QE infinity”) is required reading for understanding the Fed’s actions over subsequent years.Perhaps most importantly, QE3 forced the Fed to change its plans for normalising its balance sheet.In

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Guest post: Moneyness and Term Premia

February 15, 2018

In this guest post, Manmohan Singh of the International Monetary Fund and Phil Prince of Pine River Capital Management argue that the use of longer-term securities as collateral for short-term borrowing should affect how central bankers think about “money”. All views expressed are of the authors only and do not represent the opinions of the IMF or Pine River Capital.Most regression-based models used to estimate term premia start from the assumption that policy rates affect the long end. Del Negro et al tracked changes in the term premium over time, and decomposed that premium into a “safety” premium and a “liquidity” premium. These models are incomplete, however, because they ignore the possibility that changes in supply and demand for long bonds could also affect the management of the

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Three ways for finance to boost sustainable development, cc: Davos

January 22, 2018

This is a guest post by Josef Stadler, global head of ultra high net worth at UBS Wealth Management, and Ravi Raju, head of Asia Pacific ultra high net worth at UBS Wealth Management. It’s a call to arms for more people to buy debt of multilateral development banks, and for financial institutions to help them do it.The last, but not least, of the United Nations Sustainable Development Goals is number 17 – strengthen the means of implementing the goals and revitalise the global partnership for sustainable development.As international leaders gather for the World Economic Forum Annual Meeting in Davos, the world should be paying more attention to this collaborative goal than at any other time of the year. This is particularly true of the entities trying to provide the $5tn to $7tn in funding

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Guest post: The invisible run-off

January 19, 2018

This guest post from Winthrop T. Smith argues that America’s state and local governments will be soon be doing their own “quantitative tightening” thanks to the federal tax changes passed at the end of last year.Last May, the Fed announced its plan to “normalise” its portfolio of mortgage-backed securities and Treasury bonds. The Fed plans to gradually reduce its Treasury holdings from about $2.5tn to a new normal of perhaps $1.3tn to $1.6tn by 2022 or 2023. The Treasury must therefore replace $1tn in funding from the central bank with funds from the private sector at the same time deficits are expected to grow with tax reform and increased infrastructure spending.This has likely been priced into markets for a long time. What may be less appreciated is that the Treasury will also have to

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Some dissenting Brexit views from an econo-remainer

January 3, 2018

This guest post is from former IMF staffer Peter Doyle.____________My take on Brexit as matters stand at the outset of the new year differs in four ways from that of the analysts — econo-remainers — who constitute my usual habitat.Northern Ireland The letter of the agreement — which obliges the UK to avoid hard borders or anything akin to them — is often said to anticipate the softest forms of Brexit when combined with commitments to maintain regulatory harmonization with the rest of the UK. Given Brexiter zig-zags, delivery of this commitment hinges on Europe’s aversion to a precedent-setting sweet Brexit deal and Dublin’s particular intention to preserve the Good Friday Agreement.As noted previously, the European stance might be challenged were the prospect of a non-cooperative Brexit to

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Digital banking: a tough way to make money

November 29, 2017

This is a guest post by Victor Basta, the managing director of Magister Advisors, a boutique investment bank specialising in the technology sector.It’s been a busy period for the UK’s fledgling digital banks. Since January, eight UK digital banks have collectively raised $600m and two challenger banks were acquired for $2B+. Digital banks have built out the tech, landed banking licenses, and started winning customers – but they have arrived at a ‘now what’ moment. How can they capture a large enough customer base to validate their significant collective investment? The need to build and maintain customer growth momentum is greater than ever, but the route to profitability is looking unclear at best.In the face of this record-setting funding greater caution is warranted. Digital banks’

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Guest post: Getting to Eurobonds by reforming the ESM

November 21, 2017

The following guest post on the European Stability Mechanism and Eurobonds is from Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator. The views expressed here are his personal opinions and do not necessarily reflect the views of Consob.The European Stability Mechanism was established in late 2012 as a permanent bailout fund for the euro area. It was born as a compromise during a crisis and its powers were deliberately limited by the desire of creditor countries to segregate risks within the periphery.I have drafted a radical reform proposal that would transform the ESM into a real stability provider for the euro area as a whole. It would become a transition mechanism to a unique federal debt for the euro area.This could

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Guest post: Trading economics: a new theoretical system

November 6, 2017

In this guest post, Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association, summarises the arguments in his new Chinese-language textbook on economics.Crises destroy, but crises also create.The outbreak of each crisis gives rise to new economic theories. Marx’s theory of Surplus Value was created amidst frequent economic crises in the late 19th century and Keynes’s revolutionary theory was put forward during the Great Depression in the 1930s. Today, with a worldwide financial tsunami only now receding, people are expecting a new economic theory in response to the failure of the pre-crisis mainstream.“Trading economics” is one new theory emerging against this backdrop.

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The Hitchhiker’s Guide To Cryptocurrencies

November 2, 2017

This is a guest post by Martin Walker, director for banking and finance at the Center for Evidence Based Management, who is closely involved with blockchain banking developments.Back in the 1930s when the great depression still cast a shadow over much of the world economy the great economist John Maynard Keynes claimed:… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.Today there is no

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Guest post: Talking to Germans

October 17, 2017

This guest post is from former IMF staffer Peter Doyle in the wake of last week’s Rethinking Macroeconomic Policy conference at the Peterson Institute…____________Basil Fawlty’s “Don’t mention the war!”ƒ has given way to something nasty: non-German macroeconomists all but losing it with their German (and their little BIS brother) counterparts over the euro and global reflation — with epithets like“ordo-liberal” and worse flying around. The feeling is entirely mutual. Not even Trump can distract from the bitterness.I’m no fan of the German-cum-BIS policy line and, like many, fear that it is set to get even more entrenched by the ongoing coalition negotiations in Berlin. But its critics should look to themselves first. Because following the financial crisis that erupted post-2007, those

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Buchheit and Gulati: The Coming Need for a Standstill in Venezuela

October 10, 2017

By Lee C Buchheit and Mitu GulatiWhen officials of a new administration finally take office in Venezuela they will not have a pleasant first day on the job. On the present trajectory, they are likely to find international reserves exhausted, an oil sector in disrepair, a colossal debt, ruptured relations with the international community, hungry and angry citizens. Something disagreeable is apt to slither out of every file drawer they open.Approaching official sector institutions such as the IMF for financial assistance will also present unusual problems. The Venezuelan authorities have not spoken to the IMF in many years. The last Article IV consultation took place over a decade ago. Unlike other sovereign debt crises, when an IMF mission arrives for the first time in Caracas it will have

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Guest post: The real cause of the America’s housing bubble was foreign money

October 2, 2017

In this guest post, Martin Lowy argues that America’s housing bubble couldn’t have inflated to dangerous proportions without massive inflows from Europe.The crisis was built in just three years: 2004 through 2006. If no new financing sources had been added to the housing market after 2003, nothing extraordinary would have happened even if house prices had declined.What made those three years extraordinary was the influx of foreign money into securitized mortgage-based products. That inflow enabled mortgage money to be advanced to people who couldn’t repay it.Foreign money knows little about the domestic market and therefore relies on local banks, governments, or rating agencies. Investment banks seized on that weakness of the foreign money to use weaknesses in the system to promote badly

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Transaction laundering should be a top priority for regulators in 2018

September 27, 2017

The following guest post on digital payments and money laundering is from Ron Teicher, founder of EverCompliant.The dramatic rise of e-commerce has changed not only consumer habits but also criminal habits. Cyber attacks, ransomware, cyber terrorism, advanced persistent threats and more — the way today’s criminal operates may well be entirely digital.However, one thing has not changed in the criminal realm. Just like old-world mafiosos, digital criminals need to turn their illicit gains into seemingly legitimate funds that can be used in tightly regulated financial markets.That’s why the new class of digital criminal has not only reinvented crime, but also reinvented the art of money laundering. And regulators — who have devoted massive resources to building complex anti-money laundering

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Guest post: Central Bank Quantitative Easing as an Emerging Political Liability

September 19, 2017

In this guest post, Victor Xing of Kekselias looks at how central banks are dealing with the distributional effects of their policies.While officials have previously acknowledged QE programs’ distributional effects, they had nevertheless expected the aggregate economic benefits of these unconventional policies to outweigh these costs.Post-crisis asset price appreciation outpaced median wage growth to unintentionally burden low-to-middle income households and individuals with limited asset ownership. Rising inequality in-turn fueled discontent and contributed to the rise of anti-establishment political candidates.Efforts by elected officials to ease the effects of policy-induced inequality would likely bolster support for redistributionary policies such as “helicopter money”, which could

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Guest post: The ECB’s story on Target2 doesn’t add up

September 14, 2017

The following guest post on Target2 imbalances and capital flows is from Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator. The views expressed here are his personal opinions and do not necessarily reflect the views of Consob.The euro area’s Target2 (T2) balances have continued to diverge. As of June 2017, Italy owes €430bn to the rest of the eurosystem and Spain owes €377bn, while Germany’s claims on the eurosystem are worth €835bn.Recent research has linked the launch of the European Central Bank’s quantitative easing with the resumption of the T2 divergence process in the euro area, after a period (2012-2014) of relative reduction.The ECB itself believes that QE has been the main driver of the T2 balances. In an

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America is far more important to British tech than the EU

August 25, 2017

This is a guest post by Victor Basta, the managing director of Magister Advisors, a boutique investment bank specialising in the technology sector.The European Investment Fund (EIF) the EU agency that backs many first time European venture funds, found itself centre stage again last week as the latest ‘casualty’ of Brexit uncertainty. “Europe halts funding for British tech firms” was the headline in The Times, echoing reporting by the FT earlier in the year and signalling the dent EIF withdrawal could make on UK tech funding.While EIF withdrawal will inevitably reduce funding for UK tech companies, the impact is likely far less than it first seems. The main reason is US investors have been quietly increasing their commitment to UK tech over the past 5-10 years, such that they now

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Enforcing new Venezuelan public debt instruments (Maduro bonds, part 2)

August 18, 2017

By Lee C Buchheit and Mitu Gulati of Cleary Gottlieb Steen & Hamilton (New York) and Duke University, respectively. These authors have recently written on “How to Restructure Venezuelan Debt”. This note is written in response to questions that the authors received regarding that piece and a subsequent post by Gulati on Alphaville titled “Maduro bonds”.The decision of President Nicolas Maduro to proceed with the election of a Constituent Assembly in Venezuela on July 30, 2017 kindled a stinging international reaction. The ostensible purpose of the Constituent Assembly is to “transform the state, create a new legal framework and draft a new Constitution.” The US Treasury Secretary issued a press release calling the election “illegitimate” and imposing personal sanctions on President Maduro.

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Maduro bonds

August 8, 2017

By Mitu GulatiShowing an admirable love of alliteration, President Trump announced on July 17 that retaliation would be “strong and swift” if President Nicolas Maduro of Venezuela conducted an election for a new Constituent Assembly. The reason for creating this new legislative body was to replace the existing National Assembly, which was refusing to do the bidding of the Maduro administration.President Maduro went ahead with the election and the US response was swift but not particularly strong. The day after the election, US officials issued a number of statements condemning President Maduro’s actions, but the sanctions that followed – personal sanctions on President Maduro – were wimpy.A question on the table is whether the Maduro administration now has carte blanche to push through

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Guest post: How Italian banks are disadvantaged by new MREL rules

July 21, 2017

The following guest post on MREL rules is from Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator. The views expressed here are his personal opinions and do not necessarily reflect the views of Consob.It’s hard to be a confident investor in Italian bank debt. The recent rescues of Monte Paschi di Siena, Popolare Vicenza, and Veneto Banca are simply the latest reasons over the past few years.Markets have responded by cutting off bond funding to Italian lenders. The amount of Italian bank bonds outstanding has shrunk by about 30 per cent since the start of 2015:The decline in volumes has gone along with increasing yields on subordinated and senior unsecured notes. This is not a small matter for a country where bonds have

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Guest post: Smart contracts will need human juries

July 11, 2017

This is a post by Abraham Othman, a visiting scholar in the Operations, Information and Decisions Department of the Wharton School (University of Pennsylvania) and an advisor to the blockchain project Augur, wherein he argues human juries will be necessary to put the smart into smart contracts. Smart contracts are a promising feature of Ethereum, the decentralized application blockchain which recently passed a 20 billion dollar market cap. Smart contracts are digital contracts, written in code, whose clauses are enforced automatically. Through ventures like the Enterprise Ethereum Alliance, the financial industry is intensively exploring applications of this “scripting language for money”.But smart contracts have a lurking problem. To see why, consider Puerto Rico’s beleaguered municipal

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Guest post: How the next financial crisis won’t happen

June 9, 2017

In this guest post, former banker and banking lawyer Martin Lowy casts some doubt on the warnings about the increase in sovereign and corporate debt outstanding. He explores what the next recession might look like, and how it might (and might not) turn into a systemic financial crisis: I have been writing about the dangers of too much debt for a long time. In my first book, High Rollers: Inside the S&L Debacle, published in 1991, I wondered whether America’s apparent 1980s prosperity had only been borrowed and would implode as the S&Ls had done. (No, that did not happen.) I wrote about the subject again in the 1990s in several American Banker pieces where I praised the theory of Islamic finance and the benefits of equity versus debt finance. And in 2009, my book on the GFC was called Debt

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Guest post: The consequences of allowing a cryptocurrency takeover, or trying to head one off

June 7, 2017

In this guest post, economics professor and former Bank of England economist Tony Yates talks about the potential for “cryptocurrencies” to compete with government-backed money, and what central banks can do about it.The total value of all cryptocurrency in circulation is now almost $100bn. This is roughly double what it was just a few months ago, but it’s still tiny compared to the face value of paper dollars issued by the Federal Reserve, which alone amount to about $1.4trn. We are therefore nowhere near the point yet where cryptocurrencies pose a credible threat of supplanting central-bank-issued money.Nevertheless, it’s worth thinking through some of the implications if something like Bitcoin (which has about a 45 per cent market share) were to wholly or even partially supplant central

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Guest post: EM sovereigns: Buy defaultlessness

June 1, 2017

This guest post is from Gabriel Sterne, the Head of Global Macro Research at Oxford Economics.Long-term valuations of EM sovereign dollar debt look increasingly favourable as governments issue an ever-greater share of debt in their own currency. In the event of a crisis, many would find that the remaining share of FX debt is too small to make it worth the trouble of imposing haircuts as part of efforts to restore debt sustainability.The background story is one of a general improvement in EM resilience to external shocks. Between 2011 and 2016, EM endured unprecedented capital outflows and a slump in commodities. But EMs managed to pass the “mother of all stress tests” then with a much lower incidence of recessions and defaults than in previous episodes.Of the various reasons for EMs’

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Guest post: Why IEA scenarios should be treated with extreme caution

May 24, 2017

From Kate Mackenzie, former Alphavillain and current think-tanker at The Climate Institute.Whenever anyone, anywhere, talks or writes about what the International Energy Agency is forecasting in terms of future energy production or consumption, there are four important things to keep in mind:They are not forecasts, they are scenarios and named accordingly.The IEA publishes more than one scenario. Each one represents a different assumption about *policy* [again, the clue is in the title: Current Policies Scenario, New Policy Scenario, and 450 Scenario].Almost no-one, anywhere, ever seems to pay any attention to either 1) or 2). It’s very common to see “forecasts” or “projections” attributed to the IEA without even specifying *which* IEA scenario they’re talking about.The IEA’s scenarios

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Guest post: Why monetary policy should go green

May 18, 2017

Alexander Barkawi, founder and director of the Council on Economic Policies, argues that central banks should start prioritising green assets over regular ones in their purchasing policies.__________Monetary policy is rarely a topic in debates on green finance. It should be.The €60bn that the European Central Bank is currently injecting into financial markets on a monthly basis are a case in point. Its intervention amounts to nearly three times as much as the monthly average of €23bn in clean energy investments globally in 2016. A transparent review of how to better align ECB injections with the goal of funding a low-carbon economy and whether some of its purchases in fact undermine that objective, is critical.Central banks have already started to explore what climate change could mean for

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Guest post: Is Greece just about to default?

May 17, 2017

This guest post is from Peter Doyle, a former IMF staffer…_____Who could think so? Greek government bonds have been on a tear for a year; staff-level agreement on policies has been reached and, behind double-digits in polls, Syriza MPs are set to swallow the lot this week; so the €7bn July maturities look good.So, what fly, what ointment?Debt reduction.Markets presume that Lagarde and Merkel will fudge their differences on this again.There is much scope for doing so. Virtually anything could meet Lagarde’s demand that creditors provide “appropriate” debt relief — with the size of the IMF financial contribution adjusting to the size and formulation of reduction as it “stays in”. If gaps on that prove un-bridgable, further fudges could be found in the strength of the IMF Board’s endorsement

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Guest post: A safe asset for Europe

April 28, 2017

In this guest post, professors Markus Brunnermeier, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, and Dimitri Vayanos defend their proposal for European Safe Bonds as a way to create a pan-European safe asset without debt mutualisation.__________There is an emerging public debate on European Safe Bonds (ESBies). As the authors of the original proposal in 2011 of the Euro-nomics group, we welcome that debate. From a European perspective, we feel it important that discussions are informed by a common understanding of what ESBies are — and what they are not.A recent FT Alphaville post by an Italian regulator argued that ESBies won’t solve the euro area’s problems because they do not entail joint liability among sovereigns. Yet, back in January, an article in the Handelsblatt, accused ESBies of leading to “mutualisation through the backdoor”.So which is it? By design, ESBies are not Eurobonds. Nothing is shared among governments. This is a feature, not a bug. Through pooling and tranching, ESBies simply represent a repackaging of existing risks.What, then, is the purpose of ESBies? At present, euro area financial markets are distorted. There is no symmetrically supplied low-risk asset in abundant supply. As a result, macroeconomic shocks are amplified by endogenous flight-to-safety flows of capital. This primarily benefits non-vulnerable countries.

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Guest post: Why ESBies won’t solve the euro area’s problems

April 25, 2017

The following guest post on European Safe Bonds is from Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator. The views expressed here are his personal opinions and do not necessarily reflect the views of Consob.The euro was supposed to promise financial integration but instead has encouraged fragmentation. Since 2008, banks have retreated within national borders and governments are increasingly dependent on domestic savers for funding.Weakness in a given country’s banking system can cause sell-offs in its sovereign bonds, wounding its home government’s finances and weakening the banks further. Scepticism about a government’s debt can hit the assets of local banks and encourage deposit flight. Either way you end up with a “doom loop” of tightening credit and market-imposed fiscal austerity.Part of the problem is that there is no widely available European safe asset. A team of experts led by Markus Brunnermeier of Princeton has proposed a solution using the magic of financial engineering: European Safe Bonds (ESBies).In their scheme, a supranational vehicle, such as the European Stability Mechanism, would buy government bonds held by euro area banks in exchange for newly issued asset-backed securities.

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Guest post: Why shrinking the Fed balance sheet may have an easing effect

April 24, 2017

This guest post is from Manmohan Singh, author of Collateral and Financial Plumbing and a senior economist at the IMF. The views expressed are his own and not those of the IMF.__________Federal Reserve policy makers have recently started discussing when to start gradually reducing their $4.5tn balance sheet. Minutes of their March meeting suggest “that a change to the Committee’s reinvestment policy would likely be appropriate later this year.” This is a subject that the Fed has approached cautiously, out of concern that any decision to shrink the balance sheet would be seen as a tightening of monetary policy. I argue that in fact, unwinding may not be tantamount to tightening.Why? First of all, because letting the balance sheet shrink would release “good” collateral such as US Treasury securities, while reducing the excess reserves that commercial banks keep on deposit at the Fed. These deposits came about when the Fed bought up trillions of dollars in securities in a bid to keep long-term interest rates low, a strategy known as quantitative easing. Many of the securities were bought from non-bank financial firms, (i.e., pension funds, insurers, asset managers) which stashed the proceeds at depository institutions. Those banks in turn deposited money at the Fed, where it earned interest (only banks can earn interest on excess reserves.

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