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Fitch Says UK Facing 'Formidable' Challenge

donsutherland1

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From CNBC:

Sterling fell to session lows against the dollar and the euro on Tuesday after Fitch ratings agency described the fiscal challenge facing the UK as "formidable".

Following an unprecedented economic and financial shock, Fitch said "the scale of the UK's fiscal challenge is formidable and warrants a strong medium term consolidation strategy - including a faster pace of deficit reduction than set out in the April 2010 Budget".
News Headlines

IMO, the new British government will need to introduce a credible fiscal consolidation program, complete with concrete deficit reduction targets. If anything, it should probably err on the side of being overly aggressive. The UK would also do well to rule out exempting NHS from future cuts, even if initial cuts don't impact it. Ultimately, even as the problem is less dramatic than in the U.S., health spending is rising faster than economic growth in the UK. Without credible fiscal consolidation, the UK could be at risk at facing a ratings downgrade, perhaps as soon as over the next 6-18 months.
 

Infinite Chaos

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From CNBC:



News Headlines

IMO, the new British government will need to introduce a credible fiscal consolidation program, complete with concrete deficit reduction targets. If anything, it should probably err on the side of being overly aggressive. The UK would also do well to rule out exempting NHS from future cuts, even if initial cuts don't impact it. Ultimately, even as the problem is less dramatic than in the U.S., health spending is rising faster than economic growth in the UK. Without credible fiscal consolidation, the UK could be at risk at facing a ratings downgrade, perhaps as soon as over the next 6-18 months.
There's been a lot of talk on British TV about doing what Canada did in the 1990's when there was a large deficit to reduce / deal with. Further, they also wish to involve the general public in the same way that the Canadian Govt was supposed to have and this brought everyone on board.

Personally I wish they'd get on with it sooner rather than later, we will recover from this.
 

PeteEU

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From CNBC:

News Headlines

IMO, the new British government will need to introduce a credible fiscal consolidation program, complete with concrete deficit reduction targets.
Wont happen any time soon. Massive "credible" cuts will damage the recovery. This has to be done over time since the UK economy is one of the weakest in Europe.

If anything, it should probably err on the side of being overly aggressive.
Yea, might as well line up the poor and shoot them no? After all that is the cheapest way in the long term! :roll:

The UK can not afford to go back into recession and being overly aggressive will result in that. The UK does not have the dynamic economy of many of its European neighbours regardless if Brits believe they do. Cameron knows this, Brown knew this. The UK is very highly dependent on the City of London which is why both Cameron and Brown have and will continue to protect the City from any reforms and regulation that might remotely hurt profits.

What Cameron will do is to try to optimize the public sector and cut waste as he sees it, which means anything that effects the poor and promotes the social and class divide. He has already started it with his new education policy where private schools in rich areas will get preferential treatment. There wont be any massive cuts, since quite a bit of the deficit is from stimulus spending. In fact I would wager that military spending would go up as it usually does under conservative governments.

The UK would also do well to rule out exempting NHS from future cuts, even if initial cuts don't impact it.
Why? Just because you dont like universal healthcare? Cutting the NHS so it can be felt, will mean the present government will fall. It is political suicide and the conservatives know this. In my opinion it was Thatchers handling of the NHS that ultimately cost her the government. She is still best known as the one that gutted the NHS and pretty much ruined it (after the Falklands that is).

Now that aint saying that the NHS does not need reform especially on the administrative part but going the American way.. never. The NHS is highly inefficient when compared to the rest of Europe.

Ultimately, even as the problem is less dramatic than in the U.S., health spending is rising faster than economic growth in the UK.
You do know we are in a recession right? And again so what. The NHS is still half the price of the US system and is just as good if not better. And healthcare spending is rising faster than economic growth in most countries, but that has more to do with the lack of competition in the industry world wide than anything else. Like it or not, big pharma has divided up the world in areas that are water tight, even in the EU. This drives up costs big time and governments have a hard time breaking up these near cartels. The EU tried and so far has failed. The US is not even trying and putting up even larger barriers for the free market.

Without credible fiscal consolidation, the UK could be at risk at facing a ratings downgrade, perhaps as soon as over the next 6-18 months.
It should have been downgraded long ago along with the US, but because we have anglo-saxon owned ratings agencies this wont happen any time soon. This is just some company that has paid Fitch to come with these comments to drive down stocks and the pound so people can make tons of money shorting them. The timing is "odd" to say the least. It looks like that the markets did not react as wanted by the speculators... but we shall see.

I wish the markets and financial systems would go back to looking at fundamentals instead of reacting on rumours constantly.
 

donsutherland1

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Wont happen any time soon. Massive "credible" cuts will damage the recovery. This has to be done over time since the UK economy is one of the weakest in Europe.
The cuts to be announced in the current budget will be modest. It is in future budgets, beginning with next year's, where the cuts need to be more aggressive. By then, the UK should be on a growth path, though the growth will likely be moderate.

Yea, might as well line up the poor and shoot them no? After all that is the cheapest way in the long term! :roll:
All programs, including military expenditures, need to be examined. Social welfare expenditures need to be in the mix, but they should not be reduced to the point where an appreciable increase in the poverty rate would occur. Revenue increases are another option that has to be considered.

The UK can not afford to go back into recession and being overly aggressive will result in that. The UK does not have the dynamic economy of many of its European neighbours regardless if Brits believe they do. Cameron knows this, Brown knew this. The UK is very highly dependent on the City of London which is why both Cameron and Brown have and will continue to protect the City from any reforms and regulation that might remotely hurt profits.

What Cameron will do is to try to optimize the public sector and cut waste as he sees it, which means anything that effects the poor and promotes the social and class divide. He has already started it with his new education policy where private schools in rich areas will get preferential treatment. There wont be any massive cuts, since quite a bit of the deficit is from stimulus spending. In fact I would wager that military spending would go up as it usually does under conservative governments.
This year, the cuts will be modest. The general ballpark amounts have already been discussed, though they could be expanded somewhat. I’m looking ahead to next year’s budget. That's where things have to be more aggressive. A signal about a much more aggressive approach next year would be helpful, as it would reduce the risk of a damaging loss of market confidence that could precipitate debt-related pressures plaguing some other parts of Europe.
Why? Just because you dont like universal healthcare? Cutting the NHS so it can be felt, will mean the present government will fall. It is political suicide and the conservatives know this. In my opinion it was Thatchers handling of the NHS that ultimately cost her the government. She is still best known as the one that gutted the NHS and pretty much ruined it (after the Falklands that is).

Now that aint saying that the NHS does not need reform especially on the administrative part but going the American way.. never. The NHS is highly inefficient when compared to the rest of Europe.

You do know we are in a recession right? And again so what. The NHS is still half the price of the US system and is just as good if not better. And healthcare spending is rising faster than economic growth in most countries, but that has more to do with the lack of competition in the industry world wide than anything else…
There are many potential ways in which NHS could be reformed to put it on a sustainable path. Health care reform, even if the need is less urgent than in the U.S., is likely a requirement to address NHS’s cost issues.

IMO, the IMF’s concluding statement from its mission on Euro-Area policies contains language that is applicable beyond the Euro area, though one should substitute the Pound for the Euro. It is applicable to the UK given the UK’s debt burden and magnitude of its deficits. It highlights how market pressures, once confidence is lost, can require much more painful measures. Relevant excerpts follow:

Delayed or half-hearted fiscal consolidation in countries facing high spreads could trigger a further loss of financial market confidence in the fiscal sustainability of some member states, a spike in risk premiums and a sharp depreciation of the euro…

Countries facing market pressures have no choice but to adjust forcefully and to prepare contingency plans to avoid any slippage jeopardizing the achievement of deficit targets. For all countries, additional efforts must be made to turn around unfavorable debt dynamics over the medium term. Comprehensive entitlement reforms should be a key ingredient of many consolidation programs, with an emphasis on large medium and long-term gains, such as from increases in the effective retirement age and healthcare reform. Attention should also be paid to the quality and the composition of adjustment to maximize support for growth and to measures to protect vulnerable groups during the reform and adjustment process.


I wish the markets and financial systems would go back to looking at fundamentals instead of reacting on rumours constantly.
There is a great deal of psychology involved in markets, as in any other human activity. Human behavior is not wholly rational. There can be extended periods of irrational behavior, euphoria or fear, in market settings.
 
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Laila

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There's been a lot of talk on British TV about doing what Canada did in the 1990's when there was a large deficit to reduce / deal with. Further, they also wish to involve the general public in the same way that the Canadian Govt was supposed to have and this brought everyone on board.

Personally I wish they'd get on with it sooner rather than later, we will recover from this.
I agree and I would wish they would just start with the cuts. Better to cut now than have to service billions on the debt later on
Everything should be on the cards including the NHS and our public sector.
Everyone knows the public pensions is ridiculous and we will never be able to afford it but no Govt. is willing to admit it, Canada seems a good template imo.

And yes, London should do everything it can to prevent restrictions to City of London, especially any stupid ideas and laws Europe dreams up.
 
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PeteEU

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The cuts to be announced in the current budget will be modest. It is in future budgets, beginning with next year's, where the cuts need to be more aggressive. By then, the UK should be on a growth path, though the growth will likely be moderate.
Thats not exactly how you seemed to voice your opinion in your original post. I sounded far more.. "cut now and cut hard" stuff coming from far right wackos.

But you are basing all this on a not so sure fact that the UK will grow this and next year. They are barely above 0% as it is, while most of the rest of Europe is roaring ahead (relatively speaking). Hell even Spain will soon have higher growth than the UK.

All programs, including military expenditures, need to be examined. Social welfare expenditures need to be in the mix, but they should not be reduced to the point where an appreciable increase in the poverty rate would occur. Revenue increases are another option that has to be considered.
I agree, however there will always be issues. Take heating allowance. There are tens of thousand's of Britis expat pensioners in Spain who get winter heating allowance for living here. Would you cut that? Knowing the Spanish winter I would say no, but on the face of it I bet many would say.. wth, Spain is hot, what do they need winter heating allowances? There has been talk about cutting that, and that would force many expat brits back home and that would hurt both the Spanish economy and the British.

Another example. I know a few Brits who are on unemployment or disability allowance and live in... Spain. They fly back to the UK every once in a while to "search for work" and meet the requirements to get unemployment or whatever benefit they get. Now that should be hit down on no?

But all this is peanuts to be brutally honest. They wont touch the city of London where most reform and crackdown is needed.

This year, the cuts will be modest. The general ballpark amounts have already been discussed, though they could be expanded somewhat. I’m looking ahead to next year’s budget. That's where things have to be more aggressive. A signal about a much more aggressive approach next year would be helpful, as it would reduce the risk of a damaging loss of market confidence that could precipitate debt-related pressures plaguing some other parts of Europe.
There is enough signals in this chaos. Action is needed more than signal, and so far the new government has not done much or said they would do much. They are doing more blaming the previous government than actually doing something positive.

There are many potential ways in which NHS could be reformed to put it on a sustainable path. Health care reform, even if the need is less urgent than in the U.S., is likely a requirement to address NHS’s cost issues.
And that aint gonna happen as long as we dont have a liberalised market for healthcare products.

IMO, the IMF’s concluding statement from its mission on Euro-Area policies contains language that is applicable beyond the Euro area, though one should substitute the Pound for the Euro. It is applicable to the UK given the UK’s debt burden and magnitude of its deficits. It highlights how market pressures, once confidence is lost, can require much more painful measures. Relevant excerpts follow:

Delayed or half-hearted fiscal consolidation in countries facing high spreads could trigger a further loss of financial market confidence in the fiscal sustainability of some member states, a spike in risk premiums and a sharp depreciation of the euro…

Countries facing market pressures have no choice but to adjust forcefully and to prepare contingency plans to avoid any slippage jeopardizing the achievement of deficit targets. For all countries, additional efforts must be made to turn around unfavorable debt dynamics over the medium term. Comprehensive entitlement reforms should be a key ingredient of many consolidation programs, with an emphasis on large medium and long-term gains, such as from increases in the effective retirement age and healthcare reform. Attention should also be paid to the quality and the composition of adjustment to maximize support for growth and to measures to protect vulnerable groups during the reform and adjustment process.
That is all fine.. and nothing new there. But it is not something you do over night.

There is a great deal of psychology involved in markets, as in any other human activity. Human behavior is not wholly rational. There can be extended periods of irrational behavior, euphoria or fear, in market settings.
I know that, but it is turning into a problem. The markets are nothing but a hyperactive moody rumor believing teenager than anything else. The market is acting like middle aged people who believed the end of the world when they saw a shooting star...

Look at the Hungary story. A Hungarian politician in the new government comes out with a comment that Hungary is the next Greece and then the markets go all panic mode. And then a day later after some journalists do their job for once, we find out that the politician in question was not only miss quoted but the targeted audience was not the markets but a dig at the now defeated former government .. because the new government had found 10 million euros worth of debt/assets that had not been declared accurately and hence he said that the former government was like the former Greek government because they lied. This was all taken out of context and created massive panic on the markets. And we still have half brain American commentators and so called financial experts promoting the idea that Hungary is the next Greece... have they even LOOKED at the Hungarian economy? And yes you read right... 10 million euros of misplaced/categorised debt/assets set off that days panic selling.

Point is the markets are acting irrationally time and time again because of rumour and not facts. And this is a problem, and one of the reasons that Germany banned nakid short selling and one of the reasons that I believe that short selling should be banned till the markets come to their senses and not be driven by false fear, speculators rumormongering and out right lies. It is time to go back to the fundamentals.
 

donsutherland1

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Thats not exactly how you seemed to voice your opinion in your original post. I sounded far more.. "cut now and cut hard" stuff coming from far right wackos.
I should have been more clear in noting that I was referring to next year's budget. The modest budget cuts for the current budget are already essentially defined (probably in the realm of 6-10 billion pounds). I had commented on those in another thread in the past (http://www.debatepolitics.com/europe/72470-coalition-government-sets-work-policies.html).

I agree, however there will always be issues. Take heating allowance. There are tens of thousand's of Britis expat pensioners in Spain who get winter heating allowance for living here. Would you cut that? Knowing the Spanish winter I would say no, but on the face of it I bet many would say.. wth, Spain is hot, what do they need winter heating allowances? There has been talk about cutting that, and that would force many expat brits back home and that would hurt both the Spanish economy and the British.

Another example. I know a few Brits who are on unemployment or disability allowance and live in... Spain. They fly back to the UK every once in a while to "search for work" and meet the requirements to get unemployment or whatever benefit they get. Now that should be hit down on no?

But all this is peanuts to be brutally honest. They wont touch the city of London where most reform and crackdown is needed.
I haven't gone line-by-line through the UK budget. But I will note that achieving pension reform through a slowing of pension benefit growth, with an emphasis on adjustments for future retirees, so that the impact would not be too severe on current pensioners would make more sense than abruptly slashing pension payments.

Also, I agree with the entirety of the IMF statement on the Euro area that I believe is also applicable to the UK, including the section I underlined:

Countries facing market pressures have no choice but to adjust forcefully and to prepare contingency plans to avoid any slippage jeopardizing the achievement of deficit targets. For all countries, additional efforts must be made to turn around unfavorable debt dynamics over the medium term. Comprehensive entitlement reforms should be a key ingredient of many consolidation programs, with an emphasis on large medium and long-term gains, such as from increases in the effective retirement age and healthcare reform. Attention should also be paid to the quality and the composition of adjustment to maximize support for growth and to measures to protect vulnerable groups during the reform and adjustment process.

There is enough signals in this chaos. Action is needed more than signal, and so far the new government has not done much or said they would do much. They are doing more blaming the previous government than actually doing something positive.
I'm still waiting to see the new government’s concrete proposals.

And that aint gonna happen as long as we dont have a liberalised market for healthcare products.
That is an area where reform can be helpful.

That is all fine.. and nothing new there. But it is not something you do over night.
Of course it can't be done in a single year. Fiscal consolidation will be a multi-year process. A transition will be necessary to get from the current situation to the desired outcome so as not produce an excessively disruptive economic and social impact.

I know that, but it is turning into a problem. The markets are nothing but a hyperactive moody rumor believing teenager than anything else. The market is acting like middle aged people who believed the end of the world when they saw a shooting star...

Look at the Hungary story. A Hungarian politician in the new government comes out with a comment that Hungary is the next Greece and then the markets go all panic mode. And then a day later after some journalists do their job for once, we find out that the politician in question was not only miss quoted but the targeted audience was not the markets but a dig at the now defeated former government .. because the new government had found 10 million euros worth of debt/assets that had not been declared accurately and hence he said that the former government was like the former Greek government because they lied. This was all taken out of context and created massive panic on the markets. And we still have half brain American commentators and so called financial experts promoting the idea that Hungary is the next Greece... have they even LOOKED at the Hungarian economy? And yes you read right... 10 million euros of misplaced/categorised debt/assets set off that days panic selling.

Point is the markets are acting irrationally time and time again because of rumour and not facts. And this is a problem, and one of the reasons that Germany banned nakid short selling and one of the reasons that I believe that short selling should be banned till the markets come to their senses and not be driven by false fear, speculators rumormongering and out right lies. It is time to go back to the fundamentals.
IMO, one probably cannot alter human behavior, including market psychology very much. During periods of uncertainty, even modest bad news will lead to an amplified reaction.

I do believe journalists, including the financial press, need to be more rigorous in ensuring that the information they disseminate is credible, etc. That means either vetting information beforehand or filtering out analysts who have a consistently bad record, as many—even in the markets—are not sufficiently financially literate. At a minimum, those making estimates should have to spell out their assumptions and cite past examples where such assumptions led to the outcome they are forecasting.

There are analysts who are often quoted whose predictions have been consistently dismal, to say the least, yet their commentary still garners media attention. I highlighted one of them in the economics subforum (http://www.debatepolitics.com/econo...edicts-possible-1-300-s-and-p-end-2009-a.html) as it is a real problem for which there is too little scrutiny.

In short, the media has a responsibility to provide credible information. Information of a speculative nature is not credible.
 

alexa

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I haven't gone line-by-line through the UK budget. But I will note that achieving pension reform through a slowing of pension benefit growth, with an emphasis on adjustments for future retirees, so that the impact would not be too severe on current pensioners would make more sense than abruptly slashing pension payments.
Don't think you'll get too far on that one Don. The value of our State pension has been deteriorating for years. One of the groups the New Labour government did pull to some extent out of poverty was people living just on the State Pension or more or less with Pension Credit.

Cameron has already said he will be making improvements in the pension in real terms so that it is more in line with the rise in wages, but no room to cut on that.
 
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Lord Tammerlain

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There's been a lot of talk on British TV about doing what Canada did in the 1990's when there was a large deficit to reduce / deal with. Further, they also wish to involve the general public in the same way that the Canadian Govt was supposed to have and this brought everyone on board.

Personally I wish they'd get on with it sooner rather than later, we will recover from this.


I am not sure on how much was due to actual cost cutting, or due to spending freezes. The military was gutted, with drastic cuts

Health care spending by the federal government was reduced drastically

Canadians at the time realized it was only going to be worse if we waited any longer

We had something going for us then, and we have something going for us now


Back then we had the US which was if not booming, was entering a bubble phase with the tech bubble which prevented the worst aspects of the cutting from hitting our economy. We increased our exports to the US and that allowed for fair economic expansion at a time when we should have seen economic contration due to the reduction in spending.

Today we have China and India. While our manufacturing industries are being gutted, we still are primarily a resource economy, with Chinese and Indian economic growth keeping the values for resources relatively high Canada has not seen the worst aspects of this global slowdown as well
 

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Also, I agree with the entirety of the IMF statement on the Euro area that I believe is also applicable to the UK, including the section I underlined:

Countries facing market pressures have no choice but to adjust forcefully and to prepare contingency plans to avoid any slippage jeopardizing the achievement of deficit targets. For all countries, additional efforts must be made to turn around unfavorable debt dynamics over the medium term. Comprehensive entitlement reforms should be a key ingredient of many consolidation programs, with an emphasis on large medium and long-term gains, such as from increases in the effective retirement age and healthcare reform. Attention should also be paid to the quality and the composition of adjustment to maximize support for growth and to measures to protect vulnerable groups during the reform and adjustment process.
Yea but this can be said of any industrialized country, not just the EU or UK. And the IMF miss a big point and that is military spending.

I'm still waiting to see the new government’s concrete proposals.
Exactly, there is a very lack of concrete proposals so far, and those that have come out are not exactly moral boosting but more like the old mean Conservative policy.

That is an area where reform can be helpful.
More than helpful. In Spain they made an analysis that stated that the Spanish healthcare system could save billions if the doctors were forced to use generic drugs instead of named brands when ever possible. And Spain already has some of the cheapest drugs in Europe due to regulation of the market. Just think of a market that is fully free in Europe on what that has done for telecommunications prices and other prices.

Of course it can't be done in a single year. Fiscal consolidation will be a multi-year process. A transition will be necessary to get from the current situation to the desired outcome so as not produce an excessively disruptive economic and social impact.
I agree, but markets want action now and results now.. and that is a problem. Look at Greece, they did not even get a chance to fix the problem before the markets pushed them over the edge.

IMO, one probably cannot alter human behavior, including market psychology very much. During periods of uncertainty, even modest bad news will lead to an amplified reaction.
You cant, but you can prevent harmful behaviour in the market place.. we do it all the time. We dont allow ponzie schemes and other harmful market actions, so going a bit further to prevent harmful actions like nakid short selling or requiring more capital and lower leverage.

I do believe journalists, including the financial press, need to be more rigorous in ensuring that the information they disseminate is credible, etc. That means either vetting information beforehand or filtering out analysts who have a consistently bad record, as many—even in the markets—are not sufficiently financially literate. At a minimum, those making estimates should have to spell out their assumptions and cite past examples where such assumptions led to the outcome they are forecasting.

There are analysts who are often quoted whose predictions have been consistently dismal, to say the least, yet their commentary still garners media attention. I highlighted one of them in the economics subforum (http://www.debatepolitics.com/econo...edicts-possible-1-300-s-and-p-end-2009-a.html) as it is a real problem for which there is too little scrutiny.

In short, the media has a responsibility to provide credible information. Information of a speculative nature is not credible.
I agree fully. I dont know if you guys get CNBC Europe over in the US, but we get CNBC USA after our European version ends, and the difference is considerable. The US version almost goes out of its way to paint Europe as a hell hole and the US as a paradise, with the French as a favoured bashing point. They more than often have guests that promote this than a more balanced realistic view of things. During the Greece crisis they had daily commentators talking down the Euro, saying it would be disbanded and the EU would break up.
Even just yesterday or on Monday there was a guy promoting this view because of the Hungarian rumour and despite the rumour being disproved over here, he continued either out of ignorance or of malice to promote that Hungary was a new Greece. Or just yesterday the Squawk Box crew and guests talking about riots across Europe and social unrest. There has been one riot, in Greece. There has been peaceful protests and only a handful, but listening to the CNBC people it is mass battles in the streets all across Europe.

And all this was often with the support of the journalists/anchors who do not hide their political leanings one bit. CNBC is as fair and unbiased at times as Fox News these days and since it is the top financial news source out there, then it is rather shocking.

Now the European version often has more than one view on air, and rarely takes sides. In fact the main anchors, I can not tell what political view they have at all... that is not the case of the US anchors.

The media and their willingness to run with rumour and promote a certain angle over others has driven this crisis both before and after the recession started. CNBC had a huge part in the economic crisis we are in today because of its very close relationship to big business, so close that they were fooled big time.. being caught promoting stocks that crashed big time because of a bubble they had either ignored or shrugged off. . One would have thought they learned their lesson but no.
 
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