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‘I don’t think the PM knows’: Boris Johnson and the Brexit endgame

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At 9pm on Wednesday November 11, a grey-faced Boris Johnson scurried past staffers in 10 Downing Street and into the office of David Frost, the man he has entrusted with trying to secure a trade deal with the EU. “The PM knew that David was unhappy — he thought he might resign,” says one of Mr Johnson’s aides. 

The Vote Leave group was breaking up. The Brexit hardliners who campaigned to take Britain out of the EU in 2016 and now sustained the prime minister in office had fallen out of favour. Dominic Cummings, the iconoclastic chief adviser, was among those ousted. A few minutes later, a relieved Mr Johnson returned to tell staff that Lord Frost, his pro-Brexit chief Europe adviser since July 2019, would not be walking out in sympathy.

Lord Frost, ennobled by Mr Johnson in June in recognition of his loyalty and tenacious negotiating style, tells colleagues he never intended to quit at such a key moment in trade talks and that the tactics have not changed. But the chaotic events of recent days in Downing Street have compounded a sense of bewilderment in European capitals, as diplomats try to work out what it all means for trade talks that are entering the endgame.

Are Mr Johnson and Lord Frost now ready to make compromises in the next few days to secure a trade deal with the EU — without having Mr Cummings’ favourite refrain “fuck ’em” ringing in their ears? Or will they double down to prove to Eurosceptics they are willing to embrace the hardest of all hard Brexits in the name of national sovereignty?

One senior official says: “To tell you the truth, we don’t know — and frankly, I don’t think the PM knows either.”

Dominic Cummings, the Brexit hardliner who campaigned to take Britain out of the EU in 2016, fell out of favour with the prime minister this month
Dominic Cummings, the Brexit hardliner who campaigned to take Britain out of the EU in 2016, fell out of favour with the prime minister this month © Henry Nicholls/Reuters

Talks are bogged down on questions of access to British fishing grounds, rules to maintain fair competition between the two sides and an enforcement mechanism for the deal. All impact on Mr Johnson’s quest to regain unfettered national sovereignty. With the transition period ending on December 31, British ministers are confident Mr Johnson will opt for a deal. But EU negotiators have come away from talks over the past few days doubting whether that decision has really yet been taken.

“It’s obvious there should be an agreement,” says one senior EU diplomat, before noting quickly that Mr Johnson does not always do what is obvious.

Johnson’s calculation 

Regardless of the eventual outcome, one thing is clear: the prime minister has already opted for what amounts to a hard Brexit. In his determination to break free of Brussels’ rules, he set out from the beginning to negotiate a standard free trade agreement, accepting that this would mean new frictions for trade in goods, and lost opportunities for providers of services.

Some Brexiters initially claimed the UK could remain in the EU single market, but they abandoned that idea when it became clear it would require the government to abide by Brussels rules. Theresa May split the difference in her July 2018 Chequers plan, an attempt to maintain access to the single market with minimal border friction under a “common rule book”; it was rejected by Eurosceptics as a capitulation and by EU leaders who saw it as “cherry picking”. When Mr Johnson became prime minister in July 2019 he opted for a much cleaner break.

An anti Brexit billboard on the border between Northern Ireland and the Republic of Ireland this month. Failure to secure a trade deal will create new tensions in the region
An anti Brexit billboard on the border between Northern Ireland and the Republic of Ireland this month. Failure to secure a trade deal will create new tensions in the region © Charles McQuillan/Getty

Business is already facing a mass of red tape on January 1 by virtue of Mr Johnson’s decision to leave the single market and customs union; that will still happen regardless of whether there is a trade deal.

A deal would provide for tariff-free trade on goods that qualify as EU or UK made, helping cushion the blow for sensitive sectors including automotive and agriculture. It would also include other measures to help trade flow — recognition of truckers’ permits for example. Most trade experts agree it would be better than nothing.

Ivan Rogers, Britain’s former ambassador to the EU, has long argued that “the delta” between leaving with a thin goods-only deal and leaving without a deal was so modest that Mr Johnson might find it politically easier to make a clean break with the EU, blaming intransigent Europeans for the chaos that looms in any event on January 1.

The most recent UK government estimates reckoned the UK would miss out on 4.9 per cent of future income over 15 years if it left the bloc with the kind of basic trade deal under discussion. Under a no-deal scenario, that hit would increase to 7.7 per cent over the same period, compared with staying in the EU. That difference is significant but perhaps not a clinching argument for Mr Johnson.

But other factors will weigh heavily on the prime minister. If he does not secure a deal — and Britain leaves on what he euphemistically calls “Australian” or World Trade Organization terms — it will not be the end of the story. Even Australia on the other side of the globe is negotiating a trade deal with Brussels; Britain at some point will want one too. Rather than turning a page on Brexit, the issue would dog his premiership.

Failure to secure a trade deal would create new tensions in Northern Ireland — which will remain covered by EU customs rules as part of the divorce deal Mr Johnson struck with the EU last year. Mr Johnson has threatened to renege on those commitments over fears about the impact of a trade border in the Irish Sea. But US president-elect Joe Biden twice warned Mr Johnson in a phone call this month not to let Brexit imperil the peace process in the region.

When Boris Johnson spoke to Joe Biden in a phone call this month, the US president-elect twice warned him not to let Brexit imperil the Northern Ireland peace process
When Boris Johnson spoke to Joe Biden in a phone call this month, the US president-elect twice warned him not to let Brexit imperil the Northern Ireland peace process © Andrew Parsons/No10 Downing Street

Gordon Brown, former prime minister, wondered this month if Mr Johnson really wanted to be “at war” with the EU and the US at the start of 2021, just when “Global Britain” takes over as head of the G7 and hosts the COP26 UN climate change conference. Trampling over international treaties and antagonising allies would be sharply at odds with the new Biden-led era.

Then there is the future unity of the UK. Successive opinion polls show that Scotland — which voted 62-38 to remain in the EU — now favours independence, with Brexit fuelling the grievance towards Mr Johnson and the government in Westminster. Michael Gove, Mr Johnson’s cabinet colleague, has been urging him to agree a deal if possible.

Finally there is the issue of competence. Mr Johnson has at times been overwhelmed during the Covid-19 crisis; failing to agree a trade deal, which Eurosceptics have claimed would be “the easiest in the world”, in the midst of a global pandemic would be a further blow to his chaotic premiership. The prime minister himself said in February that it was “very unlikely” that the talks with Brussels would not succeed.

“He needs a victory,” admits one Brexiter close to the prime minister.

that Scotland — which voted 62-38 to remain in the EU — now favours independence from the United Kingdom
Successive opinion polls show that Scotland — which voted 62-38 to remain in the EU — now favours independence from the United Kingdom © Jeff J Mitchell/Getty

On the ground

With less than six weeks to go until Britain’s transition period ends, some business leaders and hauliers have given up waiting for Mr Johnson to make up his mind and are preparing for major disruption. 

In Whitehall, preparations have included reconstituting the food industry resilience forum, which includes logisticians, port operators, hauliers and supermarket chains, with twice weekly calls to ensure food supplies are maintained if the ports become clogged. Fears that perishable food could run short have resurfaced.

Richard Burnett, head of the Road Haulage Association, says hauliers are now “resigned” to the fact that there would be disruptions on January 1 and would just have to manage as best they can.

Marc Payne, managing director of Plymouth-based Armoric Freight International, says that in the event of a ‘no deal’, where the EU and UK failed to recognise each other’s trucking permits, it is unclear whether he would get sufficient permits to drive into the EU.

Trucks queue in Kent last year during an exercise to prepare for the expected backlog of traffic after the imposition of customs checks on goods crossing the Channel
Trucks queue in Kent last year during an exercise to prepare for the expected backlog of traffic after the imposition of customs checks on goods crossing the Channel © Neil Hall/EPA-EFE

The imposition of customs and veterinary checks on goods crossing the Channel will soon become a fact of life, complete with the need for documentation, new arrangements for paying VAT, export authorisation numbers and, inevitably, truck queues. 

As new barriers appear, old freedoms will be lost. UK architects, doctors and other experts from regulated professions will no longer have automatic recognition of their qualifications across Europe — instead they will have to seek permission to work from authorities in individual EU countries. 

UK nationals will no longer have the same freedom of movement rights within the EU — relying instead on a visa-waiver programme that will allow them to spend up to 90 days in any 180-day period in the union’s border-free Schengen zone. Household animals will also lose the pet passport — their equivalent of EU citizenship.

Luisa Santos, chair of the EU-UK task force at employers’ organisation BusinessEurope, says disruption was inevitable but that no company could fully prepare for a no-deal outcome, with the potential jump in tariffs from zero to as much as 40 per cent for trade in goods.

Prime Minister Boris Johnson (centre), chief UK Brexit negotiator David Frost and Cabinet Office minister Michael Gove, negotiate with their EU counterparts during lockdown
Prime Minister Boris Johnson (centre), chief UK Brexit negotiator David Frost and Cabinet Office minister Michael Gove, negotiate with their EU counterparts during lockdown © Andrew Parsons/10 Downing Street

In addition to mitigating the blow of Brexit, a deal would be a platform that would allow for the relationship to deepen over time. “It will allow for us to continue to talk,” she says. “We are not going to be able to do everything in this deal.”

Given the economic and political self-harm that a “no deal” would inflict on Britain, it is perhaps a tribute to Lord Frost’s negotiating skills — and a reflection of Mr Johnson’s unpredictable style — that the EU27 has been left guessing until the last minute about the prime minister’s real intentions.

There is genuine nervousness on both sides of the negotiating table about what happens next, although both sides still hope to reach an agreement next week.

Manfred Weber, head of the European Parliament’s large centre-right grouping, warned on Thursday that the talks were running “out of time” given the need for any agreement to be ratified by the end of the year. 

Businesses around the continent are holding their breath.

Talks with the EU are bogged down on the question of access to British fishing grounds
Talks with the EU are bogged down on the question of access to British fishing grounds © Vickie Flores/EPA-EFE/Shutterstock



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Analysis

Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend

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Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.

BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.

“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.

“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”

Column chart of By downloads (% of total) showing Top US mobile payment solution apps

BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.

Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.

The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.

Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.

The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.

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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.

The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.

“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.

Square’s gross payment volume

Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.

“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”

Square’s entry into BNPL comes as the sector is becoming increasingly competitive.

Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.

Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.

PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.

Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.

“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”

A bigger threat still is the sector’s immature and inconsistent regulatory environment.

“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”

Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.

The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.

In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.

Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”

Additional reporting by Richard Milne



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UK pushes floating wind farms in drive to meet climate targets

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In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.

Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.

Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.

Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.

Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.

Map showing the location of Kincardine offshore floating wind farm, offshore from Aberdeen on Scotland's east coast

Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.

Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.

The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.

Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.

The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.

A Norwegian flag flies from a boat near the assembly site of offshore floating wind turbines in the Hywind pilot park, operated by Equinor
Norway’s Equinor is among the companies competing to build floating turbines in Scottish waters © Carina Johansen/Bloomberg

UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050. 

Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.

WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.

Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.

Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.

An offshore wind turbine off the coast of Fukushima, Japan
A wind turbine off the coast of the town of Naraha in Japan’s Fukushima prefecture. Japan is one of the countries pursuing floating technology © Yoshikazu Tsuno/AFP/Getty Images

Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.

The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.

“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.

Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.

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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.

Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers. 

The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.

The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.

But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.

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Analysis

China tech crackdown claims ETF victims

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Exchange traded funds updates

Beijing’s regulatory crackdown on some of its biggest companies in technology and education has delivered a bruising blow to highly specialised China-focused exchange traded funds.

Broad-based tech ETFs have sailed through virtually unscathed, but some narrowly focused thematic instruments have taken a beating. Among those most affected, the KraneShares CSI China Internet ETF (KWEB) has nearly halved in value since its peak in February.

Some ETF buyers are hunting specifically for targeted strategies, despite the risks. But Kenneth Lamont, senior fund analyst at Morningstar, said this highlights the potential drawbacks of tracking a narrow theme without the flexibility to shift tactics.

“The [passive thematic] strategy has no way to quickly react to bad news and will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks,” Lamont said.

Line chart of Total returns, year to date (rebased) showing Narrow vs broad tech ETF

He noted that for the KraneShares ETF, one Chinese education group alone — TAL Education Group — was responsible for knocking 2.8 percentage points off performance from the end of June.

Global X Education ETF (EDUT), which has a large exposure to the Chinese online education sector, was also badly affected.

Actively managed ETFs, such as Ark Invest’s ARKK flagship Innovation fund, can react more quickly. After voicing her optimism for the prospects for China’s tech disrupters earlier this year, Cathie Wood, Ark’s chief executive, shed millions of dollars worth of shares in four China-domiciled companies.

Line chart of Number of shares held (millions) showing ARKK has been selling Chinese technology holdings

Investors in ARKK have not been rewarded as well as those who simply put their money in broadest based funds such as the Vanguard Total World Stock Index Fund ETF (VT), but they have still managed to ride out the China tech storm far better than more exposed counterparts.

Line chart of Returns, year to date (rebased) showing ARKK vs Vanguard Total World Stock ETF (VT)

Some investors insist Chinese investments can bounce back. Mark Martyrossian, chief executive of UK-based Aubrey Capital Management, said he believed many of the affected tech companies would maintain their market leadership.

“The gravy train may have slowed but you disembark at your peril,’ Martyrossian said.

Lamont said badly hit funds had suffered such losses because they were doing exactly what they had promised to do — provide narrow exposure.

More nimble active investment strategies also face their own challenges, said Elisabeth Kashner, director of global fund analytics at FactSet. “Active managers may successfully anticipate market reversals, but they can also miss them, sometimes seriously tanking returns,” she said. “Some people can be skilful and some people can be lucky and if you’re lucky and skilful in one period you might be lucky and skilful in the next, but you might not.”

Additional reporting by Steve Johnson

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