Eurozone

Open Europe has released a paper titled "Abandon Ship: Time to stop bailing out Greece?" which recaps all the salient points well-known to everyone on why continuing to bailout Greece is the worst possible decision available to Europe, yet which will come over and over simply to prevent the European banking oligarchy from encountering an Event of Actual Loss (as defined by Encyclopedia Britannica). "Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out. EU leaders should instead be planning for how such a default could be managed in as orderly a manner possible." Yet the main reason why European taxpayers should be concerned about the happenings in Athens, which are nothing but the latest in a now endless series of taxpayer to banker capital transfers, is that as Open Europe says by 2014, almost two-thirds of Greek debt will be taxpayer-owned! "via the bail-outs, so-called official sector (taxpayer-backed) loans are gradually replacing private sector loans. We estimate that today each household in the eurozone underwrites €535 in Greek debt (through loan guarantees). However, by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. The cost to European taxpayers of what looks like an inevitable Greek default will therefore  increase radically in the next few years, making a second bail-out far more contentious than any of the previous eurozone rescue packages." Open Europe economic analyst Raoul Ruparel added: "“A second Greek bail-out is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years. Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers....Although the uncertainty associated with such an exercise shouldn’t be underestimated, EU leaders should plan for a full, orderly restructuring, which would deal with Greece’s massive debt burden, as soon as possible. However, an honest discussion also needs to be had about whether Greece can realistically remain within the eurozone." But what "honesty" is possible when the only policy is to extend and pretend until it all finally comes crashing down?

Greek, Portuguese and Spanish debt is under pressure this morning. Greek bonds are being decimated with the 2 year government note now over 30%. Irish bonds remain stable despite Ireland’s finance minister’s reasonable assertion that some senior bondholders must share the burden of losses. European equities are also under pressure on concerns of a “Lehman moment” in the Eurozone debt crisis. The increasing talk of a “Lehman moment” in Europe is due to real concerns that a sovereign default could lead to contagion and a new global credit crisis which could send shock waves through markets and see risk assets come under pressure. This time, the situation may be worse involving as it does both large sovereign and bank debtors and given the fact that it will be both a credit and solvency crisis. Talk of “financial Armageddon” is hyperbole – at the same time there are serious risks and investors and savers should prepare by owning less risky, high quality, liquid assets that will protect from these risks and the attendant risk of a currency crises. This is clearly seen in the increasing preference of central banks internationally to favour gold as a monetary and reserve asset over the major currencies such as the dollar, the euro and pound. Eurozone Central Banks Net Buyers of Gold in 2011 for First Time Since Inception of Euro – Global Central Bank Gold Demand Increases by 43% So Far in 2011

Stagflation Threatens Major Global Economies - Inflation in China at 5.5% and UK at 4.5%. Another fundamental factor supporting gold prices and likely to lead to further gains are the increasing signs of stagflation in major global economies. UK inflation data released this morning shows that inflation remains high at 4.5%. The Bank of England expects inflation to reach 5% later this year prior to falling but the Bank’s credibility is increasingly strained as inflation has now exceeded the BoE’s target of 2% for 34 of the last 40 months. British savers and pensioners are suffering from negative real interest rates and this continues to make gold an attractive diversification from a devaluing pound. There appears to be a gathering “perfect storm” of deepening inflation, slowing economic growth and double dip recessions, stagflation, sovereign debt crisis in many major western economies and the risk of sovereign and banking contagion.

The loudest warning to date. From Reuters:

• EU Commissioner Damanaki says Greece's Eurozone membership is at risk
• EU Commissioner Damanaki says Greece must agree on tough measures or return to Drachma, according to state news agency

Incidentally, Greece would like nothing more than to return to the Drachma. And here are the next steps...

The euro, global equities and bonds in peripheral Eurozone countries are all lower this morning on heightened concerns about the debt crisis in the Eurozone. The euro has fallen against all currencies and is now at a record low against gold at EUR 1,080.21/oz. Silver is lower against most currencies but is higher against the Australian dollar and the euro ( EUR 24.80/oz). Greece’s 10 year government debt has surged to 16.98%, Portugal’s to 9.6% and Ireland’s to a new record at 10.76%. The yield on Italian 10-year government debt is up 9bp to 4.85% after S&P cuts its rating outlook on Italy’s sovereign debt to “negative” from “stable”. The Spanish 10 year bond has risen 11 basis points to 5.57%. Besides sovereign debt risk, gold is also being supported by geopolitical risk as seen in the increasingly unstable nuclear armed Pakistan where armed militants attempted to take over Pakistan’s naval air force headquarters. There is increasing tension between the U.S. and Pakistan after what the U.S regards as Pakistan’s failure or collusion regarding Osama Bin Laden. China has increasing economic and military ties and interests in Pakistan and has vowed to standby Pakistan and has called on the world to respect Pakistan’s sovereignty. Separately, in an interview with the Financial Times on Saturday, Henry Kissinger has warned of a world war involving Pakistan and India.

Following last week's ECB very dovish conference, in which Trichet was believed to have put any tightening plans in the eurozone on hold for an indefinite amount of time, today's release of very strong core Eurozone data once again brings the specter of a rate hike to the fore, sending the EURUSD notably higher, and of course, leading to a weakening in the dollar. In addition, the already well known schism between Europe's core and periphery continues, following very weak data reported in the austere PIIGS countries, offset by consensus beating growth in Germany and France. From Bloomberg: "Euro-region economic growth accelerated to the fastest pace since the second quarter of 2010, powered by forecast-topping expansion in Germany and France that offset the impact of tougher austerity measures from Ireland to Spain. Gross domestic product in the 17-member euro area rose 0.8 percent from the fourth quarter, when it increased 0.3 percent, the European Union’s statistics office in Luxembourg said in a statement today. Economists had forecast the economy to expand 0.6 percent, according to the median of 31 estimates in a Bloomberg News survey. GDP rose 2.5 percent from a year ago." All of which once again proves that there is no possibility that Germany and France will ever allow a disintegration of the euro, and will continue to bail out all their troubled neighbors as the continued pegging of Germany's red hot economy to such weaklings as Greece is the only factor that matters for the country's export-led growth.

This morning the news wires are filled with the now usual contradictory, and full of lies propaganda about a Greece imminent [restructuring|golden age]. Since very likely all are wrong, we will focus on what appear to be the most credible ones: we will start with the Dow Jones story which has been official refuted by Greece, thus giving its extra validity. As Reuters reports: "News agency Dow Jones, citing a senior Greek government official, reported that Athens expects to receive a new aid package totalling nearly 60 billion euros . Greece denied it was discussing a new package..."It's certainly positive for peripheral sentiment and is assisting in the unwinding of some yesterday's safe-haven flows into Bunds," said Rabobank rate strategist Richard McGuire. Senior euro zone policymakers acknowledged on Monday that Athens will need a second bailout package soon to avert a disorderly overhaul of its debt obligations but rating agencies said more drastic measures may be necessary." Of course, this news comes out strategically and just in time for Greece to auction off a fresh 26-week T-Bill for €1.625 BN at a new record yield of 4.88% (compared to 4.80%) before an an even lower bid to cover of 3.58 vs. 3.81 previously. One can only imagine what a flop the auction would have been without the latest rumor (and even China appears to have given up on Greece: "Foreign take up in Greek 6-month T-Bill sale 34.2% vs. Prev. 41%, according to debt agency chief.") Bottom line as some trader summarized it: "It's very difficult to trade as there are so many conflicting headlines about a restructuring being the only way forward or not. Something will have to give." Exactly - here is a hint: a restructuring, in the city square, with a Molotov Cocktail... and damn soon.

Gold and silver continue to rebound from their sell offs as Euro zone periphery worries intensify with real risks of defaults and possible contagion. Gold has risen from €1,010/oz to over €1,057/oz since Friday. The long period of correction and consolidation may soon see a break out above resistance at record nominal highs of €1,072/oz - less than 1.5% below the current price. The recent strength of the euro looks set to end as sovereign debt risks come to the fore again. This will likely see the euro fall versus most currencies and especially against gold. There has been the usual misinformed and non evidence based assertions that the gold and silver markets were ‘bubbles’ and that they have burst. The same simplistic assertions were made after the sharp price corrections seen in 2008 and were proven badly wrong.

Your daily diversion comes from German government advisor Bofinger:

• Eurozone needs a very comprehensive solution, or may not remain intact over next 12 months
• Need to consider EU stimulus measures for Greece in addition to belt-tightening
• Have to change overall approach for Eurozone periphery countries

Euro now sliding since apparently the EURUSD traders did not get the Friday memo that the G-7 have decided fair value for the pair is 1.35 tops. Oh yes, in the meantime we can't wait for Germany to get back to the DEM which will buy about $10 USD and make German exports a thing of the ancient past.

• GREECE THREATENS TO LEAVE EURO AREA, GERMANY'S DER SPIEGEL SAYS
• FINANCE MINISTER FROM EUROZONE AND EU COMMISSION HOLDINGS CRISIS MEETING TODAY IN LUXEMBOURG
• MEETING AGENDA INCLUDES POSSIBLE NEAR-TERM DEBT RESTRUCTURING FOR GREECE
• EUROGROUP CHAIRMAN JUNCKER "TOTALLY DENIES" MEETING TO BE HELD TODAY TO DISCUSS GREECE
  • And cue panic and furious denials:
    
• French finance ministry official cannot neither confirm or deny Spiegel report of emergency Eurozone meeting
• Austrian Finance Minister spokesman says Eurozone breakup "absolutely unthinkable"
• German government source says theres no plan for Greece to leave the Eurozone
  
• Senior Greek government official denies report that Greece raises possibility of leaving Eurozone
  
• IMF SAYS IT HAS `NO COMMENT' ON REPORT OF GREEK EURO EXIT BID
  

Gold commenced 2011 at $1,420.78/oz and with two days of trading left in the first quarter, gold is marginally higher at $1,420/oz. It is therefore flat for the quarter after another quarter of correction and consolidation. A lower quarterly close would be the first lower quarterly close in 9 quarters. This may be beneficial to some of those short the gold market who may be attempting to 'paint the tape' and engineer a lower quarterly close - in the forlorn hope that this could lead to momentum selling by trend, following hedge funds and traders. A lower quarterly close may be achieved but the fundamentals of anaemic supply and continuing strong demand both from the investment sector, but also from the jewellery and industrial sectors (dental and electronics primarily) internationally, and particularly in China and Asia in general will likely see gold continue to rise in 2011. Interestingly, March 2010 and the first quarter last year (see chart above), also saw gold flatline prior to strong gains in April and the second quarter of 2010 (Q2 10). Gold rose by nearly 6% last April and by nearly 12% in the quarter. The unresolved eurozone debt crisis and the emergence of the Japanese natural and nuclear disasters and geopolitical risk in oil producing nations means that the fundamentals today are as sound as they were in 2010 - if not more sound.

Are Greece and Eurozone doomed? I'm not buying the drama...

With the algos having promptly switched to trade stocks higher with dollar weakness (unlike on days when a strong dollar also somehow miraculously leads to stock strength), the world was looking for some data point to validate this morning's ramp in futures, timed perfectly to further neutralize Apple's holiday announcement. The catalyst ended up being the latest ZEW numbers of German and Eurozone economic sentiment, which came so strong in spite of ongoing European insolvency, that all one can do is laugh. These printed as follows: Eurozone ZEW Survey (Economic Sentiment) (Jan) M/M 25.4 vs. Prev. 16.6 (Prev. 15.5); German ZEW Survey (Economic Sentiment) (Jan) M/M 15.4 vs. Exp. 7.0 (Prev. 4.3). Once these hit overnight, the EURUSD went balistic and, of course, futures surged, completely eradicating any threat of a market-wide circuit breaker being hit, which would have been the case hat Apple made the Jobs announcement during regular market hours. On the other hand, how Europe, er, Germany is supposed to preserve its export-led miracle in light of a 500 basis point surge in the EURUSD in just one week, is something only Goldman's Houdini economic team can explain.

Last night, in a less than surprising Op-ed in the FT, Jean-Claude Juncker and Giulio Tremonti, prime minister and treasury minister of Luxembourg and Italy’s minister of economy and finance respectively, once again floated the idea that the time has come for a joint European bond issuance mechanism, because apparently lack of individual monetary policy is not enough, European countries now have to surrender their fiscal decision making to a bunch of dogmatic bureaucrats in Brussels. The desperate duo, which knows all too well, that they could well be next on the bond vigilantes radar, write: " The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state." We ridiculed the idea last night, noting that this proposal would only happen over Germany's dead body, which already sees as contributing far too much to keeping the European experiment alive and getting only dirty looks from its voters. Today, Germany steps up and confirms: "Germany on Monday rejected the idea of increasing the size of the European Union's safety net and ruled out a proposal to issue a joint euro zone bond." And additionally recent pressure to hike the rescue fund by the IMF and internally were also promptly shut down by Germany, which as we pointed out last week threatened to pull out of the Euro if the political wrangling by pathological liars such as the Greek elite continued: "We see no reason at all at the moment for an increase in the size of the euro rescue shield -- no reason at all." Which means that with no recourse to do anything structural, the ECB is back to buying up Portuguese bonds in a fake bid to create a sense of normalcy in the bond market, which everyone with half a brain knows will collapse the second the ECB pulls out or runs out of paper.

It appears that one way or another, the IMF will provide a lot more American money to the European rescue. Reuters reports that according to the IMF the euro zone should have a bigger rescue fund and the European Central Bank should boost its bond buying to prevent the sovereign debt crisis from derailing economic recovery. "International Monetary Fund chief Dominique Strauss-Kahn
will present the report on the economy of the 16 countries using
the euro at a meeting of euro zone finance ministers and
European Central Bank President Jean-Claude Trichet on Monday." And presumably, and we are speculating here, if the Euro zone can not afford it, the IMF will be more than happy to step in. After all recall that on August 30, the IMF extended the duration of the Flexible Credit Line (FCL), "concurrently removing the borrowing cap on this facility, which previously stood at 1000 percent of a member’s IMF quota, in essence making the FCL a limitless credit facility, to be used to rescue whomever, at the sole discretion of the IMF's overlords." We would think that an infinite amount of money should be enough to rescue even Spain when the time comes. Which begs the question: with everyone expecting muni bonds to be the purchasing target of QE3, will Bernanke again fool everyone and instead opt for direct European bond monetization? After all, the destruction of dollar value is and always has been the Fed's primary imperative, and what better way to achieve this than to collateralize the greenback with Greek bonds?