By Ambrose Evans-Pritchard
20-Oct (The Telegraph) — The EU-IMF bail-out machinery would require an extra €250bn or more to stabilize eurozone debt markets, forcing Germany and EU’s creditor states to vastly increase rescue commitments.

The report, due Friday, said a double-dip recession would lead to a downgrade of “one or two notches” for France, Spain, Italy, Ireland and Portugal, both because of tumbling tax revenues and the extra costs of propping up banks.

The scenario looks increasingly likely after Germany slashed its growth forecast from 1.8pc to 1pc for 2012. Greece and Portugal are contracting at alarming speeds. Italy and Spain are already in industrial recession.

“Confidence surveys have fallen off a cliff over past three months,” said Marchel Alexandrovich from Jefferies Fixed Income. “The lagged effects of fiscal and monetary tightening are still working their way through the system so it looks highly likely that we are in recession now.”

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20-Oct (CNBC) — A market tethered to hopes for a European debt crisis solution is likely to remain in a state of confusion, even if two upcoming summits exceed muted expectations.

As a result, market volatility will continue until there are some signs that the EU is finally getting its debt crisis under control. And the betting is now that it could take months or more for the situation to get resolved.

“Even if the Europeans come up with something very robust that shows they’re going to try to deal with the crisis, this is going to be a long slog,” says Bill Isaac, head of financial institutions practice at FTI Consulting in Vienna Va. “The problem is a bunch of countries are way overextended and somebody’s going to have to take some losses.”

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PG View: Like I said in this morning’s report, the troika’s credibility is deteriorating rapidly…

20-Oct (The Telegraph) — Despite another day of violent protests on Athens’ streets, politicians backed the bill 154 to 144 after desperate pleas from Greek senior ministers.

Meanwhile, a leaked report from the latest “troika” mission revealed that officials from the European Union, European Central Bank and International Monetary Fund (IMF) have concluded that the €159bn Greek bail-out agreed three months ago is no longer adequate to stabilise Athens.

The officials said Greece’s financial situation had deteriorated significantly since the vast bail-out was agreed in July.

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PG View: The inadequacy of the bailout means that Greece will have to pile even more austerity on its people, who are already on the verge of snapping. Or, they could just let Greece go and hope they have an adequate firewall against contagion. Those hopes were largely dashed today as well, as the EU scrambles to put together a second summit on expectations that there really is no plan to be revealed on Sunday.

20-Oct (Financial Times) — European leaders will be forced to hold a second summit, perhaps as early as Wednesday, because of the inability of German and France to reach a deal on how to increase the firepower of the eurozone’s €440bn rescue fund.

European leaders confirmed that a high-stakes summit on Sunday aimed at finalising a plan to shore up the eurozone would proceed. But one senior German official said that no substantive decisions would be taken on giving additional resources to the fund, called the European Financial Stability Facility, so it could tackle the growing threat to large eurozone banks and the Italian bond market.

“There will be no agreements,” said the senior German official. “This will now happen Wednesday at the earliest.”

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20-Oct (NPR) — Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.

It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.

…”There’s such a thing as too much debt,” he says. “But also such a thing, perhaps, as too little.”

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PG View: Sort of mute as there’s no chance we’ll be paying down our monstrous debt any time soon, but an interesting read nonetheless.

20-Oct (BBC) — EU leaders are to hold another summit by Wednesday, because they will not be able to agree a rescue plan for the euro on Sunday.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said a crisis strategy would be discussed on Sunday and adopted at the next meeting.

EU leaders need to agree a second bailout for Greece, how to recapitalise banks and a stronger bailout fund.

President Sarkozy also called for talks with the private sector.

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PG View: Well that pretty much seals the deal, there is no coordinated plan to be revealed on Sunday…maybe they’ll have something for us on Wednesday…

Risk-Off As Hopes of Debt Crisis Resolution from EU Summit Fade

20-Oct (USAGOLD) — Gold has fallen deeper into the range as fading hopes that a solution to the European sovereign debt/banking crisis will be revealed at this weekend’s EU summit. The rise in risk aversion weighed on the euro and stocks, lifted the dollar, which in turn pressured the yellow metal.

Die Welt hinted this morning that there was a chance that the EU summit might be delayed. That assertion was refuted by EU officials, but ongoing disagreements between Germany and France have been increasingly on display this week. This leaves many investors thinking that when the closing gavel falls on Sunday, that despite the assurances of 2-weeks ago, Europe still won’t be any closer to a real solution to its woes.

This is quickly becoming a credibility issue; as the troika is increasingly being seen the purveyor of hollow assurances and false hopes. At some point, the market may just give up on them; and that’s when all bets are off. Once credibility is lost, it is frequently very difficult to regain.

While rising doubts have created a risk-off environment, if fears of systemic risks suddenly rise as a result of the troika’s failure — or inability — to act, the safe-haven aspect of physical gold would likely be catapulted back to the fore. For now, we continue to see solid interest on dips within the range.

• US Philly Fed index rebounded to 8.7 in Oct, well above market expectations of -9.0, vs -17.5 Sep.
• US existing home sales -3.0% to 4.91 mln in Sep, about what was expected.
• US leading indicators +0.2% in Sep, in line with expectations, vs +0.3% in Aug.
• US initial jobless claims -6k to 403k in the week ended 15-Oct, vs upward revised 409k in the previous week.
• UK retail sales +0.6% in Sep, above market expectations, vs negatively revised -0.4% in Aug; 0.6% y/y.
• Germany PPI +0.3% m/m in Sep, in line with expectations; 5.5% y/y.
• Switzerland trade balance CHF1.9 bln in Sep.
• Japan leading index (revised) -0.3% m/m in Aug, vs -0.8% previously; coincidence index revised higher to 0.5%.

20-Oct (Der Spiegel) — How can the reach of the euro backstop fund be maximized without forcing governments to throw more money at it? European leaders are considering a finance tool that would attract private investors and greatly expand the reach of the fund.

It is already an immense sum of money: Euro-zone countries have provided guarantees worth €780 billion to the currency backstop fund known as the European Financial Stability Facility. It has a lending capacity of €440 billion, with which it is to help out deeply indebted members of the currency union.

As large as it is, though, it already appears that the EFSF could in fact be too small.

…What, then, is a currency union to do? The magic word is “leveraging.” Euro-zone leaders are looking for a finance tool which could make the impact of the EFSF as large as possible.

[source]

20-Oct (Reuters) — The euro fell against the dollar on Thursday after a report that the German government had not ruled out a postponement of the EU summit planned for this Sunday to grapple with the euro zone debt crisis.

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Let There Be Inflation

I put up a post last week that is indicative of the rising calls for the Fed to do more in the face of legislative gridlock in Congress that continues to hinder further fiscal response to our economic woes here in the United States. Calls for additional stimulus couched as a “jobs bill” have gone nowhere, escalating pressure on the Fed to do something…anything…to increase economic activity and generate some jobs.

Some have called for the Fed to focus on the “maximum employment” portion of its dual mandate rather than “stable prices.” Some believe that in targeting inflation at a higher level, it will incent consumers to make purchases sooner rather than later because the good or service that they desire would carry a higher price in the future. This would create demand for goods and services, which has been conspicuously absent during the lackluster recovery as consumers have focused on paying down debt and increasing their rate of savings amid broad-based economic uncertainty. Renewed demand would then increase employment, or so the argument goes.

The calls for inflation targeting gained momentum this week with Goldman Sachs’ called on the Fed to target GDP. While targeting a higher level of GDP rather than inflation might be more palatable from a marketing standpoint, they are essentially one and the same. Goldman economists wrote in a report that “while a shift to a nominal GDP level target would be a big decision, it would be consistent with the Fed’s dual employment and price mandate.” With only monetary policy at their disposal and interest rates already at zero percent, about the only option to increase GDP is expansion of the monetary base. That in turn devalues the dollar and creates inflation along with that additional economic activity.

It has always been my view that Fed Chairman Bernanke views deflation as a far greater evil than inflation, and he is therefore perhaps predisposed to allowing higher inflation to develop; and in fact to perhaps target inflation. Bernanke strongly emphasized clarity in a speech in Boston on Tuesday, saying, “The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans,” Bernanke said today in a speech in Boston. “Forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.”

Following that speech, PIMCO’s Bill Gross tweeted the following: Bernanke’s emphasis on “communications” is likely code for “targeting” nominal GDP or unemployment.

Apparently it was Gross’ opinion that the Fed chairman was echoing the recommendation of Goldman Sachs. Whether we ultimately see GDP targeting, unemployment targeting or outright inflation targeting, inflation is likely to be exactly what we get. Gold is of course the classic hedge against inflation and the requisite dollar devaluation.

18-Oct (Financial Times) — France warned on Tuesday that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend.
More video

In sharp contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”.

Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent.”

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19-Oct (USAGOLD) — Gold has returned to consolidative mode after rebounding from yesterday’s intraday sell-off on rumors that Germany and France had agreed to a plan to expand the European bailout fund to €2 trillion and recapitalize banks to meet a 9% capital ratio. It wasn’t abundantly clear whether the €2 trillion was inclusive of the recapitalization or not, as rumors always seem to lack details.

This initially struck me as unlikely as the Merkel administration had gone to great lengths early in the week to temper expectations of the Franco-German plan that is to be revealed at this weekend’s EU summit. And indeed the rumor was quickly refuted by an EU official late yesterday. The market is back in “wait and see” mode until the weekend, when presumably details will be announced.

• US CPI +0.3% in Sep, in line with expectations; core +0.1%, below expectations of +0.2%.
• US housing starts surged 15% to 658k in Sep on strong multi-family starts, well above market expectations of 590k, vs 572k Aug.
• Canada leading indicator -0.1% in Sep, below market expectations of +0.1%, vs unch in Aug.
• Eurozone current account (sa) -€6.3 bln in Aug, vs upward revised -€6.8 bln in Jul.
• Norges Bank holds steady on deposit rate at 2.5%.
• Japan All-Industry Index (sa) -0.5% m/m in Aug, vs 0.4% in Jul.

19-Oct (Reuters) — Demonstrators clashed with police in front of the Greek parliament on Wednesday as tens of thousands rallied at the start of a general strike timed to coincide with a vote on a bitterly resented new round of austerity measures.

Protesters showered police with stones and fire bombs on the steps of the parliament building, forcing them to retreat. The boom of tear gas canisters fired by police rang out over Syntagma Square while black smoke curled into the air.

For the first time since the crisis broke out two years ago, demonstrators reached the steps of the neo-classical building and there was a bitter tang of tear gas inside, a Reuters reporter said.

With memories still fresh of the running battles that marked anti-austerity protests in June, more than 5,000 police had deployed on the streets and the mood among the demonstrators was angry.

“We have no future here. All young people want to go abroad and they are right to do so,” said Anastasia Kolokotsa, 17, protesting outside parliament.

“There are no jobs, there is nothing here.”

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19-Oct (USAToday) — Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers.

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what’s owed on home loans and credit cards.

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18-Oct (Financial Times) — Global risk assets are climbing once again on hopes of further aid to the eurozone, with the improved sentiment backed by the latest US corporate earnings results.

This outweighed disappointing GDP data out of China and a weak survey of German investor confidence.

…Late in the US trading day, a report that Germany and France had struck a deal to backstop an expansion of the European bail-out fund to €2,000bn, and to recapitalise Europe’s banks to meet a 9 per cent capital ratio.

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PG View: I’ll believe it when the formal announcement comes, but gold is already nearly $40 off the intraday low.

18-Oct (Reuters) — Standard & Poor’s on Tuesday downgraded 24 Italian banks and financial institutions, citing renewed “market tensions” and lower economic growth prospects.

The action was taken after a review of the implications of a tougher-than-previously-anticipated macroeconomic and financial environment for the Italian banks, the credit rating agency said.

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18-Oct (MarketWatch) — The general return of confidence in the U.S. dollar has cut demand for gold as a hedge against a collapse in the U.S. currency, but economists at Capital Economics said they don’t expect that to hold back gold for much longer — and investment demand should help boost silver too.

“The monetary policy backdrop is highly favorable” for gold, they said in a quarterly report issued Tuesday.

“Interest rates are likely to stay low in the advanced economies for the foreseeable future, minimizing the opportunity cost of holding an asset like gold that pays no income.”

And in the event of a disorderly Greek default, gold is still likely to benefit more than any other currency, they said.

The Capital Economics economists expect gold prices to reach $2,500 an ounce no later than 2013 “as doubts over the survival of the euro come to a head.”

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18-Oct (CNBC) — Euro zone leaders are likely to agree to leverage their bailout fund at a summit on Sunday by allowing it to guarantee a portion of newly issued euro zone debt, euro zone officials and the expert who first developed the plan said on Tuesday.

Under the scheme, the European Financial Stability Facility (EFSF) [cnbc explains] would promise investors who buy Spanish, Italian, or other higher-risk euro zone sovereign debt [cnbc explains] at auction that it would cover a portion of any losses they made if the country were to default.

“This idea is the main contender,” one euro zone official said, but added there were other projects under consideration for how best to increase the EFSF’s firepower, with markets unconvinced it is big enough to handle the widening crisis.

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PG View: I find it hard to believe that EFSF leveraging is truly making a comeback after it was essentially ruled out by Germany, but that could make for a big surprise this weekend.

18-Oct (Bloomberg) — German Chancellor Angela Merkel told lawmakers that a European Union summit in five days will mark an important step, though not the final one, in solving the euro- area debt crisis, a participant at the meeting said.

Officials from the 17-nation euro are moving millimeter by millimeter, the official told reporters in Berlin today on condition of anonymity because the talks were held in private.

The comments by Merkel to a gathering of her Christian Democrat caucus marked the second time in two days that she sought to lower expectations that the European crisis-fighting effort would climax at the Oct. 23 meeting in Brussels, as international officials are advocating.

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18-Oct (BusinessInsider) — Politicians will hate this, but according to Nomura economist Richard Koo it’s too late to save Europe unless they’re willing to go nuclear.

By that he means: Big time guarantees across the entire financial system to ensure that everyone survives. Lots of taxpayer money with few strings attached.

[source]

The Greek government is struggling to save the country from default and there are no magical solutions, Prime Minister George Papandreou said.

“This government has been fighting for two years to save the country and still has much work ahead,” Papandreou told lawmakers of his ruling Pasok party today. His comments were televised live on state-run Vouli TV.

“Greece is being held hostage by strikes and protests, and they will not help Greece,” he said.

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17-Oct (Washington Post) — The International Monetary Fund, known throughout its history for urging governments to slash their budgets, is now worried that a global round of austerity may trigger a new recession and is urging countries to look for ways to boost growth.

On Monday, the agency warned the world’s leading economies that belt-tightening by governments, companies and consumers has become so aggressive that the global economy could falter because of anemic demand.

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18-Oct (CNBC) — From the German press to Stephen Colbert’s hit show on Comedy Central, Greece has been the butt of jokes throughout the financial crisis. The implication is always the same — that the Greek people are lazy and don’t like to work.

The stereotype makes Michalis Chrysochoidis, Greece’s minister of development and competitiveness, bristle.

…Greek workers put in longer hours than any other Europeans or Americans, according to a new report by McKinsey.

…Within the McKinsey report, however, there are two additional data points that explain why more hours worked by Greeks haven’t led to a growing economy.

First, Greece has the lowest labor participation rate in all of Europe — just 66 percent of the employable population have jobs, compared with 73 percent in the European Union and 70 percent in Southern Europe.

Second, not only are fewer Greeks working, those who do are far less productive: A Greek worker’s productivity comes in at $35 an hour, compared with $49 an hour in the EU, $55 an hour in Central Europe, and $58 and hour in the U.S.

Put it all together and it led McKinsey to one inescapable conclusion: “A relatively smaller percentage of Greeks work longer and harder hours than their European peers to support a generally unproductive system.”

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